File Numbers: 2-78931 and 811-3551
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No.___ /_/
Post-Effective Amendment No. 33 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 33
(Check appropriate box or boxes)
VONTOBEL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
1500 Forest Avenue, Suite 223, Richmond, VA 23229
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (804) 285-8211
John Pasco, III, 1500 Forest Ave., Suite 223, Richmond, VA 23229
(Name and Address of Agent for Service)
Please send copies of communications to
Steven M. Felsenstein, Esq.
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Approximate Date of Proposed Public Offering: Upon effectiveness
of this amendment.
It is proposed that this filing will become effective (check appropriate box).
/X/ immediately upon filing pursuant to paragraph (b).
/ / on (date) pursuant to paragraph (b).
/ / 60 days after filing pursuant to paragraph (a)(1).
/ / on (date) pursuant to paragraph (a)(1).
/ / 75 days after filing pursuant to paragraph (a)(2).
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
No additional shares being registered at this time. Registrant has previously
elected to register an indefinite number of shares pursuant to Rule 24f-2. The
Notice for the fiscal year ended December 31, 1996 was filed on February 28,
1997.
<PAGE>
CROSS-REFERENCE SHEET
Prospectus for the Vontobel U.S. Value Fund,
Vontobel International Equity Fund (formerly named, Vontobel
EuroPacific Fund), Vontobel Eastern European
Equity Fund and Vontobel International Bond Fund
Part A
Item No. Information Required in a Prospectus
- -------- ------------------------------------
1. Cover Page. Cover Page.
2. Synopsis. Prospectus Summary; Fund Expenses.
3. Condensed Financial Financial Highlights.
Information.
4. General Description Prospectus Summary; Cover Page; General
of Registrant. Information About the Company; The Funds'
Investments and Policies; Additional
Information on Policies and Investments;
Special Risk Considerations; Investment
Restrictions.
5. Management of the Prospectus Summary; The Company's Management;
Fund General Information About the Company; To
Obtain More Information.
5A.Management's 1996 Performance; and *.
Discussion of Fund
Performance.
6. Capital Stock and Prospectus Summary; Taxes; Dividends and
Other Securities. Capital Gains Distributions; General
Information About the Company; To Obtain More
Information.
7. Purchase of Prospectus Summary; How to Invest; How
Securities Being Net Asset Value is Determined; Special
Offered. Shareholder Services; How to Transfer
Shares.
8. Redemption or How to Redeem Shares; Special Shareholder
Repurchase. Services; How to Transfer Shares.
9. Pending Legal Not Applicable.
Proceedings.
<PAGE>
Prospectus for Sand Hill Portfolio Manager Fund
Part A
Item No. Information Required in a Prospectus
- -------- ------------------------------------
1. Cover Page. Cover Page.
2. Synopsis. Prospectus Summary; Fund Expenses.
3. Condensed Financial Financial Highlights.
Information.
4. General Description Prospectus Summary; Cover Page; General
of Registrant. Information About the Company; The Funds'
Investments and Policies; Additional
Information on Policies and Investments;
Special Risk Considerations; Investment
Restrictions.
5. Management of the Prospectus Summary; The Company's Management;
Fund General Information About the Company; To
Obtain More Information.
5A.Management's 1996 Performance; and *.
Discussion of Fund
Performance.
6. Capital Stock and Prospectus Summary; Taxes; Dividends and
Other Securities. Capital Gains Distributions; General
Information About the Company; To Obtain More
Information.
7. Purchase of Prospectus Summary; How to Invest; How
Securities Being Net Asset Value is Determined; Special
Offered. Shareholder Services; How to Transfer
Shares.
8. Redemption or How to Redeem Shares; Special Shareholder
Repurchase. Services; How to Transfer Shares.
9. Pending Legal Not Applicable.
Proceedings.
<PAGE>
Statement of Additional Information for the Vontobel U.S. Value Fund,
Vontobel International Equity Fund (formerly named,
Vontobel EuroPacific Fund), Vontobel Eastern European
Equity Fund and Vontobel International Bond Fund
Part B Information Required in a Statement of
Item No. Additional Information
- -------- --------------------------------------
10. Cover Page. Cover Page.
11. Table of Contents. Table of Contents.
12. General Information
and History. Not Applicable.
13. Investment Vontobel Funds, Inc.; Investment Policies;
Objectives and Special Investment Considerations for the
Policies. Funds; Investment Restrictions.
14. Management of the Directors and Officers.
Registrant.
15. Control Persons and Directors and Officers.
Principal Holders of
Securities.
16. Investment Advisory Investment Advisor; Transfer Agent;
and Other Services. Administrator; Distribution.
17. Brokerage Allocation Portfolio Transactions.
and Other Practices.
18. Capital Stock and General Information and History; Dividends
Other Securities. and Distributions.
19. Purchase, Redemption Special Shareholder Services; Valuation and
and Pricing of Calculation of Net Asset Value.
Securities Being
Offered.
20. Tax Status. Taxes.
21. Underwriters. Distribution.
22. Calculation of Performance.
Performance Data.
23. Financial *Incorporated by reference in the Prospectus.
Statements.
<PAGE>
Statement of Additional Information for
Sand Hill Portfolio Manager Fund
Part B Information Required in a Statement of
Item No. Additional Information
- -------- --------------------------------------
10. Cover Page. Cover Page.
11. Table of Contents. Table of Contents.
12. General Information Not Applicable.
and History.
13. Investment Vontobel Funds, Inc.; Investment Policies;
Objectives and Special Investment Considerations for the
Policies. Funds; Investment Restrictions.
14. Management of the Directors and Officers.
Registrant.
15. Control Persons and Directors and Officers.
Principal Holders of
Securities.
16. Investment Advisory Investment Advisor; Transfer Agent;
and Other Services. Administrator; Distribution.
17. Brokerage Allocation Portfolio Transactions.
and Other Practices.
18. Capital Stock and General Information and History; Dividends
Other Securities. and Distributions.
19. Purchase, Redemption Special Shareholder Services; Valuation and
and Pricing of Calculation of Net Asset Value.
Securities Being
Offered.
20. Tax Status. Taxes.
21. Underwriters. Distribution.
22. Calculation of Performance.
Performance Data.
23. Financial *Incorporated by reference in the Prospectus.
Statements.
<PAGE>
Part C
Item No. Other Information.
- -------- ------------------
24. Financial Statements Financial Statements and Exhibits.
and Exhibits.
25. Persons Controlled Persons Controlled By Or Under Common Control
By Or Under Common With Registrant.
Control With
Registrant.
26. Number of Holders of Number of Holders of Securities.
Securities.
27. Indemnification. Indemnification.
28. Business and Other Business and Other Connections of Investment
Connections of Advisor.
Investment Advisor.
29. Principal Principal Underwriters.
Underwriters.
30. Location of Accounts Location of Accounts and Records.
and Records.
31. Management Services. Management Services.
32. Undertakings. Undertakings.
* Incorporated herein by reference to Registrant's Annual Report to
Shareholders dated December 31, 1996 as filed with the Commission via
its EDGAR system on February 28, 1997.
<PAGE>
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
VONTOBEL EASTERN EUROPEAN EQUITY FUND
VONTOBEL INTERNATIONAL BOND FUND
PORTFOLIOS OF
VONTOBEL FUNDS, INC.
A "SERIES" INVESTMENT COMPANY
1500 Forest Avenue PROSPECTUS
Suite 223 Dated March 14, 1997
Richmond, Virginia 23229
Telephone: 1-800-527-9500
Vontobel Funds, Inc. ("the "Company") (formerly named, The World Funds,
Inc.) is an open-end management investment company commonly known as a "mutual
fund." A "series" mutual fund offers investors a choice of investment
objectives, with each series having its own separate and distinct portfolio of
investments and operating much like a separate mutual fund. This Prospectus
offers shares of the following four series (each, a "Fund") of the Company:
Vontobel U.S. Value Fund ("Value Fund") seeks to achieve long-term capital
returns in excess of the broad market by investing in a
carefully selected, continuously managed diversified portfolio composed
principally of equity securities ("Equity Securities," which include
securities convertible into equity securities, such as warrants,
convertible bonds, debentures or convertible preferred stock) traded on
U.S. exchanges.
Vontobel International Equity Fund ("International Equity Fund") (formerly
named, Vontobel EuroPacific Fund) seeks to achieve capital
appreciation by investing in a carefully selected and continuously
managed diversified portfolio consisting primarily of Equity
Securities principally of issuers located in Europe and the Pacific
Basin.
Vontobel Eastern European Equity Fund ("E. European Fund") seeks to
achieve capital appreciation by investing in a carefully
selected and continuously managed diversified portfolio consisting
primarily of Equity Securities principally of issuers located in
Eastern Europe.
Vontobel International Bond Fund ("Bond Fund") seeks to maximize total return
from capital growth and income by investing primarily in fixed income
securities traded in bond markets outside the U.S.
The Bond Fund is a non-diversified series, and the other three Funds
are diversified series, of the Company for purposes of the Investment Company
Act of 1940, as amended. The Company is currently composed of five series, one
of which is offered in a separate prospectus. Investors will be able to exchange
all or part of their investment from one Fund to another or to certain other
mutual funds, under conditions set by the Company.
<PAGE>
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
AMOUNTS INVESTED IN THE FUNDS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the Funds
that a prospective investor should know before investing. It should be read and
retained for future reference. More information about the Funds has been filed
with the Securities and Exchange Commission and is contained in the "Statement
of Additional Information," dated March 14, 1997, which is available at no
charge upon written request to the Company. The Funds' Statement of Additional
Information is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-2-
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY
FUND EXPENSES
FINANCIAL HIGHLIGHTS
1996 PERFORMANCE
THE FUNDS' INVESTMENTS AND POLICIES
ADDITIONAL INFORMATION ON POLICIES AND INVESTMENTS
SPECIAL RISK CONSIDERATIONS
INVESTMENT RESTRICTIONS
PERFORMANCE TERMS AND COMPUTATIONS
THE COMPANY'S MANAGEMENT
HOW TO INVEST
HOW TO REDEEM SHARES
HOW TO TRANSFER SHARES
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
SPECIAL SHAREHOLDER SERVICES
HOW NET ASSET VALUE IS DETERMINED
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
TAXES
GENERAL INFORMATION ABOUT THE COMPANY
TO OBTAIN MORE INFORMATION
<PAGE>
P R O S P E C T U S S U M M A R Y
The following summary is qualified in its entirety by the more detailed
information appearing in the body of this Prospectus.
INVESTMENT OBJECTIVES
Vontobel U.S. Value Fund ("Value Fund") seeks to achieve
long-term capital returns in excess of the broad market by
investing in a carefully selected, continuously managed
diversified portfolio composed principally of equity
securities ("Equity Securities," which include securities
convertible into equity securities, such as warrants,
convertible bonds, debentures or convertible preferred stock)
traded on U.S. exchanges.
Vontobel International Equity Fund ("International Equity Fund")
seeks to achieve capital appreciation by investing in
a carefully selected and continuously managed
diversified portfolio consisting primarily of Equity
Securities principally of issuers located in Europe and the
Pacific Basin.
Vontobel Eastern European Equity Fund ("E. European Fund") seeks
to achieve capital appreciation by investing in a
carefully selected and continuously managed diversified
portfolio consisting primarily of Equity Securities,
principally of issuers located in Eastern Europe.
Vontobel International Bond Fund ("Bond Fund") seeks to maximize
total return from capital growth and income by investing
primarily in fixed income securities traded in bond markets
outside the U.S.
See "The Funds' Investments and Policies" on Page [11].
PRINCIPAL INVESTMENTS The Funds' primary investments:
Value Fund - Equity Securities traded on U.S. exchanges.
International Equity Fund - Equity Securities principally of
issuers located in Europe and the Pacific Basin.
E. European Fund - Equity Securities principally of issuers located
in Eastern Europe.
Bond Fund - primarily fixed income securities traded in bond markets
outside the U.S.
See "The Funds' Investments and Policies" on Page
[11].
INVESTMENT ADVISOR Vontobel USA Inc. (the "Advisor") is the investment advisor
and manages the investments of each Fund according to its investment
objective and policies. See "The Company's Management" on Page [19].
DISTRIBUTIONS/DIVIDENDS Paid annually from available capital gains and income.
See "Dividends and Capital Gains Distributions" on Page [18].
REINVESTMENT Distributions may be reinvested automatically. See "Dividends and
Capital Gains Distributions" on Page [18].
<PAGE>
PURCHASES Initial purchase is $1,000 minimum. Subsequent purchases must be a
minimum of $50. Shares of the Funds are offered for sale without a
sales charge from the distributor, Vontobel Fund Distributors (see "How
to Invest" on Page [22]).
NET ASSET VALUE Quoted daily in the financial section of most
newspapers under Vontobel. Additional information may also be obtained
by calling 1-800-527-9500. See "How the Net Asset Value is Determined"
on Page [26].
PRINCIPAL RISK FACTORS There can be no assurance that a Fund will achieve
its investment objective. An investor should consider other
factors, including the following: the International Equity Fund, E.
European Fund and Bond Fund (each, an "International Fund") invest in
foreign securities, and consequently may be affected by currency
fluctuations or exchange controls, foreign taxes, differences in
accounting procedures, less supervision and regulation of security
markets, political or social instability and other risks. Each
International Fund may utilize various investment strategies, including
purchasing and selling exchange listed and over-the-counter put and
call options on securities, fixed income indices and other financial
instruments, purchasing and selling financial futures contracts and
options thereon and entering into various interest rate transactions
and currency transactions. Each of these strategies entail special
risks. The Funds may invest in repurchase agreements and the Bond Fund
may invest in reverse repurchase agreements. Investing in such
securities entails risks. See "Special Risk Considerations" on Page
[15].
-2-
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that shareholders
in the Funds will incur.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
International
Shareholder Transaction Expenses Value Equity E. European Bond
Fund Fund Fund Fund
=============================================================================================
<S> <C>
Sales Load Imposed on Purchases None None None None
- ---------------------------------------------------------------------------------------------
Sales Load Imposed on Reinvested None None None None
Dividends
- ---------------------------------------------------------------------------------------------
Redemption Fees None* None* None*+ None*
- ---------------------------------------------------------------------------------------------
Exchange Fees None** None** None** None**
- ---------------------------------------------------------------------------------------------
</TABLE>
* A shareholder electing to redeem shares via a telephone request will be
charged $10 for each such redemption request.
** A shareholder may be charged a $10 fee for each telephone exchange.
+ A 2% redemption fee is charged on shares held less than six months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses International
(as percentage of Value Equity E. European Bond
average daily net assets) Fund Fund Fund Fund
===================================================================================================
<S> <C>
Management Fee 0.95%*** 0.93% 1.25% 1.00%
- ---------------------------------------------------------------------------------------------------
12b-1 Fees None None None None
- ---------------------------------------------------------------------------------------------------
Other Operating Expenses 0.48%*** 0.46%*** 0.46% 0.52%***
- ---------------------------------------------------------------------------------------------------
Total Fund Operating Expenses
1.43%*** 1.39%*** 1.71% 1.52%***
- ---------------------------------------------------------------------------------------------------
</TABLE>
*** The Advisor has voluntarily agreed to waive a portion of its Management
Fee and custodian fee credits have reduced Other Operating Expenses as
set forth above. Set forth below, for each Fund as applicable, are the
management fees and total operating expenses absent such fee waivers
and/or expense credits as a percentage of the average daily net assets
of each such Fund:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Total Operating
Management Fees Other Operating Expenses Absent Fee
Absent Fee Expenses Absent Waivers/Expense
Fund Waivers++ Expense Credits Credits
===================================================================================
<S> <C>
Value 1.00% 0.53% 1.53%
- -----------------------------------------------------------------------------------
International
Equity 0.93% 0.67% 1.60%
- -----------------------------------------------------------------------------------
E. European 1.25% 0.77% 2.02%
- -----------------------------------------------------------------------------------
Bond 1.00% 0.84% 1.84%
- -----------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE>
++ Information concerning reductions in the management fees due to higher Fund
asset levels appears on page [_____].
The purpose of these tables is to assist investors in understanding the
various costs and expenses that they will bear directly or indirectly.
Management expects that, to the extent that the Funds increase in size, their
Other Operating Expenses will decline as an annual percentage rate reflecting
economies of scale.
Example
The following examples illustrate the expenses that an investor would
pay on a $1,000 investment over various time periods assuming (1) a 5% annual
rate of return, and (2) redemption at the end of each time period. As noted in
the table above, the Funds do not charge redemption fees (apart from small per
transaction charges for telephone redemption and/or exchange service fees and
the redemption fee of the E. European Fund that is not charged on shares held
six months or more, as noted above).
Fund 1 Year 3 Years 5 Years 10 Years
- ---- ------ ------- ------- --------
Value $16 $48 $83 $182
International Equity $16 $50 $87 $190
E. European $21 $63 $109 $235
Bond $19 $58 $100 $216
These examples should not be considered a representation of past or
future expenses or performances. Actual expenses may be greater or lesser than
those shown.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The Financial Highlights for the Funds for the periods indicated below
have been examined by Tait, Weller and Baker, independent certified public
accountants, whose unqualified reports thereon appear with the Funds' audited
financial statements in the Annual Reports to Shareholders of the Value,
International Equity, E. European and Bond Funds for the year ended December 31,
1996 (each, an "Annual Report"). The financial statements of the Funds and the
reports thereon are incorporated by reference in this Prospectus from the Annual
Reports. Additional performance information for each Fund is included in its
Annual Report. The Annual Reports and the financial statements therein are
available at no cost upon request to the Company at the address and telephone
number noted on the cover page of this Prospectus.
Vontobel U.S. Value Fund
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Years ended December 31, Mar. 30* to
Dec. 31
-------------------------------------------------------------------- ---------------
Per Share Operating Performance 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C>
Net asset value, beginning of period $13.25 $10.26 $12.64 $12.00 $11.36 $ 8.86 $10.00
------ ------ ------ ------ ------ ------ ------
Income from investment operations-
Net investment income 0.17 0.05 0.09 0.16 0.10 0.07 0.14
Net realized and unrealized gain (loss) on
investments 2.65 4.09 (0.08) 0.56 1.70 3.23 (1.13)
---- ----- ------- ----- ----- ----- -------
Total from investment operations 2.82 4.14 0.01 0.72 1.80 3.30 (0.99)
---- ----- ------ ----- ----- ----- -------
Less distributions-
Distributions from net investment income (0.19) (0.04) (0.23) (0.02) (0.10) (0.06) (0.15)
Distributions from realized gains on
investments (2.10) (1.11) (2.16) (0.06) (1.06) (0.74) 0.00
------ ------ ------ ------- ------ ------- -----
Total distributions (2.29) (1.15) (2.39) (0.08) (1.16) (0.80) (.15)
------ ------ ------ ------- ------ ------- ------
Net asset value, end of period $13.78 $13.25 $10.26 $12.64 $12.00 $11.36 $ 8.86
====== ====== ====== ====== ====== ====== =======
Total Return 21.28% 40.36% .02% 6.00% 16.30% 37.29% (9.90%)
======= ======= ======= ======= ======= ======= ========
Ratios/Supplemental Data
Net assets, end of period (000) $69,552 $55,103 $29,852 $34,720 $31,335 $22,315 $9,488
Ratio to average net assets-(A)
Expenses (B) 1.48% 1.65% 1.62% 1.82% 1.96% 2.54% 1.94%*
Expenses-net (C) 1.43% 1.50% 1.62% 1.82% 1.96% 2.54% 1.94%*
Net investment income 0.63% 0.23% .76% 1.23% .76% .92% 1.48%*
Portfolio turnover rate 108.36% 95.93% 98.80% 137.32% 99.66% 166.46% 87.29%
Average brokerage commissions per share $0.0883 -- -- -- -- -- --
</TABLE>
* Commencement of Operations was March 31, 1990; ratios are annualized.
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by 0.04% in 1996, 0.06% in 1995 and 0.09% in 1990.
(B) Expense ratio has been increased to include additional custodian fees in
1996 and 1995 which were offset by custodian fee credits; prior to 1995
custodian fee credits reduced expense ratios.
(C) Expense ratio-net reflects the effect of the custodian fee credits the
Fund received.
-5-
<PAGE>
Vontobel International Equity Fund
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Per Share Operating Performance
<S> <C>
Net asset value, beginning of period $17.13 $16.23 $17.22 $12.23 $12.67 $10.67
------ ------ ------ ------ ------ ------
Income from investment operations-
Net investment income 0.03 0.16 0.01 0.08 0.08 0.00
Net realized and unrealized gain
(loss) on investments 2.85 1.61 (0.92) 4.91 (0.38) 2.00
---- ---- ------ ---- ------ ----
Total from investment operations 2.88 1.77 (.91) 4.99 (0.30) 2.00
---- ---- ----- ---- ------ ----
Less distributions-
Distributions from net investment
income (0.03) (0.17) (0.08) 0.00 (0.08) 0.00
Distributions from realized gains (1.76) (0.70) 0.00 0.00 0.00 0.00
Distributions in excess of realized
gains 0.00 0.00 0.00 0.00 (0.06) 0.00
---- ---- ---- ---- ------ ----
Total distributions (1.79) (0.87) (0.08) -- (0.14) 0.00
------ ------ ------ ---- ------ ----
Net asset value, end of period $18.22 $17.13 $16.23 $17.22 $12.23 $12.67
====== ====== ====== ====== ====== ======
Total Return 16.98% 10.91% (5.28%) 40.80% (2.37%) 18.74%
Ratios/Supplemental Data
Net assets, end of period (000's) $151,710 $130,505 $138,174 $136,932 $47,761 $25,611
Ratio to average net assets-
Expenses (B) 1.60% 1.63% 1.54% 1.77% 1.98% 2.71%(A)
Expenses-net (C) 1.39% 1.53% 1.54% 1.77% 1.98% 2.71%(A)
Net investment income 0.15% .41% .08% .85% .79% .02%(A)
Portfolio turnover rate 54.58% 68.43% 34.04% 10.66% 27.42% 3.40%
Average commission rate paid per
share $0.0279 -- -- -- -- --
</TABLE>
(A) Management fee waivers and expense reimbursements reduced the expense ratio
and increased the net investment income ratio by .07% in 1991.
(B) Expense ratio has been increased to include additional custodian fees in
1996 and 1995 which were offset by custodian fee credits. Prior to 1995,
custodian fee credits reduced expense ratios.
(C) Expense ratio-net reflects the effect of the custodian fee credits the
Fund received.
-6-
<PAGE>
Vontobel International Equity Fund
(continued)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
Per Share Operating Performance 1990 1989(D) 1988(D) 1987(D)
---- ------- ------- -------
<S> <C>
Net asset value, beginning of period $12.24 $11.17 $10.27 $10.00
------ ------ ------ ------
Income from investment operations-
Net investment income .02 (.09) (.03) (.06)
Net realized and unrealized gain
(loss) on investments (1.54) 1.21 .96 .33
------ ---- ---- -----
Total from investment operations (1.52) 1.12 .93 .27
------ ---- ---- -----
Less distributions-
Distributions from net investment income (.02) 0.00 0.00 0.00
Distributions in excess of realized gains (.03) (.05) (.03) 0.00
----- ----- ----- ----
Total distributions (.05) (.05) (.03) 0.00
----- ----- ----- ----
Net asset value, end of period $10.67 $12.24 $11.17 $10.27
====== ====== ====== ======
Total Return (12.42%) 10.03% 9.06% 2.70%
Ratios/Supplemental Data
Net assets, end of period (000's) $10,074 $2,564 $2,732 $1,109
Ratio to average net assets-
Expenses(B) 2.76% 2.99% 2.99% 4.35%
Expenses-net(C) 2.76%(A) 2.99%(A) 2.99%(A) 4.35%(A)
Net investment income .25%(A) (.83%)(A) (.57%)(A) (.50%)(A)
Portfolio turnover rate 60.87% 84.56% 18.60% 80.00%
</TABLE>
(A) Management fee waivers and expense reimbursements reduced the expense ratio
and increased the net investment income ratio by .69%, 3.11%, 5.03% and
1.00% in 1990, 1989, 1988 and 1987, respectively.
(B) Expense ratio has been increased to include additional custodian fees in
1995 which were offset by custodian fee credits. Prior to 1995, custodian
fee credits reduced expense ratios.
(C) Expense ratio-net reflects the effect of the custodian fee credits the
Fund received.
(D) Periods during which the Fund was advised by other investment advisors. On
July 6, 1990, the Fund's current investment advisor was appointed and the
Fund's investment objective was changed to its current status.
-7-
<PAGE>
Vontobel Eastern European Equity Fund
For a Share Outstanding Throughout the Period
February 15* to
December 31, 1996
---------------------
Per Share Operating Performance
Net asset value, beginning of period $10.00
Income from investment operations- ------
Net investment loss (0.06)
Net realized and unrealized gain on investments 4.95
------
Total from investment operations 4.89
------
Net asset value, end of period $14.89
======
Total Return 48.90%
Ratios/Supplemental Data
Net assets, end of period (000's) $61,853
Ratio to average net assets-
Expense (A) 2.02%**
Expense ratio-net (B) 1.71%**
Net investment loss (1.07)%**
Portfolio turnover rate 38.69%
Average commission rate paid per share $0.0737
- ------------
* Commencement of Operations
** Annualized
(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.
-8-
<PAGE>
Vontobel International Bond Fund
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
Year Ended Year Ended March 1* to
Per Share Operating Performance Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ---------------
<S> <C>
Net asset value, beginning of period $10.60 $ 9.48 $10.00
------ ------ ------
Income from investment operations-
Net investment income 0.47 0.61 0.70
Net realized and unrealized gain (loss) on
investments 0.32 1.06 (0.50)
------ ------ ------
Total from investment operations 0.79 1.67 0.20
------ ------ ------
Less distributions-
Distributions from net investment income (0.40) (0.55) (0.70)
Distributions from realized gains on
investments (0.06)
Distributions in excess of net investment
income -- -- (0.02)
-------- -------- -------
Total distributions (0.46) (0.55) (0.72)
-------- -------- -------
Net asset value, end of period $10.93 $10.60 $ 9.48
======= ====== ======
Total Return 7.51% 17.60% 1.98%
====== ====== ======
Ratios/Supplemental Data
Net assets, end of period (000) $26,879 $16,253 $10,235
Ratio to average net assets (A)
Expense (B) 1.84% 1.76% 1.35%**
Expense ratio-net (C) 1.52% 1.35% 1.35%**
Net investment income 4.78% 5.38% 3.99%**
Portfolio turnover rate 19.89% 18.63% 19.00%
</TABLE>
- ------------
* Commencement of Operations
** Annualized
(A) Management fee waivers reduced the expense ratios and increased the ratios
of net investment income by 0.20% in 1996, 1.00% in 1995 and 0.19% in 1994.
(B) Expense ratio has been increased to include additional custodian fees in
1996 and 1995 that were offset by custodian fee credits; prior to 1995
custodian fee credits reduced the expense ratio.
(C) Expense ratio-net reflects the effect of the custodian fee credits the
Fund received.
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<PAGE>
1996 PERFORMANCE
VONTOBEL U.S. VALUE FUND
The Value Fund produced a total return of 21.3% for the year, versus
the 23.0% return for the S&P 500 with income and 20.8% for the average growth
and income equity fund tracked by Lipper Analytical Services, Inc. For the
second consecutive year, holders of U.S. stocks in 1996 experienced total
returns well above the historical trendline. Perhaps the most notable aspect of
the market's move over the past twelve months was the heady outperformance of
largecap stocks. The Dow Jones Industrial Average, comprised of 30 of America's
largest, most well-known companies, led the pack in 1996, providing a total
return of 28.7% for the year, well ahead of the broader S&P 500's 23.0% total
return, and almost double the return on the Russell 2000, an index representing
relatively small companies. The Fund's underperformance was not surprising given
its strict adherence to an investment style that dictates the sale of securities
held as they approach established price targets. The Advisor therefore reduced
the Fund's holdings in many companies during the year whose stocks subsequently
appreciated even further. Gillette, for example, represented 4.4% of total
assets at the start of 1996. This great company met everyone's expectations over
the course of the year, and entered into an agreement to purchase Duracell in
the fourth quarter, further capturing investors' imaginations. The Advisor sold
the last of the Fund's Gillette shares shortly after the acquisition was
announced. In examining and rejecting many individual companies for possible
investment, it is not so much that the Advisor does not like the companies, but
that the Advisor feels their stock prices do not offer the relative safety of
principal and potential of a satisfactory return that the Fund seeks. Because
the Advisor experienced difficulty in identifying compelling new investments in
1996, the Fund carried a large cash position throughout much of the year, which
penalized performance to the extent that cash underperformed stocks in 1996.
VONTOBEL INTERNATIONAL EQUITY FUND
The International Equity Fund produced a total return of 17.0% for the
year, versus the 6.0% return of the MSCI Europe, Australia, Far East Index and
11.8% for the average international equity fund tracked by Lipper Analytical
Services, Inc. Again in 1996, global markets turned in strong performances as
economic growth ranged from moderate to tepid, and inflation remained tame.
Except for the UK, central banks remained accommodative, which was the major
support for the markets' multiple expansion during the year. The Fund's
performance benefitted primarily from the shift in country allocation in the
first quarter, when the Advisor increased the weighting in Europe at the expense
of Japan and the emerging markets. Since, at the beginning of the year, the
Advisor could not find a great number of attractively valued companies in Japan,
the Advisor turned instead to Europe, which offered attractive valuations from
both a top-down and bottom-up standpoint. The key factors in the Advisor's
top-down valuation process are the comparison of bond market versus equity
market valuations, and the rate of change in the direction of interest rates,
both of which pointed to equity market valuations, and the rate of change in the
direction of interest rates, both of which pointed to
-10-
<PAGE>
double-digit-return expectations for European markets based on their historical
behavior. At the end of 1996 the Fund's weighting in Europe was 59.1%, versus
49.7% at the end of 1995. The Japanese domestic economy remains very weak, and
the lack of progress in addressing the issues in the financial sector remains a
negative for the sector and the stock market as a whole, at least in the short
term. The average price to earnings multiple of the Fund's Japanese holdings is
about 25X and the price to sales ratio is 2.3, which represents not only a large
discount to the domestic equity markets but is comparable with international
markets. At year end the Fund's weighting was 22.9%, versus 29.7%, at the end of
1995. To protect the value of the Fund's portfolio against the adverse effects
of an appreciating U.S. dollar, the Fund had hedge contracts covering
approximately 65% of the portfolio's exposure to the DM bloc, the French franc,
the Swiss franc and the Japanese yen. The Fund had no hedges against the Fund's
holdings in pound sterling, which turned out to be a good call since the British
pound was one of the few currencies to appreciate against the dollar during the
year.
VONTOBEL EASTERN EUROPEAN EQUITY FUND
The E. European Fund produced a total return of 48.9% for the period
from inception on February 15, 1996 through December 31, 1996, versus the 23.9%
return of the Nomura Research Inc. Eastern European Index ("NRI Index") for the
same period. The Fund's fourth quarter performance ranked 23rd out of 115
emerging markets funds tracked by Lipper Analytical Services, Inc. In the second
and third quarters the Fund ranked 1st out of 90 and 99 funds, respectively.
1996 was a momentous year for investors in Central and Eastern European equities
as the more advanced markets (Hungary, Poland and the Czech Republic)
consolidated their credibility, attracting an estimated flow of US$ 5 billion in
new funds to the region's bourses. Russia, Hungary and Poland were among the
world's five top-performing markets, in both local currency and US dollar terms.
Russia, the world's best-performing market in 1996, was rated for the first time
in its history and successfully placed a US$ 1 billion 5-year bond issue in
international capital. The Fund's performance benefitted from the improved
credit standings of Central and Eastern European nations, spurring heavy capital
inflows into the region. It further benefitted from the increased allocation to
Russia from 5% in the second quarter to 16% by year end. It should be noted that
the NRI Index used for comparative purposes has no exposure to the Russian
market. Eastern European equities are a relatively new asset class. As the
investment industry further develops and refines its indices, the Advisor may
select a new benchmark in the future that more appropriately reflects its
country allocation.
VONTOBEL INTERNATIONAL BOND FUND
The Bond Fund produced a total return of 7.5% for the year, versus the
5.3% return of the J.P. Morgan Government Bond Index ex-US and 8.8% for the
average global fixed income fund tracked by Lipper Analytical Services, Inc.
During the first half of 1995, U.S. dollar weakness contributed to over half of
international bond market returns. In the second half, particularly the last
quarter, international bond markets were propelled by falling yields as
inflation remained subdued not only in Europe and Japan but also in the U.S.
European bond markets posted double-digit returns in U.S. dollar terms, led by
Sweden, Denmark, Spain, the
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<PAGE>
Netherlands and France. In contrast, the Japanese market, the best-performer in
the first quarter, ended the year with the lowest U.S dollar return in the
benchmark index, 10.4%. An added factor in the European markets was the
re-commitment of the European Union to introduce a single European currency
within the 1999 timetable. The Fund remained overweighted in the European
markets of Denmark, Germany and Ireland. It was also overweighted in the
Australian market, given the Advisor's positive outlook for both the Australian
currency and bond market. Thanks to its continued lack of exposure to the
Japanese yen bond market, the Fund outperformed its benchmark by 2.3%. However,
it fell shy of the average return of 8.8% of the 44 international bond funds in
the Lipper universe. With its emphasis on high-quality investment-grade debt,
the Fund, unlike many of its peers, held no positions in high-flying emerging
markets debt, the year's best-performing asset class. About 23% of the Fund's
assets were held in U.S. dollar and foreign cash and short-term instruments.
Some 11% of the Fund's non-dollar-related assets were hedged to safeguard
against possible further U.S. dollar appreciation.
THE FUNDS' INVESTMENTS AND POLICIES
VONTOBEL FUNDS, INC.
The Funds are series of Vontobel Funds, Inc. (the "Company"), an
open-end management investment company incorporated in Maryland in 1983. The
Company currently consists of five series, and the Board of Directors may elect
to add more series in the future. A minimum initial investment of $1,000 is
required to open a shareholder account in each Fund, and each subsequent
investment must be $50 or more.
The investment objective of each Fund is fundamental and may not be
changed without the approval of shareholders. The investment policies of each
Fund are not fundamental, however, and may be changed with the approval of the
Company's Board of Directors. All investments entail some risks and there is no
assurance that the investment objective of a Fund can be achieved. See "Special
Risk Considerations" below.
VONTOBEL U.S. VALUE FUND
Investment Objective. The investment objective of the Value Fund is to
seek to achieve long-term capital returns in excess of the broad market by
investing in a carefully selected, continuously managed diversified portfolio of
principally equity securities (including securities convertible into equity
securities, such as warrants, convertible bonds, debentures, or convertible
preferred stock) traded on U.S. exchanges. The Advisor uses the S&P 500 as the
benchmark for the broad market against which the performance of the Value Fund
is measured.
Investment Policies. The Value Fund is designed for individuals and
institutions who need a core exposure to U.S. equity markets. It is the policy
of the Value Fund to invest
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<PAGE>
primarily in equity securities (common stocks or securities convertible into
common stocks) that are listed on a securities exchange or that have an
established over-the-counter market.
It is not the intention of the Advisor to attempt to time the direction
of the market or to forecast future changes regarding interest rates or the
economy. As an equity fund the Value Fund will have at least 65% of its assets
invested in common stocks or securities convertible into common stocks.
Since the Value Fund seeks to achieve capital appreciation, it will
dispose of a security, regardless of the time it has been held, to establish
gains, to avoid anticipated reductions of value, or to reduce or eliminate a
position in a security which is no longer believed to offer the potential for
suitable gains. Portfolio turnover is expected not to exceed an annual rate of
100% under normal circumstances. Such a turnover rate may reflect substantial
short term trading and corresponding brokerage costs which the Value Fund must
pay. A higher portfolio turnover rate may result in additional brokerage
commissions or expenses to the Value Fund.
The selection of the securities in which the Value Fund will invest
will not be limited to companies of any particular size, or to securities traded
in any particular marketplace, and will be based only upon the expected
contribution such securities would make to the investment objective. The Value
Fund may assume a temporary defensive posture. See "Temporary Defensive
Positions" below.
Investment Strategy. In managing the Value Fund, the Advisor draws a
distinction between investment, i.e., an action that seeks safety of principal
and a satisfactory return, versus speculation, i.e., an action that may offer
significant return potential but that offers insufficient safety of principal.
The Advisor believes that the intrinsic value of any asset can be calculated by
discounting the estimated free cash flow generated by that asset over its
lifetime. This belief has led the Advisor to adopt a bottom-up approach that
stresses predictability, one in which the prevailing level of interest rates
provides a yardstick for determining absolute value independent of the level of
market indices. Eschewing many of the tenets of modern portfolio theory, the
Advisor considers the riskiness of an investment to be a function of the
company's business rather than the volatility of its stock price.
The Advisor employs a highly selective, bottom-up approach to stock
picking, relying on a screening process to help find stocks that are
statistically cheap. The Advisor emphasizes qualitative criteria in evaluating a
company's potential as a prospective investment opportunity.
A valuation technique based upon the discounting of future cash flows
implies a high degree of reliance upon the estimates of future financial
results. The Advisor believes that the best beginning point to analyzing a
company's future is to review its past. Consequently, those companies that have
produced highly volatile returns and those with short operating histories do not
lend themselves to our investment approach. Recognizing the tendency of markets
to overreact to both good news and to bad news, the Advisor, like many value
investors, often takes a contrarian stance to "momentum" managers. Recognizing
also the broader market's
-13-
<PAGE>
tendency to paint with the same brush all companies within an industry group,
the Advisor often finds itself significantly overweighting out-of-favor market
sectors.
The Advisor has developed a proprietary screen that assigns a "value
indicator" to each of approximately 3,000 stocks in a selected universe of
companies. Stocks are ranked from highest to lowest "value indicator", and those
stocks comprising the S&P 500 index are also sorted by industry group. Using a
firm's profitability level (as measured by its relative cash flow return on
equity) and a valuation measure (as measured by its price to book value), the
purpose of the screen is to highlight those firms that are more productive than
the market but that are selling at a discount to the market. The screening
process also collects and reports information regarding each company's
historical return levels, debt-to-capitalization, and historical
price-to-earnings and dividend yield. The sorting by industry group draws
attention to sector moves that may indicate stress and, by extension,
opportunity.
The screens provide a starting point, a way of focusing our attention
on stocks that are statistically cheap versus the market or versus their
historical ranges. The Advisor also uses brokerage and industry contacts and the
business press to obtain additional investment ideas.
Having determined that an investment opportunity may exist, the Advisor
reads companyprovided materials and public filings and often will look at
materials developed by or related to the company's competitors. The Advisor also
may interview company management, and if the company is followed by brokerage
houses with which the Advisor does business, may also review brokerage firm
research. Most company interviews are by telephone, but personnel of the Advisor
also travel several times each year, visiting companies whose stock is held or
is under consideration, or which is a competitor of such companies. In
evaluating a company's suitability as an investment vehicle, the Advisor takes
into account the following:
Predictability: No one can foretell the future with exactitude, but
some businesses are far more predictable than others. An asset cannot
be valued without some idea of the cash flows that asset will generate.
This desire for predictability has for the most part deterred the
Advisor from investing in fast-evolving industries (specifically,
computers) and has also deterred the Advisor from committing capital to
highly cyclical businesses.
Generation of Free Cash Flow: Free cash flow is the amount of money
available, after required capital spending, for reinvestment and/or
return to the owners of the business.
Adequate Returns: Those businesses not generating a competitive level
of return on invested capital are unsuitable as investments.
Low Debt: High leverage introduces a level of risk that is
unacceptable.
Elements of a Franchise: This provides a competitive advantage,
enabling high returns over extended periods of time.
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<PAGE>
Regulatory Environment: The less regulation to which a company is
subject, the better, as less regulation increases the company's ability
to manage and price effectively.
Shareholder-oriented Management: High insider ownership is one
indicator that management will act with the best interests of the
shareholders in mind. Intelligent, prudent use of company funds is
another.
The Advisor considers companies that meet these qualitative hurdles
"investable".
A price target is generally reached by treating forecasted free cash
flow as an annuity, using prevailing interest rates as the discount factor. For
those companies in which the Advisor has an exceptional level of confidence, it
projects some level of cash flow growth, using either proprietary or consensus
forecasts. (Price targets may later be adjusted for significant changes in the
prevailing level of interest rates, and also may later be reviewed as
company-specific events dictate.)
Generally, a new position will be established if the market price of a
security is 20% or more below calculated intrinsic value. Position size is
dictated by the Advisor's degree of confidence in the business and the stock's
degree of undervaluation, as well as the availability of attractive investment
alternatives. Position sizes normally range from 1% to 6% of portfolio assets,
but the Advisor has occasionally taken larger positions. Generally, portfolios
comprise approximately 20 positions.
A stock is sold for one of two reasons. Either it has reached the
target price or the thesis for purchase has deteriorated. Large positions are
trimmed as stocks approach sell targets. There is no automatic sell-down
percentage.
Sector Allocation: No conscious sector allocation decision is made.
Sector allocation is a residual of stock selection.
Investment Level: Our cash position is a residual of our ability to
find suitable investment opportunities.
In managing the Value Fund, the Advisor follows a highly differentiated
approach. This approach is bottom-up, with strict adherence to a discipline
constructed around absolute, not relative, valuation, resulting in comparatively
high levels of investment in both individual issues and industry sectors. On
occasion, when suitable investments are not identified, a large cash position
may be maintained.
VONTOBEL INTERNATIONAL EQUITY FUND
Investment Objective. The investment objective of the International
Equity Fund is to seek to achieve capital appreciation by investing in a
carefully selected and continuously managed diversified portfolio consisting
primarily of equity securities (which are securities
-15-
<PAGE>
convertible into equity securities, such as warrants, convertible bonds,
debentures or convertible preferred stock). The investments of the International
Equity Fund will consist principally of equity securities of European and
Pacific Basin countries.
Investment Policies. The International Equity Fund is designed as a
core holding for individuals and institutions who wish to diversify their
investment programs to take advantage of opportunities in the global security
markets of the world, with the principal emphasis on opportunities in Europe and
the Pacific Basin. Investing in the International Equity Fund can provide
international diversity to an investor's existing portfolio of U.S. equity
securities and U.S. dollar and foreign currency denominated bonds, thereby
reducing volatility or risk over time. 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, Germany,
France, the Netherlands, Switzerland, Norway, Spain, Japan, Hong Kong,
Australia, and Singapore. The Advisor will decide when and how much to invest in
each of those markets. Investments may also be made in equities issued by
companies in "developing countries" or "emerging markets", such as Taiwan,
Malaysia, Indonesia, and Mexico. Investments in the equity markets of these
countries involves exposure to economic structures that are generally less
diverse and mature, and whose political systems may have less stability than
those of "developed countries." Subject to investment limitations stated in the
Statement of Additional Information, the International Equity Fund may invest in
the shares of open-end and closed-end investment companies that acquire equity
securities of foreign issuers in which the Fund may invest. By investing in
shares of such investment companies, the Fund would indirectly pay a portion of
the operating expenses, management expenses, and brokerage costs of such
companies, as well as those of the Fund. Federal and state securities laws
impose limits on such investments with which the Fund will comply, and may
affect the ability of the Fund to acquire or dispose of such shares.
The Advisor believes that global economic and political developments
have helped to create new investment opportunities. In recent years a number of
economies in developed and developing countries have grown faster than the U.S.
economy, and return on equity investments in these markets has often been
superior to similar investments in the U.S. In addition, the U.S. stock market
presently represents approximately 40% of the capitalization of the world's
stock markets compared to approximately two-thirds in 1970. Significant growth
of international capital markets, coupled with advances in technology and lower
cost of communications, have increased the globalization of securities trading.
Therefore, over the past few years, the number of investment opportunities
outside the U.S. has grown rapidly.
It is the policy of the International Equity Fund to invest primarily
in equity securities which may achieve capital appreciation by selecting
companies with superior potential based on a series of macro and micro economic
analyses. The 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 (please refer to "Investment
Restrictions" in the Statement of Additional Information).
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<PAGE>
Under normal circumstances the International Equity Fund will have at
least 65% of its assets invested in European and Pacific Basin equity
securities. The International Equity Fund intends to diversify investments
broadly among countries and normally to have represented in the portfolio
business activities of not less than three different countries. The securities
the International Equity Fund purchases may not always be purchased on the
principal market. For example, American Depository Receipts ("ADR's") may be
purchased if trading conditions make them more attractive than the underlying
security. ADR's are receipts typically issued in the U.S. by a bank or trust
company evidencing ownership of an underlying foreign security. The
International Equity Fund may invest in ADR's which are structured by a U.S.
bank without the sponsorship of the underlying foreign issuer. In addition to
the risks of foreign investment applicable to the underlying securities, such
unsponsored ADR's may also be subject to the risks that the foreign issuer may
not be obligated to cooperate with the U.S. bank, may not provide additional
financial and other information to the bank or the investor, or that such
information in the U.S. market may not be current. Please refer to the Statement
of Additional Information for more information on ADR's.
The selection of the securities in which the International 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.
Since the International Equity Fund seeks to achieve capital
appreciation, it will dispose of a security, regardless of the time it has been
held, to establish gains, to avoid anticipated reductions of value, or to reduce
or eliminate a position in a security which is no longer believed to offer the
potential for suitable gains. Portfolio turnover is expected not to exceed an
annual rate of 100% under normal circumstances. Such a turnover rate may reflect
substantial short term trading and corresponding brokerage costs which the
International Equity Fund must pay.
Investment Strategy. The Advisor will seek to identify those countries
in the European and Pacific regions where economic and political factors are
likely to produce above average returns, as well as those companies in such
countries that are best positioned to take advantage of such developments or are
most attractively valued. In this regard the Advisor will allocate the assets of
the International Equity Fund principally between the European and Pacific
regions.
The Advisor's approach is governed by its belief that the principal
factors affecting an equity market's return are, on a country allocation basis,
the proportion of liquidity in the economy, and, on a stock selection basis, a
consistent stable earnings record together with favorable earnings prospects and
reasonable valuations and, in addition, that the effect of currency fluctuations
on portfolio returns can be reduced through a systematic hedging strategy.
For its country allocation, the Advisor analyzes approximately 30
international equity markets, which include the 20 markets currently comprised
in Morgan Stanley's Europe, Australia and Far East Index ("EAFE"), as well as
the constituent countries of the International Finance Corporation's ("IFC")
Emerging Markets Index. The Advisor also gives consideration
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<PAGE>
to such factors as liquidity, accessibility to foreign investors, regulatory
protection of shareholders, accounting and disclosure standards, transferability
of funds and exchange controls, if any.
The tendency of markets to overreact to short-term concerns (inflation,
political instability) results in market valuations that deviate significantly
from their underlying historical values. The country allocation process aims to
determine the relative attractiveness of the markets in the Advisor's country
universe by establishing a relationship between their current valuations and the
amount of liquidity available in their respective economies and then comparing
that relationship with its historic norm. The rigorous use of comparative
historical data is designed to reduce subjective and speculative bias.
The Advisor's country allocation process is driven by the output of a
valuation model that produces a total expected return range in local currency
for each country in the Advisor's investment universe. Based on data generally
covering close to 30 years' history for markets in the EAFE universe and 10
years' history for countries in the IFC universe, the Advisor tested for the
combination of factors that have historically proven to have statistically
significant predictive power. On a rolling basis, the Advisor compares each
country's equity market relative to its own historical record to determine its
attractiveness at any given point in time. The result of this process is a
12-month expected return range for each market in local currency. On the basis
of these expected return ranges, the Advisor produces a country ranking that
indicates the attractiveness of each market in absolute and relative terms, and
that forms the basis for the Advisor's country allocation process.
Factors: The model evaluates approximately 10 common and specific
factors for each country selected from three sets of independent variables:
macroeconomic variables, valuation indicators and market momentum.
Each factor is assigned a numerical value based on a scale determined
by the historic ranges within which such factors have fluctuated. Based on the
arithmetical sum of all such values, an attractiveness ranking for each country
in the Advisor's universe is produced on a monthly basis. The use of three
different sets of variables in combination results in a higher degree of
predictability of the model's output. Generally, the factors are equally
weighted. In a few instances a double weight is assigned if the predictive power
of a particular factor has historically been very high, like the yield curve,
which is of relevance in most industrialized markets.
Based on the model's monthly total return expectations, a relative
ranking in descending order of attractiveness of all countries in the Advisor's
universe is produced. Since several countries may fall within the same expected
total return range, the actual ranking is determined by the absolute expected
return number for each country. The Advisor normalizes the distribution of
country weights through the use of a risk-variance matrix that establishes for
each market a minimum/maximum weight relative to the benchmark (EAFE). If a
particular country's expected return range shows significant change from one
month to the next or exhibits
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<PAGE>
a declining trend over a quarter, the Advisor analyzes the individual factors
used in the model to determine which of them accounted for the lowered country
ranking. Based on this analysis, the Advisor decides on the magnitude and timing
of the adjustments in country weights.
Before a decision is made to increase a country weight based on the
quantitative output of the valuation model, the Advisor reviews the country's
fundamental economic data that are not part of the country screening process as
well as its political situation. This systematic qualitative analysis focuses on
such macroeconomic data as GDP growth, external trade balances, current account
and balance of payments, external debt position and debt service ratios, foreign
reserve position, ability to finance deficits in external accounts, fiscal and
exchange rate policies, private and public savings rates, as well as
inflationary trends.
Normally, the Fund will tend to be fully invested. International equity
markets have historically demonstrated low correlation with one another, so it
is extremely unlikely that the model would produce simultaneously negative total
return expectations for all the countries in the Advisor's universe so as to
trigger a significant temporary defensive move to cash.
For stock selection within each country, the Advisor seeks to invest in
medium- to largecapitalization companies with solid prospects for consistent and
sustainable annual earnings growth. The Advisor's focus is on companies that
have a long record of successful operations in their core business and earnings
growth through increasing market share and unit sales volumes. Typically they
occupy a leading position in their industry, have demonstrated a high degree of
self-financing and have consistently generated free cash flow.
The Advisor's stock selection process begins by screening a universe of
approximately 2800 stocks in a market capitalization range from approximately
$500 million to approximately $100 billion. The Advisor's screens are designed
to be representative of each market and generally cover a broad cross-section of
companies which together account for about 70% of total market capitalization.
The Advisor's approach is to look at companies whose growth factors can be
measured and compared. The Advisor's data series focus on low price to sales
ratios, consistent earnings growth, solid operating margins, high returns on
equity relative to price to cash flow, and healthy debt ratios. The Advisor
defines cash flow as recurrent net profit plus depreciation. Furthermore, the
Advisor analyzes the share price in relation to earnings before interest, taxes,
depreciation and amortization, and looks at the underlying trend of cash and
retained earnings. The screens, comprising 24 principal factors, include
conventional valuation ratios.
The Advisor supplements the above quantitative screening process by an
analysis of certain qualitative criteria, one of the most important of which is
to identify strong, stable and reliable management that maintains a company's
market position through consistent unit volume growth and gains in market share
rather than a reliance on price increases, exercises tight financial control and
fosters a culture of market responsiveness.
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Based on the Advisor's ranking of approximately 2800 stocks in about 30
different international equity markets, the Advisor usually selects names which
appear in the top 30% of the screens for each country. Based on the screening
factors, these stocks typically show low historical deviations of annual
earnings, high returns on equity and low debt levels. At initial purchase, the
Advisor focuses on companies that on average are selling at a 20% discount to
their long-term growth rate. Position size at purchase ranges from about 0.7% to
1% of total portfolio assets. Within this range position size varies in
proportion to the market capitalization of the company within a given country's
stock market. The Advisor normally allows positions to reach a maximum of
approximately 4% of total assets.
Shifts in country weight are the principal cause for selling stocks.
Stocks are sold if a country's maximum weight based on the risk-variance matrix
has been exceeded.
Within each country, no conscious sector allocation decision is made.
Sector allocation is a residual of the stock selection within each country.
The holding periods of the Fund's core holdings generally exceed one
year. Annual portfolio turnover (total purchases versus average portfolio
assets) has historically been approximately 35%.
For active currency management, the Advisor employs a systematic
currency hedging approach based on a technical-trend-following model.
The International Equity Fund may 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") as described in
"Additional Information on Policies and Investments - Strategic Transactions"
below.
The International Equity Fund may assume a temporary defensive posture.
See "Temporary Defensive Positions" below.
VONTOBEL EASTERN EUROPEAN EQUITY FUND
Investment Objective. The investment objective of the E. European Fund
is to seek to achieve capital appreciation by investing in a carefully selected
and continuously managed diversified portfolio consisting primarily of equity
securities (which are securities convertible into equity securities, such as
warrants, convertible bonds, debentures or convertible preferred stock). The
investments of the Fund will consist principally of equity securities of Eastern
European countries.
Investment Policies. The Fund is designed for individuals and
institutions who wish to diversify their investment programs in international
equities to take advantage of opportunities
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in the newly reorganized capital and securities markets of Central/Eastern
Europe. The Fund normally will invest at least 65% of its assets in equity
securities of companies located in or which conduct a significant portion of
their business in countries which are generally considered to comprise Eastern
Europe, i.e., the member countries of the former Warsaw Pact, including the
European successor states of the former Soviet Union. Currently, the Fund
invests principally in Hungary, the Czech Republic, Poland and Russia. These
countries are already at a relatively advanced stage in their transition to a
market-based economy. The Advisor believes that their relatively well developed
capital and stock markets can handle transactions of a large enough size to
permit fund investment. However, 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 Advisor 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 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. As noted above, investments in equity securities
issued by companies in these "developing countries" or "emerging markets,"
involve exposure to economic structures that are generally less diverse and
mature, with political systems which may have less stability than those of
"developed countries."
The Advisor believes that economic and political developments in Europe
have helped to create new opportunities. In recent years a number of economies
in developed and developing countries have grown faster than the U.S. economy,
and the return on equity investments in these markets has often been superior to
similar investments in the U.S. In addition, the U.S. stock market presently
represents approximately 40% of the capitalization of the world's stock markets
compared to approximately two-thirds in 1970. Significant growth of European
securities markets, coupled with advances in technology and lower cost of
communications, have increased the globalization of securities trading.
Therefore, over the past few years, the number of investment opportunities
outside of the U.S. has grown rapidly. Despite this trend, however, Central and
Eastern European stocks are generally underrepresented in investment portfolios.
Therefore, the Fund offers a means to achieve equity exposure to this region.
It is the policy of the Fund to invest primarily in equity securities
which may achieve capital appreciation by selecting companies with superior
potential based on a series of macro and micro economic analyses. The Fund may
select its investments from companies which are listed on a securities exchange
or from companies whose securities have an established over-the-counter market,
and may make limited investments in "thinly traded" securities (please refer to
the "Investment Restrictions" in the Statement of Additional Information).
The Fund may invest in other investment companies which invest in
Eastern European stocks. By investing in shares of such investment companies
which invest exclusively in such countries, the Fund would indirectly pay a
portion of the operating expenses, management expenses, and brokerage costs of
such companies, as well as those of the Fund. Federal and
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state securities laws impose limits on such investments with which the Fund will
comply, and may affect the ability of the Fund to acquire or dispose of such
shares.
The Fund intends to diversify investments broadly among countries and
normally will have represented in the portfolio business activities of not less
than three different countries. The securities the Fund purchases may not always
be purchased on the principal market. For example, American Depository Receipts
("ADR's"), European Depository Receipts ("EDR's"), or Global Depository Receipts
("GDR's") may be purchased if trading conditions make them more attractive than
the underlying security. ADR's are receipts typically issued in the U.S. by a
bank or trust company evidencing ownership of an underlying foreign security.
The Fund may invest in ADR's which are structured by a U.S. bank without the
sponsorship of the underlying foreign issuer. In addition to the risks of
foreign investment applicable to the underlying securities, such unsponsored
ADR's may also be subject to the risks that the foreign issuer may not be
obligated to cooperate with the U.S. bank, may not provide additional financial
and other information to the bank or the investor, or that such information in
the U.S. market may not be current. Similarly, EDR's and GDR's represent
receipts for a foreign security issued in a location outside the U.S., and may
involve risks comparable to ADR's, as well as the fact that the EDR or GDR is
itself issued outside the U.S. For temporary defensive purposes, the Fund may
hold cash or debt obligations denominated in U.S. dollars or foreign currencies.
These debt obligations include U.S. and foreign government securities and
investment grade corporate debt securities, or bank deposits of major
international institutions. Please refer to the Statement of Additional
Information for more information on ADR's, EDR's, and GDR's.
The selection of the securities in which the Fund will invest will not
be limited to companies of any particular size, or to securities traded in any
particular marketplace, and will be based only upon the expected contribution
such security will make to its investment objective.
Since the Fund seeks to achieve capital appreciation, it will dispose
of a security, regardless of the time it has been held, to establish gains, to
avoid anticipated reductions of value, or to reduce or eliminate a position in a
security which is no longer believed to offer the potential for suitable gains.
Portfolio turnover is expected not to exceed an annual rate of 100% under normal
circumstances. Such a turnover rate may reflect substantial short term trading
and corresponding brokerage costs which the Fund must pay.
Investment Strategy. The Advisor will seek to identify those countries
in the Central/Eastern European region where economic and political factors are
likely to produce above average long term returns, as well as those companies in
such countries that are best positioned to take advantage of such developments
or are most attractively valued. The Fund's assets will be allocated primarily
to the equity markets of those countries whose economies are likely to benefit
from strengthening macroeconomic forces as a result of their transition from a
centrally planned to a market-based economy, the orderly functioning of
democratized political institutions, flexible and viable economic policies,
persistent privatization efforts, modernized legal, banking and regulatory
frameworks, as well as from widespread domestic and foreign support for their
respective national policies.
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The Advisor's approach is governed by its belief that the true economic
value of companies in the newly emerging markets of Eastern Europe is reflected
in their ability to generate consistent growth of free cash flow based on a
sound and verifiable balance sheet and profit and loss accounts prepared in
accordance with internationally accepted accounting principles.
The equity markets of Eastern Europe are currently small by comparison
with those of the industrialized nations of the Organization of Economic
Cooperation and Development, representing on average only approximately 5% of
GDP versus 75% in the U.S. The Fund invests only in equity markets in countries
that (i) are in or have completed transition to a true free market economy, (ii)
have a continued commitment to privatization, and (iii) follow consistent
economic policies. All of these criteria have to be fulfilled simultaneously for
an equity market to qualify for investment.
The region's free market economies and their equity markets are in
their initial stages of development. Reliable historical macroeconomic data is
scarce, and most companies whose shares are listed have insufficiently long
operating histories to permit meaningful long-term financial analysis.
Therefore, the Advisor selects stocks using a thorough bottom-up analysis based
on reliable financial statements supported by regular visits of all companies in
which the Fund invests and which are candidates for investment.
The Advisor in most cases requires companies to present their balance
sheets and profit and loss accounts using either International Accounting
Standards ("IAS") or U.S. generally accepted accounting principles ("US GAAP").
If a company is unable or unwilling to supply the Fund with financials prepared
in accordance with the foregoing accounting standards, the Advisor either
refrains from investing or employs the local office of a major international
accounting firm to translate the financial information supplied into IAS or US
GAAP financial statements.
The Advisor's stock selection process begins by screening the universe
of companies in a market capitalization range of $20 million to approximately $4
billion or more. The screening process involves quantitative and qualitative
criteria.
The Advisor's equity screens focus first and foremost on a company's
ability to generate consistently strong free cash flow. The Advisor defines free
cash flow as net income plus depreciation and amortization, plus or minus
changes in working capital minus capital investments to sustain current and
future earnings growth, and minus amounts used for retiring the principal of
outstanding debt. The Advisor also screens for strong balance sheets and
consistent growth in returns on equity.
The most important quantitative factors are aggregate amount of free
cash flow, cash flow relative to total debt, net cash to total equity, acid
test, current ratio, inventory turnover, asset growth, sales and unit volume
growth, and trend rate of growth in return on equity.
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On occasion the Fund may also invest in companies with strong growth
potential but that do not yet generate free cash flow. Such investments are made
only if there is a strong probability that they will be able to do so within a
time horizon of 12 to 18 months.
The Advisor focuses on companies that manufacture and sell commercially
viable products and services in growing markets, both domestic and export, and
have experienced, minority-shareholder-oriented management.
Based on the Advisor's own two-year earnings and balance sheet
projections, the Advisor calculates earnings and cash flow per share estimates.
The Advisor discounts two-year cash flows to present value using a composite
discount rate, based on local interest rates to which is added a risk premium
for each market.
The Advisor corroborates the valuation of fair market value by
comparing it against the company's historical multiples, the forward multiples
of similar companies in the same industry in its domestic market, the forward
multiples of similar international companies in the same industry and the
overall market's forward multiple.
The Advisor generally purchases stocks when they are trading at a
discount of about 25% to the Advisor's calculation of fair market value, after
adjusting for the expected rate of inflation for the next 12 months, the
expected rate of currency depreciation/devaluation, if any, and an "illiquidity"
discount of 10% to allow for difficult markets at the time of sale.
Generally, stocks are sold when they reach fair value, they
underperform the local index by more than 20% over a trailing six-month period
or a company's fundamentals deteriorate and neither research nor management can
explain the underlying cause. Stock positions generally are trimmed when market
appreciation causes them to exceed 5% of the Fund's total assets.
Position size at purchase ranges from about 2% to 5% of the Fund's
total assets. Within this range, position size varies in proportion to the
market capitalization of the company within a given country's stock market.
Positions generally are allowed to reach a maximum of 5% of the Fund's total
assets. For risk control purposes, the Advisor generally limits investments in
emerging growth companies with micro market capitalizations, i.e., $50 million
or less ("microcaps"), to a maximum of about 2% of the Fund's total assets. The
Fund's allocation to microcaps normally will not exceed approximately 25% of its
total assets.
Normally, the Fund tends to be fully invested.
Sector Allocation. Within each country, no conscious sector allocation
decision is made. Sector allocation is a residual of the stock selection within
each country.
The holding periods of the Fund's core holdings generally exceed one
year. Annual portfolio turnover (total purchases versus average portfolio
assets) reaches approximately 35%.
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<PAGE>
The Fund currently does not actively manage currency risk. Expected
currency depreciation/devaluation is part of the Advisor's evaluation process
for determining a purchase price.
The E. European Fund may 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 of foreign currency
futures as, described in "Additional Information on Policies and Investments -
Strategic Transactions" below.
The E. European Fund may assume a temporary defensive posture. See
"Temporary Defensive Positions" below.
VONTOBEL INTERNATIONAL BOND FUND
Investment Objective. The investment objective of the Bond Fund is to
maximize total return from capital growth and income. The Bond Fund offers
investors a convenient way to invest in a managed portfolio of debt securities
denominated in foreign currencies ("International" securities). The Bond Fund
seeks to achieve its objective of total return by investing in a continuously
managed portfolio consisting primarily of high-grade international bonds.
International bonds are defined as bonds issued (i) in countries other than the
U.S.; (ii) by issuers which are organized in a country other than the U.S. or
have at least 50% of their assets or derive at least 50% of their revenues in
such country (notwithstanding the currency in which such bonds are denominated);
or (iii) by national or international authorities other than the U.S. The
Advisor will seek protection and possible enhancement of principal value by
actively managing currency, bond market and maturity exposure and by security
selection.
The Bond Fund operates as a non-diversified fund for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"), but will seek to
qualify as a diversified investment company for purposes of Subchapter M of the
Internal Revenue Code of 1986, as amended.
Investment Policies. The Bond Fund is designed for individuals and
institutions who wish to diversify their investment programs to take advantage
of opportunities in bond markets outside the U.S. Direct investment in
international securities is usually impractical for most individual and smaller
institutional investors. Investors often find it difficult to purchase and sell
international bonds, to obtain current information about foreign entities, to
hold securities in foreign safekeeping and to convert the value of their
investments from foreign currencies into U.S. dollars. The Bond Fund manages
these concerns for the investor. With a single investment in the Bond Fund, a
shareholder can benefit from the income and potential capital protection and
appreciation associated with a professionally managed portfolio of high-grade
international bonds. The Advisor to the Bond Fund has had extensive experience
investing in international markets and dealing with trading, custody and
currency transactions around the world. To achieve its objective, the Bond Fund
will invest in a managed portfolio of high-grade
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<PAGE>
international bonds that are denominated in foreign currencies, including bonds
denominated in the European Currency Unit ("ECU").
In recent years, opportunities for investment in international bond
markets have become more significant. Foreign currency denominated bond markets
have grown faster than the U.S. dollar denominated bond market in terms of U.S.
dollar market value and now represent more than half of the value of the world's
developed bond markets. Participants in the markets have grown in number thereby
providing better marketability. A number of international bond markets have
reduced entry barriers to foreign investors by deregulation and by reducing
their withholding taxes.
Simultaneously with the opening of foreign markets, barriers to
international capital flows have been reduced or eliminated, freeing investment
funds to seek the highest real returns. Thus, market conditions in one economy
influence market conditions elsewhere through the channel of global capital
flows. The Bond Fund provides a convenient vehicle to participate in
international bond markets, some of which may outperform U.S. dollar denominated
bond markets in U.S. dollar terms during certain periods of time.
Although the Bond Fund is non-diversified, investing in the Bond Fund
can provide international diversity to an investor's existing portfolio of U.S.
dollar denominated bonds ("U.S. bonds"), thereby reducing volatility or risk
over time. Historically, total returns of international bond markets have often
diverged from returns generated by U.S. bond markets. These divergences stem not
only from fluctuating exchange rates, but also from foreign interest rates not
always moving in the same direction or magnitude as interest rates in the U.S.
Investment in the Bond Fund may provide the international bond portion of an
investor's diversification program.
International bonds may provide, at times, higher investment returns
than U.S. bonds. For example, international bonds may provide higher current
income than U.S. bonds and the local price of international bonds can appreciate
more than U.S. bonds. Fluctuations in foreign currencies relative to the U.S.
dollar can potentially benefit investment returns. Of course, in each case, at
any time the opposite may also be true. Investments in the Bond Fund provide
international diversity not only to an investor's existing portfolio of U.S.
bonds but also to an investor's holdings of U.S. or international equities and
other assets.
The portfolio investments of the Bond Fund will be selected on the
basis of, among other things, yields, credit quality, and the fundamental
outlooks for currency and interest rate trends in different parts of the globe,
taking into account the ability to hedge a degree of currency or local bond
price risk. The Bond Fund will normally invest at least 65% of its total assets
in bonds denominated in foreign currencies, however, generally foreign currency
denominated bonds will constitute 90% of its portfolio.
The Bond Fund will invest in very high investment grade instruments
that will bear the rating of A or higher by Standard & Poor's Ratings Group
("S&P") or A or higher by Moody's
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Investors Service, Inc. ("Moody's"), or unrated securities which the Advisor
believes to be of comparable quality. The Bond Fund reserves the right, however,
to invest its assets in lower rated debt securities, that is, debt securities
rated BBB by S&P or Baa by Moody's or below, but no lower than B by S&P or
Moody's or which are unrated but are of comparable quality as determined by the
Advisor. It will do so to avail itself of the higher yields available with these
securities. The Bond Fund will invest no more than 5% of its total assets in
securities rated below investment grade or which are unrated but are of
comparable quality as determined by the Advisor. Securities rated below
investment grade (i.e., below BBB by S&P or Baa by Moody's) entail greater risks
than investment grade debt securities. Securities rated BB by S&P or Ba by
Moody's and below are commonly referred to as "junk bonds" and involve a high
degree of speculation with respect to the payment of principal and interest.
(See "Special Risk Considerations.")
The investments of the Bond Fund may include:
* Debt securities issued or guaranteed by a foreign national government,
its agencies, instrumentalities or political subdivisions;
* Debt securities issued or guaranteed by supranational organizations
(e.g., European Investment Bank, Inter-American Development Bank, the
World Bank and other such organizations);
* Corporate foreign debt securities;
* Bank or bank holding company debt securities;
* Other debt securities, including those convertible into common stock.
The Bond Fund may purchase securities which are not publicly offered.
If such securities are purchased, they may be subject to restrictions applicable
to restricted securities. Please see "Additional information on Policies and
Investments - Investment Restrictions."
The Bond Fund intends to select its investments from a number of
country and market sectors. It may invest substantial amounts in issuers from
one or more countries and would normally have investments in securities of
issuers from a minimum of three different countries; however, it may invest
substantially all of its assets in securities of issuers located in the U.S. for
temporary or emergency purposes. A non-governmental issuer will be considered to
be "from" a country in which it is organized, in which it has at least 50% of
its assets, or from which it derives at least 50% of its revenues.
Under normal circumstances, the Bond Fund will invest no more than 35%
of the value of its total assets in U.S. dollar debt securities, however,
generally it will invest less than 10% of its assets in U.S. dollar debt
securities. The Bond Fund may engage in strategic transactions, as described
below, for hedging purposes and to seek to increase gain.
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<PAGE>
Short-term investments. To protect against adverse movements of
interest rates and for liquidity, the Bond Fund may also invest all or a portion
of its net assets in short-term obligations denominated in U.S. and foreign
currencies such as, but not limited to, bank deposits; bankers' acceptances;
certificates of deposit; commercial paper; short-term government, government
agency, supranational agency and corporate obligations; and repurchase
agreements.
The Bond Fund does not engage in short-term trading due to the fact
that such practices would result in increased commissions and transactions
costs. The Bond Fund may assume a temporary defensive posture. See "Temporary
Defensive Positions" below.
Investment Strategy. The Bond Fund seeks to minimize credit risk and
maintain high liquidity. It is a "non-diversified" investment company under
Federal securities laws, and therefore may invest a larger portion of its assets
in certain issuers, including foreign governments and domestic issuers other
than the U.S. government. It may invest more than 5% of its assets in government
debt securities of the U.S. However, because it intends to qualify as a
"regulated investment company" for purposes of Subchapter M of the Internal
Revenue Code, at least 50% of its total assets must be invested in cash, U.S.
government securities, and securities of issuers (including foreign
governments), in which it has invested not more than 5% of its assets. In any
event, it does not intend to invest more than 5% of its assets in the securities
of any one issuer unless such securities are issued or guaranteed by a national
government and will not invest more than 25% of its total assets in the
securities of any one issuer or national government (other than the United
States). (A regulated investment company is also limited in its purchases of
voting securities of any issuer; the Bond Fund does not intend to purchase any
voting securities, except to the extent it receives such securities due to
conversion of convertible securities.)
Because the Bond Fund is intended for long-term investors who can
accept the risks associated with investing in international bonds, investors
should not rely on an investment in the Bond Fund for their short-term financial
needs and should not view it as a vehicle for playing short-term swings in the
international bond and foreign exchange markets. Shares of the Bond Fund alone
should not be regarded as a complete investment program.
Total return from investment in the Bond Fund will consist of income
after expenses, bond price gains (or losses) in terms of the local currency, and
currency gains (or losses). For tax purposes, realized gains and losses on
currency are regarded as ordinary income and loss and could, under certain
circumstances, have an impact on distributions. The value of the Bond Fund's
portfolio will fluctuate in response to various economic factors, the most
important of which are fluctuations in foreign currency exchange rates and
interest rates.
The Advisor's investment approach is governed by its belief that the
principal factors affecting the total returns of the Fund are (i) the outlook
for the currency in which the underlying securities are denominated, and (ii)
the return outlook in local currency for each bond market in the Advisor's
investment universe. The Advisor believes that quality/sector and security
selection should be aimed at reducing overall portfolio risk rather than
producing
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<PAGE>
incremental return. In addition, the Advisor believes that the effect of
interest rate and foreign currency fluctuations on the Fund's returns can be
reduced through a systematic hedging strategy.
The management of the Fund involves several levels of decision-making:
currency exposure, interest rate sensitivity within markets, quality/sector
exposure and issue selection. The exclusion or inclusion of markets from the
Advisor's market universe and the weighting of markets relative to a benchmark
index cannot be determined without first evaluating currency exposure.
The Advisor's investment approach involves three steps: (i) top-down
currency and market allocation; (ii) management of currency risk and market
allocation; and (iii) relative value analysis (involving maturity,
quality/sector and security selection).
Top-Down Currency and Market Allocation ("Asset Allocation"). The
Advisor analyzes the 12 international fixed income markets which currently
constitute the J.P. Morgan World Government Bond Index (ex-US) and the markets
of Switzerland and Ireland, as well as ECU fixed income markets. To determine
currency and hence market allocation, the Advisor produces monthly forecasts for
both the currency and bond markets in each country in this market universe.
These forecasts are based upon an analysis of broad macroeconomic factors and
economic conditions, including inflation and growth expectations, monetary and
fiscal policy, balance of payments and exchange rates. Technical market
indicators and general sentiment are also assessed. Based on this macroeconomic
scenario, the Advisor develops 3-, 6- and 12-month forecasts for exchange rates
and bond market returns in local currency that form the basis of the Advisor's
investment strategy.
The Advisor's investment process begins with the calculation of total
local currency returns along the yield curve (including yields on short-term
investments) for each market in the Advisor's universe. These projected local
currency returns are translated into U.S. dollar total returns. The Advisor then
establishes a relative attractiveness ranking based on each market's forecasted
U.S. dollar returns, which forms the basis for the Advisor's currency and market
exposure decision.
The Advisor seeks to maximize total return by overweighting those
markets and currencies showing the highest total expected U.S. dollar return
based on the Advisor's ranking. These total returns are adjusted for individual
market risk based on historical volatility and the manager's experience. This
may result in significant over- or underweighting of individual fixed income
markets as well as the underlying currency exposure.
Management of Asset Allocation. The Fund's currency and bond market
weighings are reviewed on an ongoing basis and compared against the monthly
ranking of the markets in the Advisor's universe according to their total return
outlook in U.S. dollars. Shifts in bond market weights are driven by changes in
the relative attractiveness ranking and tend to be gradual. Since it is possible
to increase or reduce currency and bond market exposure by using
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<PAGE>
derivatives, it is not uncommon for a specific bond market's weighing to differ
from the weighing of its corresponding currency. Futures may also be employed to
adjust portfolio risk in anticipation of foreign currency devaluations,
political turmoil in countries to whose currency and interest rate policy the
Fund's portfolio is exposed, or to address expected downgrades of an issuer's
credit rating.
If the need for rapid adjustment of market exposure manifests itself,
exchange-traded derivative instruments are used (i) as hedging instruments or
(ii) as instruments for tactical asset allocation, as described below.
Hedging against negative return impact caused by rising interest rates
takes place through the sale of interest rate futures contracts or the purchase
of put options on interest rate futures contracts. The hedge ratio is derived
from the duration of the underlying fixed income investment(s). These techniques
are employed as anticipatory hedges to gain time to allow for the orderly sale
of underlying securities in response to a negative assessment of market
conditions. The need to hedge currency risk in this context is assessed
separately.
Due to changes in the Advisor's market return forecasts, it may become
necessary from time to time to adjust the duration of certain fixed income
investments held in the Fund which are denominated in one or various foreign
currencies. In this event, the Fund's cash positions can be converted into
synthetic bond positions through the purchase of interest rate futures contracts
or the purchase of call options thereon. As a result, portfolio duration is
lengthened. This technique allows the Fund to make an immediate adjustment to
portfolio duration pending the purchase of underlying positions. Alternatively,
bond positions can be converted into synthetic cash positions by means of
selling interest rate futures contracts or the purchase of put options thereon,
thereby shortening portfolio duration. In all such cases, the portfolio's
currency allocation does not change.
If the U.S. dollar shows strength relative to a currency in which the
Fund holds investments in excess of that projected in the Advisor's currency
forecast, the Advisor hedges positions by buying U.S. dollars against the
foreign currency in the interbank forward foreign exchange market or by selling
the currency in the futures and options markets. Currency hedging decisions are
driven by a systematic currency hedging approach based on a
technicaltrend-following model, combined with fundamental analysis.
Cash may be held in U.S. dollars and/or in any of the major trading
currencies. The Fund's cash position is first and foremost a function of the
Advisor's currency allocation decision and secondarily a function of the
Advisor's duration selection. If the outlook for U.S. dollar cash returns is
more attractive than that for cash and bond returns in all other currencies, the
Fund will hold a U.S. dollar cash position generally not in excess of 25% of its
total assets. Conversely, if the outlook for foreign currency cash returns is
more attractive, the Fund will hold foreign cash positions not in excess of
approximately 25% of its total assets.
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Relative Value Analysis. Maturity selection is based on the Advisor's
total return forecasts, i.e., the Advisor focuses on investment that the Advisor
expects to produce the highest total return in local currency along the yield
curve in each market in the Advisor's universe for the planned holding period.
Maturity selection or, more precisely, duration selection, is the second most
important factor in the Advisor's process. Duration is the expected life of a
fixed-income security, taking into account its coupon yield, interest payments,
maturity and call features. Duration attempts to measure actual maturity, as
opposed to final maturity, by measuring the average time required to collect all
payments of principal and interest. The duration of a callable bond, also called
its effective duration, may be considerably shorter than its stated maturity in
a period of rising interest rates. Thus, as market interest rates rise, the
duration of a financial instrument decreases. For example, a 30-year
conventional mortgage may have an effective duration of only 11 to 12 years,
which means the loan will probably be paid off in about one-third of the time it
is supposedly carried by the originating lender as an earning asset. Duration
differs from other measurements such as average life and half life. Duration
measures the time required to recover a dollar of price in present value terms
(including principal and interest), whereas average life computes the average
time needed to collect one dollar of principal. The Advisor's selection of
duration is based on the Advisor's total return forecasts. Particular yield
curve shapes and/or anomalies are also taken into account. As indicated in the
preceding paragraph, U.S. dollar and/or foreign cash positions are a function of
both currency allocation and duration selection decisions.
Foreign government, governmental agency and supranational agency
obligations and foreign currency Eurobond issues represent the most common types
of investment used in the Fund's portfolio construction. Credit quality of most
issuers in these markets tends to be very high. Quality and sector management
are therefore not as complex as for domestic U.S. bonds. The Advisor focuses its
issue selection on the highest credit quality since opportunities to achieve
significant incremental returns in sector selection are limited.
Issue selection within the quality constraints referred to above is
principally aimed at achieving duration and yield curve targets determined in
accordance with the Advisor's top-down market allocation decisions. The Advisor
is conscious of the need for liquidity and therefore invests only in issues
within a sector that have the greatest future marketability, as determined by
quality of issuer, issue size, number of market makers, and bid/offer spreads.
Since in most markets the Advisor purchases government bonds, the liquidity of
portfolio holdings is usually very high.
The Advisor's aim is to buy those fixed income securities that are most
reasonably priced as measured in terms of the yield spread against a comparable
government bond or, in the case of a government bond, if the Advisor believes
that it is undervalued relative to its peers. At purchase the Advisor
establishes positions of up to a maximum of 5% of the Fund's total assets. The
Advisor also gives consideration to such factors as liquidity (tradability),
legal protection of bondholders, accounting and disclosure standards,
transferability of funds and the risk of imposition of exchange controls, as
well as the tax treatment of interest and capital gains.
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Positions are sold (i) as a result of shifts in currency and market
weights, (ii) as a result of duration adjustments, (iii) if the underlying bonds
become expensive relative to the government bond, (iv) in response to sector
selection, (v) based on a negative credit review of an issuer, or (vi) if cash
becomes a more attractive investment alternative.
The most critical determinants of performance (total return in U.S.
dollars) are strategic decisions as to currency exposure and duration. The
Advisor therefore refrains from switching among issues to boost portfolio
return; any incremental benefit would likely be offset by trading costs since
bid/ask spreads in international fixed income markets can be wider than in U.S.
domestic markets. Trading activity is usually governed by implementation of
strategic changes in portfolio composition, which are usually infrequent, so
portfolio turnover is generally low.
ADDITIONAL INFORMATION ON POLICIES AND INVESTMENTS
Repurchase Agreements. As a means of earning income for periods as
short as overnight, the Funds may without limit enter into repurchase
agreements, which are collateralized by U.S. government securities in which it
may otherwise invest, with selected banks and broker/dealers. Under a repurchase
agreement, a Fund acquires securities, subject to the seller's agreement to
repurchase at a specified time and price. The Fund requires the party obligated
to repurchase the securities to provide it with collateral for that obligation.
Repurchase agreements are considered to be loans under the 1940 Act. The Fund
may enter into repurchase commitments for investment purposes for periods of 30
days or more. Such commitments involve investment risk similar to that of debt
securities in which it invests. For purposes of the tax diversification test
under Subchapter M of the Code, repurchase agreements are likely to be treated
as securities issued by the seller and subject to the "5% per issuer"
requirement noted above. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted. In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell the securities. Also, the value of such securities may
decline before it is able to dispose of them.
Reverse Repurchase Agreements. As a means of enhancing income, the Bond
Fund may enter into reverse repurchase agreements with selected banks and
broker/dealers. Under a reverse repurchase agreement, a fund sells securities
subject to an obligation to repurchase those securities at a specified time and
price. In order to comply with U.S. regulatory conditions applicable to
investment companies, the Bond Fund will recognize gains or losses on such
obligations each day, and will segregate cash, U.S. government securities, or
other high-grade debt instruments in an amount sufficient to satisfy its
repurchase obligation, will mark the value of the assets to market daily, and
post additional collateral if necessary. The Bond Fund may invest the payment
received for such securities prior to fulfilling its obligation to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act. Therefore, the Bond Fund's investment in reverse repurchase
agreements is subject to the borrowing limitations of the 1940 Act (See
"Investment Restrictions" in the Statement of
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Additional Information). If the buyer under a repurchase agreement becomes
insolvent, the Bond Fund's right to reacquire its securities may be impaired. In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the buyer of the securities before repurchase of the securities under
a reverse repurchase agreement, it may encounter delay and incur costs before
being able to apply the cash held to purchase replacement securities. Also, the
value of such securities may increase before it is able to purchase them.
When-issued Securities. The Bond Fund may purchase securities on a
when-issued or forward delivery basis, for payment and delivery at a later date.
The price and yield are generally fixed on the date of commitment to purchase.
During the period between purchase and settlement, no interest accrues to the
Bond Fund. At the time of settlement, the market value of the security may be
more or less than the purchase price. The Bond Fund reflects gains or losses on
such commitments each day, and segregates assets sufficient to meet its
obligation pending payment for the securities.
Strategic Transactions. Each of the Funds may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific fixed-income market movements), to manage the maturity or duration of
fixed-income securities, or to enhance potential gain. Such strategies are
generally accepted as modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the 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 forward foreign currency contracts,
foreign currency futures as defined below, currency swaps or options on
currencies (collectively, all the above are called "Strategic Transactions").
Interest rate swaps involve the exchange by a fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
The Advisor does not, as a general rule, intend regularly to enter into
strategic transactions for the purpose of reducing currency and market risk, for
two reasons. First, for the E. European Fund, since financial derivatives in
Eastern European markets currently must be tailor-made to the Fund's
specifications, they are extremely costly and illiquid instruments,
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and as such do not offer a cost-effective way to reduce currency and market
risk. Second, each of the Funds is intended for investors with a long-term
investment horizon and it is the Advisor's view that any short-term losses due
to fluctuations in local currencies or stock market values will be compensated
over the long term by the capital appreciation of the portfolio securities.
Notwithstanding the foregoing, the Advisor may, from time to time as
circumstances dictate, engage in strategic transactions as described herein.
Currency risk is assessed separately from equity analysis. To balance
undesirable currency risk, each of the International Equity Fund, E. European
Fund and Bond Fund (each, an "International Fund") may enter into forward
contracts to purchase or sell foreign currencies in anticipation of the Fund's
currency requirements, and to protect against possible adverse movements in
foreign exchange rates. Although such contracts may reduce the risk of loss due
to a decline in the value of the currency which is sold, they also limit any
possible gain which might result should the value of the currency rise. Foreign
investments which are not U.S. dollar denominated may require the Fund to
convert assets into foreign currencies or convert assets and income from foreign
currencies to dollars. Normally, exchange transactions will be conducted on a
spot or cash basis at the prevailing rate in the foreign exchange market.
However, the investment policies permit the Fund to enter into forward foreign
currency exchange contracts in order to provide protection against changes in
foreign exchange rates. Any transactions in foreign currencies will be designed
to protect the dollar value of the assets composing or selected to be acquired
or sold for the investment portfolio of the Fund; the Fund will not speculate in
foreign currencies. In addition, because the exchange rate of some Eastern
European currencies may be linked to a basket of convertible currencies
including the U.S. dollar and the deutschemark, the Advisor may elect, from time
to time as circumstances dictate, to reduce the effect of currency fluctuations
on the value of existing or anticipated holdings or sales proceeds of portfolio
securities by proxy hedging. For more information, see sections on forward
foreign currency contracts and proxy hedging in the Statement of Additional
Information.
Each International Fund may purchase and write covered call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of foreign securities. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. In
connection with such transactions, the Fund will segregate assets sufficient to
meet its obligations: when the Fund's obligation is denominated in a foreign
currency, the Fund will own that currency or assets denominated in that
currency, or a currency or securities which the Advisor determines will move
along with the hedged currency or portfolio securities.
Each International Fund may enter into contracts for the purchase or
sale for future delivery of foreign currencies ("foreign currency futures").
This investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the portfolio securities or adversely affect the prices of securities that the
Fund intends to purchase or sell at a later date. The successful use of currency
futures
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will usually depend on the Advisor's ability to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected manner, the
Fund may not achieve the anticipated benefits of foreign currency futures or may
realize losses.
Each International Fund is authorized to use financial futures,
currency futures, and options on such futures for certain hedging purposes
subject to conditions of regulatory authorities (including margin requirements)
and limits established by the Company's Board of Directors to avoid speculative
use of such techniques.
Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect its unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of its portfolio, to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities, or as a means to efficiently change country
and/or currency allocation. Some Strategic Transactions may also be used to
enhance potential gain although no more than 5% of a Fund's assets will be
committed to futures and options on future entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Bond Fund to utilize
these Strategic Transactions successfully will depend on the Advisor's ability
to predict pertinent market movements, which cannot be assured. The Bond Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
See "Special Risk Considerations - Strategic Transactions" for
additional information. Strategic Transactions also are likely to involve
"Section 988 transactions," at least in part. As such, the foreign currency
component must be segregated for tax purposes and treated as ordinary interest
income or loss and distributed. See "Taxation," also.
Temporary Defensive Positions. When the Advisor 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). For
temporary defensive or emergency purposes, however, the Bond Fund may invest
without limit in investment grade U.S. debt securities, including short-term
money market securities. 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.
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When a Fund is in a temporary defensive position, it is not pursuing its stated
investment policies. The Advisor decides when it is appropriate to be in a
defensive position. It is impossible to predict for how long such alternative
strategies will be utilized.
SPECIAL RISK CONSIDERATIONS
Foreign Securities and Currencies. Since investments in each
International Fund are normally primarily denominated in foreign currencies,
exchange rates are likely to have a significant impact on its total performance.
For example, a fall in the U.S. dollar's value relative to the Japanese yen will
increase the U.S. dollar value of a Japanese bond held in the portfolio, even
though the price of that bond in yen terms remains unchanged. Conversely, if the
U.S. dollar rises in value relative to the yen, the U.S. dollar value of a
Japanese bond will fall. Investors should be aware that exchange rate movements
can be significant and endure for long periods of time. The Advisor attempts to
control exchange rate risks through active portfolio management.
In addition, for the Bond Fund, the Advisor attempts to mitigate
interest rate risks through management of currency, bond market and maturity
exposure and security selection which will vary based on available yields and
the Advisor's outlook for the interest rate cycle in various countries and
changes in foreign currency exchanges rates. In any of the markets in which the
Fund invests, longer maturity bonds tend to fluctuate more in price as interest
rates change than shorter-term instruments - again providing both opportunity
and risk.
In addition to the risks outlined above, an investor should be aware
that investing in foreign securities involves risks which are not normally
associated with investing in U.S. securities, such as, exchange control
regulations; costs incurred in connection with conversions between various
currencies; availability of less financial information than comparable U.S.
companies; lack of uniform accounting, auditing and financial reporting
requirements; less liquidity and more volatility than securities listed on U.S.
security markets due to substantially lower trading volume; possibly lower sales
prices in the event of forced liquidation of securities in order to meet
unanticipated cash requirements; fixed commissions on foreign security markets
which are generally higher than negotiated commissions on U.S. security markets,
in addition to less supervision and regulation of such security markets;
difficulty in enforcing judgments abroad; and the possibility of expropriation
of assets, confiscatory taxation, imposition of withholding of taxes prior to
payment of dividends or other distributions, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Communications between the U.S. and foreign countries may be less reliable than
within the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. It may be more
difficult for an International Fund's agents to keep currently informed about
corporate actions which may affect the prices of portfolio securities.
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Newly Developed Markets. The E. European Fund invests, and the
International Equity Fund may invest, in securities which trade in newly
developed markets which do not have a lengthy operating history. These markets
may be subject to substantial volatility and securities traded on these markets
may be subject to greater fluctuations in price than securities traded on more
developed markets. An investment in securities trading in these types of markets
should be considered risky and they pose greater risk than investments in more
developed markets. In cases of extreme volatility, obtaining accurate quotes on
securities may be difficult and in some instances the fund will rely on security
prices which are determined by procedures set by the Board of Directors to
determine "fair value".
Non-Diversified Fund. While the Bond Fund will seek to qualify as a
"diversified" investment company under provisions of Subchapter M of the
Internal Revenue Code of 1986, it will not be diversified under the 1940 Act.
Thus, while at least 50% of its total assets will be represented by cash, cash
items, and other securities limited in respect of any one issuer to an amount
not greater than 5% of its total assets, it will not satisfy the 1940 Act
requirement in this respect, which applies that test to 75% of its assets. A
non-diversified portfolio is subject to greater risk because adverse effects on
the portfolio's security holdings may affect a larger portion of the overall
assets.
Strategic Transactions. Strategic Transactions have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation it can realize on its investments or cause it
to hold a security it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors including
the imposition of exchange controls, suspension of settlements, or the inability
to deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degrees of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. The Strategic Transactions that
the Fund may use and some of their risks are
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described more fully in the Statement of Additional Information. Investments in
debt securities issued by foreign governments and foreign corporations domiciled
in such countries could result in the imposition of withholding taxes on
interest and capital gains by the country of domicile or residence of the
issuer. The amount of tax withheld, if any, will depend on the domestic tax law
of the country of domicile or residence of the issuer and/or the availability of
a bilateral income tax treaty between such country and the United States. If a
withholding tax is imposed, the rate of return on the foreign investments could
be adversely affected.
INVESTMENT RESTRICTIONS
The investments of the Funds are subject to investment limitations
which may not be changed without the approval of at least a majority of the
outstanding voting securities, as that term is defined in the 1940 Act. (See the
Statement of Additional Information for the specific definition.)
Certain of these policies are detailed below, while other policies
which prohibit or limit particular practices are set forth in the Statement of
Additional Information. The investment restrictions of each Fund specifically
provide, except as noted otherwise, that it may not:
* Except for the Bond 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.
* Except for the Bond 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 or, except for the Value Fund, more than 10% of any class of the
outstanding stock or securities of such issuer.
* Act as an underwriter of securities of other issuers, except (i) that
each of the International Equity and E. European 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; and (ii) with respect to
the Bond Fund, to the extent that the Bond Fund may be deemed an
underwriter in connection with the disposition of portfolio securities
of the Fund.
* Buy or sell commodities or commodity contracts, provided that each of
the International Equity and E. European Funds may utilize not more
than 1% of its assets for deposits or commissions required to enter
into, for the International Equity Fund, forward foreign currency
contracts, and for the E. European Fund, financial futures contracts,
for
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hedging purposes as described under "Investment Policies" and
"Additional Information on Policies and Investments - Strategic
Transactions." (Such deposits or commissions are not required for
forward foreign currency contracts.)
* As to the International Equity Fund and E. European Fund, 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 and Bond 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 and Bond Fund may borrow up to 20% of the value of the
Fund's assets to meet redemptions, provided that the Fund may not make
other investments while such borrowings are outstanding.
* Make loans, except that a Fund may (1) lend portfolio securities; and
(2) enter into repurchase agreements secured by the U.S. Government or
Agency securities and, with respect to the Bond Fund, except to the
extent that the entry into repurchase agreements and the purchase of
debt securities in accordance with its investment objective and
policies may be deemed to be loans.
* Invest more than 25% of a Fund's total assets in securities of
companies in the same industry, with certain qualifications with
respect to the Bond Fund described in the Statement of Additional
Information.
Percentage limitations in the foregoing description of the Funds'
investments and policies and this "Investment Restrictions" section are
determined at the time a Fund makes a purchase or loan subject to such
percentage.
PERFORMANCE TERMS AND COMPUTATIONS
From time to time each of the Funds may advertise information regarding
its performance. All performance figures are historical, show the performance of
a hypothetical investment and are not intended to indicate future performance.
Advertising may include the following performance measurements.
"Yield" is the ratio of income per share derived from the portfolio
investments to the current maximum offering price expressed in terms of a
percentage.
"Distribution rate" is the amount of distribution per share made over a
twelve-month period divided by a current maximum offering price.
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"Total return" is the total of all income and capital gains paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
"Average annual total return" refers to the average annual compound
rate of return of an investment in the Fund assuming that the investment has
been held for one-, five- and ten-year periods, as applicable, and/or the life
of the Fund.
"Cumulative total return" represents the cumulative change in value of
an investment in the Bond Fund for various periods. These calculations assume
that dividends and capital gains distributions were reinvested.
"Capital change" measures return from capital, including reinvestment
of any capital gains distributions but not reinvestment of dividends.
Performance will vary based upon, among other things, changes in market
conditions and the level of the Funds' expenses. Please refer to the Statement
of Additional Information for more information on Performance.
THE COMPANY'S MANAGEMENT
The Board of Directors of the Company is responsible for the
supervision of the general business of the Company. The Directors act as
fiduciaries for shareholders under the laws of the State of Maryland. The Board
has appointed John Pasco, III to serve as President of the Company. The Company
employs the following persons to provide it with investment advice and to
conduct its ongoing business:
Investment Advisor - Vontobel USA Inc. (the "Advisor") manages the
investments of the assets of the Funds pursuant to Investment Advisory
Agreements (each, an "Advisory Agreement"). The Advisory Agreement of the E.
European Fund is effective for a period of two years from February 14, 1996, and
may be renewed thereafter, and the Advisory Agreement of each of the other Funds
may be renewed annually, only so long as such renewal and continuance is
specifically approved at least annually by the Company's Board of Directors or
by vote of a majority of the outstanding voting securities of the applicable
Fund, provided the continuance is also approved by a majority of the Directors
who are not "interested persons" of the Company or the Advisor by vote cast in
person at a meeting called for the purpose of voting on such approval. The
address of the Advisor is 450 Park Avenue, New York, N.Y. 10022.
The Advisor is a wholly owned and controlled subsidiary of Vontobel
Holding Ltd., a Swiss bank holding company, having its registered offices in
Zurich, Switzerland. As of December 31, 1996, the Advisor manages in excess of
$1.4 billion. The Advisor also acts as the advisor to three series of a
Luxembourg fund organized by an affiliate of the Advisor. That fund does not
accept investments from the U.S.
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Mr. Edwin Walczak is the First Vice President and Chief Investment
Officer of the Advisor, and has been the President and portfolio manager of the
Value Fund since its inception in March 1990.
Mr. Fabrizio Pierallini, who is a Vice President of the Advisor, has
been the President and portfolio manager of the International Equity Fund since
May 1994. From May 1991 to April 1994 Mr. Pierallini was an
Associate-Director/Portfolio Manager with Swiss Bank Corporation in New York
where he was responsible for, among other things, international asset
allocation. From September 1988 to May 1991 Mr. Pierallini was a Vice-
President/Portfolio Manager with SBC Portfolio Management Ltd. in Zurich,
Switzerland, where, among other responsibilities, he actively managed
institutional portfolios.
Mr. Arpad Pongracz, who is a Vice President of the Advisor, has been
the President and portfolio manager of the E. European Fund since its inception
on February 15, 1996. Mr. Pongracz joined Vontobel Asset Management,
Switzerland, in 1990 as an equity analyst. He was subsequently appointed
portfolio manager for all European equity institutional accounts and mutual
funds. Since 1995, he has been head of Vontobel Asset Management's
international equities team. Mr. Pongracz is a Chartered Financial Analyst.
Mr. Sven Rump, who is a Vice President of the Advisor, has been the
President and portfolio manager of the Bond Fund since its inception on March 1,
1994. Mr. Rump is also a Vice President of Vontobel Asset Management Ltd.,
Zurich, Switzerland, where he is responsible for managing fixed income
investments and mutual funds. From October 1990 to October 1991, Mr. Rump was a
Vice President of Bank Vontobel (Switzerland) and a fixed income specialist for
the private banking group. Mr. Rump is a Chartered Financial Analyst.
Pursuant to the Advisory Agreements, the Advisor provides the Funds
with investment management services, subject to the supervision of the Board of
Directors of the Company, and with office space, and pays the ordinary and
necessary office and clerical expenses relating to investment research,
statistical analysis, supervision of the Funds' portfolios and certain other
costs. The Advisor also bears the cost of fees, salaries and other remuneration
of the Company's Directors, officers or employees who are officers, Directors,
or employees of the Advisor. Each Fund is responsible for all other costs and
expenses, such as, but not limited to, brokerage fees and commissions in
connection with the purchase and sale of securities, legal, auditing,
bookkeeping and record keeping services, custodian and transfer agency fees and
fees and other costs of filing notice of or registration of its shares for sale
under various state and Federal securities laws. All expenses of each Fund not
specifically assumed by the Advisor are assumed by the Fund.
Under the Advisory Agreement with each Fund, the Advisor is entitled to
monthly compensation accrued daily at an annual rate equal to the percentage of
the average daily net assets of the Funds as set forth below:
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================================================================================
International
Value Equity E. European Bond
Amount of Assets Managed Fund Fund Fund Fund
- --------------------------------------------------------------------------------
$0-$100 million 1.00% 1.00% 1.25% 1.00%
- --------------------------------------------------------------------------------
More than $100 million to 0.75% 0.75% 1.25% 1.00%
$500 million
- --------------------------------------------------------------------------------
More than $500 million 0.75% 0.75% 1.00% 1.00%
================================================================================
These fees are higher than those charged to most other investment companies, but
are comparable to fees paid by investment companies with investment objectives
and policies similar to the Funds' investment objectives and policies. The fee
is paid monthly, within five business days after the end of the month. Each
Advisory Agreement provides that the fee paid will be reduced to the extent
necessary to comply with any applicable state expense limitation provision to
which the Fund may be subject.
The Advisory Agreements contemplate the authority of the Advisor to
place orders for each of the Funds pursuant to its investment determinations
either directly with the issuer or with any broker or dealer. The Advisor may
allocate brokerage to an affiliated dealer in accordance with written policies
and procedures adopted by the Company's Board of Directors. In placing orders
with brokers or dealers, the Advisor will attempt to obtain the best net price
and the most favorable execution of its orders. The Advisor may purchase and
sell securities to and from brokers and dealers who provide the Advisor with
research advice and other services, or who sell shares of the Funds. From time
to time, and subject to the Advisor obtaining the best price and execution for
each Fund, the Board of Directors may authorize the Advisor to allocate
brokerage transactions to a broker in consideration of: (1) investment research
or statistical services, or (2) payment of an obligation otherwise payable by
the Funds.
Administrator - Commonwealth Shareholder Services, Inc. ("CSS"), serves
as Administrator to each Fund pursuant to an Administrative Services Agreement.
CSS provides certain recordkeeping and shareholder servicing functions required
of registered investment companies, and will assist each Fund in preparing and
filing certain financial and other reports and performs certain daily functions
required for ongoing operations. CSS may furnish personnel to act as the
Company's officers to conduct the Company's business subject to the supervision
and instructions of the Company's Board of Directors.
The Administrative Services Agreements provide that CSS will be paid
monthly: (1) 0.20% of the average daily net assets of the Funds (which includes
regulatory matters, backup of the pricing of shares of each Fund, administrative
duties in connection with the execution of portfolio trades, and certain
services in connection with Fund accounting); (2) an hourly fee for
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shareholder servicing and state securities law matters; and (3) certain
out-of-pocket expenses. The address of CSS is 1500 Forest Avenue, Suite 223,
Richmond, VA 23229.
Custodian and Accounting Services Agents
Brown Brothers Harriman & Co. ("BBH") is the Company's custodian and
accounting services agent for the International Funds. BBH collects income when
due and holds all the portfolio securities and cash of the International Funds.
(BBH, with the consent of the Company, has designated The Depository Trust
Company of New York, as its agent to secure some of the assets of the
International Funds.) BBH is authorized to appoint other entities to act as
sub-custodians to provide for the custody of foreign securities which may be
acquired and held by the International Funds outside the U.S. Such appointments
are subject to appropriate review by the Company's Board of Directors. BBH, as
the accounting services agent of the International Funds, maintains and keeps
current the books, accounts, records, journals or other records of original
entry relating to such Funds' business. The address of BBH is 40 Water Street,
Boston, Massachusetts 02109.
Star Bank (the "Star Bank") in Cincinnati, Ohio is the custodian and
accounting services agent for the Value Fund. Star Bank collects income when due
and holds all of the Value Fund's portfolio securities and cash. Such
appointments are subject to appropriate review by the Company's Board of
Directors. Star Bank, as the accounting services agent of the Value Fund,
maintains and keeps current the books, accounts, records, journals or other
records of original entry relating to the Value Fund's business. The address of
Star Bank is 425 Walnut Street, P.O. Box 1118, Cincinnati, Ohio 45201-1118.
Transfer and Dividend Disbursing Agent - Fund Services, Inc. ("FSI" or
the "Transfer Agent") is the transfer and dividend disbursing agent for the
Company. John Pasco, III, Chairman of the Board of the Company owns one third of
the stock of FSI, and, therefore, FSI may be deemed to be an affiliate of the
Company. FSI provides all the necessary facilities, equipment and personnel to
perform the usual and ordinary services of the transfer and dividend disbursing
agent, including administrative receipt and processing of orders and payments
for purchases of shares, opening shareholder accounts, preparing shareholder
meeting lists, mailing proxy material, receiving and tabulating proxies, mailing
shareholder reports and prospectuses, withholding certain taxes on non-resident
alien accounts, disbursing income dividends and capital distributions, preparing
and filing U.S. Treasury Department Form 1099 (or equivalent) for all
shareholders, preparing and mailing confirmation forms to shareholders for all
purchases and redemptions of the Company's shares and all other confirmable
transactions in shareholders' accounts, recording reinvestment of dividends and
distribution of the Company's shares. Under the Agreement between the Company
and FSI, as in effect on May 1, 1991, FSI is compensated pursuant to a schedule
of services and out-of-pocket expenses. The schedule calls for a minimum payment
of $16,500 per year. The address of the Transfer Agent is P.O. Box 26305,
Richmond, VA 23260.
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Principal Underwriter/Distributor - Vontobel Fund Distributors, a
division of First Dominion Capital Corp. (the "Distributor"), acts as the
principal underwriter for the Company pursuant to an agreement effective January
1, 1994. Mr. John Pasco, III, who owns 100% of the outstanding stock of the
Distributor, is the President, Treasurer and a Director of the Distributor. Mr.
Pasco is also the Chairman and a Director of the Company. The address of the
Distributor is 1500 Forest Avenue, Suite 223, Richmond, VA 23229.
HOW TO INVEST
Shares of the Funds may be purchased directly from the Distributor or
through brokers or dealers who are members of the National Association of
Securities Dealers, Inc. who are registered, if required, in the state where the
purchase is made and who have a sales agreement with the Distributor. After a
shareholder account is established, subsequent orders for shares may be mailed
directly to the Transfer Agent. The offering price per share is equal to the net
asset value per share next determined after receipt of a purchase order. A
minimum initial investment of $1,000 is required to open a shareholder account
in each Fund, and each subsequent investment must be $50 or more. Under certain
circumstances the Company 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).
When an investor acquires shares of a Fund from a securities broker or
dealer, the investor may be charged a transaction fee for shares purchased
and/or redeemed at net asset value through that broker or dealer.
To facilitate the handling of transactions with shareholders, the
Company uses an open account plan. The Transfer Agent will automatically
establish and maintain an open account for the Funds' shareholders. Under the
open account plan your shares are reflected in your open account. This service
facilitates the purchase, redemption or transfer of shares, eliminates the need
to issue or safeguard certificates and reduces time delays in executing
transactions. Stock certificates are not required and are not normally issued.
Stock certificates for full shares will be issued by the Transfer Agent upon
written request but only after payment for the shares is collected by the
Transfer Agent.
Purchase by Mail - For initial purchases the account application form
(the "Account Application") which accompanies this Prospectus should be
completed, signed, and mailed to the Transfer Agent, together with your check or
other negotiable bank draft drawn on and payable by a U.S. Bank payable to the
applicable Fund. For subsequent purchases include with your check the tear-off
stub from a prior purchase confirmation, or otherwise identify the name(s) of
the registered owner(s) and the social security numbers.
Investing by Wire - You may purchase shares by requesting your bank to
transmit "Federal Funds" by wire directly to the Transfer Agent. To invest by
wire please call the Transfer Agent for instructions, then notify the
Distributor by calling 800-527-9500. Your bank
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may charge you a small fee for this service. The Account Application which
accompanies this Prospectus should be completed and promptly forwarded to the
Transfer Agent. This application is required to complete the Funds' records in
order to allow you access to your shares. Once your account is opened by mail or
by wire, additional investments may be made at any time through the wire
procedure described above. Be sure to include your name and account number in
the wire instructions you provide your bank.
HOW TO REDEEM SHARES
Subject to certain exigencies described below, shares of the Funds may
be redeemed at any time and in any amount by mail or telephone. For your
protection, the Transfer Agent will not redeem your shares until it has received
all information and documents necessary for your request to be in "proper
order." (See "Signature Guarantees.") You will be notified promptly by the
Transfer Agent if your redemption request is not in proper order.
If a shareholder redeems shares of the E. European Fund that have been
held less than six months (including shares to be exchanged), the Company will
deduct from the proceeds a redemption charge of 2% of the amount of the
redemption. This amount is retained by the E. European Fund to offset the Fund's
costs of purchasing or selling securities.
The Company's procedure is to redeem shares at the net asset value next
determined after receipt by the Transfer Agent of the redemption request in
proper order as described herein. Payment will be made promptly, but no later
than the seventh day following receipt of the request in proper order. Please
note that (1) the Transfer Agent cannot accept redemption requests which specify
a particular date for redemption, or which specify any special conditions; and
(2) if the shares you are redeeming were purchased by you less than 15 days
prior to the receipt of your redemption request, the Transfer Agent must
ascertain that your check in payment of the shares you are redeeming has cleared
prior to disbursing the redemption proceeds. If you anticipate the need to
redeem before 15 days after purchase, you should make your purchase by Federal
Funds wire, or by a certified, treasurer's or cashier's check.
The Company may suspend the right to redeem shares for any period
during which the New York Stock Exchange is closed or the Securities and
Exchange Commission determines that there is an emergency. In such circumstances
you may withdraw your redemption request or permit your request to be held for
processing at the net asset value per share next computed after the suspension
is terminated.
Redemption by Mail - To redeem shares by mail, send the following
information to the Transfer Agent: (1) a written request for redemption signed
by the registered owner(s) of the shares, exactly as the account is registered;
(2) the stock certificates for the shares you are redeeming, if any stock
certificates were issued; (3) any required signature guarantees (see "Signature
Guarantees"); and (4) any additional documents that might be required for
redemption by corporations, executors, administrators, trustees, guardians, etc.
The Transfer Agent will mail the proceeds to your currently registered address,
payable to the registered owner(s) unless
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you specify otherwise in your redemption request. There is no charge to
shareholders for redemptions by mail.
Redemption by Telephone - You may redeem your shares by telephone if
you request this service on your Account Application at the time you complete
your initial Account Application. If you do not request this service at that
time, you must request approval of telephone redemption privileges in writing
(sent to the Company's Transfer Agent) with a signature guarantee (see
"Signature Guarantee") before you can redeem shares by telephone. Once your
telephone authorization is in effect, you may redeem shares by calling the
Transfer Agent at (800) 628-4077. By establishing this service, you authorize
the Transfer Agent to act upon any telephone instructions it believes to be
genuine, to (1) redeem shares from your account and (2) mail or wire redemption
proceeds. There is no charge for establishing this service, but the Transfer
Agent will charge your account a $10.00 service fee each time you make a
telephone redemption. The amount of this service charge may be changed at any
time, without notice, by the Transfer Agent.
You cannot redeem shares by telephone if you hold a stock certificate
representing the shares you are redeeming or if you paid for the shares with a
personal, corporate, or government check and your payment has been on the books
of the Company for less than 15 days.
If it should become difficult to reach the Transfer Agent by telephone
during periods when market or economic conditions lead to an unusually large
volume of telephone requests, a shareholder may send a redemption request to the
Transfer Agent by overnight mail.
The Company employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if it does not,
it may be liable for any losses due to unauthorized or fraudulent transactions.
As a result of this policy, a shareholder authorizing telephone redemption bears
the risk of loss which may result from unauthorized or fraudulent transactions
which the Company believes to be genuine. When you request a telephone
redemption or transfer, you will be asked to respond to certain questions
designed to confirm your identity as a shareholder of record. Your cooperation
with these procedures will protect your account and the Company from
unauthorized transactions.
Redemption by Wire - If you request by mail or telephone 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 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.
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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, VA 23229. The Transfer Agent cannot
honor guarantees from notaries public, savings and loan associations, or savings
banks.
Small Accounts - Due to the relatively higher cost of maintaining small
accounts, the Company may deduct $10 per year from an account of a Fund or, for
the E. European Fund, may redeem the Fund's shares in the account, if as a
result of redemption or transfer of shares the total investment remaining in the
account for the Fund, has a value of less than $1,000. Shareholders will receive
60 days' written notice to increase the account value above $1,000 before the
fee begins to be deducted, or, for the E. European Fund, the shares are
redeemed. A decline in the market value of your account alone would not require
you to bring your investment up to the minimum.
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.
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SPECIAL SHAREHOLDER SERVICES
The Company offers the following four services for its shareholders:
Regular Account - allows shareholders to make voluntary additions and
withdrawals to and from their account as often as they wish;
Invest-A-Matic Account - permits automatic monthly investments into a
Fund from your checking account on a fixed or flexible schedule;
Individual Retirement Accounts (IRA's); and
Exchange Privileges Account - allows the shareholder to exchange his or
her shares for shares of certain other Funds having different investment
objectives provided the shares of the Fund the shareholder is exchanging into
are noticed for sale in the shareholder's state of residence. A shareholder's
account may be charged a $10.00 telephone exchange fee. An exchange is treated
as a redemption and a purchase, and may result in the realization of a gain or
loss on the transaction. More information on any of these services is available
upon written request to the Company.
HOW NET ASSET VALUE IS DETERMINED
The net asset value ("NAV") of the shares of each Fund is determined by
its custodian as of the close of trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern Time) on each business day from Monday to Friday
or on each day (other than a day during which no Fund share was tendered for
redemption and no order to purchase or sell a Fund share was received by the
Company) in which there is a sufficient degree of trading in the portfolio
securities that the current NAV of the shares might be materially affected by
changes in the value of such portfolio security. Each Fund's NAV is calculated
at such 4:00 p.m. time set by the Company's Board of Directors based upon the
Board's determination that this is the most appropriate time to price the
securities.
NAV per share is determined by dividing the total value of the assets,
less its liabilities, by the total number of shares then outstanding. Generally,
securities owned by a Fund are valued at market value.
Investments in securities traded on a national securities exchange or
included in the NASDAQ National Market System are valued at the last reported
sales price. Other securities traded in the over-the-counter market and listed
securities for which no sale is reported on that date are valued at the last
reported bid price.
Short-term debt securities (less than 60 days to maturity) are valued
at their fair market value using amortized cost pricing procedures set, and
determined to be fair, by the Board of
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Directors. Other assets for which market prices are not readily available are
valued at their fair value as determined in good faith under procedures set by
the Board of Directors.
ADR's, EDR's, and GDR's 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. Items 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 Company's management may compute the NAV per share more frequently
in order to protect shareholders' interests.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends from net investment income are declared annually. Each of the
Funds intends to distribute annually realized net capital gains, after
utilization of capital loss carryforwards, if any, to prevent application of a
federal excise tax. However, a Fund may make an additional distribution any time
prior to the due date, including extensions, of filing its tax return, if
necessary to accomplish this result. Any dividends or capital gains distributed
pursuant to a dividend declaration declared in October, November or December
with a record date in such a month and paid during the following January will be
treated by shareholders for federal income tax purposes as if received on
December 31 of the calendar year declared. Unless you elect otherwise, dividends
and capital gains distributions will be reinvested in additional shares of the
Fund at no charge. Changes in your election regarding receipt of dividends and
distributions must be sent to the Transfer Agent. Shareholders will be subject
to tax on all dividends paid to them or reinvested in shares of the Fund. If an
investment in Fund shares is made by a retirement plan, all dividends and
capital gains distributions must be reinvested into an account of such plan.
Generally, dividends from net investment income are taxable to
investors as ordinary income. Certain gains or losses on the sale or retirement
of international securities held by a Fund, to the extent attributable to
fluctuations in currency exchange rates, as well as certain other gains or
losses attributable to exchange rate fluctuations, must be treated as ordinary
income or loss. Such income or loss may increase or decrease (or possibly
eliminate) the income available for distribution to shareholders. If, under the
rules governing the tax treatment of foreign currency gains and losses, the
income available for distribution is decreased or eliminated, all or a portion
of the dividends declared by a Fund may be treated for federal income tax
purposes as a return of capital or, in some circumstances, as capital gain.
Generally, a shareholder's tax basis in Fund shares will be reduced to the
extent that an amount distributed to the shareholder is treated as a return of
capital.
Long-term capital gains distributions, if any, are taxable as net
long-term capital gains when distributed regardless of the length of time
shareholders have owned their shares. Net short-term capital gains and any other
taxable income distributions are taxable as ordinary income.
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Each Fund sends detailed tax information about the amount and type of
its distributions to its shareholders by January 31 of the year following the
distributions.
TAXES
Each Fund will seek to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company under the Code, a Fund is not liable for federal
income taxes on income or net capital gains that are distributed to its
shareholders or imputed to shareholders under the Code, or for any excise tax,
to the extent its earnings are distributed as provided in the Code, and assuming
it meets the tax diversification test, 90% gross income test and 30% gross
income test as required by the Code.
In order to meet the tax diversification test, at the close of each
quarter of its fiscal year, (i) at least 50% of the value of each Fund's total
assets must be represented by cash and cash items including receivables (for
these purposes, currency and demand deposits denominated in a currency other
than the U.S. dollar will not be considered cash, a cash item or a receivable),
U.S. Government securities, and securities of other regulated investment
companies, and other securities limited in respect of any one issuer to an
amount not greater than 5% of the value of its total assets, and to not more
than 10% of the outstanding voting securities of such issuer; and (ii) not more
than 25% of the value of its total assets may be invested in the securities of
any one issuer (other than U.S. Government securities and the securities of
other regulated investment companies).
Each Fund will meet the 90% of gross income test if 90% of its gross
income is derived from dividends, interest, payments with respect to certain
securities loans, and gain from the sale or disposition of stock or securities
or foreign currencies, or other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to its
business of investing in such stock, securities, or currencies.
Each Fund will meet the 30% of gross income test provided that less
than 30% of its gross income for the fiscal year is derived from the sale or
disposition of any of the following held for less than three months: stock or
securities, options, futures, or forward contracts (other than such contracts on
foreign currencies), and foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (and hedging
instruments) are not directly related to the Fund's principal business of
investing in stock or securities (or options and futures with respect to stock
or securities.)
Each Fund will act and invest so as to comply with the requirements of
Subchapter M outlined above. This may mean, for example, that it will be
required to hold an investment longer than it otherwise would, or not engage in
a hedging transaction which it otherwise would, in order to avoid violating one
of the tests outlined above.
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The distribution to shareholders each year of investment income and
capital gains will represent taxable income to the shareholders. The Company is
a series corporation. Each series is taxed as a separate taxable entity under
the Code.
Each International Fund may be subject to foreign withholding taxes on
income from certain of its foreign securities. These withholding taxes will
reduce the return on the shareholder's investment. If more than 50% of the value
of a Fund's assets at the close of its taxable year consists of stock or
securities in foreign corporations, it may elect to pass through to its
shareholders the amount of foreign withholding taxes it paid. If this election
is made, shareholders will be (i) required to include in their gross income
their pro rata share of foreign source income (including any foreign taxes paid
by the fund), and (ii) entitled to either deduct (as an itemized deduction in
the case of individuals) their share of such foreign taxes in computing their
taxable income or to claim a credit for such taxes against their U.S. income
tax, subject to certain limitations under the Code. The Fund will notify its
shareholders of such election within 60 days of the close of its tax year.
Shareholders may decide whether to utilize such flow through amount as either a
deduction or a tax credit. Individual shareholders will usually find that the
credit is more favorable. Tax-exempt investors, such as pension plans and
individual retirement accounts, will not benefit from this pass through.
On the account application, the shareholder must provide the
shareholder's taxpayer identification number ("TIN"), certify that it is correct
and certify that the shareholder is not subject to backup withholding under
Internal Revenue Service ("IRS") rules. If the shareholder fails to provide a
correct TIN or the proper certifications, the Fund will withhold 31% of all
distributions and redemption proceeds payable to the shareholder. The Fund will
also begin backup withholding on a shareholder's Fund account if the IRS
instructs the Fund to do so. The Fund reserves the right not to open a
shareholder's account or, if an account is already opened, to redeem a
shareholder's shares at the current NAV, less any taxes withheld, if the
shareholder fails to provide a correct TIN, fails to provide the proper
certifications, or the IRS advises the Fund to begin backup withholding on the
shareholder's Fund account.
GENERAL INFORMATION ABOUT THE COMPANY
The Company is authorized to issue up to 500,000,000 shares of common
stock, par value $0.01 per share, of which it has presently allocated 50,000,000
shares to the Value Fund, 50,000,000 shares to the International Equity Fund,
50,000,000 shares to the E. European Fund, 50,000,000 shares to the Bond Fund
and 50,000,000 shares to the Sand Hill Portfolio Manager Fund. The Board of
Directors can allocate the remaining authorized but unissued shares to any
series of the Company or may create additional series and allocate shares to
such series.
A share of a Fund has priority in the assets of that fund in the event
of a liquidation. The shares of a Fund will be fully paid and nonassessable,
will have no preference over other shares of the Fund as to conversion,
dividends, or retirement, and will have no preemptive rights. Shares of a Fund
will be redeemable from the assets of that Fund at any time, as described above.
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Each outstanding share of a Fund is entitled to one vote for each full
share of stock and a fractional vote for fractional shares of stock. All
shareholders vote on matters which concern the Company as a whole. The Company
is not required to hold a meeting of shareholders each year, and may elect not
to hold a meeting in years when no meeting is necessary. The shareholders of a
Fund shall vote separately on matters that affect only such Fund's interest. The
Funds' shares do not have cumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Directors can elect
all of the Directors if they choose to do so. Shareholders may utilize
procedures described in the Statement of Additional Information to call a
meeting.
The name of the Company was changed from The World Funds, Inc. to
Vontobel Funds, Inc. effective on February 28, 1997, as approved by the Board of
Directors of the Company.
Limitation on Use of Name - The Advisory Agreement for each Fund
authorizes the Company to utilize the name "Vontobel." The Company agrees that
if an Advisory Agreement is terminated it will submit to shareholders a proposal
that the related Fund redesignate its name to eliminate any reference to the
name "Vontobel" or any derivation thereof unless the Advisor waives this
requirement in writing.
TO OBTAIN MORE INFORMATION
For further information on the Funds, please contact Commonwealth
Shareholder Services, Inc., P.O. Box 8687, Richmond, VA 23226, telephone: (800)
527-9500.
Additional information may also be obtained by requesting a copy of the
Statement of Additional Information.
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Investment Advisor: Vontobel USA Inc.
450 Park Avenue
New York, NY 10022
Distributor: Vontobel Fund Distributors,
a division of First Dominion Capital Corp.
1500 Forest Avenue, Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Funds and marketing
services, call the Distributor at (800) 527-9500 toll
free.
Transfer Agent: For account information, wire purchase or redemptions,
call or write to the Company's Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260-6305
(800) 628-4077 Toll Free
More Information: For 24-hour, 7-days-a-week price information call
1-800-527-9500.
For information on any series of the Company,
investment plans, or other shareholder services,
call 1-800-527-9500 during normal business hours,
or write the Company at 1500 Forest Avenue, Suite
223, Richmond, VA 23229.
No dealer, sales representative or any other person has been authorized
to give any information or to make any representations, other than those
contained in this Prospectus, in connection with the offer made by this
Prospectus and, if given or made, such other information or representations must
not be relied upon as having been authorized by the Fund or the Distributor.
This Prospectus does not constitute an offer by the Fund or the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
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SAND HILL PORTFOLIO MANAGER FUND
A "SERIES" OF VONTOBEL FUNDS, INC.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
1-800-527-9500 (Toll Free)
PROSPECTUS
Dated March 14, 1997
This Prospectus offers shares of the Sand Hill Portfolio Manager Fund (the
"Fund"), a no-load diversified series of Vontobel Funds, Inc. (the "Company")
(formerly, The World Funds, Inc.), an open-end management investment company
commonly known as a "mutual fund." The Company is currently composed of five
series, four of which are offered to investors through a separate prospectus.
The Company offers investors a choice of investment objectives and policies,
with each series having its own separate and distinct portfolio of investments
and operating much like a separate mutual fund.
The Fund seeks to maximize total return (consisting of realized and unrealized
appreciation plus income) consistent with allocating its investments among
equity securities (i.e., stocks), debt securities (i.e., bonds) and short term
investments.
This Prospectus sets forth concisely the information about the Fund which a
prospective investor should know before investing. It should be read and
retained for future reference. More information about the Fund has been filed
with the Securities and Exchange Commission and is contained in the "Statement
of Additional Information," dated March 14, 1997, which is available at no
charge upon written request to the Fund. The Fund's Statement of Additional
Information is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY
FUND EXPENSES
FINANCIAL HIGHLIGHTS
1996 PERFORMANCE
VONTOBEL FUNDS, INC.
INVESTMENT OBJECTIVE
WHY INVEST IN THE FUND?
ASSET ALLOCATION POLICIES
ADDITIONAL INFORMATION ON INVESTMENTS, POLICIES AND RISKS
PERFORMANCE TERMS AND COMPUTATIONS
THE FUND'S MANAGEMENT
HOW TO INVEST
HOW TO REDEEM SHARES
HOW TO TRANSFER SHARES
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
SPECIAL SHAREHOLDER SERVICES
HOW NET ASSET VALUE IS DETERMINED
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
TAXES
GENERAL INFORMATION ABOUT THE FUND
TO OBTAIN MORE INFORMATION
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SAND HILL PORTFOLIO MANAGER FUND
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing in the body of this Prospectus.
Investment Objective: The investment objective of the Sand Hill Portfolio
Manager Fund (the "Fund") is to seek to maximize total return (consisting of
realized and unrealized appreciation plus income) consistent with allocating its
investments among equity securities (i.e., stocks), debt securities (i.e.,
bonds) and short term investments. As with any mutual fund, there is no
assurance that the Fund will achieve its objective. See "Investment Objective"
on Page ___ .
Investment Advisor: Sand Hill Advisors, Inc. (the "Investment Advisor") is the
investment advisor of the Fund. See "The Fund's Management" on Page___ .
Distributions/Dividends: Paid annually from available capital gains and income.
See "Dividends and Capital Gains Distributions" on Page___.
Reinvestment: Distributions may be reinvested automatically without a sales
charge. See "Dividends and Capital Gains Distributions" on Page ___.
Initial Purchase: $25,000 minimum (may be waived under certain circumstances.)
See "How to Invest" on Page ___.
Subsequent Purchases: $50 minimum. See "How to Invest" on Page___.
Net Asset Value: The net asset value per share of the Fund is calculated on
each day that the New York Stock Exchange is open for trading. You may obtain
the net asset value per share of the Fund by calling 1-800-527-9500. See "How
Net Asset Value is Determined" on Page__.
No Sales Charge or Redemption Fees: The Fund's shares are sold at their net
asset value per share, with no sales charges, Rule 12b-1 fees, redemption fees
(except for wire/telephone redemptions) or exchange fees.
Principal Risk Factors: The Fund invests in different types of securities issued
in the United States or abroad. Its performance will be influenced by various
factors, including market and economic conditions, company-specific developments
and the skill of the Investment Advisor in allocating investments among stocks,
bonds and other investments. See "Asset Allocation Policies" on page _______.
The Fund may invest in foreign securities, and therefore may be affected by
changes in exchange rates between foreign currencies and the U.S. dollar,
different regulatory standards and taxes, adverse social or political
developments and other factors. See "Foreign Securities and Depositary Receipts"
on page _______________.
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FUND EXPENSES
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None*
Exchange Fees None
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*A shareholder placing a telephone redemption request will be charged $10 for
each such service.
Annual Fund Operating Expenses (as % of average daily net assets)
Management Fee (after fee waivers and/or
expense reimbursements)** 0.50%
12b-1 Fees None
Other Operating Expenses (before expense credits) 2.00%
-----
Total Fund Operating Expenses (after fee waivers
and/or expense reimbursements and before
expense credits) 2.50%
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**The Investment Advisor has voluntarily undertaken to waive its management fee,
otherwise payable at an annual rate of 1.00%, or to reimburse expenses of the
Fund, so that Total Fund Operating Expenses do not exceed an annual rate of
2.00% of average daily net assets. Other Operating Expenses do not include a
decrease of 0.50% to reflect custodian fee credits obtained by the Fund in the
fiscal year ended December 31, 1996, which are expected to be obtained in the
current fiscal year as well. Including such custodian fee credits, Total Fund
Operating Expenses were 2.00% for the year ended December 31, 1996. Absent such
voluntary fee waivers and/or expense reimbursements and custodian fee credits,
the Total Fund Operating Expenses would be at an annual rate of 3.50%.
The purpose of this table is to assist investors in understanding the various
costs and expenses that they will bear directly or indirectly. The expenses and
fees in the table are based on actual figures for the fiscal year ended December
31, 1996. Management expects that as the Fund increases in size its Other
Operating Expenses will decline as an annual percentage rate reflecting
economies of scale.
Example of Expenses
The following example illustrates the expenses that an investor would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return, and (2) redemption at the end of each time period. As noted in the table
above, the Fund charges no redemption fees (apart from small per transaction
charges for telephone redemption services as noted above.)
1 Year 3 Years 5 Years 10 Years
$25 $78 $133 $284
These examples should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or lesser than those
shown.
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FINANCIAL HIGHLIGHTS
The Financial Highlights for the periods indicated below have been audited by
Tait, Weller and Baker, independent certified public accountants, whose
unqualified report thereon appears with the Fund's audited financial statements
in the Annual Report to Shareholders of the Sand Hill Portfolio Manager Fund for
the year ended December 31, 1996 (the "Annual Report"). The report and the
Fund's audited financial statements are incorporated by reference in this
Prospectus. Additional performance information for the Fund is included in the
Annual Report. The Annual Report and the financial statements therein are
available at no cost upon request to the Company at the address and telephone
number noted on the cover of this Prospectus.
For a share outstanding during the periods indicated:
<TABLE>
<CAPTION>
Year Ended January 2, 1995*
December 31, to December 31,
Per Share Operating Performance 1996 1995
---- ----
<S> <C>
Net asset value, beginning period $11.11 $10.00
------ ------
Income from investment operations
Net investment income 0.14 0.06
Net investment realized and unrealized
gain on investments 2.02 1.10
---- ----
Total from investment operations 2.16 1.16
---- ----
Less distributions
Distributions from net investment income (0.15) (0.05)
Distributions from capital gains (0.33) --
------ ------
Total distributions (0.48) (0.05)
------ ------
Net asset value, end of period $12.79 $11.11
====== ======
Total Return 19.57% 11.60%
====== ======
Ratios/Supplemental Data
Net assets, end of period (000's) $6,459 $4,025
Ratio to average net assets-(A)
Expense ratio (B) 2.50% 3.03%**
Expense ratio-net (C) 2.00% 1.90%**
Net investment income 1.29% 0.52%)**
Portfolio turnover rate 32.97% 40.96%
Average brokerage commission per share $0.0581
</TABLE>
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* Commencement of operations.
** Annualized
(A) Management fee waivers reduced the expense ratios and increased the net
investment income ratio by 0.64% in 1996 and 1.00% in 1995.
(B) Expense ratio has been increased to include custodian fees which were offset
by custodian credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits the Fund
received.
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1996 PERFORMANCE
The Sand Hill Portfolio Manager Fund (the "Fund") rose 19.57% for the year ended
December 31, 1996, as compared with the returns of the following relevant
indices:
S&P 500 Index 22.99%
MSCI EAFE (international index) 4.40%
Salomon Treasury Bond Index 2.73%
U.S. Treasury Bills (cash surrogate) 5.50%
At the end of the year the composition of the Fund was 56.0% domestic stocks,
17.2% international stocks, 20.2% bonds and 6.6% cash. These percentages roughly
correspond to the weightings in the Fund over the course of the year. The
domestic stock portfolio consisted of 38 companies representing a cross-section
of industries and market capitalizations. Technology (15.9% of the total
domestic stock portfolio), energy (12.9%), consumer non-durable (12.2%), health
care (11.4%) and financial companies (10.5%) were the sectors with the highest
weightings in the Fund.
The international stock allocation consisted of the ADRs of 18 companies. The
international stocks in the Fund are represented by larger companies from a
variety of industries and countries. The international allocation at the end of
the year was as follows: Europe 46.1%, Southeast Asia 30.4%, Japan 15.3% and
Latin America 8.2%.
VONTOBEL FUNDS, INC.
The Fund is a no-load series of Vontobel Funds, Inc. (called The World Funds,
Inc. until February 28, 1997) (the "Company"), an open-end diversified
management investment company incorporated in Maryland in 1983. The Company
currently consists of five series, and the Board of Directors of the Company may
elect to add more series in the future. A minimum initial investment of $25,000
is required to open a shareholder account in the Fund, and each subsequent
investment must be $50 or more.
INVESTMENT OBJECTIVE
The Fund seeks to maximize total return (consisting of realized and unrealized
appreciation plus income) consistent with allocating its investments among
equity securities (i.e., stocks), debt securities (i.e., bonds) and short term
investments. By allocating investments across broad asset classes, the
Investment Advisor seeks to achieve over time a high total return, yet
experience lower price volatility than might be inherent in a more limited asset
mix.
The investment objective of the Fund may not be changed without the approval of
shareholders. Unless specifically stated otherwise, each of the Fund's other
investment policies may be changed by the Board of Directors, without
shareholder approval. There is no assurance that the investment objective can
be achieved.
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Because the value of the securities in which the Fund may invest may fluctuate
from day-to-day, the value of an investment in the Fund will vary based upon the
Fund's investment performance. When you sell your shares of the Fund, they may
be worth more or less than their cost to you.
WHY INVEST IN THE FUND?
The Fund is designed for investors seeking maximum total return through a
professionally managed portfolio that provides a mix of domestic and foreign
stocks, bonds and short term investments. The purpose of an investment in the
Fund should be to seek representation in a wide selection of asset classes and
markets with specific allocations and securities selections set by an
experienced portfolio management organization.
The Fund provides an easy, efficient and low cost way of investing in a
carefully selected, continuously managed and diversified portfolio of equity
securities, debt securities and short term investments. (See "Equity Securities,
Debt Securities and Short Term Investments" on Page __.)
ASSET ALLOCATION POLICIES
The Fund seeks to take advantage of investment opportunities using a mix of
asset classes and markets throughout the world. Investments will be selected not
only based upon the Investment Advisor's evaluation of the merits of the
particular investment, but also based upon the Investment Advisor's evaluation
of the investment's relationship to other investments in the portfolio. National
economies and their investment markets change at varying rates and not
necessarily in tandem with one another. Many foreign markets do not have the
maturity, depth, or liquidity of the U.S. market. Therefore, the opportunity to
take advantage of their growth normally means acceptance of higher price
volatility than is usual in the U.S. The Investment Advisor believes that by
allocating investments among equity, debt and short term asset classes in
different markets, the Fund can seek to benefit from the faster growth of
several markets. In addition, investing assets in a number of markets may
provide less portfolio volatility than might otherwise result from investment in
a single market.
The Fund's investments are allocated among equity securities, debt securities
and short term investments, according to the Investment Advisor's anticipation
of risks and returns for each asset class. There are no limitations on the
amount of the Fund's assets which may be allocated to each of these three asset
classes. The Investment Advisor believes that, over time, common stocks produce
the greatest return among these asset classes. Therefore, common stocks will
normally comprise a large percentage of the invested assets. Bonds, or other
evidences of indebtedness, will be used to generate income, to seek capital
gains and to dampen portfolio volatility. While representation in markets and
asset classes is the purpose of the Fund, the Investment Advisor intends to
retain the flexibility necessary to move among asset classes and markets as
changing conditions of the United States and foreign economies
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warrant. Asset classes will be considered both for their total return potential
as well as for the defensive or strategic aspects they offer the portfolio. In
that sense, interest- earning short term investments will, in varying degrees,
be a component of the overall asset allocation.
Because the Fund invests in different types of securities in proportions which
will vary over time, investors should not expect the Fund to exhibit stable
asset allocations. Investors should also realize that the Fund's performance
will depend upon the skill of the Investment Advisor to anticipate the relative
risks and return of stocks, bonds and other securities and to adjust the
portfolio accordingly.
Equity Securities, Debt Securities and Short-Term Investments
The three major asset classes in which the Fund will invest, as defined by the
Investment Advisor, are equity securities, debt securities and short term
investments. Short term investments are debt securities with less than three
years to maturity, and are viewed as comprising a different type of investment
risk than longer term debt securities, that involve less risk of interest rate
volatility, but more risk of market value volatility.
Within each of these asset classes, the Fund may invest in foreign or domestic
securities.
Equity Securities consist of common stocks as well as warrants, rights, and
securities which are convertible into common stocks, such as convertible bonds.
The Investment Advisor uses valuation screens for the Fund's equity holdings
primarily involving an analysis of a company's cash flow return on investment.
Specifically, the Investment Advisor determines the cash flow of a company and
then applies a market derived discount rate to the cash flows. Next the
Investment Advisor determines the free cash flow that can be reinvested into the
company and applies the same market derived discount rate. The Investment
Advisor also identifies industries that are positioned to participate in strong
demographic, societal or economic trends and looks for companies within those
industries that have a particular competitive advantage or niche.
Stocks and other equity securities are subject to the risk that specific stocks
or the prices of equity securities in general will decline in value over short
or even extended periods of time.
Debt Securities consist of the following bonds, obligations and other evidences
of indebtedness denominated in U.S. or foreign currencies which are issued by
governments, companies or other issuers to borrow money from investors:
* obligations issued or guaranteed by the U.S. Government or a foreign
national government or the agencies, instrumentalities or political
subdivisions of the U.S. Government or of a foreign government;
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* obligations issued or guaranteed by supranational organizations (e.g.,
European Investment Bank, Inter-American Development Bank, the World Bank
and other organizations);
* obligations of foreign or domestic corporations;
* long term debt securities issued by banks or bank holding companies; and
* other debt securities whose purchase is consistent with the investment
objective of the Fund.
Debt securities may pay fixed or variable rates of interest, may have varying
maturity dates at which the issuers must repay their debt, and have varying
degrees of risk. The market values of debt securities are influenced primarily
by credit risk (the risk that the issuer of the security will not maintain the
financial strength needed to pay principal and interest on its debt securities)
and interest rate risk (the risk that changes in prevailing interest rates will
increase or decrease the prices of outstanding debt securities.) Generally, the
market values of fixed-rate debt securities vary inversely with changes in
prevailing interest rates. When interest rates rise, fixed-rate debt securities
fall in market value. Conversely, when interest rates fall, fixed-rate debt
securities increase in market value.
There is no limit on the maturities of the debt securities that the Investment
Advisor will select. Rather, the Investment Advisor will select debt securities
for the Fund on the basis of, among other things, credit quality, yield,
potential for capital gains and the Investment Advisor's fundamental outlook for
currency and interest rate trends around the world.
The Fund will invest in investment grade debt securities, which are debt
securities that bear the rating BBB or higher by Standard & Poor's Ratings Group
("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's") or
unrated securities that the Investment Advisor deems to be of comparable
quality. However, the Fund reserves the right to invest its assets in lower
quality debt securities, which are commonly known as "junk bonds". It will do so
to avail itself of the higher yields available with these securities or to seek
to realize capital gains. The Fund does not currently intend to invest more than
5% of its assets in securities that are rated below investment grade or that are
unrated but are of comparable quality as determined by the Investment Advisor.
If that policy should change, the Fund will revise its prospectus and advise the
Fund's shareholders.
After its purchase by the Fund, a debt security may cease to be rated or its
rating may be reduced. Neither event would require the elimination of the debt
security from the portfolio.
Short Term Investments are obligations denominated in U.S. or foreign currencies
consisting of bank deposits, bankers acceptances, certificates of deposit,
commercial paper, short-term government, government agency, supranational agency
and corporate obligations, and repurchase agreements. Depending on the
Investment Advisor's assessment of the
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<PAGE>
prospects for the various asset classes, all or a portion of the Fund's assets
may be invested in high quality short-term investments or cash to protect
against adverse movements of interest rates or to provide liquidity.
ADDITIONAL INFORMATION ON INVESTMENTS, POLICIES AND RISKS
The Fund may invest in the securities, and engage in the investment practices
described below, each of which may involve the specific risks which are
described. The Fund may not buy all of these securities or engage in all of
these investment practices at any one point in time or even over an extended
period of time. See the Statement of Additional Information for more detailed
information about these securities and investment practices, including
limitations designed to reduce related risks.
Foreign Securities and Depositary Receipts
Investing in foreign securities may involve special risks, such as:
Social or Political Risk. Social or political instability, limitations
on the removal of funds from foreign countries, expropriation,
repudiation by a foreign government of its debt, or confiscatory taxes
could adversely affect the value of the Fund's foreign investments.
Currency Risk. The U.S. dollar value of a foreign security could
decrease when the value of the U.S. dollar rises against the foreign
currency in which the security is denominated, and could increase when
the U.S. dollar falls against that currency.
Market Risk. Foreign securities may be less liquid and show greater
price volatility than domestic securities.
Regulatory Risk. Foreign issuers of securities are not generally
subject to the regulatory controls or the accounting and financial
reporting standards imposed on U.S. issuers. There is generally less
publicly available information about foreign securities than about
domestic securities. Also, judgments may be more difficult to enforce
abroad.
The foreign securities the Fund purchases may be bought directly in their
principal markets abroad or they may be acquired through the use of depositary
receipts. The Fund may invest in both sponsored and unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other
similar depositary receipts. ADRs are issued by an American bank or trust
company and evidence ownership of underlying securities of a foreign company.
EDRs are issued in Europe, usually by foreign banks, that evidence ownership of
either foreign or domestic underlying securities. Unsponsored ADRs and EDRs are
organized without the participation of the issuer of the underlying securities.
As a
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<PAGE>
result, information concerning the issuer may not be as current as for sponsored
ADRs and EDRs.
Convertible Securities
The Fund may invest in convertible securities. A convertible security is a
fixed-income security (a bond or preferred stock) that may be converted at a
stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Through their conversion
feature, convertible securities provide an opportunity to participate in capital
appreciation resulting from an increase in the value of a convertible security's
underlying common stock. The value of a convertible security is influenced by
the market value of the underlying common stock and tends to increase as the
market value of the underlying stock rises, and tends to decrease as the market
value of the underlying stock declines. For purposes of considering convertible
securities for purchase by the Fund, the Investment Advisor evaluates
convertible securities by standards applicable to equity securities and not by
debt securities ratings.
Investment Companies
The Fund may invest up to 10% of its total assets in shares of closed-end
investment companies. Because of restrictions on direct investment by U.S.
entities in certain countries, investment in other investment companies may be
the most practical or only manner in which the Fund can invest in the securities
markets of those countries. Investment in the shares of other investment
companies may involve duplicative investment advisory and administrative
expenses and is subject to limitations under the Investment Company Act of 1940,
as amended (the "1940 Act"). See The Statement of Additional Information for a
description of these limitations.
Zero Coupon Securities
The Fund may purchase zero coupon securities (each, a "Zero"). Zeroes pay no
income until maturity and are sold at substantial discounts from their stated
redemption price at maturity. When held to maturity, the entire return on
Zeroes, comes from the difference between the discounted issue price and the
stated redemption price at maturity. The annual accretion in value of the Zeroes
will constitute annual taxable income to the Fund which it is required to
distribute to its shareholders at least annually in order to comply with the
Internal Revenue Code of 1986, as amended (the "Code"), notwithstanding that the
Fund will not have received income until maturity or until the Zeroes are sold
if they are sold prior to maturity. If a Zero is sold prior to maturity, the
amount of income received will depend on the current market value of the Zero
and the income received may be less than the accretion in value to date of sale,
between the discounted issue price and the maturity value of the Zero. Zero
coupon securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
cash distributions of interest.
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Repurchase Agreements
As a means of earning income for periods as short as overnight, the Fund may,
without limit, enter into repurchase agreements, which are collateralized by
U.S. government securities, with selected banks and broker/dealers. Under a
repurchase agreement, a fund acquires securities, subject to the seller's
agreement to repurchase the securities at a specified time and price. The Fund
requires the party obligated to repurchase the securities to provide it with
collateral for that obligation.
If the seller under a repurchase agreement becomes insolvent, the Fund's right
to dispose of the securities may be restricted. In the event of bankruptcy
proceedings with respect to the seller of the securities, before repurchase of
the securities under a repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the securities. Also, the value of such
securities may decline before the Fund is able to dispose of them. For federal
tax diversification purposes, repurchase agreements are treated as securities
issued by the seller and not cash, cash items or receivables or U.S. Government
securities.
When-Issued Securities
The Fund may purchase securities on a when-issued or forward delivery basis, for
payment and delivery at a later date. The price and yield are generally fixed on
the date of commitment to purchase. During the period between purchase and
settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price. The
Fund's net asset value reflects gains or losses on such commitments each day,
and the Fund segregates assets each day sufficient to meet the Fund's
obligations to pay for the securities.
Illiquid Securities
Normally, the Fund will not invest more than 5% of its net assets in securities
which are illiquid or not readily marketable; however, the Fund is permitted to
invest up to 15% of its net assets in illiquid securities.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies, including the use of derivatives, as described below to hedge
various market risks (such as changes in security prices, interest rates and
currency exchange rates), or to enhance potential gain. Such strategies are
generally accepted as modern portfolio management techniques and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are developed
or regulatory changes occur.
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In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed put and call options on securities and securities indices,
and enter into various currency transactions such as currency forward contracts,
and options on currencies (collectively, all of the above are called "Strategic
Transactions").
Strategic Transactions involving derivatives may be used to attempt (1) to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, (2) to protect its unrealized gains in the
value of its portfolio securities, (3) to facilitate the sale of such securities
for investment purposes, (4) to establish a position in the options markets as a
temporary substitute for purchasing or selling particular securities, or (5) as
a means efficiently to change country and/or currency allocations.
The ability of the Fund to utilize these Strategic Transactions successfully
will depend on the Investment Advisor's ability to predict, which cannot be
assured, pertinent market movements. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Investment Advisor's view as to certain market movements is incorrect, the
risk that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in losses
to the Fund, force the sale or purchase of portfolio securities at inopportune
times or for prices higher than or lower than current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. In addition, options markets may not
be liquid in all circumstances. As a result, in certain markets, the Fund might
not be able to close out a transaction without incurring substantial losses, if
at all. Although the use of options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time hedging tends to limit any potential gain that might result
from an increase in value of such position. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors,
including the imposition of exchange controls, suspension of settlements, or the
inability to deliver or receive a specified currency. Losses resulting from the
use of Strategic Transactions will reduce net asset value, and possibly income,
and such losses can be greater than if the Strategic Transactions had not been
utilized. The Strategic Transactions that the Fund may use and the risks of
these techniques are described more fully in the Statement of Additional
Information.
Other Securities
The Fund may also invest in other types of securities which will not constitute
the Fund's principal portfolio emphasis, such as, mortgage-backed securities,
asset-backed securities, indexed securities and warrants. Each of these types of
securities will, if used, comprise less
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than 5% of the Fund's total assets. Please see the Statement of Additional
Information for further details.
Fundamental Limitations
The Fund has adopted certain fundamental limitations which may not be changed
without a shareholder vote and which are designed to reduce its investment risk.
Some of these limitations are that the Fund may not:
* as to 75% of its assets, purchase the securities of any issuer
(other than obligations issued or guaranteed as to principal and
interest by the Government of the United States or any agency
or instrumentality thereof) if, as a result of such purchase,
more than 5% of its total assets would be invested in the
securities of such issuer;
* purchase stock or securities of an issuer (other than
obligations issued or guaranteed as to principal and interest by
the Government of the United States or any agency or
instrumentality thereof) if such purchase would cause the Fund to
own more than 10% of any class of the outstanding stock or
securities or more than 10% of any class of voting securities of
such issuer;
* borrow money, except through reverse repurchase agreements or from
banks for temporary or emergency purposes, and then only in an
amount not in excess of 20% of the value of the Fund's net assets
at the time the borrowing is made; or
* purchase the securities of any issuer (other than obligations
issued or guaranteed by the Government of the United States or any
agency or instrumentality thereof) if, as a result of such
purchase, more than 25% of the Fund's total assets would be
invested in any one industry.
These limitations apply at the time the Fund purchases securities for the
portfolio. See the Statement of Additional Information for other investment
limitations applicable to the Fund.
PERFORMANCE TERMS AND COMPUTATIONS
From time to time the Fund may advertise information regarding its performance.
All performance figures are historical, show the performance of a hypothetical
investment and are not intended to indicate future performance. Advertising may
include the following performance measurements.
"Yield" is the ratio of income per share derived from the portfolio investments
to the current maximum offering price expressed in terms of a percentage.
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"Total return" is the total of all income and capital gains paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
"Average annual total return" refers to the average annual compound rate of
return of an investment in the Fund assuming that the investment has been held
for one year and the life of the Fund.
"Cumulative total return" represents the cumulative change in value of an
investment in the Fund for various periods. These calculations assume that
dividends and capital gains distributions were reinvested.
"Capital change" measures return from capital, including reinvestment of any
capital gains distributions but not reinvestment of dividends.
Performance will vary based upon, among other things, changes in market
conditions and the level of the Fund's expenses. Please refer to the Statement
of Additional Information for more information on performance.
THE FUND'S MANAGEMENT
The Company's Board of Directors is responsible for the supervision of the
general business of the Company and the Fund. The Directors act as fiduciaries
for shareholders under the laws of the State of Maryland. The Board appointed
John Pasco, III to serve as President of the Company and appointed Jane H.
Williams to serve as President of the Fund. The Fund employs the following
persons to provide it with investment advice and to conduct its on-going
business:
Investment Advisor
Sand Hill Advisors, Inc. (the "Investment Advisor"), a registered investment
adviser, manages the investments of the Fund pursuant to an Investment Advisory
Agreement (the "Advisory Agreement"), dated December 29, 1994. The Advisory
Agreement is effective for an initial term of two years and thereafter may be
renewed annually by the Board of Directors of the Fund.
The Investment Advisor is a privately held corporation. In addition to the
assets of the Fund, the Investment Advisor manages other assets of approximately
$235 million as of the date of this Prospectus. The Investment Advisor has
approximately two years of experience managing a mutual fund portfolio, and has
approximately 14 years of experience managing investment portfolios for private
clients.
Ms. Jane H. Williams has been the portfolio manager of the Fund since its
inception in January of 1995. Ms. Williams is also the President of the Fund,
Vice President of the
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Company, and Executive Vice President and a Director of the Investment Advisor
which was founded in September of 1982 by Ms. Williams. Ms. Williams owns
35.46% of the stock of the Investment Advisor.
Effective June 1, 1996, David W. Cost, Jr. began assisting Ms. Williams in the
day-to-day portfolio management of the Fund. Mr. Cost joined the Investment
Advisor in 1993 as a Research Analyst. From July 1985 to May 1990, Mr. Cost
held a middle market commercial banker position with Union Bank in Los Angeles,
CA and he began working on his MBA in June 1990. He holds a BA from Dartmouth
College and an MBA from the University of California at Los Angeles. He
received his CFA designation in 1995.
Pursuant to the Advisory Agreement, the Investment Advisor provides the Fund
with investment management services, subject to the supervision of the Company's
Board of Directors, and with office space, and pays the ordinary and necessary
office and clerical expenses relating to investment research, statistical
analysis, supervision of its portfolio and certain other costs. The Investment
Advisor also bears the cost of fees, salaries and other remuneration of the
Company's Directors, officers or employees who are officers, Directors, or
employees of the Investment Advisor. The Fund is responsible for all other costs
and expenses, such as, but not limited to, brokerage fees and commissions in
connection with the purchase and sale of securities, legal, auditing,
bookkeeping and record keeping services, custodian and transfer agency fees and
other costs and fees of registration of, or filing of notice of, its shares for
sale under various state and Federal securities laws.
Under the Advisory Agreement, the Investment Advisor is entitled to be paid
monthly compensation that is accrued daily at an annual rate of 1.00% of the
average daily net assets of the Fund. This fee is higher than that paid by many
investment companies. If the assets of the Fund exceed $100,000,000, the
Investment Advisor is entitled to a fee for such assets computed at an annual
rate of 0.75% on such excess. The Advisory Agreement requires that the fee be
paid monthly, within five (5) business days after the end of the month. The
Advisory Agreement provides that the fee paid by the Fund will be reduced to the
extent necessary to comply with any applicable state expense limitation
provision to which the Fund may be subject. The Investment Advisor has
undertaken voluntarily to waive its advisory fee as described in "Fund Expenses"
above. All expenses not specifically assumed by the Investment Advisor are
assumed by the Fund. The address of the Investment Advisor is 3000 Sand Hill
Road, Building 3, Suite 150, Menlo Park, California 94025.
The Advisory Agreement contemplates the authority of the Investment Advisor to
place orders pursuant to its investment determinations for the Fund either
directly with the issuer or with any broker or dealer. In placing orders with
brokers or dealers, the Investment Advisor will attempt to obtain the best net
price and the most favorable execution of its orders. The Investment Advisor may
purchase and sell securities to and from brokers and dealers who provide
research or investment information which benefits the Fund, the Investment
Advisor, or the Investment Advisor's other clients, or who provide other
services to the Fund or sell its shares.
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<PAGE>
Administrator
Commonwealth Shareholder Services, Inc. ("CSS"), serves as administrator to the
Fund pursuant to an Administrative Services Agreement. CSS provides certain
recordkeeping, administrative and shareholder servicing functions required of
registered investment companies. CSS may furnish personnel to act as the Fund's
officers to conduct the Fund's business subject to the supervision and
instructions of the Board of Directors of the Company.
The Administrative Services Agreement provides that CSS will be paid monthly:
(1) the greater of .20% of the average daily net assets of the Fund or $15,000
per year for administration (which includes regulatory matters, backup of the
pricing of the Fund, administrative duties in connection with the execution of
portfolio trades, and certain services in connection with fund accounting); (2)
certain out-of-pocket expenses; and (3) an hourly fee for shareholder servicing
and blue sky matters. The address of CSS is 1500 Forest Avenue, Suite 223,
Richmond, VA 23229.
Custodian and Accounting Services Agent
Star Bank (the "Custodian") in Cincinnati, Ohio is the custodian and accounting
services agent for the Fund. The Custodian collects income when due and holds
all of the Fund's portfolio securities and cash. The Custodian is authorized to
appoint other entities to act as sub-custodians to provide for the custody of
foreign securities which may be acquired and held by the Fund outside the U.S.
Such appointments are subject to appropriate review by the Company's Board of
Directors.
Star Bank, as the accounting service agent, maintains and keeps current the
books, accounts, records, journals or other records of original entry relating
to the Fund's business. The address of Star Bank is 425 Walnut Street, P.O. Box
1118, Cincinnati, Ohio 45201-1118.
Transfer and Dividend Disbursing Agent
Fund Services, Inc. (the "Transfer Agent" or "FSI") is the Fund's transfer and
dividend disbursing agent. John Pasco, III, Chairman of the Board of the Company
owns one third of the stock of FSI, and, therefore, FSI may be deemed to be an
affiliate of the Fund. FSI provides all the necessary facilities, equipment and
personnel to perform the usual and ordinary services of transfer and dividend
disbursing agent, including: receiving and processing orders and payments for
purchases of the Fund's shares, opening shareholder accounts, preparing
shareholder meeting lists, mailing proxy material, receiving and tabulating
proxies, mailing shareholder reports and prospectuses, withholding certain taxes
on non-resident alien accounts, disbursing income dividends and capital
distributions, preparing and filing U.S. Treasury Department Form 1099 (or
equivalent) for all shareholders, preparing and mailing confirmation forms to
shareholders for all purchases and redemptions of shares and all other
confirmable transactions in shareholders' accounts, and recording
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reinvestment of dividends and distributions of the Company's shares. Under an
Agreement between the Company and FSI, as in effect on May 2, 1991, FSI is
compensated pursuant to a schedule of services and out-of-pocket expenses. The
schedule calls for a minimum payment of $16,500 per year. The address of the
Transfer Agent is P.O. Box 26305, Richmond, VA 23260.
Principal Underwriter/Distributor
First Dominion Capital Corp. (the "Distributor") acts as the principal
underwriter for the Company pursuant to an agreement dated January 1, 1994. Mr.
John Pasco, III, who is President, Director and Treasurer of the Distributor,
owns 100% of the stock of the Distributor. The address of the Distributor is
1500 Forest Avenue, Suite 223, Richmond, VA 23229.
HOW TO INVEST
Purchases of the Fund's shares are made at the net asset value per share. A
minimum initial investment of $25,000 is required to open a shareholder account,
and each subsequent investment must be $50 or more. Under certain circumstances,
the Fund may waive the minimum initial investment for purchases by officers,
Directors and employees of the Company and its affiliated entities and for
certain related advisory accounts and retirement accounts. The offering price
per share is equal to the net asset value per share next determined after the
receipt of a purchase order.
To facilitate the handling of transactions with shareholders, the Company uses
an open account plan. The Transfer Agent will automatically establish and
maintain an open account for the Fund's shareholders. Under the open account
plan, your shares are reflected in your open account. This service facilitates
the purchase, redemption or transfer of shares, and eliminates the need to
safeguard certificates and reduces time delays in executing transactions. Stock
certificates are not required and are not normally issued. Stock certificates
for full shares will be issued, however, by the Transfer Agent upon written
request but only after payment for the shares is collected by the Transfer
Agent.
Purchase by Mail
For initial purchases, the account application form (the "Account Application")
which accompanies this prospectus should be completed, signed, and mailed to the
Transfer Agent, together with your check or other negotiable bank draft drawn on
and payable by a U.S. Bank and payable to the Portfolio Manager Fund. For
subsequent purchases, include with your check the tear-off stub from a prior
purchase confirmation, or otherwise identify the name(s) of the registered
owner(s) and the social security number(s).
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Investing by Wire
You may purchase shares by requesting your bank to transmit "Federal Funds" by
wire directly to the Transfer Agent. To invest by wire please call the Transfer
Agent for instructions, then notify the Distributor by calling 800-527-9500.
Your bank may charge you a small fee for this service. The Account Application
which accompanies this Prospectus should be completed and promptly forwarded to
the Transfer Agent. This application is required to complete the Fund's records
in order to allow you access to your shares. Once your account is opened by mail
or by wire, additional investments may be made at any time through the wire
procedure described above. Be sure to include your name and account number in
the wire instructions you provide your bank.
HOW TO REDEEM SHARES
Shares may be redeemed at any time by mail or telephone. For your protection,
the Transfer Agent will not redeem your shares until it has received all
information and documents necessary for your request to be in "proper order."
(See "Signature Guarantees.") You will be notified promptly by the Transfer
Agent if your redemption request is not in proper order.
The Fund's procedure is to redeem shares at the net asset value next determined
after receipt by the Transfer Agent of the redemption request in proper order as
described herein. Payment will be made promptly, but no later than the seventh
day following receipt of the request in proper order. Please note that the
Transfer Agent cannot accept redemption requests which specify a particular date
for redemption, or which specify any special conditions. If the shares you are
redeeming were purchased by you less than 15 days prior to the receipt of your
redemption request, the Transfer Agent must ascertain that your check in payment
of the shares you are redeeming has cleared prior to disbursing the redemption
proceeds. If you anticipate the need to redeem before 15 days, you should make
your purchase by Federal Funds wire, or by a certified, treasurer's or cashier's
check. The Fund may suspend the right to redeem shares for any period during
which the New York Stock Exchange is closed or the Securities and Exchange
Commission determines that there is an emergency. In such circumstances you may
withdraw your redemption request or permit your request to be held for
processing at the net asset value per share next computed after the suspension
is terminated.
Redemption by Mail
To redeem shares by mail, send the following information to the Transfer Agent:
(1) a written request for redemption signed by the registered owner(s) of the
shares, exactly as the account is registered; (2) the stock certificates for the
shares you are redeeming, if any stock certificates were issued; (3) any
required signature guarantees (see "Signature Guarantees"); and (4) any
additional documents that might be required for redemption by corporations,
executors, administrators, trustees, guardians, etc. The Transfer Agent will
mail the proceeds to your currently registered address, payable to the
registered owner(s) unless you
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specify otherwise in your redemption request. There is no charge to
shareholders for redemptions by mail.
Redemption by Telephone
You may redeem your shares by telephone if you request this service on your
Account Application at the time you complete your initial Account Application.
If you do not request this service at that time, you must request approval of
telephone redemption privileges in writing (sent to the Fund's Transfer Agent)
with a signature guarantee (see "Signature Guarantees") before you can redeem
shares by telephone. Once your telephone authorization is in effect, you may
redeem shares by calling the Transfer Agent at (800) 628-4077. By establishing
this service, you authorize the Transfer Agent to act upon any telephone
instructions it believes to be genuine, to (1) redeem shares from your account
and (2) mail or wire redemption proceeds. There is no charge for establishing
this service, but the Transfer Agent will charge your account a $10.00 service
fee each time you make a telephone redemption. The amount of this service charge
may be changed at any time, without notice, by the Transfer Agent.
You cannot redeem shares by telephone if you hold a stock certificate
representing the shares you are redeeming or if you paid for the shares with a
personal, corporate, or government check and your payment has been on the books
of the Fund for less than 15 days.
If it should become difficult to reach the Transfer Agent by telephone during
periods when market or economic conditions lead to an unusually large volume of
telephone requests, a shareholder may send a redemption request to the Transfer
Agent by overnight mail.
The Fund employs procedures reasonably designed to confirm the authenticity of
your instructions communicated by telephone and, if it does not, it may be
liable for any losses due to unauthorized or fraudulent transactions; however, a
shareholder authorizing telephone redemption bears the risk of loss which may
result from unauthorized or fraudulent transactions which the Fund believes to
be genuine. When you request a telephone redemption or transfer, you will be
asked to respond to certain questions designed to confirm your identity as a
shareholder of record. Your cooperation with these procedures will protect your
account and the Fund from unauthorized transactions.
Redemption by Wire
If you request by mail or telephone 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.
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Signature Guarantees
To protect you and the Fund (and its agents) from fraud, signature guarantees
are required for: (1) all redemptions ordered by mail if you require that the
check be payable to another person or that the check be mailed to an address
other than the one indicated on the account registration; (2) all requests to
transfer the registration of shares to another owner; and (3) all authorizations
to establish or change telephone redemption service, other than through your
initial Account Application.
In the case of redemption by mail, signature guarantees must appear either: (a)
on the written request for redemption; or (b) on a separate instrument of
assignment (usually referred to as a "stock power") specifying the total number
of shares being redeemed. The Fund 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; and (f) foreign branches
of any of the above. In addition, the Fund will guarantee your signature if you
personally visit its offices at 1500 Forest Avenue, Suite 223, Richmond, VA
23229. The Transfer Agent cannot honor guarantees from notaries public, savings
and loan associations, or savings banks.
Small Accounts
Due to the relatively higher cost of maintaining small accounts, the Fund may
deduct $10.00 per year from accounts valued at less than $1,000 unless the
account value has dropped below $1,000 solely as a result of share value
depreciation. Shareholders will receive 60 days' written notice to increase the
account value above $1,000 before the fee is deducted.
HOW TO TRANSFER SHARES
If you wish to transfer shares to another owner, send a written request to the
Transfer Agent. Your request should include: (1) the name of the Fund and
existing account registration; (2) signature(s) of the registered owner(s); (3)
the new account registration, address, Social Security Number or taxpayer
identification number and how dividends and capital gains are to be distributed;
(4) any stock certificates which have been issued for the shares being
transferred; (5) signature guarantees (see "Signature Guarantees"); and (6) any
additional documents which are required for transfer by corporations,
administrators, executors, trustees, guardians, etc. If you have any questions
about transferring shares, call the Transfer Agent at (800) 628-4077.
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<PAGE>
ACCOUNT STATEMENTS AND SHAREHOLDER REPORTS
Each time you purchase, redeem or transfer shares of the Fund, you will receive
a written confirmation. You will also receive a year-end statement of your
account if any dividends or capital gains have been distributed, and the Fund's
annual and semi-annual reports to shareholders.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following four services for its shareholders: Regular
Account - allows shareholders to make voluntary additions and withdrawals to and
from their account as often as they wish; Invest-A-Matic Account - permits
automatic monthly investments into the Fund from your checking account on a
fixed or flexible schedule; Individual Retirement Accounts (IRA's); and Exchange
Privileges Account - allows the shareholder to exchange his or her shares for
shares of certain other funds having a different investment objective from the
Fund. More information on any of these services is available upon written
request to the Fund.
HOW NET ASSET VALUE IS DETERMINED
The net asset value ("NAV") of the Fund's shares is determined as of the close
of trading on the New York Stock Exchange (currently 4:00 p.m., Eastern Time) on
each business day from Monday to Friday or on each day (other than a day during
which no Fund share was tendered for redemption and no order to purchase or sell
a Fund share was received by the Fund) in which there is a sufficient degree of
trading in the portfolio securities of the Fund that the current NAV of the
shares might be materially affected by changes in the value of such portfolio
security. The Fund's NAV is calculated at the 4:00 p.m. time set by the Board of
Directors based upon the Board's determination that this is the most appropriate
time to price the securities.
NAV per share is determined by dividing the total value of the assets, less its
liabilities, by the total number of shares then outstanding. Generally,
securities owned by the Fund are valued at market value.
The Fund's management may compute the NAV per share more frequently in order to
protect shareholders' interests.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Dividends from net investment income are declared annually. The Fund intends to
distribute annually realized net capital gains, after utilization of capital
loss carryforwards, if any, to prevent application of a federal excise tax.
However, it may make an additional distribution any time prior to the due date,
including extensions, of filing its tax return, if necessary to accomplish this
result. Any dividends or net capital gain distributed pursuant to a dividend
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declaration declared in October, November or December with a record date in such
a month and paid during the following January will be treated by shareholders
for federal income tax purposes as if received on December 31 of the calendar
year declared. Unless you elect otherwise, dividends and capital gains
distributions will be reinvested in additional shares of the Fund at no charge.
Changes in your election regarding receipt of dividends and distributions must
be sent to the Transfer Agent. Shareholders will be subject to tax on all
dividends paid to them or reinvested in shares of the Fund. If an investment in
Fund shares is made by a retirement plan, all dividends and capital gains
distributions must be reinvested into an account of such plan.
Generally, dividends from net investment income are taxable to investors as
ordinary income. Certain gains or losses on the sale or retirement of
international securities held by the Fund, to the extent attributable to
fluctuations in currency exchange rates, as well as certain other gains or
losses attributable to exchange rate fluctuations, must be treated as ordinary
income or loss. Such income or loss may increase or decrease (or possibly
eliminate) the income available for distribution to shareholders. If, under the
rules governing the tax treatment of foreign currency gains and losses, the
income available for distribution is decreased or eliminated, all or a portion
of the dividends declared by the Fund may be treated for federal income tax
purposes as a return of capital, or in some circumstances, as capital gain.
Generally, a shareholder's tax basis in his/her Fund shares will be reduced to
the extent that an amount distributed to the shareholder is treated as a return
of capital.
Long-term capital gains distributions, if any, are taxable as net long-term
capital gains when distributed regardless of the length of time shareholders
have owned their shares. Net short-term capital gains and any other taxable
income distributions are taxable as ordinary income.
The Fund sends detailed tax information about the amount and type of its
distributions to its shareholders by January 31 of the year following the
distributions.
TAXES
The Fund will be treated as a separate corporation and will seek to qualify and
maintain its qualification as a regulated investment company under Subchapter M
of the Code. Provided it maintains its qualification as a regulated investment
company under the Code, the Fund will not be liable for federal income taxes on
income distributed as dividends to its shareholders or on net capital gains that
are distributed to its shareholders or imputed to them under the Code, or for
any excise tax, to the extent its earnings are distributed as provided in the
Code, and assuming it meets the tax diversification test, 90% gross income test
and 30% gross income test as required by the Code.
In order to meet the tax diversification test, at the close of each quarter of
its fiscal year, (i) at least 50% of the value of the Fund's total assets must
be represented by cash and cash items including receivables, U.S. Government
securities, and securities of other regulated investment companies, and other
securities limited in respect of any one issuer to an amount
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not greater than 5% of the value of its total assets, and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and the securities of other
regulated investment companies.)
The Fund will meet the 90% of gross income test if 90% of its gross income is
derived from dividends, interest, payments with respect to certain securities
loans, and gain from the sale or disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to its business of investing
in such stock, securities, or currencies. The Fund will meet the 30% of gross
income test provided that less than 30% of its gross income for the fiscal year
is derived from the sale or disposition of any of the following held for less
than three months: stock or securities, options, futures, or forward contracts
(other than such contracts on foreign currencies), and foreign currencies (or
options, futures, or forward contracts on foreign currencies ("hedging
instruments")) but only if such currencies (and hedging instruments) are not
directly related to the Fund's principal business of investing in stock or
securities (or options and futures with respect to stock or securities.)
The Fund will act and invest so as to comply with the requirements of Subchapter
M outlined above. This may mean, for example, that the Fund will be required to
hold an investment longer than it otherwise would, or not engage in a hedging
transaction which it otherwise would, in order to avoid violating one of the
tests outlined above. The distribution to shareholders each year of investment
income and capital gains will represent taxable income to the shareholders.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the value of its assets at the close
of its taxable year consists of stock or securities in foreign corporations, it
may elect to pass through to its shareholders the amount of foreign withholding
taxes it paid. If this election is made, shareholders will be (i) required to
include in their gross income their pro rata share of foreign source income
(including any foreign taxes paid by the Fund), and (ii) entitled to either
deduct (as an itemized deduction in the case of individuals) their share of such
foreign taxes in computing their taxable income or to claim a credit for such
taxes against their U.S. income tax, subject to certain limitations under the
Code. The Fund will notify its shareholders of such election within 60 days of
the close of its tax year, which is December 31. Shareholders may decide whether
to utilize such flow through amount as either a deduction or a tax credit;
individual shareholders will usually find that the credit is more favorable. Tax
exempt investors, such as pension plans and individual retirement accounts, will
not benefit from this pass through, and therefore the Fund may not be a suitable
investment for such investors.
On the account application, the shareholder must provide the
shareholder's taxpayer identification number ("TIN"), certify that it is correct
and certify that the shareholder is not subject to backup withholding under
Internal Revenue Service ("IRS") rules. If the shareholder fails to provide a
correct TIN or the proper certifications, the Fund will withhold
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31% of all distributions and redemption proceeds payable to the shareholder. The
Fund will also begin backup withholding on a shareholder's Fund account if the
IRS instructs the Fund to do so. The Fund reserves the right not to open a
shareholder's account or, if an account is already opened, to redeem a
shareholder's shares at the current NAV, less any taxes withheld, if the
shareholder fails to provide a correct TIN, fails to provide the proper
certifications, or the IRS advises the Fund to begin backup withholding on the
shareholder's Fund account.
GENERAL INFORMATION ABOUT THE FUND
The Company is authorized to issue up to 500,000,000 shares of common stock, par
value $0.01 per share, of which the Company has presently allocated 50,000,000
shares to the Vontobel U.S. Value Fund, 50,000,000 shares to the Vontobel
EuroPacific Fund, 50,000,000 shares to the Vontobel Eastern European Equity
Fund, 50,000,000 shares to the Vontobel International Bond Fund and 50,000,000
shares to the Fund. The Board of Directors can allocate the remaining authorized
but unissued shares to any series of the Company or may create additional series
and allocate shares to such series. A share of the Fund has priority in the
assets of the Fund in the event of a liquidation. The shares of the Fund will be
fully paid and nonassessable, will have no preference over other shares of the
Fund as to conversion, dividends or retirement, and will have no preemptive
rights. Shares of the Fund will be redeemable from the assets of the Fund at any
time, as described in "How to Redeem Shares" above.
Each outstanding share of the Company is entitled to one vote for each full
share of stock and a fractional vote for fractional shares of stock. All
shareholders vote on matters that concern the Company as a whole. The Company is
not required to hold a meeting of shareholders each year, and may elect not to
hold a meeting in years when no meeting is necessary. The shareholders of the
Fund shall vote separately on matters which affect only the interests of the
Fund. The Company's shares do not have cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Directors can elect all of the Directors if they choose to do so. Shareholders
have the right to call a meeting to consider the removal of one or more of the
Directors and will be assisted in shareholder communications in such matter.
The name of the Company was changed from The World Funds, Inc. to Vontobel
Funds, Inc. on February 28, 1997, as approved by the Board of Directors of the
Company.
Limitation on Use of Name - The Advisory Agreement for the Fund authorizes the
Company to utilize the name "Sand Hill." The Company agrees that if the Advisory
Agreement is terminated it will promptly redesignate the name of the Sand Hill
Portfolio Manager Fund to eliminate any reference to the name "Sand Hill" or any
derivation thereof unless the Investment Advisor waives this requirement in
writing.
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TO OBTAIN MORE INFORMATION
For further information on the Sand Hill Portfolio Manager Fund, please contact
Commonwealth Shareholder Services, Inc., P.O. Box 8687, Richmond, VA 23226,
telephone: (800) 527-9500. Additional information may also be obtained by
requesting a copy of the Fund's Statement of Additional Information.
Investment Advisor: Sand Hill Advisors, Inc.
3000 Sand Hill Road
Building 3, Suite 150
Menlo Park, CA 94025
Distributor: First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Fund and
Marketing Services, call the Distributor at
(800) 527-9500 Toll Free.
Transfer Agent: For account information, wire purchases or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260-6305
(800) 628-4077 Toll Free
More Information: For 24-hour, 7-days-a-week price information,
call 1-800-527-9500.
For information on any series of Vontobel Funds, Inc. investment plans, or other
shareholder services, call 1-800-527- 9500 during normal business hours, or
write Vontobel Funds, Inc. at 1500 Forest Avenue, Suite 223, Richmond, VA
23229.
No dealer, sales representative or any other person has been authorized
to give any information or to make any representations, other than those
contained in this Prospectus, in
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connection with the offer made by this Prospectus and, if given or made, such
other information or representations must not be relied upon as having been
authorized by the Fund or the Distributor. This Prospectus does not constitute
an offer by the Fund or the Distributor to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
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<PAGE>
VONTOBEL FUNDS, INC.
VONTOBEL U.S. VALUE FUND
VONTOBEL INTERNATIONAL EQUITY FUND
VONTOBEL EASTERN EUROPEAN EQUITY FUND
VONTOBEL INTERNATIONAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION DATED MARCH 14, 1997
Vontobel Funds, Inc. (the "Company") is an open-end management
investment company commonly known as a "mutual fund." This Statement of
Additional Information is not a prospectus but supplements the information
contained in the current Prospectus of the Vontobel U.S. Value Fund, Vontobel
International Equity Fund (formerly named Vontobel EuroPacific Fund), Vontobel
Eastern European Equity Fund and Vontobel International Bond Fund (each, a
"Fund"), dated March 14, 1997. It should be read in conjunction with the
Prospectus, and has been designed to provide you with further information which
is not contained in the Prospectus. The Prospectus of the Funds may be obtained
at no charge upon request to the Company. Please retain this Statement of
Additional Information for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS STATEMENT OF ADDITIONAL INFORMATION. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
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Vontobel Funds, Inc.
Investment Policies
Additional Investments and Investment Techniques
Strategic Transactions
Options
Futures
Currency Transactions
Combined Transactions
Eurocurrency Instruments
Use of Segregated and Other Special Accounts
Repurchase Agreements
Reverse Repurchase Agreements
Special Investment Considerations of the Funds
Investment Restrictions
Taxes
Dividends and Distributions
Portfolio Transactions
Valuation and Calculation of Net Asset Value
Directors and Officers
Investment Advisor Transfer Agent
Administrator
Eligible Benefit Plans
Distribution
Fund Expenses
Special Shareholder Services
General Information and History
Performance
Financial Statements
Appendix - Bond Ratings
<PAGE>
VONTOBEL FUNDS, INC.
The Funds are series of Vontobel Funds, Inc. (the "Company"), a
Maryland corporation which is an open-end, management investment company,
commonly known as a "mutual fund." Each of the Funds is a no-load series of
the Company. The Vontobel U.S. Value Fund (the "Value Fund"), the
Vontobel International Equity Fund (the "International Equity Fund") (formerly
named, Vontobel EuroPacific Fund) and the Vontobel Eastern European Equity Fund
(the "E. European Fund") are diversified series, and the Vontobel International
Bond Fund (the "Bond Fund") is a non-diversified series. A diversified series
has investment restrictions that require that, with respect to 75% of its
total assets, the series may invest no more than 5% of its total assets
in the securities of a single issuer, with certain exceptions, as described in
the "Special Risk Considerations - Non-Diversified Fund" section of the
Prospectus. Each of the International Equity Fund, E. European Fund and Bond
Fund (each, an "International Fund") may or does invest a large percentage of
its assets in foreign securities, as described in the Prospectus and below.
There is some market risk inherent in any investment, due in part to
changes in general economic and market conditions, and therefore there is no
assurance that a Fund's investment objective will be realized. However, the
investment policies of each Fund are intended to provide the flexibility to take
advantage of opportunities while accepting only what Vontobel USA Inc. (the
"Advisor") believes to be reasonable risks. Investment policies are intended to
provide the flexibility to take advantage of opportunities while accepting only
what management believes to be reasonable risks. Changes in portfolio securities
are made on the basis of investment considerations, and it is against the policy
of management to make changes for trading purposes.
Investment Policies
Vontobel U.S. Value Fund
Under normal circumstances, the Value Fund will have at least 65% of
its assets invested in common stocks or securities convertible into common
stocks. The Fund may also acquire fixed income investments where these fixed
income securities are convertible into equity securities (and which may
therefore reflect appreciation in the underlying equity security), and where
anticipated interest rate movements, or factors affecting the degree of risk
inherent in a fixed income security are expected to change significantly so as
to produce appreciation in the security consistent with the Fund's objective.
The fixed income securities in which the Fund may invest will be rated at the
time of purchase Baa or higher by Moody's Investors Service, Inc. ("Moody's"),
or BBB or higher by Standard and Poor's Ratings Group ("S&P"), or if they are
foreign securities which are not subject to standard credit ratings the fixed
income securities will be "investment grade" issues (in the judgement of the
Advisor) based on available information. Securities rated as BBB are regarded as
having adequate capacity to pay interest and repay principal.
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The Fund will select its non-equity investments from among securities
and obligations of all kinds including preferred stocks, warrant rights, bonds
(of any class or rating), repurchase agreements, money market investments (such
as U.S. Government securities (see the description below) issued by the U.S.
Treasury, agencies or other instrumentalities) and other evidences of
indebtedness.
The Fund will enter into only repurchase agreements involving U.S.
Government securities in which it may otherwise invest. See "Additional
Investments and Investment Techniques - Repurchase Agreements" below.
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. U.S.
Treasury securities are backed by the "full faith and credit" of the United
States. Securities issued or guaranteed by Federal agencies and the U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. An instrumentality of the U.S. Government is a government
agency organized under Federal charter with government supervision.
The Fund may lend its portfolio securities.
The Fund's investments will be subject to the market fluctuations and
risks which are inherent in all investments, and although the Advisor will seek
to attain the Fund's stated objective, there can be no assurance that the
objective will be achieved.
Vontobel International Equity Fund
Under normal circumstances, the International Equity Fund will have at
least 65% of its assets invested in a portfolio of common stocks or securities
convertible into common stocks of issuers principally from European and Pacific
Basin countries. The Fund will normally be invested in not less than three
countries. However, when the Advisor believes that investments should be
deployed in a temporary defensive posture because of economic or market
conditions, the Fund may invest up to 100% of its assets in U.S. Government
securities (such as bills, notes, or bonds of the U.S. Government and its
agencies) or other forms of indebtedness such as bonds, certificates of deposit
or repurchase agreements.
The Fund may also acquire fixed income investments where these fixed
income securities are convertible into equity securities (and which may
therefore reflect appreciation in the underlying equity security), and where
anticipated interest rate movements, or factors affecting the degree of risk
inherent in a fixed income security are expected to change
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significantly so as to produce appreciation in the security consistent with the
Fund's objective. The fixed income securities in which the Fund may invest will
be rated at the time of purchase Baa or higher by Moody's or BBB or higher by
S&P, or if they are foreign securities which are not subject to standard credit
ratings the fixed income securities will be "investment grade" issues (in the
judgement of the Advisor) based on available information. Securities rated as
BBB are regarded as having adequate capacity to pay interest and repay
principal.
The Fund will select its non-equity investments from among securities
and obligations of all kinds including preferred stocks, warrant rights, bonds
(of any class or rating), repurchase agreements, money market investments (such
as U.S. Government securities (see the description below) issued by the U.S.
Treasury, agencies or other instrumentalities) and other evidences of
indebtedness.
The Fund will enter into only repurchase agreements involving U.S.
Government securities in which it may otherwise invest. See "Additional
Investments and Investment Techniques - Repurchase Agreements" below.
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. U.S.
Treasury securities are backed by the "full faith and credit" of the United
States. Securities issued or guaranteed by Federal agencies and the U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. An instrumentality of the U.S. Government is a government
agency organized under Federal charter with government supervision.
It is the Fund's practice to enter into repurchase agreements with
selected banks and securities dealers, depending upon the availability of the
most favorable yields. The Fund will always seek to perfect its security
interest in the collateral. If the seller of a repurchase agreement defaults,
the Fund may incur a loss if the value of the collateral securing the repurchase
agreement declines. The Advisor monitors the value of the collateral to ensure
that its value always equals or exceeds the repurchase price and also monitors
the financial condition of the issuer of the repurchase agreement. If the seller
defaults, the Fund may incur disposition costs in connection with liquidating
the collateral of that seller. If bankruptcy proceedings are commenced with
respect to the seller, realization upon the collateral by the Fund may be
delayed or limited.
The Fund is designed to take advantage of the opportunities provided by
the ability to invest overseas, and therefore may be subject to some of the
special risks described below.
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As noted in the Prospectus, the Fund has the right to invest in
securities which may be considered to be "thinly traded" if they are deemed to
offer the potential for appreciation, but it does not presently intend to invest
more than 5% of its assets in such securities. The trading volume of such
securities is generally lower and their prices may be more volatile as a result,
and such securities are less likely to be exchange-listed securities. The Fund
may also invest, subject to certain restrictions described below, in options
(puts and calls) and, to a limited extent, in restricted securities.
The Fund may invest in the shares of closed-end investment companies
which acquire equity securities of countries in which the Fund may invest. By
investing in shares of such investment companies, the Fund would indirectly pay
a portion of the operating expenses, management expenses, and brokerage costs of
such an investment company as well as the expenses of the Fund. The Advisor will
recommend such investments when it believes that this would allow the Fund to
achieve a greater diversification at an economically more advantageous price
than through the acquisition of individual securities, or when such company is
able to achieve an investment in a country which the Fund cannot acquire for
legal or economic reasons.
The Fund may utilize American Depository Receipts ("ADR's") and
European Depository Receipts ("EDR's"). Generally, ADR's are dollar denominated
securities issued in registered form and designed for use in the United States
securities markets. They represent and may be converted into the underlying
foreign security. EDR's, in bearer form, are similarly designed for use in the
European securities markets. For purposes of determining the country of origin,
ADR's and closed-end investment companies will not be deemed to be domestic
securities.
The Fund may lend its portfolio securities.
The Fund's investments will be subject to the market fluctuations and
risks which are inherent in all investments, and although the Advisor will seek
to attain the Fund's stated objective there can be no assurance that the
objective will be achieved.
Hedging with Forward Foreign Currency Contracts, Futures and Options on Futures
The Fund's investment objective (as described in the Prospectus)
contemplates investment in securities of issuers domiciled or operating outside
of the United States. Such foreign investments may require the Fund temporarily
to hold funds in foreign currencies prior to, during or following the completion
of investment programs. In such circumstances the value of the Fund's assets, as
measured in United States dollars, may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations.
The Fund will conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market or, when deemed
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necessary to "hedge" the Fund's anticipated cash movements, through entering
into forward foreign currency exchange contracts to purchase or sell foreign
currencies, futures or options on futures. See "Additional Investments and
Investment Techniques" below.
Covered Call and Put Options
The Fund may write (sell) "covered" call options and purchase put
options, and purchase call and write put options to close out options previously
written by it. The Fund may purchase put options in the following two
circumstances when: (1) it holds a position in the security (that is, the put is
covered), or (2) a put option on a market index when, in the opinion of the
Advisor, such index is representative of the securities held in the portfolio,
therefore, the index will move in the same direction as the securities held in
the portfolio. The purpose of writing covered call options and purchasing put
options will be to reduce the effect of price fluctuations of selected
securities owned by it on the net asset value per share. The hedging activities
on portfolio securities using options are separate and different from the
foreign currency hedging transactions (see above) entered into by the Fund.
Although additional revenues may be generated through the use of covered call
options, the Advisor does not consider the additional revenues which may be
generated as the primary reason for writing covered call options, which is
undertaken to hedge the investments in a particular security. Similarly, foreign
currency hedging is intended to hedge currency movements, not to speculate on
currency gains or generate commission income. There is no assurance that the
Fund's portfolio will be hedged, or that the hedge will be complete or in exact
correlation with market movement. In order to hedge its investment the Fund will
generally give up opportunities to gain from market movement.
The Fund will write only covered call options and purchase put options.
It will write covered call options and purchase put options in standard
contracts which are quoted on national securities exchanges or similar
instruments in comparable markets in the countries in which it invests and holds
its portfolio securities. See "Additional Investments and Investment Techniques"
below.
Vontobel Eastern European Equity Fund
Under normal circumstances the E. European Fund will have at least 65%
of its assets invested in a portfolio of common stocks or securities convertible
into common stocks of issuers from not less than three countries. However, when
the Advisor believes that investments should be deployed in a temporary
defensive posture because of economic or market conditions, the Fund may invest
up to 100% of its assets in U.S. Government securities (such as bills, notes, or
bonds of the U.S. Government and its agencies) or other forms of indebtedness
such as bonds, certificates of deposit or repurchase agreements.
The Fund may also acquire fixed income investments where these fixed
income securities are convertible into equity securities (and which may
therefore reflect appreciation
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in the underlying equity security), and where anticipated interest rate
movements, or factors affecting the degree of risk inherent in a fixed income
security are expected to change significantly so as to produce appreciation in
the security consistent with the Fund's objective. The fixed income securities
in which the Fund may invest will be rated at the time of purchase Baa or higher
by Moody's Investor Service, Inc., or BBB or higher by Standard and Poor's
Corporation, or if they are foreign securities which are not subject to standard
credit ratings the fixed income securities will be "investment grade" issues (in
the judgement of the Advisor) based on available information. Securities rated
as BBB are regarded as having adequate capacity to pay interest and repay
principal.
The Fund will select its non-equity investments from among securities
and obligations of all kinds including preferred stocks, warrant rights, bonds
(of any class or rating), repurchase agreements, money market investments (such
as U.S. Government securities (see the description below) issued by the U.S.
Treasury, agencies or other instrumentalities) and other evidences of
indebtedness.
The Fund may enter into repurchase agreements (which enables it to
employ its assets pending investment) during very short periods of time.
Ordinarily these agreements permit the Fund to maintain liquidity and earn
higher rates of return than would normally be available from other short-term
money market instruments. The Fund will enter into only repurchase agreements
involving U.S. Government securities in which it may otherwise invest. See
"Additional Investments and Investment Techniques - Repurchase Agreements"
below.
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. U.S.
Treasury securities are backed by the "full faith and credit" of the United
States. Securities issued or guaranteed by Federal agencies and the U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. An instrumentality of the U.S. Government is a government
agency organized under Federal charter with government supervision.
It is the Fund's practice to enter into repurchase agreements with
selected banks and securities dealers, depending upon the availability of the
most favorable yields. The Fund will always seek to perfect its security
interest in the collateral. If the seller of a repurchase agreement defaults,
the Fund may incur a loss if the value of the collateral securing the repurchase
agreement declines. The Advisor monitors the value of the collateral to ensure
that its value always equals or exceeds the repurchase price and also monitors
the financial condition of the issuer of the repurchase agreement. If the seller
defaults, the Fund may
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incur disposition costs in connection with liquidating the collateral of that
seller. If bankruptcy proceedings are commenced with respect to the seller,
realization upon the collateral by the Fund may be delayed or limited.
The Fund is designed to take advantage of the opportunities provided by
the ability to invest overseas, and therefore may be subject to some of the
special risks described below.
As noted in the Prospectus, the Fund has the right to invest in
securities which may be considered to be "thinly traded" if they are deemed to
offer the potential for appreciation, but it does not presently intend to invest
more than 15% of its assets in such securities. The trading volume of such
securities is generally lower and their prices may be more volatile as a result,
and such securities are less likely to be exchange-listed securities. The Fund
may also invest, subject to certain restrictions described below, in options
(puts and calls) and, to a limited extent, in restricted securities.
The Fund may invest in the shares of closed-end investment companies
which acquire equity securities of Eastern/Central European countries in which
the Fund may invest. By investing in shares of such investment companies, the
Fund would indirectly pay a portion of the operating expenses, management
expenses, and brokerage costs of such an investment company as well as the
expenses of the Fund. The Advisor will recommend such investments when it
believes that this would allow the Fund to achieve a greater diversification at
an economically more advantageous price than through the acquisition of
individual securities, or when such company is able to achieve an investment in
a country which the Fund cannot acquire for legal or economic reasons.
The Fund may utilize American Depository Receipts ("ADR's"), European
Depository Receipts ("EDR's") and Global Depository Receipts ("GDR's").
Generally, ADR's are dollar denominated securities issued in registered form and
designed for use in the United States securities markets. They represent and may
be converted into the underlying foreign security. EDR's, in bearer form, are
similarly designed for use in the European securities markets. For purposes of
determining the country of origin, ADR's and closed-end investment companies
will not be deemed to be domestic securities.
It is the Fund's policy not to lend its portfolio securities at the
present time, although it is not restricted from so doing.
The Fund's investments will be subject to the market fluctuations and
risks which are inherent in all investments, and although the Advisor will seek
to attain the Fund's stated objective there can be no assurance that the
objective will be achieved.
Hedging with Forward Foreign Currency Contracts, Futures and Options or Futures
The Fund's investment objective (as described in the Prospectus)
contemplates investment in securities of issuers domiciled or operating outside
the United States. Such
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foreign investments may require the Fund to temporarily hold funds in foreign
currencies prior to, during or following the completion of investment programs.
In such circumstances the value of the Fund's assets, as measured in United
States dollars, may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations.
The Fund will conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market or, when deemed necessary to "hedge" the Fund's anticipated cash
movements, through entering into forward contracts to purchase or sell foreign
currencies, currency futures or options on currency futures. See "Additional
Investments and Investment Techniques" below.
Vontobel International Bond Fund
The Bond Fund offers investors a convenient way to invest in a managed
portfolio of foreign currency denominated debt securities. It seeks to achieve
its objective of total return primarily by investing in a managed portfolio of
high-grade bonds denominated in foreign currencies. It will seek protection and
possible enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
To achieve its objective, the Fund will primarily invest in
international bonds that are denominated in foreign currencies, including bonds
denominated in the European Currency Unit (ECU). International bonds are defined
as bonds issued in countries other than the United States. The Fund's
investments may include debt securities issued or guaranteed by a foreign
national government, its agencies, instrumentalities or political subdivisions,
debt securities issued or guaranteed by supranational organizations, corporate
debt securities, bank or holding company debt securities and other debt
securities including those convertible into common stock. The Fund will invest
in very high investment grade instruments that will bear the rating of A or
higher by Standard & Poor's Ratings Group ("S&P") or A or higher by Moody's
Investor Service, Inc. ("Moody's") or unrated securities which the Advisor
believes to be of comparable quality. However, the Fund reserves the right to
invest its assets in lower rated securities (including unrated securities which
the Advisor believes to be of such lower quality). (See the Appendix for Bond
Ratings). The Fund will invest no more than 5% of its assets in securities rated
below investment grade (i.e., below BBB by S&P or Baa by Moody's) or which are
unrated but are of comparable quality as determined by the Advisor. (See
"Special Risk Considerations" in the Fund's Prospectus.)
Because of the Fund's investment considerations discussed above and its
investment policies, investments in the Fund are not intended to provide a
complete investment program for an investor.
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The Fund cannot guarantee a gain or eliminate the risk of loss. The
Fund's net asset value per share will increase or decrease with changes in the
market price of the Fund's investments, and there is no assurance that the
Fund's investment objective will be achieved.
Debt Securities. The Fund may purchase "investment-grade" bonds, which
are those rated Baa or higher by Moody's or BBB or higher by S&P, or unrated
securities which the Advisor believes are of comparable quality. The Fund may
also invest up to 5% of its assets in lower rated securities or securities which
are unrated but are of comparable quality as determined by the Advisor. Bonds
rated Baa or BBB may have speculative elements as well as investment-grade
characteristics. The Fund may invest in debt securities which are rated as low
as C by Moody's or D by S&P. Such securities may be in default with respect to
payment of principal or interest.
Additional Investments and Investment Techniques
Strategic Transactions. Each of the Funds may, but is not required to,
utilize various other investment strategies described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad
specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities, or to enhance potential gain.
Such strategies are generally accepted as modern portfolio management and are
regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, 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").
Risks of Strategic Transactions Outside the United States. When
conducted outside the United States, Strategic Transactions may not be regulated
as rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.
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Options. Each of the Funds may purchase and sell options as described
in the Prospectus and herein.
General Characteristics of Options. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of the Fund's assets in
special accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. Such protection is, of course, only provided during the life of the put
option when the Fund, as the holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. By using put options in this manner, the
Fund will reduce any profit it might otherwise have realized in its underlying
security by the premium paid for the put option and by transaction costs.
A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument. When writing a covered call option, the Fund, in return for the
premium, gives up the opportunity for profit from a price increase in the
underlying security above the exercise price, but conversely retains the risk of
loss should the price of the security decline. If a call option which it has
written expires, it will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security during the option period. If the call option is exercised, the Fund
will realize a gain or loss from the sale of the underlying security.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option, or, which it will pay when
purchasing a put option, will reflect, among other things, the current market
price of the underlying security, the relationship of the exercise price to such
market price, the historical price volatility of the underlying security, the
length of the option period, the general supply of and demand for credit
conditions, and the general interest rate environment. The premium received by
the Fund for writing covered call options will be recorded as a liability in its
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sale price at the
time at which the Fund's net asset value per share is computed (close of the New
York Stock Exchange), or, in the absence of such sale, the latest
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asked price. The liability will be extinguished upon expiration of the option,
the purchase of an identical option in a closing transaction, or delivery of the
underlying security upon the exercise of the option.
The premium paid by the Fund when purchasing a put option will be
recorded as an asset in its statement of assets and liabilities. This asset will
be adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the Fund's net asset value per share is computed
(close of the New York Stock Exchange), or, in the absence of such sale, the
latest bid price. The asset will be extinguished upon expiration of the option,
the selling (writing) of an identical option in a closing transaction, or the
delivery of the underlying security upon the exercise of the option.
The purchase of a put option will constitute a short sale for federal
tax purposes. The purchase of a put at a time when the substantially identical
security held long has not exceeded the long term capital gain holding period
could have adverse tax consequences. The holding period of the long position
will be cut off so that even if the security held long is delivered to close the
put, short term gain will be recognized. If substantially identical securities
are purchased to close the put, the holding period of the securities purchased
will not begin until the closing date. The holding period of the substantially
identical securities not delivered to close the short sale will commence on the
closing of the short sale.
The Fund will purchase a call option only to close out a covered call
option it has written. It will write a put option only to close out a put option
it has purchased. Such closing transactions will be effected in order to realize
a profit on an outstanding call or put option, to prevent an underlying security
from being called or put, or, to permit the sale of the underlying security.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option, or purchase another put option, on the underlying security
with either a different exercise price or expiration date or both. If the Fund
desires to sell a particular security from its portfolio on which it has written
a call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security. There is,
of course, no assurance that the Fund will be able to effect such closing
transactions at a favorable price. If it cannot enter into such a transaction,
it may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security. This could
result in higher transaction costs, including brokerage commissions. The Fund
will pay brokerage commissions in connection with the writing or purchase of
options to close out previously written options. Such brokerage commissions are
normally higher than those applicable to purchases and sales of portfolio
securities.
Options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, the Fund may
purchase an underlying security for delivery in
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accordance with an exercise notice of a call option assigned to it, rather than
delivering such security from its portfolio. In such cases additional brokerage
commissions will be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option; however, any loss so incurred in a
closing purchase transaction may be partially or entirely offset by the premium
received from a simultaneous or subsequent sale of a different call or put
option. Also, because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurocurrency instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
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The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Advisor must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers," or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of A-1 from Standard & Poor's Ratings Group ("S&P") or P-1 from Moody's
Investors Service, Inc. ("Moody's") or an equivalent rating from any other
nationally recognized statistical rating organization ("NRSRO"). The staff of
the SEC currently takes the position that OTC options purchased by a fund, and
portfolio securities "covering" the amount of a fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a fund's limitation on investing no
more than 10% of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The 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
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instruments) that are traded in U.S. and foreign securities exchanges and in the
over-the-counter markets, and futures contracts. The International Equity, E.
European and Bond Funds may purchase and sell call options on currencies. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The 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 it holds the above securities in its
portfolio), and futures contracts (except for the Bond Fund, not futures
contracts on individual corporate debt securities.) The International Equity, E.
European and Bond Funds may purchase and sell put options on currencies. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price. For tax purposes, the purchase of a put is treated as a short sale which
may cut off the holding period for the security so it 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. Each of the
Funds may also purchase and sell call and put options on securities indices and
other financial indices and in so doing can achieve many of the same objectives
it would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option physical delivery is specified).
This amount of cash is equal to the excess of the closing price of the index
over the exercise price of the option, which also may be multiplied by a formula
value. The seller of the option is obligated, in return for the premium
received, to make delivery of this amount. The gain or loss on an option on an
index depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
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Futures. Each of the International Funds may enter into financial
futures contracts or purchases or sell put and call options on such futures as a
hedge against anticipated interest rate or currency market changes and for risk
management purposes, and for the Bond Fund, for duration management. The use of
futures for hedging is intended to protect the International Fund from (i) the
risk that the value of its portfolio of investments in a foreign market may
decline before it can liquidate its interest, or (ii) the risk that a foreign
market in which it proposes to invest may have significant increases in value
before it can cause its cash to be invested in that market. In the first
instance, the International Fund will sell a future based upon a broad market
index which it is believed will move in a manner comparable to the overall value
of securities in that market. In the second instance, the International 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.
General Characteristics of Futures. Regulatory policies governing the
use of such hedging techniques require the International Fund to provide for the
deposit of initial margin and the segregation of suitable assets to meet its
obligation 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 Fund, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurocurrency instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The International Fund's use of financial futures and options thereon
will in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the
International Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the International Fund. If the International Fund exercises an
option on a futures contract it will be obligated to post initial margin (and
potential subsequent variation margin) for the resulting futures position just
as it would for any position. Futures contracts and options thereon are
generally settled by entering into an
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offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantage price, nor that delivery will occur.
The International Fund will not enter into a futures contract or
related option (except for closing transactions) if immediately thereafter, the
sum of the amount of its initial margin and premiums on open futures contracts
and options thereon would exceed 5% of the International Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded calculating
the 5% limitation. The segregation requirements with respect to futures
contracts and options thereon are described below.
Currency Transactions. Each of 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 agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward foreign currency contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A currency swap is an agreement
to exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below. The International Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or (except for OTC
currency options) are determined to be of equivalent credit quality by the
Advisor.
The International Fund's 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 is entering into a currency transaction with
respect to specific assets or liabilities of the International Fund, which will
generally arise in connection with the purchase or sale of its portfolio
securities or the receipt of income therefrom. The International Fund may enter
into Transaction Hedging out of a desire to preserve the United States dollar
price of a security when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency. The International Fund will be able
to protect itself against possible losses resulting from changes in the
relationship between the United States dollar and foreign currencies during the
period between the date the security is purchased or sold and the date on which
payment is made or received by entering into a forward contract for the purchase
or sale, for a fixed amount of
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dollars, of the amount of the foreign currency involved in the underlying
security transactions.
Position Hedging is entering into a currency transaction with respect
to portfolio security positions denominated or generally quoted in that
currency. The International Fund may use Position Hedging when the Advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the United States dollar, the International Fund may
enter into a forward foreign currency contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of its portfolio securities denominated in such foreign currency. The precise
matching of the forward foreign currency contract amount and the value of the
portfolio securities involved may not have a perfect correlation since the
future value of the securities hedged will change as a consequence of market
movements between the date the forward contract is entered into and the date it
matures. The projection of short-term currency market movement is difficult, and
the successful execution of this short-term hedging strategy is uncertain.
The International Fund will not enter into a transaction to hedge
currency exposure to an extent greater, after netting all transactions intended
wholly or partially to offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held in
its portfolio that are denominated or generally quoted in or currently
convertible into such currency, other than with respect to proxy hedging as
described below.
The International Fund may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Fund has or in which
the Fund expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the International Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a fund's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the fund's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the International Fund's securities
denominated in linked currencies. For example, if the Advisor considers that the
Austrian schilling is linked to the German deutschemark (the "D-mark"), the Fund
holds securities denominated in schillings and the Advisor believes that the
value of schillings will decline against the U.S. dollar, the Advisor may enter
into a contract to sell D-marks and buy dollars. Currency hedging involves some
of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to a fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. 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 that a fund is engaging in proxy hedging. If a
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fund enters into a currency hedging transaction, the fund will comply with the
asset segregation requirements described below. Cross currency hedges may not be
considered "directly related" to the International Fund's principal business of
investing in stock or securities (or options and futures thereon), resulting in
gains therefrom not qualifying under the less than 30% of gross income" test of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Risks of Currency Transactions. Currency transactions are subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to an International Fund if it is unable to deliver
or receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy. 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, at the same time they tend to
limit any potential gain which might result should the value of such currency
increase.
Combined Transactions. The Funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Advisor, it is in the best interests of a Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Advisor's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Eurocurrency Instruments. The 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 Fund
might use Eurocurrency futures contracts and options thereon to hedge
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against changes in LIBOR and other interbank rates, to which many interest rate
swaps and fixed income instruments are linked.
Use of Segregated and Other Special Accounts. Many transactions, in
addition to other requirements, require that a Fund segregate liquid high grade
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through the ownership of the underlying security, financial
instruments or currency. In general, either the full amount of any obligation by
a Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a Fund on an index will require the
Fund to own portfolio securities which correlate with the index or segregate
liquid high grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by a Fund requires the
Fund to segregate liquid, high grade assets equal to the exercise price.
A currency contract which obligates an International Fund to buy or
sell currency will generally require the Fund to hold an amount of that currency
or liquid securities denominated in that currency equal to the Fund's
obligations or to segregate liquid high grade assets equal to the amount of the
Fund's obligation.
OTC options entered into by 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 the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
generally settle with physical delivery, and the Fund will segregate an amount
of assets equal to the full value of the option. OTC options settling with
physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet
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its obligation to purchase or provide securities or currencies, or to pay the
amount owed at the expiration of an index-based futures contract. Such assets
may consist of cash, cash equivalents, liquid debt securities or other
acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. An International Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the International Fund could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Fund. Moreover, instead of segregating assets
if the International Fund held a futures or forward contract, it could purchase
a put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offered in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
An International Fund's activities involving Strategic Transactions may
be limited by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "Taxes.")
Repurchase Agreements. Each of the Funds may enter into repurchase
agreements with member banks of the Federal Reserve System, any foreign bank or
with any domestic or foreign broker/dealer which is a reporting government
securities dealer or its equivalent which may be a foreign bank whose
creditworthiness is equal to the standards set for the Fund's direct investment
in debt obligations, if the creditworthiness of the bank or broker/dealer has
been determined by the Advisor to be at least as high as that of other
obligations the Fund may purchase.
A repurchase agreement provides a means for a Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., a Fund) acquires a debt security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. Securities subject to a repurchase agreement are held in a segregated
account and the value of such securities is kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to a Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to a fund
together with the repurchase price on repurchase. In either case, the income to
a Fund is unrelated to the interest rate on
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the Obligation itself. Obligations will be physically held by the Fund's
custodian or in the Federal Reserve Book Entry system. Repurchase agreements are
considered securities issued by the seller for purposes of the diversification
test under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and not cash, a cash item or a U.S.
Government security.
For purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), a repurchase agreement is deemed to be a loan from a Fund to the
seller of the Obligation subject to the repurchase agreement and is therefore
subject to that Fund's investment restrictions applicable to loans. It is not
clear whether a court would consider the Obligation purchased by a Fund subject
to a repurchase agreement as being owned by the Fund or as being collateral for
a loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, a Fund may encounter
delay and incur costs before being able to sell the security. Delays may involve
loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and a Fund has not perfected a security
interest in the Obligation, the Fund may be required to return the Obligation to
the seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, a Fund would be at risk of losing some or all of the
principal and income involved in the transaction. As with any unsecured debt
instrument purchased for the Fund, the Advisor seeks to minimize the risk of
loss through repurchase agreements by analyzing the creditworthiness of the
obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the security. However, if the market value of the Obligation
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund will direct the seller of the Obligation to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price. It is
possible that the Fund will be unsuccessful in seeking to enforce the seller's
contractual obligation to deliver additional securities. A repurchase agreement
with foreign banks may be available with respect to government securities of the
particular foreign jurisdiction, and such repurchase agreements involve risks
similar to repurchase agreements with U.S. entities.
It is the practice of each Fund to enter into repurchase agreements
with selected banks and securities dealers, depending upon the availability of
the most favorable yields. The Fund will always seek to perfect its security
interest in the collateral. If the seller of a repurchase agreement defaults,
the Fund may incur a loss if the value of the collateral securing the repurchase
agreement declines. The Advisor monitors the value of the collateral to ensure
that its value always equals or exceeds the repurchase price and also monitors
the financial condition of the issuer of the repurchase agreement. If the seller
defaults, the Fund may incur disposition costs in connection with liquidating
the collateral of that seller. If bankruptcy proceedings are commenced with
respect to the seller, realization upon the collateral by the Fund may be
delayed or limited.
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The Bond Fund may also enter into repurchase commitments with any party
deemed creditworthy by the Advisor, if the transaction is entered into for
investment purposes and the counterparty's creditworthiness is at least equal to
that of issuers of securities which the Fund may purchase. Such transactions may
not provide the Fund with collateral which is marked-to-market during the term
of the commitment.
Reverse Repurchase Agreements. The Bond Fund may enter into reverse
repurchase agreements. A reverse repurchase agreement is an arrangement under
which the seller (i.e. a fund) sells an Obligation to a buyer, and agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
The Bond Fund may enter into reverse repurchase agreements with member banks of
the Federal Reserve System, any foreign bank or with any domestic or foreign
broker/dealer which is a reporting government securities dealer or its
equivalent which may be a foreign bank whose creditworthiness is equal to the
standards set for the Fund's direct investment in debt obligations.
A reverse repurchase agreement provides a means for the Bond Fund to
earn income on funds which would otherwise be invested in debt securities, for
periods as short as overnight. Securities subject to a repurchase agreement are
held by the purchaser, and the seller holds, and may invest, the price received
for the security. The repurchase price may be higher than the purchase price,
the difference being an expense to the Bond Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate payable by the Fund
together with the repurchase price on repurchase. In either case, the income
paid by the Bond Fund is unrelated to the interest rate on the Obligation
itself. When the Bond Fund is subject to repurchase an Obligation under a
reverse repurchase agreement, it will segregate with its custodian cash, U.S.
government securities, or other high quality debt instruments equal in value to
the amount payable by it under the agreement.
The risk to the Bond Fund is that if the buyer does not resell the
Obligations to the Fund, the Fund may encounter expense or delay in applying the
cash held by it to acquire replacement securities. If the market price of the
securities to be acquired rises, the Bond Fund may have to bear an additional
cost when making such a purchase. If the buyer is in bankruptcy, the Bond Fund
may face claims of the Trustee seeking the assets held by the Fund.
Special Investment Considerations of the Funds
Each of the International Funds, is intended to provide individual and
institutional investors with an opportunity to invest a portion of their assets
in a globally and/or internationally oriented portfolio, according to the
International Fund's objective and policies, and is designed for long-term
investors who can accept international investment risk. The Advisor believes
that allocation of assets on a global or international basis decreases the
degree to which events in any one country, including the United States, will
affect an investor's entire investment holdings. In the period since World War
II, many leading foreign economies have grown more rapidly than the United
States economy, thus providing
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investment opportunities, although there can be no assurance that this will be
true in the future. As with any long-term investment, the value of the
International Fund's shares when sold may be higher or lower than when
purchased.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in United States securities and
which may favorably or unfavorably affect the performance of the International
Fund. As foreign companies are not generally subject to the same uniform
standards, practices and requirements, with respect to accounting, auditing and
financial reporting, as are domestic companies, there may be less publicly
available information about a foreign company than about a domestic company.
Many foreign securities markets, while growing in volume of trading activity,
have substantially less volume in the U.S. market, and securities of some
foreign issuers are less liquid and more volatile than securities of domestic
issuers. Similarly, volume and liquidity in most foreign bond markets is less
than in the United States and, at times, volatility of price can be greater than
in the United States. Furthermore, foreign markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of a fund are
uninvested and no return is earned thereon. The inability of an International
Fund to make intended security purchases due to settlement problems could cause
a fund to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
an International Fund due to subsequent declines in value of the portfolio
security or, if the Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
securities exchanges and bid to asked spreads in foreign bond markets are
generally higher than negotiated commissions on U.S. exchanges and bid to asked
spreads in the U.S. bond market, although the International Fund will endeavor
to achieve the most favorable net results on its portfolio transactions.
Furthermore, an International Fund may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts. There is generally
less government supervision and regulation of business and industry practices,
securities exchanges, brokers and listed companies than in the United States.
Communications between the United States and foreign countries may be less
reliable than within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect United States
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. The International
Fund's Advisor seeks to mitigate the risks associated with the foregoing
considerations through continuous professional management.
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Investments in foreign securities usually will involve currencies of
foreign countries. Because of the considerations discussed above, the value of
the assets of the International Fund, as measured in U.S. dollars, may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the Fund may incur costs in connection
with conversions between various currencies. Although the International Fund
values its assets daily in terms of U.S. dollars, it does not intend to convert
its holdings of foreign currencies into U.S. dollars on a daily basis. It will
do so from time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a fund at one rate, while
offering a lesser rate of exchange should the International Fund desire to
resell that currency to the dealer. The International Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into the forward or futures contracts (or option thereon) to purchase
or sell foreign currencies. The International Fund may, for hedging purposes,
purchase foreign currencies in the form of bank deposits.
Because the International Fund may be invested in both U.S. and foreign
securities markets, changes in its share price may have a low correlation with
movements in the U.S. markets. The International Fund's share price will reflect
the movements of the bond markets in which it is invested and of the currencies
in which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies may account for part of the Fund's investment
performance. Foreign securities such as those purchased by the International
Fund may be subject to foreign government taxes which could reduce the yield on
such securities, although a shareholder of the Fund may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her proportionate share of such foreign taxes paid by
the Fund (see "Taxes"). U.S. and foreign securities markets do not always move
in step with each other and the total returns from different markets may vary
significantly. The International Fund intends to invest in many securities
markets around the world in an attempt to take advantage of opportunities
wherever they may arise.
Investment Restrictions
The policies set forth below that are identified as fundamental
policies of a Fund, along with the investment objective of such Fund, may not be
changed without approval of a majority of the outstanding voting securities of
such Fund. As used in this Statement of Additional Information a "majority of
the outstanding voting securities of a Fund" means the lesser of (1) 67% or more
of the voting securities present at such meeting, if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy; or (2) more than 50% of the outstanding voting securities of the Fund.
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As a matter of fundamental policy, the Value Fund, International Equity
Fund and E. European Fund will not:
1. Invest in companies for the purpose of exercising control;
2. 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;
3. Purchase or sell commodities or commodity contracts; provided that each
of the International Equity and E. European Funds may utilize not more
than 1% of its assets for deposits or commissions required to enter
into, for the International Equity Fund, forward foreign currency
contracts, and for the E. European Fund, financial futures contracts,
for hedging purposes as described under "The Funds' Investments and
Policies" and "Additional Information on Policies and Investments -
Strategic Transactions" in the Prospectus;
4. Invest in interests in oil, gas, or other mineral explorations or
development programs;
5. 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;
6. Issue senior securities;
7. Act as an underwriter of securities of other issuers, except that each
of the International Equity and E. European 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;
8. Concentrate its investments in any industry;
9. Participate on a joint or a joint and several basis in any securities
trading account;
10. Engage in short sales;
11. Purchase or sell real estate, provided that liquid securities of
companies which deal in real estate or interests therein will not be
deemed to be investment in real estate;
12. 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;
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13. Purchase stock or securities of an issuer (other than the obligations
of the United States or any agency or instrumentality thereof) if such
purchase would cause the Fund to own more than 10% of any class of the
outstanding voting securities of such issuer or, except for the Value
Fund, more than 10% of any class of the outstanding stock or securities
of such issuer;
14. Except as specified below for the Value Fund, borrow money except for
temporary or emergency purposes and then only in an amount not in
excess of 5% of the lower of value or cost of its total assets, in
which case the Fund may pledge, mortgage or hypothecate any of its
assets as security for such borrowing but not to an extent greater than
5% of its total assets. Notwithstanding the foregoing, the Value Fund
and Bond 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 (i) the Fund maintains
asset coverage of 300% in connection with the issuance of senior
securities; (ii) to avoid the untimely disposition of assets to meet
redemptions, the Fund may borrow up to 20% of the value of its assets
to meet redemptions; and (iii) the Fund may not make other investments
while such borrowings are outstanding; or
15. Except for the Value Fund, make loans, except that it may (1) lend
portfolio securities; and (2) enter into repurchase agreements secured
by the U.S. Government or Agency securities.
As a matter of fundamental policy, the Bond Fund will not:
1. Borrow money, except as a temporary measure for extraordinary or
emergency purposes; or except in connection with reverse repurchase
agreements, provided that the Fund maintains asset coverage of 300% in
connection with issuance of senior securities. However, to avoid the
untimely disposition of assets to meet redemptions the Fund may borrow
up to 20% of the value of its assets to meet redemptions. The Fund may
not make other investments while such borrowings are outstanding;
2. Purchase or sell real estate (except that the Fund may invest in (i)
securities of companies which deal in real estate or mortgages, and
(ii) securities secured by real estate or interest therein, and that
the Fund reserves freedom of action to hold and to sell real estate
acquired as a result of the Fund's ownership of securities) or purchase
or sell physical commodities or contracts relating to physical
commodities;
3. Act as underwriter of securities issued by others, except to the extent
that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the Fund;
4. Make loans to other persons, except (a) loans of portfolio securities,
and (b) to the extent the entry into repurchase agreements and the
purchase of debt securities in
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accordance with its investment objectives and investment policies may
be deemed to be loans;
5. Issue senior securities, except as appropriate to evidence indebtedness
which it is permitted to incur and except for shares of the separate
classes or series of the Corporation; provided that collateral
arrangements with respect to currency-related contracts, futures
contracts, option or other permitted investments, including deposits of
initial and variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction; or
6. Purchase any securities which would cause more than 25% of the market
value of its total assets at the time of such purchase to be invested
in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to investments in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
(for the purpose of this restriction: telephone companies are
considered to be in a separate industry from gas and electric public
utilities, and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related
to financing the activities of their parents).
The Directors of the Company have voluntarily adopted certain policies
and restrictions which are observed in the conduct of the Funds' affairs. These
represent intentions of the Directors based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Directors without requiring prior notice to or approval
of shareholders.
As a matter of non-fundamental policy, the Value Fund, International
Equity Fund and E. European Fund may not:
1. Invest more than 15% of its net assets in illiquid securities;
2. Purchase warrants if such purchase would exceed 5% of the Fund's net
assets, including, within that limitation, 2% of the Fund's net assets
of warrants not listed on the New York or American Stock Exchanges. For
the purpose of this limitation, warrants acquired by the Fund in units
or attached to securities may be deemed to be without value;
3. Engage in arbitrage transactions;
4. For the International Equity Fund and E. European Fund, purchase or
sell options (puts or calls written by others) unless the following
conditions are met: (a) the value of its investment in puts, calls,
straddles, spreads or any combination thereof is limited to 5% of the
Fund's net assets and the premiums paid therefore may not exceed 2% of
the Fund's net assets; and (b) options must be listed on a national
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securities exchange or, for foreign securities, on comparable exchanges
in the country of issuance of the underlying security;
5. For the Value Fund, write or purchase call or put options, except for
fully covered call options;
6. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the Company or of its
managers or advisors who individually own beneficially more than 0.5%
of the outstanding securities of such issuer, together own beneficially
more than 5% of such outstanding securities; or
7. For the Value Fund, pledge, mortgage, or hypothecate its assets in
excess of 1/3 of its total assets.
As a matter of non-fundamental policy, the Bond Fund may not:
1. Purchase or retain securities of any open-end investment company, or
securities of closed-end investment companies except by purchase in the
open market where no commission or profit to a sponsor or dealer
results from such purchases, or except when such purchase, though not
made in the open market, is part of a plan of merger, consolidation,
reorganization or acquisition of assets; in any event the Fund may not
purchase more than 3% of the outstanding voting securities of another
investment company, may not invest more than 5% of its assets in
another investment company, and may not invest more than 10% of its
assets in other investment companies;
2. Pledge, mortgage or hypothecate its assets in excess of 1/3 of its
total assets;
3. Purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or director of
the Company or a member, officer, or director of the Fund's Advisor if
one or more of such individuals owns beneficially more than one-half of
one percent (1/2%) of the outstanding shares or securities or both
(taken at market value) of such issuer and such individuals owning more
than one-half of one percent (1/2%) of such shares or securities
together own beneficially more than 5% of such shares or securities or
both;
4. Purchase securities on margin; or make short sales unless it holds such
securities or, by virtue of its ownership of other securities it has
the right to obtain securities equivalent in kind and amount of the
securities sold and, if the right is conditional, the sale is made upon
the same conditions, except (i) in connection with arbitrage
transactions and, (ii) that the Fund may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities;
5. Invest more than 15% of its net assets in illiquid securities;
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6. Buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund at any
time do not exceed 20% of its net assets; or sell put options on
securities if, as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of the Fund's net assets;
7. Enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to all futures contracts entered into on behalf of
the Fund and the premiums paid for options on futures contracts does
not exceed 5% of the Fund's total assets, provided that in the case of
an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit;
8. Invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which own or
invest in such interests);
9. Purchase or sell real estate limited partnership interests;
10. Purchase securities which are not bonds denominated in foreign currency
("international bonds") if, immediately after such purchase, less than
65% of its total assets would be invested in international bonds,
except that for temporary defensive purposes the Fund may purchase
securities which are not international bonds without limitation; or
11. Invest more than 5% of its net assets in the securities of issuers in
emerging countries.
Restrictions with respect to repurchase agreements shall be construed
to be for repurchase agreements entered into for the investment of available
cash consistent with the Fund's repurchase agreement procedures, not repurchase
commitments entered into for general investment purposes.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of the Fund's assets will
not be considered a violation of the restriction.
Taxes
Each of the Funds will seek to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code").
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income
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tax (assuming the Fund meets the 90% and 30% of gross income tests and the tax
diversification test of Subchapter M) to the extent that it distributes annually
its investment company taxable income and net realized capital gains in the
manner required under the Code. The Fund intends to distribute at least annually
all of its investment company taxable income and net realized capital gains and
therefore generally does not expect to pay federal income taxes.
Each Fund is subject to a 4% nondeductible excise tax on amounts
required to be but which are not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's investment company taxable income for
the calendar year, at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses prescribed by the Code) realized
during the one-year period ending October 31 during such year, and all ordinary
income and capital gains for prior years that were not previously distributed.
Investment company taxable income generally includes dividends,
interest, net short-term capital gains in excess of net long-term capital
losses, and net foreign currency gains, if any, less expenses. Realized net
capital gains for a fiscal year are computed by taking into account any capital
loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim his/her share of federal income taxes paid by the
Fund on such gains as a credit against his/her own federal income tax liability,
and will be entitled to increase the adjusted tax basis of his/her Fund shares
by the difference between his/her pro rata share of such gains and his/her tax
credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the Fund have been held by such
shareholders. Such distributions are not eligible for a dividends-received
deduction for corporate investors. Any loss realized upon the redemption of
shares held at the time of redemption for six months or less from the date of
their purchase will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain during such six-month
period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal
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income tax purposes in each share so received equal to the net asset value of a
share on the reinvestment date.
All distributions of investment company taxable income and realized net
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Vontobel fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to information reporting requirements.
An individual may make a deductible IRA contribution of up to $2,000
or, if less, the amount of the individual's earned income for any taxable year
if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,000 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,000 and
$50,000; $25,000 for a single individual, with a phase-out for adjusted gross
income between $25,000 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000, or 100% of taxable
compensation if less, to an IRA (up to $2,250 to IRAs for an individual and his
or her nonearning spouse, for years prior to 1997) for that year. Starting in
1997, even a spouse who does not earn compensation can contribute up to $2,000
per year to his or her own IRA. The deductibility of such contributions will be
determined under the same rules as for contributions made by individuals with
earned income. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by each Fund result in a reduction in the net asset value
of such Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
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Each of the International Funds intends to qualify for and may make the
election permitted under Section 853 of the Code so that shareholders may
(subject to limitations) be able to claim a credit or deduction on their federal
income tax returns for, and may be required to treat as part of the amounts
distributed to them, their pro rata portion of qualified taxes paid by the Fund
to foreign countries (which taxes relate primarily to investment income). The
International Fund may make an election under Section 853 of the Code, provided
that more than 50% of the value of the total assets of the Fund at the close of
the taxable year consists of securities in foreign corporations. The foreign tax
credit available to shareholders is subject to certain limitations imposed by
the Code.
If an International Fund invests in stock of certain foreign investment
companies, the Fund may be subject to U.S. federal income taxation on a portion
of any "excess distribution" with respect to, or gain from the disposition of,
such stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the International Fund's holding period for the stock.
The distribution or gain so allocated to any taxable year of the International
Fund, other than the taxable year of the excess distribution or disposition,
would be taxed to the Fund at the highest ordinary income rate in effect for
such year, and the tax would be further increased by an interest charge to
reflect the value of the tax deferral deemed to have resulted from the ownership
of the foreign company's stock. Any amount of distribution or gain allocated to
the taxable year of the distribution or disposition would be included in the
International Fund's investment company taxable income and, accordingly, would
not be taxable to the Fund to the extent distributed by the Fund as a dividend
to its shareholders.
Each of the International Funds may be able to make an election, in
lieu of being taxable in the manner described above, to include annually in
income its pro rata share of the ordinary earnings and net capital gain of the
foreign investment company, regardless of whether it actually received any
distributions from the foreign company. These amounts would be included in the
International Fund's investment company taxable income and net capital gain
which, to the extent distributed by the Fund as ordinary or capital gain
dividends, as the case may be, would not be taxable to the Fund. In order to
make this election, the International Fund would be required to obtain certain
annual information from the foreign investment companies in which it invests,
which in many cases may be difficult to obtain. The International Fund may make
an election with respect to those foreign investment companies which provide the
Fund with the required information.
Many futures contracts (including foreign currency futures contracts)
entered into by a Fund, certain forward foreign currency contracts, and all
listed nonequity options written or purchased by the Fund (including options on
debt securities, options on futures contracts, options on securities indices and
options on broad-based stock indices) will be governed by Section 1256 of the
Code. Absent a tax election to the contrary, gain or loss attributable to the
lapse, exercise or closing out of any such position generally will be treated as
60% long-term and 40% short-term capital gain or loss, and on the last trading
day of the Fund's fiscal year, all outstanding Section 1256 positions will be
marked to market (i.e., treated as
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if such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss. Under certain circumstances, entry into a futures contract to sell
a security may constitute a short sale for federal income tax purposes, causing
an adjustment in the holding period of the underlying security or a
substantially identical security in a Fund's portfolio. Under Section 988 of the
Code, discussed below, foreign currency gains or losses from foreign currency
related forward contracts, certain futures and similar financial instruments
entered into or acquired by the Fund will be treated as ordinary income or loss.
Subchapter M requires that the Fund realize less than 30% of its annual
gross income from the sale or other disposition of stock, securities and certain
options, futures and forward contracts held for less than three months. The
Fund's options, futures and forward transactions may increase the amount of
gains realized by the Fund that are subject to this 30% limitation. Accordingly,
the amount of such transactions that the Fund may undertake may be limited.
Positions of a Fund which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes a Fund's risk of loss with respect to such stock could
be treated as a "straddle" which is governed by Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for any
"qualified covered call options" on stock written by the Fund.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures contract or forward contract or
nonequity option governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position will be treated as a
"mixed straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, certain tax elections exist for them which reduce or
eliminate the operation of these rules. The Fund will monitor its transactions
in options and futures and may make certain tax elections in connection with
these investments.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues interest or other
receivables, or accrues expenses or other liabilities, denominated in a foreign
currency and the time the Fund actually collects such receivables, or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain futures and forward contracts, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition are also
treated as ordinary gain or loss. These gains or losses, referred to under the
Code as "Section 988" gains or losses, may increase or decrease the amount of
the Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
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A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to a Fund each year, even though the Fund will not receive cash interest
payments from these securities. The original issue discount imputed income will
comprise a part of the Fund's investment company taxable income which must be
distributed to shareholders in order to maintain the Fund's qualification as a
regulated investment company and to avoid federal income tax.
Each Fund will be required to report to the IRS all distributions of
investment company taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. Under the backup withholding provisions of Section 3406 of
the Code, distributions of investment company taxable income and capital gains
and proceeds from the redemption or exchange of the shares of a regulated
investment company may be subject to withholding of federal income tax at the
rate of 31% in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law.
Withholding may also be required if the Fund is notified by the IRS or a broker
that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld. Amounts withheld
are applied against the shareholder's tax liability and a refund may be obtained
from the Internal Revenue Service, if withholding results in overpayment of
taxes. A shareholder should contact the Fund or the Transfer Agent if the
shareholder is uncertain whether a proper Taxpayer Identification Number is on
file with the series.
Shareholders of each Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each investor should consult his or her own tax adviser as to the applicability
of these taxes.
In January of each year, the Company's Transfer Agent issues to each
shareholder a statement of the federal income tax status of all distributions.
Non-U.S. Shareholders. The foregoing discussion of U.S. federal income
tax law relates solely to the application of that law to U.S. persons, i.e.,
U.S. citizens and residents and U.S. corporations, partnerships, trusts and
estates. Each shareholder who is not a U.S. person should consider the U.S. and
foreign tax consequences of ownership of Fund shares. Each shareholder who is
not a U.S. person should also consider the U.S. estate tax implications of
holding Fund shares at death. The U.S. estate tax may apply to such holdings if
an investor dies while holding shares of a Fund. Each investor should consult
his or her own tax adviser about the applicability of these taxes. Distributions
of net investment income to non-resident aliens and foreign corporations that
are not engaged in a trade or business in the U.S. to which the distribution is
effectively connected, will be subject to a withholding tax imposed at the rate
of 30% upon the gross amount of the distribution in the
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<PAGE>
absence of a Tax Treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains realized by the Fund are
not subject to tax unless the distribution is effectively connected with the
conduct of the shareholder's trade or business within the United States, or the
foreign shareholder is a non-resident alien individual who was physically
present in the U.S. during the tax year for more than 182 days.
The foregoing is a general abbreviated summary of present Federal
income taxes on dividends and distributions. Shareholders should consult their
tax advisers about the application of the provisions of the tax law described in
this Statement of Additional Information in light of their particular tax
situations and about any state and local taxes applicable to dividends and
distributions received.
Dividends and Distributions
As stated previously, it is the policy of each Fund to distribute
substantially all of its net investment income and net realized capital gains,
if any, shortly before the close of the fiscal year (December 31st).
All dividend and capital gains distributions, if any, will be
reinvested in full and fractional shares based on net asset value (without a
sales charge) as determined on the exdividend date for such distributions.
Shareholders may, however, elect to receive all such payments, or the dividend
or distribution portion thereof, in cash, by sending written notice to this
effect to the Transfer Agent. This written notice will be effective as to any
subsequent payment if received by the Transfer Agent prior to the record date
used for determining the shareholders' entitlement to such payment. Such an
election will remain in effect unless or until the Transfer Agent is notified by
the shareholder in writing to the contrary.
Portfolio Transactions
It is the policy of the Advisor, in placing orders for the purchase and
sale of each Fund's securities, to seek to obtain the best possible price and
execution for its securities transactions taking into account such factors as
price, commission, where applicable, (which is negotiable in the case of U.S.
national securities exchange transactions but which is generally fixed in the
case of foreign exchange transactions), size of order, difficulty of execution
and skill required of the executing broker/dealer. After a purchase or sale
decision is made by the Advisor, the Advisor then arranges for execution of the
transaction in a manner deemed to provide the best result for the Fund.
Exchange-listed securities are generally traded on their principal
exchange unless another market offers a better result. Securities traded only in
the over-the-counter market may be executed on a principal basis with primary
market makers in such securities except for fixed price offerings and except
where the Fund may obtain better prices or executions on a commission basis or
by dealing with other than a primary market maker.
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<PAGE>
While there is no formula, agreement or undertaking to do so, and when
it can be done consistently with the policy of obtaining the most favorable net
results, the Advisor may allocate a portion of its brokerage commissions to
persons or firms providing the Advisor with investment recommendations,
statistical, research or similar services useful to the daily operation of the
Fund or other clients of these persons. The term "investment recommendations,
statistical, research or similar services" means advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, and
furnishing analysis and reports concerning issuers, industries, securities,
economic factors and trends, and portfolio strategy. Such services are one of
the many ways the Advisor can keep abreast of the information generally
circulated among institutional investors by broker-dealers. While this
information is useful in varying degrees, its value is indeterminable. Such
services received on the basis of transactions for a Fund may be used by the
Advisor for the benefit of other clients, and the Fund may benefit from such
transactions effected for the benefit of other clients. Subject to obtaining
best price and execution, a Fund may consider sales of its shares as a factor in
the selection of brokers to execute portfolio transactions. The Advisor is not
authorized, when placing portfolio transactions for 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. The Advisor does not place orders with
brokers or dealers on the basis that the broker or dealer has or has not sold
Fund shares. Except for implementing the policy stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof.
The Advisor has been instructed not to place transactions with a
broker-dealer with which it is affiliated unless that broker-dealer, Vontobel
Securities Ltd., stands ready to demonstrate to the Company that each Fund will
receive (1) a price and execution no less favorable than that available from
unaffiliated persons, and (2) a price and execution equivalent to that offered
to unaffiliated persons by that broker-dealer, in each case on transactions of a
like size and nature. In this regard, the Board of Directors of the Company has
adopted policies and procedures which govern such allocation of brokerage
transactions, and the Board reviews at its meetings details of all transactions
which have been placed pursuant to those policies.
When two or more funds managed by the Advisor are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated in a manner deemed equitable to each fund. It is recognized that in
some cases the procedure could have a detrimental effect on the price or volume
of the security as far as a Fund is concerned. In other cases, however, it is
believed that the ability of such Fund to participate in volume transactions
will be beneficial for the Fund. It is the opinion of the Board of Directors of
the Company that these advantages, when combined with the other benefits
available because of the Advisor's organization, outweigh the disadvantages that
may be said to exist from exposure to simultaneous transactions.
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<PAGE>
The Funds paid brokerage commissions as follows:
Years Ended December 31,
Fund 1994 1995 1996
- ---- ---- ---- ----
Value Fund $155,168 $171,098 $198,787
International Equity Fund $329,824 $587,813 $1,185,252
E. European Fund N/A N/A $344,275
Bond Fund 0 0 0
The Funds paid brokerage commissions to Vontobel Securities, Ltd. (an
affiliated broker-dealer) as follows:
Years Ended December 31,
Fund 1994 1995 1996
- ---- ---- ---- ----
Value Fund 0 0 0
International Equity Fund $7,818 0 0
E. European Fund N/A N/A 0
Bond Fund 0 0 0
Average annual portfolio turnover rate is the ratio of the lesser of
sales or purchases to the monthly average value of the portfolio securities
owned during the year, excluding from both the numerator and the denominator all
securities with maturities at the time of acquisition of one year or less. A
higher rate involves greater transaction expenses to a Fund and may result in
the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for a Fund's portfolio whenever
necessary, in the Advisor's opinion, to meet the Fund's objective. The Advisor
anticipates that the average annual portfolio turnover rate of each of the Funds
will be less than 100%.
Valuation and Calculation of Net Asset Value
Each Fund's net asset value ("NAV") per share is calculated daily from
Monday through Friday on each business day on which the New York Stock Exchange
(the "Exchange") is open. The Exchange is currently closed on weekends and on
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, July 4th, Labor Day, Thanksgiving Day and Christmas Day, and the preceding
Friday or subsequent Monday when any of these holidays falls on a Saturday or
Sunday, respectively. Each Fund's NAV is calculated at the time set by the Board
of Directors based upon a determination of the most appropriate time to price
the Fund's securities.
The Board of Directors has determined that each Fund's NAV be
calculated as of the close of trading of the Exchange (currently 4:00 p.m.,
Eastern Time) on each business day from Monday to Friday or on each day (other
than a day during which no security was tendered for redemption and no order to
purchase or sell such security was received by the Fund) in which there is a
sufficient degree of trading in the Fund's portfolio securities that
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<PAGE>
the current NAV of the Fund's shares might be materially affected by changes in
the value of such portfolio security.
NAV per share is determined by dividing the total value of a Fund's
securities and other assets, less liabilities (including proper accruals of
taxes and other expenses), by the total number of shares then outstanding, and
rounding the result to the nearer cent.
Each Fund may compute its NAV per share more frequently if necessary to
protect shareholders' interests.
Generally, securities owned by each Fund are valued at market value. In
valuing a Fund's assets, portfolio securities, including ADRs and EDRs, which
are traded on the Exchange, will be valued at the last sale price prior to the
close of regular trading on the Exchange. Lacking any sales, the security will
be valued at the last bid price prior to the close of regular trading on the
Exchange. ADRs and EDRs for which such a value cannot be readily determined on
any day will be valued at the closing price of the underlying security adjusted
for the exchange rate. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated in accordance
with procedures approved by the Board of Directors of the Company as the primary
market.
Unlisted securities which are quoted on the NASD's National Market
System, for which there have been sales of such securities, shall be valued at
the last sale price reported on such system. If there are no such sales, the
value shall be the high or "inside" bid, which is the bid supplied by the NASD
on its NASDAQ Screen for such securities in the over-the-counter market. The
value of such securities quoted on the NASDAQ System, but not listed on the
NASD's National Market System, shall be valued at the high or "inside" bid.
Unlisted securities which are not quoted on the NASDAQ System and for which the
over-the-counter market quotations are readily available will be valued at the
last reported bid price for such securities in the over-the-counter market.
Other unlisted securities (and listed securities subject to restriction on sale)
will be valued at their fair value as determined in good faith by the Board of
Directors. Open futures contracts are valued at the most recent settlement
price, unless such price does not reflect the fair value of the contract, in
which case such positions will be valued by or under the direction of the Board
of Directors.
The value of a security traded or dealt in upon an exchange may be
valued at what the Company's pricing agent determines is fair market value on
the basis of all available information, including the last determined value, if
the pricing agent determines that the last bid does not represent the value of
the security, or if such information is not available. For example, the pricing
agent may determine that the price of a security listed on a foreign stock
exchange that was fixed by reason of a limit on the daily price change does not
represent the fair market value of the security. Similarly, the value of a
security not traded or dealt in upon an exchange may be valued at what the
pricing agent determines is fair market value if the pricing agent determines
that the last sale, inside bid does not represent the value of the security,
provided that such amount is not higher than the current bid price.
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<PAGE>
Notwithstanding the foregoing, money market investments with a
remaining maturity of less than sixty days shall be valued by the amortized cost
method; debt securities are valued by appraising them at prices supplied by a
pricing agent approved by the Company, which prices may reflect broker-dealer
supplied valuations and electronic data processing techniques and are
representative of market values at the close of the Exchange; options on
securities, futures contracts and options on futures listed or admitted to
trading on a national exchange shall be valued at their last sale on such
exchange prior to the time of determining NAV; or if no sales are reported on
such exchange on that day, at the mean between the most recent bid and asked
price; and forward contracts shall be valued at their last sale as reported by
the Company's pricing service, or lacking a report by the service, at the value
of the underlying currencies at the prevailing currency rates.
U.S. Treasury bills, and other short-term obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, with
original or remaining maturities in excess of 60 days are valued at the mean of
representative quoted bid and asked prices for such securities or, if such
prices are not available, are valued at the mean of representative quoted bid
and asked prices for securities of comparable maturity, quality and type.
Short-term securities, with 60 days or less to maturity, are amortized to
maturity based on their cost if acquired within 60 days of maturity or, if
already held, on the 60th day, based on the value determined on the 61st day.
The value of a security which is subject to legal or contractual delays
in or restrictions on resale by a Fund shall be taken to be the fair value
thereof as determined in accordance with procedures established by the Company's
Board, on the basis of such relevant factors as the following: the cost of such
security to the Fund, the market price of unrestricted securities of the same
class at the time of purchase and subsequent changes in such market price,
potential expiration or release of the restrictions affecting such security, the
existence of any registration rights, the fact that the Fund may have to bear
part or all of the expense of registering such security, and any potential sale
of such security to another investor. The value of other property owned by a
Fund shall be determined in a manner which, in the discretion of the pricing
agent of the Fund, most fairly reflects fair market value of the property on
such date.
Following the calculation of security values in terms of currency in
which the market quotation used is expressed ("local currency"), the pricing
agent shall, prior to the next determination of the NAV of a Fund's shares,
calculate these values in terms of United States dollars on the basis of the
conversion of the local currencies (if other than U.S.) into United States
dollars at the rates of exchange prevailing at the value time as determined by
the pricing agent.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the New York
Stock Exchange is open). In addition, European or Far Eastern securities trading
generally or in a particular country or
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<PAGE>
countries may not take place on all business days in New York. Furthermore,
trading takes place in Japanese markets on certain Saturdays and in various
foreign markets on days which are not business days in New York and on which a
Fund's NAV is not calculated. Each Fund calculates NAV per share, and therefore,
effects sales, redemptions and repurchases of its shares, as of the close of the
Exchange once on each day on which that Exchange is open. Such calculation may
not take place contemporaneously with the determination of the prices of
portfolio securities used in such calculations. If events materially affecting
the value of a portfolio security occur between the time when its price is
determined and the time when a Fund's NAV is calculated, such a security will be
valued at fair value as determined in good faith by the Board of Directors.
Any purchase order may be rejected by the Distributor or by the
Company.
Directors and Officers
The following is a list of the Company's Directors and Officers, their
birth date, and a brief statement of their present positions and
principal occupations, during the past five years.
*John Pasco, III (4/10/45)
Chairman, Director, and Treasurer
1500 Forest Ave, Suite 223; Richmond, VA 23229
Mr. Pasco is Treasurer and Director of Commonwealth Shareholder
Services, Inc., the Company's Administrator, since 1985. Director,
President and Treasurer of Commonwealth Capital Management, Inc. (a
registered Investment Advisor) since 1983. Director and shareholder of
Fund Services, Inc., the Company's Transfer and Disbursing Agent, since
1987 and shareholder of Commonwealth Fund Accounting, Inc. which
provides bookkeeping services to Star Bank. Mr. Pasco is also a
certified public accountant.
*Henry Schlegel (1/24/53)
January 24, 1953 (44)
Director
450 Park Avenue, New York, NY 10022
Mr. Schlegel is a Director, the President and the Chief Executive
Officer of Vontobel USA, Inc. (since 1988).
Samuel Boyd, Jr. (9/18/40)
Director
10808 Hob Nail Court, Potomac, MD 20854
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<PAGE>
Mr. Boyd is curently the Manager of the Customer Services Operations
and Accounting Division of the Potomac Electric Power Company. Mr.
Boyd is also a certified public accountant.
William E. Poist (6/11/39)
Director
5272 River Road, Bethesda, MD 20816
Mr. Poist is a financial and tax consultant through his firm Management
Consulting for Professionals. Mr. Poist is also a certified public
accountant.
Paul M. Dickinson (11/11/47)
Director
8704 Berwickshire Drive, Richmond, VA 23229
Mr. Dickinson is currently the President of Alfred J. Dickinson, Inc.,
Realtors.
*Edwin D. Walczak (9/17/53)
Vice President of the Company and President of the Vontobel U.S. Value
Fund
450 Park Avenue, New York, NY 10022
First Vice President and Chief Investment Officer of Vontobel USA Inc.,
a registered investment advisor, since 1988. From 1984 to 1988 Mr.
Walczak was an institutional portfolio manager at Lazard Freres Asset
Management, New York.
*Sven Rump (6/2/58)
Vice President of the Company and President of the Vontobel
International Bond Fund
450 Park Avenue, New York, NY 10022
Vice President of Vontobel USA Inc. since 1993. Mr. Rump is currently
(since October 1991) a Vice President of Vontobel Asset Management,
Switzerland, and is responsible for managing fixed income mutual funds.
From October 1990 to October 1991 Mr. Rump was a Vice President of Bank
Vontobel (Switzerland) and a fixed income specialist for the private
banking group. From September 1988 to October 1990 Mr. Rump was an
Associate with J.P. Morgan Securities (Switzerland) Ltd. in the Fixed
Income Department. Mr. Rump is a Chartered Financial Analyst.
*Fabrizio Pierallini (8/14/59)
Vice President of the Company and President of the Vontobel
International Equity Fund
450 Park Avenue, New York, NY 10022
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<PAGE>
Vice President and Portfolio Manager (International Equities), Vontobel
USA Inc. since April 1994. From 1991 to 1994 Mr. Pierallini was
Associate-Director/Portfolio Manager with Swiss Bank Corporation in New
York; from 1988 to 1991 he was a Vice-President/Portfolio Manager with
SBC Portfolio Management Ltd. in Zurich, Switzerland; and from 1986 to
1988 he was an Associate/Institutional Consultant with Bank Julius Baer
in Zurich, Switzerland.
*Arpad Pongracz (12/8/58)
Vice President of the Company and President of the Vontobel Eastern
European Equity Fund
450 Park Avenue, New York, NY 10022
Vice President of Vontobel USA Inc. since January 1966. Mr. Pongracz
joined Vontobel Asset Management, Switzerland, in 1990 as an equity
analyst. He was subsequently appointed portfolio manager for all
European equity institutional accounts and mutual funds. Since 1995 he
has been head of Vontobel Asset Management's international equities
team. Prior to joining the Vontobel group, he worked at Union Bank of
Switzerland in Canada and in Switzerland as an equity analyst. Mr.
Pongracz is a Chartered Financial Analyst.
*F. Byron Parker, Jr. (1/26/43)
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since 1986.
Partner in the law firm Mustian & Parker.
* Persons deemed to be "interested" persons of the Company, Vontobel USA Inc.
or First Dominion Capital Corp. under the 1940 Act.
The Directors of the Company received compensation from the Company, as
follows:
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<PAGE>
<TABLE>
<CAPTION>
Compensation Table
- -------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement From Registrant
Aggregate Benefits Accrued Estimated Annual and Fund
Name of Person, Compensation As Part of Fund Benefits Upon Complex Paid to
Position From Registrant Expenses Retirement Directors
<S> <C>
John Pasco, III $0 N/A N/A N/A
Director
Henry Schlegel $0 N/A N/A N/A
Director
Samuel Boyd, Jr. $8,000 N/A N/A N/A
Director
William E. Poist $8,000 N/A N/A N/A
Director
Paul M. Dickinson $8,000 N/A N/A N/A
Director
</TABLE>
The directors and officers of the Company, as a group, do not own 1% or
more of any of the Funds.
To the best knowledge of the Company, the following persons own of
record or beneficially 5% or more of the shares of a Fund, and own such shares
in the amounts indicated: For the Value Fund, (1) Charles Schwab Reinvestment
(25.99%); (2) Vontobel #V501-504 (8.26%); and (3) Bank J. Vontobel and its
affiliates for the benefit of its customers (22.02%). For the International
Equity Fund, (1) Peoples Two Ten Co. (13.00%); (2) Charles Schwab Reinvestment
(12.02%); and (3) Bank J. Vontobel and its affiliates for the benefit of its
customers (32.96%). For the E. European Fund, (1) Donaldson Lufkin (5.80%); (2)
Charles Schwab Reinvestment (37.03%); and (3) Bank J. Vontobel and its
affiliates for the benefit of its customers (10.76%). For the Bond Fund, (1) HCA
Foundation (15.87%); (2) Vontobel #V201-002 (5.32%); (3) Charles Schwab
Reinvestment (9.30%); and (4) Bank J. Vontobel and its affiliates for the
benefit of its customers (37.71%).
Investment Advisor
Vontobel USA Inc. (the "Advisor") manages the investment of the assets
of the Funds pursuant to Investment Advisory Agreements (each, an "Advisory
Agreement"). The Advisory Agreement of the E. European Fund is effective for a
period of two years from February 14, 1996, and may be renewed thereafter, and
the Advisory Agreement of each of the other Funds may be renewed annually, only
so long as such renewal and continuance is specifically approved at least
annually by the Company's Board of Directors or by vote of a majority of the
outstanding voting securities of the Company, provided the continuance is also
approved by a majority of the Directors who are not "interested persons" of the
Company or the Advisor by vote cast in person at a meeting called for the
purpose of voting on such approval. Each Advisory Agreement is terminable
without penalty on sixty days notice by the Company's Board of Directors or by
the Advisor. Each Advisory Agreement provides that it will terminate
automatically in the event of its assignment.
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<PAGE>
The Advisor is a wholly owned subsidiary of Vontobel Holding Ltd., a
Swiss bank holding company. The address of the Advisor is 450 Park Avenue, New
York, N.Y. 10022.
The Advisor is compensated at annual rates as percentages of the
average daily net assets of the Funds, respectively, as described in the
Prospectus of the Funds. The amount of fees each Fund paid to the Advisor for
investment advisory services and the amount of investment advisory fees waived
by the Advisor for the last three fiscal years is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996
---- ---- ----
<S> <C>
Fund Fee Payable/Waived Fee Payable/Waived Fee Payable/Waived
Value Fund $330,768/0 $385,289/$22,500 $620,180/$22,437
International Equity Fund $1,352,106/0 $1,154,541/0 $1,280,135/0
E. European Fund N/A N/A $302,021/0
Bond Fund $127,150/$27,001 $128,371/$128,371 $248,407/$48,630
</TABLE>
The Advisory Agreements contemplate the authority of the Advisor to
place orders pursuant to its investment determinations for each Fund either
directly with the issuer or with any broker or dealer. In placing orders with
brokers or dealers, the Advisor will attempt to obtain the best net price and
the most favorable execution of its orders. The Advisor may purchase and sell
securities to and from brokers and dealers who provide a Fund with research
advice and other services, or who sell shares of the Fund. See "Portfolio
Transactions" above.
Transfer Agent
Fund Services, Inc. (the "Transfer Agent" or "FSI") is the Company's
transfer and disbursing agent, pursuant to a Transfer Agent Agreement. The
Transfer Agent Agreement is dated September 1, 1987, and has been renewed each
year by the Board of Directors of the Company, including a majority of the
Directors who are not interested persons of the Company or the Transfer Agent.
John Pasco, III, Chairman of the Board of the Company and an officer
and shareholder of Commonwealth Shareholder Services, Inc (the Administrator of
the Funds) owns one third of the stock of FSI, and, therefore, FSI may be deemed
to be an affiliate of the Company and Commonwealth Shareholder Services, Inc.
Pursuant to the Transfer Agent Agreement the minimum annual fee for
each Fund is $16,500. During 1996, the Transfer Agent was paid $75,837 by the
Value Fund, $68,948 by the International Equity Fund, $16,073 by the E. European
Fund and $28,385 by the Bond Fund.
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<PAGE>
Administrator
Commonwealth Shareholder Services, Inc. is the Company's administrator
pursuant to Administrative Services Agreements (the "Service Agreements"). The
Service Agreements are described in the Funds' Prospectus. Each of the Service
Agreements continues in effect from year to year for a term of one year only if
the Board of Directors, including a majority of the directors who are not
interested persons of the Company or the Administrator, approve the extension at
least annually. During 1996, CSS was paid $147,596 by the Value Fund, $297,410
by the International Equity Fund, $80,336 by the E. European Fund and $54,468 by
the Bond Fund.
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 may not be made more often than monthly. A separate account will be
established for each employee, spouse or child for which purchases are made. The
requirements for initiating or continuing purchases pursuant to an eligible
benefit plan may be modified and the offering to such plans may be terminated at
any time without prior notice.
Distribution
Shares of the Funds are sold at NAV on a continuous basis, without a
sales charge.
Vontobel Fund Distributors, a division of First Dominion Capital Corp.
(the "Distributor"), 1500 Forest Avenue, Suite 223, Richmond, VA 23229, is the
Company's principal underwriter pursuant to a Distribution Agreement between the
Company and the Distributor. John Pasco, III, Chairman of the Board of the
Company owns 100% of the Distributor, and is its President, Treasurer and a
Director.
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<PAGE>
Fund Expenses
Each Fund will pay its expenses not assumed by the Advisor, including,
but not limited to, the following: custodian; stock transfer and dividend
disbursing fees and expenses; taxes; expenses of the issuance and redemption of
Fund shares (including stock certificates, registration and qualification fees
and expenses); legal and auditing expenses; and the cost of stationery and forms
prepared exclusively for the Fund.
The allocation of the general expenses to each Fund is made on a basis
that the Company's Board of Directors deems fair and equitable, which may be
based on the relative net assets of the series of the Company or the nature of
the services performed and relative applicability to each series of the Company.
Under each Fund's Advisory Agreement, the Advisor has agreed to
reimburse the Fund if the annual ordinary operating expenses of the Fund exceeds
the most stringent limits prescribed by any state in which the Fund's shares are
offered for sale. This expense limitation is calculable based on the aggregate
net assets of the Fund. Expenses which are not subject to this limitation are
interest, taxes and extraordinary expenses. Expenditures, including costs
incurred in connection with the purchase or sale of portfolio securities, which
are capitalized in accordance with generally accepted accounting principles
applicable to investment companies, are accounted for as capital items and not
as expenses. Reimbursement, if any, will be on a monthly basis, subject to
year-end adjustment and limited to the amount of the advisory fee due from the
Fund.
Investors should understand that the International Funds' expense
ratios can be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of foreign
securities and the rates of advisory fees paid by the International Funds are
higher.
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.
Telephone Transactions: You may redeem shares or transfer into another
fund if you request this service at the time you complete the initial Account
Application. If you do not elect this service at that time, you may do so at a
later date by putting your request in writing to the Transfer Agent and having
your signature guaranteed.
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<PAGE>
Each Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if it does not,
it may be liable for any losses due to unauthorized or fraudulent transactions.
As a result of this policy, a shareholder authorizing telephone redemption bears
the risk of loss which may result from unauthorized or fraudulent transactions
which the Fund believes to be genuine. When you request a telephone redemption
or transfer, you will be asked to respond to certain questions designed to
confirm your identity as a shareholder of record. Your cooperation with these
procedures will protect your account and the Fund from unauthorized
transactions.
Invest-A-Matic Account: Any shareholder may utilize this feature, which
provides for automatic monthly investments into your account. Upon your request,
the Transfer Agent will withdraw a fixed amount each month from your checking
account for investment into your account. This does not require you to make a
commitment for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Invest-AMatic Plan as desired by notifying the
Transfer Agent. This feature requires a separate Plan application, in addition
to the Account Application. To obtain an application, or to receive more
information, please call the offices of the Company.
Individual Retirement Account ("IRA") - All wage earners under 70-1/2,
even those who participate in a company sponsored or government retirement plan,
may establish their own IRA. You can contribute 100% of your earnings up to
$2,000 (or $2,250 with a spouse who is not a wage earner, for years prior to
1997). Starting in 1997, even a spouse who does not earn compensation can
contribute up to $2,000 per year to his or her own IRA. The deductibility of
such contributions will be determined under the same rules as for contributions
made by individuals with earned income. A special IRA program is available for
corporate employers under which the employers may establish IRA accounts for
their employees in lieu of establishing corporate retirement plans. Known as
SEP-IRA's (Simplified Employee Pension-IRA), they free the corporate employer of
many of the recordkeeping requirements of establishing and maintaining a
corporate retirement plan trust.
If you have received a lump sum distribution from another qualified
retirement plan, you may rollover all or part of that distribution into your
Fund IRA. Your rollover contribution is not subject to the limits on annual IRA
contributions. By acting within applicable time limits of the distribution you
can continue to defer Federal Income Taxes on your lump sum contribution and on
any income that is earned on that contribution.
How to Establish Retirement Accounts: Please call 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. You may wish to
consult with your attorney or other tax advisor for specific advice concerning
your tax status and plans.
Exchange Privilege: Shareholders may exchange their shares for shares
of any other series of the Company, provided the shares of the fund the
shareholder is exchanging into are
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<PAGE>
noticed for sale in the shareholder's state of residence. Each account must meet
the minimum investment requirements (currently $1,000). Exchange Privilege
Authorization Forms are available by calling the Company. Your special
authorization form must have been completed and must be on file with the
Transfer Agent. To make an exchange, an exchange order must comply with the
requirements for a redemption or repurchase order and must specify the value or
the number of shares to be exchanged. Your 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 your account a $10.00 service
fee each time you make such an 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.
General Information and History
The Company is authorized to issue up to 500,000,000 shares of common
stock, par value $0.01 per share, of which it has presently allocated 50,000,000
shares to the Value Fund, 50,000,000 shares to the International Equity Fund,
50,000,000 shares to the E. European Fund, 50,000,000 shares to the Bond Fund,
and 50,000,000 shares to the Sand Hill Portfolio Manager Fund. The Board of
Directors can allocate the remaining authorized but unissued shares to any
series of the Company, or may create additional series and allocate shares to
such series. Each series is required to have a suitable investment objective,
policies and restrictions, to maintain a separate portfolio of securities
suitable to its purposes, and to generally operate in the manner of a separate
investment company as required by the 1940 Act.
If additional series were to be formed, the rights of existing series
shareholders would not change, and the objective, policies and investments of
each series would not be changed. A share of any series would continue to have a
priority in the assets of that series in the event of a liquidation.
The shares of each series when issued will be fully paid and
nonassessable, will have no preference over other shares of the same series as
to conversion, dividends, or retirement, and will have no preemptive rights. The
shares of any series will be redeemable from the assets of that series at any
time at a shareholder's request at the current NAV of that series determined in
accordance with the provisions of the 1940 Act and the rules thereunder. The
Company's general corporate expenses (including administrative expenses) will be
allocated among the series in proportion to net assets or as determined in good
faith by the Board.
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<PAGE>
The investment advisory fees payable to the Advisor by each Fund and
the expense limitation guarantee formula of each Fund will be based upon the
separate assets of each Fund. The shareholders of each of the Funds have the
right to vote with respect to the investment advisor of such Fund, respectively.
Voting and Control - Each outstanding share of the Company is entitled
to one vote for each full share of stock and a fractional share of stock. All
shareholders vote on matters which concern the corporation as a whole. Election
of Directors or ratification of the auditor are examples of matters to be voted
upon by all shareholders. The Company is not required to hold a meeting of
shareholders each year. The Company intends to hold annual meetings when it is
required to do so by the Maryland General Corporate Law or the 1940 Act.
Shareholders have the right to call a meeting to consider the removal of one or
more of the Directors and will be assisted in Shareholder communication in such
matter. Each series shall vote separately on matters (1) when required by the
General Corporation Law of Maryland, (2) when required by the 1940 Act and (3)
when matters affect only the interest of the particular series. An example of a
matter affecting only one series might be a proposed change in an investment
restriction of one series. The shares will not have cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of directors can elect all of the directors if they choose to do so.
Code of Ethics - The Company has adopted a Code of Ethics which imposes
certain restrictions on the authority of portfolio managers and certain other
personnel of the Company and the Advisor governing personal securities
activities and investments of those persons and has instituted procedures to its
Code of Ethics to require such investment personnel to report such activities to
the compliance officer. The Code is reviewed and updated annually.
Performance
Current yield and total return are the two primary methods of measuring
investment performance. Occasionally, however, a Fund may include its
distribution rate in sales literature. Yield, in its simplest form, is the ratio
of income per share derived from the Fund's portfolio investments to the current
maximum offering price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. Total return, on the other
hand, is the total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the change in the
value of the original investment, expressed as a percentage of the purchase
price. The distribution rate is the amount of distributions per share made by
the Fund over a twelve-month period divided by the current maximum offering
price.
Generally, performance quotations by investment companies are subject
to certain rules adopted by the Securities and Exchange Commission (the
"Commission"). These rules require the use of standardized performance
quotations, or alternatively, that every nonstandardized performance quotation
furnished by a Fund be accompanied by certain
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<PAGE>
standardized performance information computed as required by the Commission.
Current yield and total return quotations used by a Fund are based on the
standardized methods of computing performance mandated by the Commission.
Yield. As indicated below, current yield is determined by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholder
during the 30-day base period. According to the Commission formula:
Yield = 2 [(a-b + 1) -1]
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Total Return. The Funds' average annual total returns for the periods
ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
One-Year Five-Year Ten-Year
Period Period Period From Inception
Ended Ended Ended to
Fund Name 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C>
Value Fund 21.27% 15.91% N/A 15.06%
International Equity Fund 16.98% 11.04% 8.97%* N/A
E. European Fund N/A N/A N/A 48.93%**
Bond Fund 7.51% N/A N/A 10.11%
</TABLE>
* Since July 6, 1990, when the International Equity Fund's current
investment advisor was appointed and the Fund's investment objective
was changed to its current status. Average annual total return of 3.71%
for the ten-year period since January 1, 1987 includes that of the
Fund's predecessor, the Tyndall-Newport Global Growth Fund
(1/1/87-7/6/90).
** Unannualized return from inception through 12/31/96.
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<PAGE>
As the following formula indicates, the average annual total return is
determined by multiplying a hypothetical initial purchase order of $1,000 by the
average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and reinvested)
for the stated period less any fees charged to all shareholder accounts and
annualizing the result. The calculation assumes the maximum sales load is
deducted from the initial $1,000 purchase order and that all dividends and
distributions are reinvested at the public offering price on the reinvestment
dates during the period. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year or since inception period
and the deduction of all applicable charges and fees. According to the
Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year periods (or
fractional portion thereof).
Sales literature pertaining to a Fund may quote a distribution rate in
addition to the yield or total return. The distribution rate is the amount of
distributions per share made by the Fund over a twelve-month period divided by
the current maximum offering price. The distribution rate differs from the yield
because it measures what the Fund paid to shareholders rather than what the Fund
earned from investments. It also differs from the yield because it may include
dividends paid from premium income from option writing, if applicable, and
short-term capital gains in addition to dividends from investment income. Under
certain circumstances, such as when there has been a change in the amount of
dividend payout, or a fundamental change in investment policies, it might be
appropriate to annualize the distributions paid over the period such policies
were in effect, rather than using the distributions paid during the past twelve
months.
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare the Fund's
NAV or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a Fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or risk
is standard deviation. Standard deviation is used to measure variability of NAV
or total return around an average,
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<PAGE>
over a specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Sales literature referring to the use of a Fund as a potential
investment for IRAs, Business Retirement Plans, and other tax-advantaged
retirement plans may quote a total return based upon compounding of dividends on
which it is presumed no federal income tax applies.
Regardless of the method used, past performance is not necessarily
indicative of future results, but is an indication of the return to shareholders
only for the limited historical period used.
Comparisons and Advertisements
To help investors better evaluate how an investment in a Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss yield, total return, or Fund volatility as reported by various financial
publications. Advertisements may also compare yield, total return, or volatility
(as calculated above) to yield, total return, or volatility as reported by other
investments, indices, and averages. The following publications, indices, and
averages may be used:
(a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
(b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available. Comparisons
of performance assume reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Analysis,
and Lipper Mutual Fund Indices - measures total return and average current yield
for the mutual fund industry. Ranks individual mutual fund performance over
specified time periods assuming reinvestment of all distributions, exclusive of
sales charges.
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<PAGE>
(f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(g) Mutual Fund Source Book and other material, published by Morningstar,
Inc. - analyzes price, yield, risk, and total return for equity funds.
(h) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, and Money magazines - rate fund performance over specified time
periods.
(i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services, in major expenditure groups.
(j) Standard & Poor's 100 Stock Index - an unmanaged index based on the price of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for option trading.
(k) Morgan Stanley Capital International EAFE Index - an arithmetic, market
valueweighted average of the performance of over 1,000 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
(l) J.P. Morgan Traded Global Bond Index - is an unmanaged index of government
bond issues and includes Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, The Netherlands, Spain, Sweden, United Kingdom and United States
gross of withholding tax.
(m) Financial publications: Barron's, Financial Times, Investor's Business
Daily, New York Times, and The Wall Street Journal - publications that rate fund
performance over specified time periods.
(n) IFC Global Total Return Composite Index - An unmanaged index of common
stocks that includes 18 developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (net of dividends reinvested).
(o) Nomura Research, Inc. Eastern Europe an Equity Index - comprised of
those equities which are traded on listed markets in Poland, the Czech Republic,
Hungary and Slovakia (returns do not include dividends).
In assessing such comparisons of yield, return, or volatility, an
investor should keep in mind that the composition of the investments in the
reported indices and averages in not identical to a Fund's portfolio, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
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<PAGE>
Fund to calculate its figures. In addition, there can be no assurance that the
Fund will continue its performance as compared to such other averages.
Financial Statements
The books of each Fund will be audited at least once each year by Tait,
Weller and Baker, of Philadelphia, PA, independent public accountants.
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<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
RATINGS:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1,2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, modified 2 indicated a mid-range rating, and the modifier 3
indicates that the issue ranks at the lower end of the rating category.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations, i.e.
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements, their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
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<PAGE>
B - Bonds which are rated B generally lack characteristics of the desirable
investment assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
MOODY'S SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1 - Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics,
lending market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established access
to range of financial markets and assured sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime 3 - Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
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<PAGE>
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation indicate an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from highest rated issues only to a small degree.
Plus(+) or Minus(-) - The ratings from AA to CCC may be modified by the
addition of a plus or a minus sign, which shows relative standing
within the major rating categories.
A - Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in categories than for debt in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation which indicates BB the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
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<PAGE>
Investment Advisor: Vontobel USA Inc.
450 Park Ave.
New York, NY 10022
Distributor: Vontobel Fund Distributors,
a division of First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
2 Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Marketing Services: For general information on the Funds and
marketing services, call the Distributor at
(800) 527-9500 toll free.
Transfer Agent: For account information, wire purchase or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260-6305
(800) 628-4077 Toll Free
More Information: For 24-hour, 7-days-a-week price information
call 1-800-527-9500. For information on any
series of the Company, investment plans, or
other shareholder services, call the Company
at 1-800-527-9500 during normal business
hours, or write the Company at 150 Forest
Avenue, Suite 223, Richmond, VA 23229
-58-
<PAGE>
VONTOBEL FUNDS, INC.
SAND HILL PORTFOLIO MANAGER FUND
Statement of Additional Information Dated March 14, 1997
Vontobel Funds, Inc. (the "Company") is an open-end management
investment company commonly known as a "mutual fund." This Statement of
Additional Information is not a Prospectus but supplements the information
contained in the Prospectus of the Sand Hill Portfolio Manager Fund (the
"Fund"), dated March 14, 1997. It should be read in conjunction with the
Prospectus and has been designed to provide you with further information which
is not contained in the Prospectus. A Prospectus of the Fund may be obtained at
no charge upon request to the Fund. Please retain this Statement of Additional
Information for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS STATEMENT OF ADDITIONAL INFORMATION. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
Investment Objective and Policies 1
Special Investment Considerations 1
Investment Techniques
Asset Allocation Categories 2
Zero Coupon Securities 3
Investment Companies 3
Depositary Receipts 4
Warrants 4
Mortgage-Backed and Asset-Backed Securities 4
Strategic Transactions 4
Convertible Securities 8
Repurchase Agreements 9
Illiquid Securities 10
Restricted Securities 10
Indexed Securities 10
Investment Restrictions 10
Taxes 13
Dividends and Distributions 16
Portfolio Transactions 16
Net Asset Value 18
Directors and Officers 20
Investment Advisor 21
Transfer Agent 22
Administrator 22
Distribution 22
Expenses of the Fund 23
Special Shareholder Services 23
General Information and History 24
Performance 25
Financial Statements 28
Appendix - Bond Ratings 29
<PAGE>
VONTOBEL FUNDS, INC.
SAND HILL PORTFOLIO MANAGER FUND
Statement of Additional Information
The Fund is a series of the Company, a Maryland corporation which is an
open-end, management investment company, commonly known as a "mutual fund." The
Fund is a no-load diversified series of the Company.
Investment Objective and Policies
The Fund's investment objective is to seek to maximize total return
(consisting of realized and unrealized appreciation plus income) consistent with
allocating its investments among equity securities (i.e., stocks), debt
securities (i.e., bonds) and short term investments.
The asset allocation and investment policies of the Fund are described
in the Fund's Prospectus. The following discussion supplements the information
in the Fund's Prospectus with respect to the types of securities in which the
Fund may invest and the investment techniques it may use in pursuit of its
investment objective.
Special Investment Considerations
Investors should recognize that the Fund may invest in both domestic
and foreign securities. Investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in United States securities and which may favorably or
unfavorably affect the performance of the Fund. As foreign companies are not
generally subject to the same uniform standards, practices and requirements with
respect to accounting, auditing and financial reporting as are domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the United States and, at times,
volatility of price can be greater than in the United States. Furthermore,
foreign markets have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of a fund are uninvested and no return is earned thereon. Inability to
dispose of portfolio securities due to settlement problems either could result
in losses to a fund due to subsequent declines in value of the portfolio
security or, if a fund has entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
securities exchanges and bid-to- asked spreads in foreign bond markets are
generally higher than negotiated commissions on U.S. exchanges and bid-to-asked
spreads in the U.S. bond market, although the
<PAGE>
Fund will endeavor to achieve the most favorable net results on its portfolio
transactions. Further, a fund may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. There is generally less
government supervision and regulation of business and industry practices,
securities exchanges, brokers and listed companies than in the United States.
Communications between the United States and foreign countries may be less
reliable than within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect United States
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Sand Hill Advisors,
Inc. (The "Investment Advisor") seeks to mitigate the risks associated with the
foregoing considerations through continuous professional management.
Investments in foreign securities usually will involve currencies of
foreign countries. Because of the considerations discussed above, the value of
the assets of the Fund, as measured in U.S. dollars, may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations, and the Fund may incur costs in connection with conversions
between various currencies. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a fund at one
rate, while offering a lesser rate of exchange should the fund desire to resell
that currency to the dealer. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward contracts
to purchase or sell foreign currencies. The Fund may, for hedging purposes,
purchase foreign currencies in the form of bank deposits.
Because the Fund may be invested in both U.S. and foreign securities
markets, changes in its share price may have a low correlation with movements in
the U.S. markets. The Fund's share price will reflect the movements of the
markets in which it is invested and of the currencies in which the investments
are denominated; the strength or weakness of the U.S. dollar against foreign
currencies may account for part of the Fund's investment performance. Foreign
securities such as those purchased by the Fund may be subject to foreign
government taxes which could reduce the yield on such securities, although a
shareholder of the Fund may, subject to certain limitations, be entitled to
claim a credit or deduction for U.S. federal income tax purposes for his or her
proportionate share of such foreign taxes paid by the Fund (see "Taxes"). U.S.
and foreign securities markets do not always move in step with each other and
the total returns from different markets may vary significantly.
The Fund cannot guarantee a gain or eliminate the risk of loss. The
Fund's net asset value per share will increase or decrease with changes in the
market price of the Fund's investments, and there is no assurance that the
Fund's investment objective will be achieved.
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Investment Techniques
Asset Allocation Categories. The Fund invests in three major
categories of investments: equity securities, debt securities and short-term
investments. Each of these categories may include securities of domestic or
foreign issuers.
Equity securities consist of common stocks, securities which are
convertible into common stocks, such as convertible bonds, preferred stocks,
depositary receipts, securities of investment companies, rights and warrants.
The Investment Advisor allocates the Fund's equity investments to industries it
believes will benefit from major trends and to individual stocks which exhibit
superior prospects for enhancing the Fund's total return.
Debt securities consist of bonds, notes, convertible bonds,
asset-backed and mortgage-backed securities, government and government agency
securities, zero coupon securities, and other debt securities whose purchase is
consistent with the Fund's investment objective. The Fund's investments may
include international bonds that are denominated in foreign currencies,
including the European Currency Unit. International bonds are defined as bonds
issued in countries other than the United States. The Fund's investments may
include debt securities issued or guaranteed by supranational organizations,
corporate debt securities, bank or holding company debt securities.
The Fund may purchase "investment-grade" bonds, which are those rated
Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Ratings Group ("S&P"), or unrated securities which the
Investment Advisor believes are of comparable quality. The Fund may also invest
up to 10% of its assets in lower rated securities or securities which are
unrated but are of comparable quality as determined by the Investment Advisor.
Bonds rated Baa or BBB may have speculative elements as well as investment-grade
characteristics. The Fund may invest in debt securities which are rated as low
as C by Moody's or D by S&P. Securities rated D may be in default with respect
to payment of principal or interest. See the Appendix for a description of bond
ratings.
Short-term investments are debt obligations. For purposes of the Fund's
asset allocation policies, short-term investments are differentiated from debt
securities. Short-term investments are generally used to protect the Fund
against adverse movements of interest rates or currency exchange rates or to
provide the Fund with liquidity. Debt securities, on the other hand, are
generally used to seek superior total return by taking advantage of yield
differentials between different securities.
Zero Coupon Securities. The Fund may invest in zero coupon securities
as described in the Prospectus. Zero coupon securities which are convertible
into common stock offer the opportunity for capital appreciation as increases
(or decreases) in market value of such securities closely follows the movements
in the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks as they usually are issued with short maturities (15 years or less) and
are issued
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with options and/or redemption features exercisable by the holder of the
obligation entitling the holder to redeem the obligation and receive a defined
cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including Treasury
Income Growth Receipts (TIGRS-TM) and Certificate of Accrual on Treasuries
(CATS-TM). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates, or other evidences of ownership of the U.S.
Treasury securities, has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the Division of Investment
Management of the SEC no longer considers such privately stripped obligations to
be U.S. Government securities, as defined in the 1940 Act; therefore, the Fund
intends to adhere to this staff position and will not treat such privately
stripped obligations to be U.S. Government securities for the purpose of
determining the Fund's "diversification."
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "Taxes").
Investment Companies. The Fund may invest up to 10% of its assets in
shares of closed-end investment companies. Investments in such investment
companies are subject to limitations under the Investment Company Act of 1940,
as amended (the "1940 Act"). Investment in closed-end funds is subject to the
willingness of investors to sell their shares in the open market and the Fund
may have to pay a substantial premium to acquire shares of closed-end funds in
the open market. The yield of such securities will be reduced by the operating
expenses of such companies. Under the 1940 Act limitations, the Fund may not own
more than 3% of the total outstanding voting stock of any other investment
company nor may it invest more than 5% of its assets in any one investment
company or invest more than 10% of its assets in securities of all investment
companies combined. An investor in the Fund should recognize that he may invest
directly in other investment companies and that, by investing in investment
companies indirectly through the Fund, he will bear not only his proportionate
share
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of the Fund's expenses (including operating costs and investment advisory and
administrative fees) but also, indirectly, similar expenses of the underlying
investment company. Finally, an investor should recognize that, as a result of
the Fund's policies of investing in other investment companies, he may receive
taxable capital gains distributions to a greater extent than would be the case
if he invested directly in the underlying investment companies.
Depositary Receipts. The Fund may utilize depositary receipts, as
described in the Prospectus. For purposes of determining the country of origin,
depositary receipts and closed-end investment companies which invest primarily
in foreign securities will be deemed to be foreign securities.
Warrants. The Fund may invest up to 5% of its net assets in warrants,
provided that no more than 2% of its net assets may be invested in warrants that
are not listed on the New York Stock Exchange or the American Stock Exchange. A
warrant is a long-term option issued by a corporation that generally gives the
investor the right of buying a specified number of shares of the underlying
common stock of the issuer at a specified exercise price at any time on or
before an expiration date. If the Fund does not exercise or dispose of a warrant
prior to its expiration, it will expire worthless.
Mortgage-Backed and Asset-Backed Securities. Mortgage-backed securities
include, but are not limited to, securities issued by the Government National
Mortgage Association and The Federal Home Loan Mortgage Association.
Mortgage-backed securities represent ownership in specific pools of mortgage
loans. Unlike traditional bonds which pay principal only at maturity,
mortgage-backed securities make unscheduled principal payments to the investor
as principal payments are made on the underlying loans in each pool. Like other
fixed-income securities, when interest rates rise, the value of a
mortgage-backed security will decline. However, when interest rates decline, the
value of a mortgage-backed security with prepayment features may not increase as
much as other fixed-income securities.
Asset-backed securities participate in, or are secured by and payable
from, a stream of payments generated by particular assets, such as credit card,
motor vehicle or trade receivables. They may be pass-through certificates which
are similar to mortgage-backed commercial paper, which is issued by an entity
organized for the sole purpose of issuing the commercial paper and purchasing
the underlying assets. The credit quality of asset-backed securities depends
primarily on the quality of the underlying assets and the level of any credit
support provided. The weighted average lives of mortgage-backed and asset-backed
securities are likely to be substantially shorter than their stated final
maturity dates would imply because of the effect of scheduled and unscheduled
principal prepayments. Pay-downs of mortgage-backed and assetbacked securities
may result in income or loss being realized earlier than anticipated for tax and
accounting purposes.
Strategic Transactions. The Fund may, but is not required to, utilize
various other investment strategies described below which use derivative
investments to hedge various market
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risks (such as changes in interest rates, currency exchange rates, and
securities prices) or to enhance potential gain.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed put and call options on securities or
securities indices, and enter into various currency transactions such as
currency forward contracts, or options on currencies (collectively, all the
above are called "Strategic Transactions"). Strategic Transactions may be used
to attempt to protect against possible changes in the market value of securities
held in, or to be purchased for, the Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, or to establish a position in the options
markets as a temporary substitute for purchasing or selling particular
securities. Any or all of these investment techniques may be used at any time
and there is no particular strategy that dictates the use of one technique
rather than another, as use of any Strategic Transaction is a function of
numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Advisor's
ability to predict pertinent market movements, which cannot be assured. The Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the Investment Advisor's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale or purchase of portfolio securities
at inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the amount
of appreciation the Fund can realize on its investments or cause the Fund to
hold a security it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors including
the imposition of exchange controls, suspension of settlements, or the inability
to deliver or receive a specified currency. Although the use of options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it tends to limit
any potential gain which might result from an increase in value of such
position. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of the Fund's assets in
special accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, currency or other
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instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. 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 call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, securities index, currency or other instrument might be intended to
protect the Fund against an increase in the price of the underlying security.
An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options only. Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options are
each settled for the net amounts, if any, by which the option is "in the money"
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying security through the process of exercising
the option, listed options are closed by entering into offsetting purchase or
sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more
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exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although outstanding options on that exchange would
generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell exchange-listed call options on
securities that are traded in U.S. and foreign securities exchanges and on
securities indices and currencies. All calls sold by the Fund must be "covered"
(i.e., the Fund must own the securities subject to the call) or must meet the
asset segregation requirements described below as long as the call is
outstanding. Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold.
The Fund may purchase and sell exchange-listed put options on
securities (whether or not it holds the above securities in its portfolio), and
on securities indices and currencies. The Fund will not sell put options if, as
a result, more than 25% of the Fund's assets would be required to be segregated
to cover its potential obligations under such put options. In selling put
options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price. For tax purposes,
the purchase of a put is treated as a short sale which may cut off the holding
period for the security so it is treated as generating gain on securities held
less than three months or short term capital gain (instead of long term) as the
case may be.
Options on Securities Indices and Other Financial Indices. The Fund may
also purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call or is
less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also
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may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
making up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
Currency Transactions. The Fund may engage in currency transactions
with counterparties in order to hedge the value of portfolio holdings
denominated in particular currencies against fluctuations in relative value. The
Fund's currency transactions may include forward currency contracts and exchange
listed options on currencies. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract.
The Fund's dealings in forward currency contracts will be limited to
hedging involving either specific transactions or portfolio positions. Specific
transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or the receipt
of income therefrom. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted in
that currency.
The Fund will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Investment Advisor considers that the Austrian
schilling is linked to the German deutschemark (the "D-mark"), the Fund holds
securities denominated in schillings and the Investment Advisor believes that
the value of schillings will decline against the U.S. dollar, the Investment
Advisor may enter into a contract to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency
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transactions can result in losses to a fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present or may not be present during the particular time that a fund
is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, it will comply with the asset segregation requirements described
below.
Risks of Currency Transactions. Currency transactions are subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to a fund if it is unable to deliver or receive
currency or funds in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Currency exchange rates may fluctuate based
on factors extrinsic to that country's economy.
Risks of Strategic Transactions Outside the United States. When
conducted outside the United States, Strategic Transactions may not be regulated
as rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic
Transactions, in addition to other requirements, require that a fund segregate
liquid high grade assets with its custodian to the extent fund obligations are
not otherwise "covered" through the ownership of the underlying security,
financial instruments or currency. In general, either the full amount of any
obligation by a fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by a fund
will require the fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid high-grade securities sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by a fund on an index
will require the fund to own portfolio securities which correlate with the index
or segregate liquid high grade assets equal to the excess of the index value
over the exercise price on a current basis. A put option written by a fund
requires the fund to segregate liquid, high grade assets equal to the exercise
price.
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Except when a fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a fund to buy or sell currency
will generally require the fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the fund's obligations or to
segregate liquid high grade assets equal to the amount of the fund's obligation.
OCC issued and exchange listed index options will generally provide for
cash settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the Fund,
or the in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Fund sells a call option on an
index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. OCC issued and exchange listed
options sold by the Fund other than those generally settle with physical
delivery, and the Fund will segregate an amount of assets equal to the full
value of the option.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
forward contract, it could purchase a put option on the same forward contract
with a strike price as high or higher than the price of the contract held. Other
Strategic Transactions may also be offered in combinations. If the offsetting
transaction terminates at the time of or after the primary transaction no
segregation is required, but if it terminates prior to such time, assets equal
to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "Taxes.")
Convertible Securities. The Fund may invest in convertible securities,
that is, bonds, notes, debentures, preferred stocks and other securities which
are convertible into common stock. Investments in convertible securities can
provide an opportunity for capital appreciation and/or income through interest
and dividend payments by virtue of their conversion or exchange features. The
Fund will limit its purchases of convertible securities to debt securities
convertible into common stocks.
The convertible securities in which the Fund may invest are either
fixed income or zero coupon debt securities which may be converted or exchanged
at a stated or determinable
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exchange ratio into underlying shares of common stock. The exchange ratio for
any particular convertible security may be adjusted from time to time due to
stock splits, dividends, spin-offs, other corporate distributions or scheduled
changes in the exchange ratio. Convertible debt securities and convertible
preferred stocks, until converted, have general characteristics similar to both
debt and equity securities. Although to a lesser extent than with debt
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all debt securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment on all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities. Convertible securities may be issued as fixed income
obligations that pay current income or as zero coupon notes and bonds, including
Liquid Yield Option Notes ("LYONs").
Repurchase Agreements. The Fund may enter into repurchase agreements
(which enables it to employ its assets pending investment) during very short
periods of time. Ordinarily these agreements permit the Fund to maintain
liquidity and earn higher rates of return than would normally be available from
other short-term money-market instruments.
Under a repurchase agreement, a fund buys a money-market instrument and
obtains a simultaneous commitment from the seller to repurchase the investment
at a specified time and at an agreed upon yield to the fund. The seller is
required to pledge cash and/or collateral which is equal to at least 100 percent
of the value of the commitment to repurchase. The collateral is held by the
fund's custodian. The Fund will only enter into repurchase agreements
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involving U.S. Government securities in which it may otherwise invest.
Repurchase agreements are considered securities issued by the seller for
purposes of the diversification test under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), and not cash, a cash item or a U.S.
Government security.
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. U.S.
Treasury securities are backed by the "full faith and credit" of the United
States. Securities issued or guaranteed by Federal agencies and U.S. Government
sponsored instrumentalities may or may not be backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the investor must look principally to the
agency or instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitment.
An instrumentality of the U.S. Government is a government agency organized under
Federal charter with government supervision.
It is the Fund's practice to enter into repurchase agreements with
selected banks and securities dealers, depending upon the availability of the
most favorable yields. The Fund will always seek to perfect its security
interest in the collateral. If the seller of a repurchase agreement defaults,
the Fund may incur a loss if the value of the collateral securing the repurchase
agreement declines. The Investment Advisor monitors the value of the collateral
to ensure that its value always equals or exceeds the repurchase price and also
monitors the financial condition of the issuer of the repurchase agreement. If
the seller defaults, the Fund may incur disposition costs in connection with
liquidating the collateral of that seller. If bankruptcy proceedings are
commenced with respect to the seller, realization upon the collateral by the
Fund may be delayed or limited.
Illiquid Securities. Normally, the Fund will not invest more than 5% of
its net assets in securities which are illiquid or not readily marketable;
however, the Fund is permitted to invest up to 15% of its net assets in such
securities. Illiquid securities are securities that cannot be sold in the
ordinary course of business at approximately the prices at which they are
carried on the Fund's books. The Fund will treat as illiquid repurchase
agreements with maturities in excess of seven days. Illiquid securities do not
include those securities that meet the requirements of Rule 144A under the
Securities Act of 1933, and that have been determined to be liquid by the
Investment Advisor under the supervision of the Fund's Board of Directors.
In determining the liquidity of the Fund's portfolio securities, the
Investment Advisor will consider all appropriate factors, such as: the frequency
of trading in the security; the number of dealers in, and potential purchasers
of, the security; dealer undertakings to maintain a market in the security;
whether the security is subject to demand or tender features which enhance its
marketability; and the nature of the marketplace for trading. If market
quotations are not
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available, illiquid securities are valued at fair value as determined in good
faith by the Fund's Board of Directors or a committee thereof.
Restricted Securities. The Fund may invest in restricted securities.
Generally, "restricted securities" are securities which have legal or
contractual restrictions on their resale. In some cases, these legal or
contractual restrictions may impair the liquidity of a restricted security; in
others, the legal or contractual restrictions may not have a negative effect on
the liquidity of the security. Restricted securities which are deemed by the
Investment Advisor to be illiquid will be included in the Fund's policy which
limits investments in illiquid securities.
Indexed Securities. The Fund may purchase securities whose prices are
indexed to the prices of other securities, securities indices, currencies, or
other financial indicators. Indexed securities, or structured notes, are usually
debt securities whose value at maturity or coupon rate is determined by
reference to a specific instrument or index. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices.
The performance of indexed securities depends to a great extent on the
performance of the security, index, currency or other instrument to which they
are indexed, and may also be influenced by changes in interest rates. Indexed
securities are subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer's
credit-worthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations, and certain U.S. government agencies. Indexed
securities may be more volatile than their underlying instruments.
Investment Restrictions
The policies set forth below are fundamental policies of the Fund and
may not be changed without approval of a majority of the outstanding voting
securities of the Fund. As used in this Statement of Additional Information a
"majority of the outstanding voting securities of the Fund" means the lesser of
(1) 67% or more of the voting securities present at such meeting, if the holders
of more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy; or (2) more than 50% of the outstanding voting securities
of the Fund.
As a matter of fundamental policy, the Fund may not:
1. as to 75% of its assets, purchase the securities of any issuer (other
than obligations issued or guaranteed as to principal and interest by
the Government of the United States or any agency or instrumentality
thereof) if, as a result of such purchase, more than 5% of its total
assets would be invested in the securities of such issuer;
2. purchase stock or securities of an issuer (other than obligations
issued or guaranteed as to principal and interest by the Government of
the United States or any agency or
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instrumentality thereof) if such purchase would cause the Fund to own
more than 10% of any class of the outstanding stock or securities or
more than 10% of any class of voting securities of such issuer;
3. borrow money, except through reverse repurchase agreements or from
banks for temporary or emergency purposes, and then only in an amount
not in excess of 20% of the value of the Fund's net assets at the time
the borrowing is made (borrowings in excess of 5% will be subject to
300% asset coverage requirements of the 1940 Act), provided that the
Fund will not purchase portfolio securities when its borrowings exceed
5% of its total assets;
4. purchase the securities of any issuer (other than obligations issued or
guaranteed by the Government of the United States or any agency or
instrumentality thereof) if, as a result of such purchase, more than
25% of the Fund's total assets would be invested in any one industry;
5. act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Fund;
6. make loans to other persons, except (a) loans of portfolio securities,
and (b) to the extent that the entry into repurchase agreements and the
purchase of debt securities in accordance with its investment objective
and investment policies may be deemed to be loans;
7. issue senior securities, except as appropriate to evidence indebtedness
which it is permitted to incur, and except for shares of the separate
classes or series of the corporation of which the Fund is a series;
provided that the segregation of assets or other collateral
arrangements with respect to currency-related contracts, futures
contracts, options or other permitted investments, including deposits
of initial and variation margin, are not considered to be the issuance
of senior securities for purposes of this restriction, and obligations
for which the Fund segregates assets in accordance with securities
regulatory requirements will not be deemed to be senior securities;
8. purchase or sell real estate (except that the Fund may invest in (i)
securities of companies which deal in real estate, or mortgages, and
(ii) securities secured by real estate or interests therein, and that
the Fund reserves freedom of action to hold and to sell real estate
acquired as a result of the Fund's ownership of securities) or purchase
or sell physical commodities or contracts relating to physical
commodities.
The Fund has voluntarily adopted certain policies and restrictions
which are observed in the conduct of its affairs. These represent intentions of
the Directors based upon current circumstances. They differ from fundamental
investment policies in that they may be changed
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or amended by action of the Directors without requiring prior notice to or
approval of shareholders.
The following policies are not fundamental policies and may be changed
without shareholder approval. The Fund does not currently intend to:
(a) purchase or sell futures contracts or options thereon;
(b) make short sales of securities;
(c) make loans of portfolio securities;
(d) purchase or sell real estate limited partnership interests;
(e) purchase or retain securities of any open-end investment
company; purchase securities of closed-end investment
companies except by purchase in the open market where no
commission or profit to a sponsor or dealer results from such
purchase; however, the Fund may acquire investment company
securities in connection with a plan of merger, consolidation,
reorganization or acquisition of assets; in any event, the
Fund may not purchase more than 3% of the outstanding voting
securities of another investment company, may not invest more
than 5% of its assets in another investment company, and may
not invest more than 10% of its assets in other investment
companies;
(f) borrow, pledge, mortgage or hypothecate its assets in excess,
together with permitted borrowings, of 1/3 of its total
assets;
(g) purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection
with futures contracts and options on futures contracts, if
any, shall not constitute purchasing securities on margin.
(h) invest more than 15% of its net assets in securities which are
illiquid or not readily marketable, including repurchase
agreements which are not terminable within 7 days (normally,
no more than 5% of the Fund's net assets will be invested in
such securities).
*(i) purchase put options or write covered call options if, as a
result, more than 25% of the Fund's total assets would be
hedged with options;
*(j) write put options if, as a result, the Fund's total
obligations upon exercise of written put options would exceed
25% of the Fund's total assets;
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<PAGE>
*(k) purchase call options if, as a result, the current value of
options premiums for call options purchased by the Fund would
exceed 5% of the Fund's total assets;
(l) purchase warrants, valued at the lower of cost or market, in
excess of 5% of the value of the Fund's net assets; provided
that no more than 2% of the Fund's net assets may be warrants
that are not listed on the New York Stock Exchange or the
American Stock Exchange.
*NOTE: items (i), (j) and (k) above do not apply to options
attached to, or purchased as a part of, their
underlying securities.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of the Fund's assets will
not be considered a violation of the restriction.
In order to satisfy certain state regulatory requirements the Fund has
agreed that, so long as its shares are offered for sale in such state(s), it
will not:
1. invest in interests in oil, gas, or other mineral exploration
or development programs;
2. invest more than 5% of its total assets in the securities of
any issuers which have (together with their predecessors) a
record of less than three years continuous operations;
3. purchase or retain any securities if (i) one or more officers
or directors of the Fund or its investment advisor
individually own or would own, directly or beneficially, more
than 1/2 of 1 per cent of the securities of such issuer, and
(ii) in the aggregate such persons own or would own more than
5% of such securities.
Taxes
The Fund will seek to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax (assuming the Fund meets the 90%
and 30% of gross income tests and the tax diversification test of Subchapter M)
to the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code. The Fund
intends to distribute at least
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annually all of its investment company taxable income and net realized capital
gains and therefore generally does not expect to pay federal income taxes.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but which are not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses prescribed by the Code) realized during the one-year
period ending October 31 during such year, and all ordinary income and capital
gains for prior years that were not previously distributed.
Investment company taxable income generally includes dividends,
interest, net short-term capital gains in excess of net long-term capital
losses, and net foreign currency gains, if any, less expenses. Realized net
capital gains for a fiscal year are computed by taking into account any capital
loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim his/her share of federal income taxes paid by the
Fund on such gains as a credit against his/her own federal income tax liability,
and will be entitled to increase the adjusted tax basis of his/her Fund shares
by the difference between his/her pro rata share of such gains and his/her tax
credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the Fund have been held by such
shareholders. Such distributions are not eligible for a dividends-received
deduction for corporate investors.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and realized net
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following
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year. Redemptions of shares, including exchanges for shares of another fund, may
result in tax consequences (gain or loss) to the shareholder and are also
subject to information reporting requirements.
An individual may make a deductible IRA contribution of up to $2,000
or, if less, the amount of the individual's earned income for any taxable year
if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,000 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,000 and
$50,000; $25,000 for a single individual, with a phase-out for adjusted gross
income between $25,000 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000, or 100% of taxable
compensation if less, to an IRA (up to $2,250 to IRAs for an individual and his
or her nonearning spouse, for years prior to 1997) for that year. Starting in
1997, even a spouse who does not earn compensation can contribute up to $2,000
per year to his or her own IRA. The deductibility of such contributions will be
determined under the same rules as for contributions made by individuals with
earned income. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by the Fund result in a reduction in the net asset value
of its shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of their invested capital upon the distribution, which will
nevertheless be taxable to them.
The Fund intends to qualify for and may make the election permitted
under Section 853 of the Code so that shareholders may (subject to limitations)
be able to claim a credit or deduction on their federal income tax returns for,
and may be required to treat as part of the amounts distributed to them, their
pro rata portion of qualified taxes paid by the Fund to foreign countries (which
taxes relate primarily to investment income). The Fund may make an election
under Section 853 of the Code, provided that more than 50% of the value of the
total assets of the Fund at the close of the taxable year consists of securities
in foreign corporations. The foreign tax credit available to shareholders is
subject to certain limitations imposed by the Code.
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If the Fund invests in stock of certain foreign investment companies,
the Fund may be subject to U.S. federal income taxation on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Fund's holding period for the stock. The distribution
or gain so allocated to any taxable year of the Fund, other than the taxable
year of the excess distribution or disposition, would be taxed to the Fund at
the highest ordinary income rate in effect for such year, and the tax would be
further increased by an interest charge to reflect the value of the tax deferral
deemed to have resulted from the ownership of the foreign company's stock. Any
amount of distribution or gain allocated to the taxable year of the distribution
or disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may be able to make an election, in lieu of being taxable in
the manner described above, to include annually in income its pro rata share of
the ordinary earnings and net capital gain of the foreign investment company,
regardless of whether it actually received any distributions from the foreign
company. These amounts would be included in the Fund's investment company
taxable income and net capital gain which, to the extent distributed by the Fund
as ordinary or capital gain dividends, as the case may be, would not be taxable
to the Fund. In order to make this election, the Fund would be required to
obtain certain annual information from the foreign investment companies in which
it invests, which in many cases may be difficult to obtain. The Fund may make an
election with respect to those foreign investment companies which provide the
Fund with the required information.
Certain forward foreign currency contracts, and all listed nonequity
options written or purchased by the Fund (including options on debt securities,
options on securities indices and options on broad-based stock indices) will be
governed by Section 1256 of the Code. Absent a tax election to the contrary,
gain or loss attributable to the lapse, exercise or closing out of any such
position generally will be treated as 60% long-term and 40% short-term capital
gain or loss, and on the last trading day of the Fund's fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e., treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss. Under Section 988 of the Code, discussed below, foreign currency
gains or losses from foreign currency related forward contracts and similar
financial instruments entered into or acquired by the Fund will be treated as
ordinary income or loss.
Subchapter M requires that the Fund realize less than 30% of its annual
gross income from the sale or other disposition of stock, securities and certain
options, and forward contracts held for less than three months. The Fund's
options and forward transactions may increase the amount of gains realized by
the Fund that are subject to this 30% limitation. Accordingly, the amount of
such transactions that the Fund may undertake may be limited.
Positions of the Fund which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes a Fund's risk of
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loss with respect to such stock could be treated as a "straddle" which is
governed by Section 1092 of the Code, the operation of which may cause deferral
of losses, adjustments in the holding periods of stock or securities and
conversion of short-term capital losses into long-term capital losses. An
exception to these straddle rules exists for any "qualified covered call
options" on stock written by the Fund.
Positions of the Fund which consist of at least one position not
governed by Section 1256 and at least one forward contract or nonequity option
governed by Section 1256 which substantially diminishes the Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or eliminate the
operation of these rules. The Fund will monitor its transactions in options and
may make certain tax elections in connection with these investments.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues interest or other
receivables, or accrues expenses or other liabilities, denominated in a foreign
currency and the time the Fund actually collects such receivables, or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
A portion of the difference between the issue price of zero coupon
securities and their stated redemption price at maturity ("original issue
discount") is considered to be income to the Fund each year, even though the
Fund will not receive cash interest payments from these securities. The original
issue discount imputed income will comprise a part of the Fund's investment
company taxable income which must be distributed to shareholders in order to
maintain the Fund's qualification as a regulated investment company and to avoid
federal income tax.
The Fund will be required to report to the IRS all distributions of
investment company taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. Under the backup withholding provisions of Section 3406 of
the Code, distributions of investment company taxable income and capital gains
and proceeds from the redemption or exchange of the shares of a regulated
investment company may be subject to withholding of federal income tax at the
rate of 31% in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law.
Withholding may also be required if the Fund is notified by the IRS or a broker
that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the
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withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Amounts withheld are applied against the
shareholder's tax liability and a refund may be obtained from the Internal
Revenue Service, if withholding results in overpayment of taxes. A shareholder
should contact the Fund or the Transfer Agent if the shareholder is uncertain
whether a proper Taxpayer Identification Number is on file with the series.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each investor should consult his or her own tax adviser as to the applicability
of these taxes.
In January of each year the Company's Transfer Agent issues to each
shareholder a statement of the federal income tax status of all distributions.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of Fund shares. Each shareholder who is not a U.S.
person should also consider the U.S. estate tax implications of holding Fund
shares at death. The U.S. estate tax may apply to such holdings if an investor
dies while holding shares of a Fund. Each investor should consult his or her
own tax adviser about the applicability of these taxes. Distributions of net
investment income to non-resident aliens and foreign corporations that are not
engaged in a trade or business in the U.S. to which the distribution is
effectively connected, will be subject to a withholding tax imposed at the rate
of 30% upon the gross amount of the distribution in the absence of a Tax Treaty
providing for a reduced rate or exemption from U.S. taxation. Distributions of
net long-term capital gains realized by the Fund are not subject to tax unless
the distribution is effectively connected with the conduct of the shareholder's
trade or business within the United States, or the foreign shareholder is a non-
resident alien individual who was physically present in the U.S. during the tax
year for more than 182 days.
The foregoing is a general abbreviated summary of present Federal
income taxes on dividends and distributions. Shareholders should consult their
tax advisers about the application of the provisions of the tax law described in
this Statement of Additional Information in light of their particular tax
situations and about any state and local taxes applicable to dividends and
distributions.
Dividends and Distributions
As stated previously, it is the policy of the Fund to distribute
substantially all of its net investment income and net realized capital gains,
if any, shortly before the close of the fiscal year (December 31st).
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All dividend and capital gains distributions, if any, will be
reinvested in full and fractional shares based on net asset value (without a
sales charge) as determined on the exdividend date for such distributions.
Shareholders may, however, elect to receive all such payments, or the dividend
or distribution portion thereof, in cash, by sending written notice to this
effect to the Transfer Agent. This written notice will be effective as to any
subsequent payment if received by the Transfer Agent prior to the record date
used for determining the shareholders' entitlement to such payment. Such an
election will remain in effect unless or until the Transfer Agent is notified by
the shareholder in writing to the contrary.
Portfolio Transactions
It is the policy of the Investment Advisor, in placing orders for the
purchase and sale of the Fund's securities, to seek to obtain the best possible
price and execution for its securities transactions taking into account such
factors as price, commission, where applicable (which is negotiable in the case
of U.S. national securities exchange transactions but which is generally fixed
in the case of foreign exchange transactions), size of order, difficulty of
execution and skill required of the executing broker/dealer. After a purchase or
sale decision is made by the Investment Advisor, the Investment Advisor then
arranges for execution of the transaction in a manner deemed to provide the best
result for the Fund.
While there is no formula, agreement or undertaking to do so, and when
it can be done consistently with the policy of obtaining the most favorable net
results, the Investment Advisor may allocate a portion of its brokerage
commissions to persons or firms providing the Investment Advisor with investment
recommendations, statistical, research or similar services useful to the daily
operation of the Fund or other clients of these persons. The term "investment
recommendations, statistical, research or similar services" means advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, and furnishing analysis and reports concerning issuers, industries,
securities, economic factors and trends, and portfolio strategy. Such services
are one of the many ways the Fund's Investment Advisor can keep abreast of the
information generally circulated among institutional investors by
broker-dealers. While this information is useful in varying degrees, its value
is indeterminable. Such services received on the basis of transactions for the
Fund may be used by the Investment Advisor for the benefit of other clients, and
the Fund may benefit from such transactions effected for the benefit of other
clients. Subject to obtaining best price and execution the Fund may consider
sales of its shares as a factor in the selection of brokers to execute portfolio
transactions. The Investment Advisor generally does not, when placing portfolio
transactions for the Fund, pay a brokerage commission in excess of that which
another broker might have charged for executing the same transaction on account
of the receipt of research, market or statistical information. The Investment
Advisor does not place orders with brokers or dealers on the basis that the
broker or dealer has sold Fund shares, although transactions may be placed with
such brokers. Except for implementing the policy stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof.
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When two or more accounts managed by the Investment Advisor are
simultaneously engaged in the purchase or sale of the same security, the
transactions are allocated in a manner deemed equitable to each account. It is
recognized that in some cases the procedure could have a detrimental effect on
the price or volume of the security as far as the Fund is concerned. In other
cases, however, it is believed that the ability of the Fund to participate in
volume transactions will be beneficial for the Fund. It is the opinion of the
Board of Directors of the Company that these advantages, when combined with the
other benefits available because of the Investment Advisor's organization,
outweigh the disadvantages that may be said to exist from exposure to
simultaneous transactions.
Exchange-listed securities are generally traded on their principal
exchange unless another market offers a better result. Securities traded only in
the over-the-counter market may be executed on a principal basis with primary
market makers in such securities except for fixed price offerings and except
where the Fund may obtain better prices or executions on a commission basis or
by dealing with other than a primary market maker.
The Fund paid $7,070 and $7,086 in brokerage commissions for the years
ended December 31, 1995 and 1996, respectively.
Average annual portfolio turnover rate is the ratio of the lesser of
sales or purchases to the monthly average value of the portfolio securities
owned during the year, excluding from both the numerator and the denominator all
securities with maturities at the time of acquisition of one year or less. A
higher rate involves greater transaction expenses to a fund and may result in
the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for the Fund's portfolio whenever
necessary, in the Investment Advisor's opinion, to meet the Fund's objective.
The Investment Advisor anticipates that the Fund's average annual portfolio rate
will be less than 100%.
Net Asset Value
The Fund's net asset value ("NAV") per share is calculated daily from
Monday through Friday on each business day on which the New York Stock Exchange
(the "Exchange") is open. The Exchange is currently closed on weekends and on
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, July 4th, Labor Day, Thanksgiving Day and Christmas Day, and the preceding
Friday or subsequent Monday when any of these holidays falls on a Saturday or
Sunday, respectively. The Fund's NAV is calculated at the time set by the Board
of Directors based upon a determination of the most appropriate time to price
the Fund's securities.
The Board of Directors has determined that the Fund's NAV be calculated
as of the close of trading of the Exchange (currently 4:00 p.m., Eastern Time)
on each business day from Monday to Friday or on each day (other than a day
during which no security was tendered for redemption and no order to purchase or
sell such security was received by the Fund) in which
-24-
<PAGE>
there is a sufficient degree of trading in the Fund's portfolio securities that
the current NAV of the Fund's shares might be materially affected by changes in
the value of such portfolio security.
NAV per share is determined by dividing the total value of the Fund's
securities and other assets, less liabilities (including proper accruals of
taxes and other expenses), by the total number of shares then outstanding, and
rounding the result to the nearer cent.
The Fund may compute its NAV per share more frequently if necessary to
protect shareholders' interests.
Generally, securities owned by the Fund are valued at market value. In
valuing the Fund's assets, portfolio securities, including ADRs and EDRs, which
are traded on the Exchange, will be valued at the last sale price prior to the
close of regular trading on the Exchange. Lacking any sales, the security will
be valued at the last bid price prior to the close of regular trading on the
Exchange. ADRs and EDRs for which such a value cannot be readily determined on
any day will be valued at the closing price of the underlying security adjusted
for the exchange rate. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated in accordance
with procedures approved by the Board of Directors of the Fund as the primary
market. Securities will be valued using quotations on the exchange and lacking
any sales, securities will be valued at the last reported bid price prior to the
Fund's valuation time, unless the Fund is aware of a material change in the
value prior to the time it values its securities.
Unlisted securities which are quoted on the NASD's National Market
System, for which there have been sales of such securities, shall be valued at
the last sale price reported on such system. If there are no such sales, the
value shall be the high or "inside" bid, which is the bid supplied by the NASD
on its NASDAQ Screen for such securities in the over-the-counter market. The
value of such securities quoted on the NASDAQ System, but not listed on the
NASD's National Market System, shall be valued at the high or "inside" bid.
Unlisted securities which are not quoted on the NASDAQ System and for which the
over-the-counter market quotations are readily available will be valued at the
current bid prices for such securities in the over-the-counter market. Other
unlisted securities (and listed securities subject to restriction on sale) may
be valued at their fair value as determined in good faith by the Board of
Directors.
The value of a security traded or dealt in upon an exchange may be
valued at what the Company's pricing agent determines is fair market value on
the basis of all available information, including the last determined value, if
the pricing agent determines that the last bid does not represent the value of
the security, or if such information is not available. For example, the pricing
agent may determine that the price of a security listed on a foreign stock
exchange that was fixed by reason of a limit on the daily price change does not
represent the fair market value of the security. Similarly, the value of a
security not traded or dealt in upon an exchange may be valued at what the
pricing agent determines is fair market value if the pricing agent determines
that the last sale, or inside bid does not represent the value of the security,
provided that such amount is not higher than the current bid price.
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<PAGE>
Notwithstanding the foregoing, money market investments with a
remaining maturity of less than sixty days shall be valued by the amortized cost
method described below; debt securities are valued by appraising them at prices
supplied by a pricing agent approved by the Fund, which prices may reflect
broker-dealer supplied valuations and electronic data processing techniques and
are representative of market values at the close of the Exchange; options on
securities listed or admitted to trading on a national exchange shall be valued
at their last sale on such exchange prior to the time of determining net asset
value; or if no sales are reported on such exchange on that day, at the mean
between the most recent bid and asked price; and forward contracts shall be
valued at their last sale as reported by the Fund's pricing service, or lacking
a report by the service, at the value of the underlying currencies at the
prevailing currency rates.
The value of an illiquid security which is subject to legal or
contractual delays in or restrictions on resale by the Fund shall be taken to be
the fair value thereof as determined in accordance with procedures established
by the Fund's Board, on the basis of such relevant factors as the following: the
cost of such security to the Fund, the market price of unrestricted securities
of the same class at the time of purchase and subsequent changes in such market
price, potential expiration or release of the restrictions affecting such
security, the existence of any registration rights, the fact that the Fund may
have to bear part or all of the expense of registering such security, and any
potential sale of such security to another investor. The value of other property
owned by the Fund shall be determined in a manner which, in the discretion of
the pricing agent of the Fund, most fairly reflects fair market value of the
property on such date.
Following the calculation of security values in terms of currency in
which the market quotation used is expressed ("local currency"), the pricing
agent shall, prior to the next determination of the NAV of the Fund's shares,
calculate these values in terms of United States dollars on the basis of the
conversion of the local currencies (if other than U.S. dollars) into United
States dollars at the rates of exchange prevailing at the value time as
determined by the pricing agent.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the New York
Stock Exchange is open). In addition, European or Far Eastern securities trading
generally or in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Fund's net asset value is not
calculated. The Fund calculates net asset value per share, and therefore,
effects sales, redemptions and repurchases of its shares, as of the close of the
Exchange once on each day on which that Exchange is open. Such calculation does
not take place contemporaneously with the determination of the prices of all of
the portfolio securities used in such calculation. If events materially
affecting the value of a portfolio security occur between the time when its
closing
-26-
<PAGE>
price is determined and the time when the Fund's net asset value is calculated,
such a security will be valued at fair value as determined in good faith by the
Board of Directors.
U.S. Treasury bills, and other short-term obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, with
original or remaining maturities in excess of 60 days are valued at the mean of
representative quoted bid and asked prices for such securities or, if such
prices are not available, are valued at the mean of representative quoted bid
and asked prices for securities of comparable maturity, quality and type.
Short-term securities, with 60 days or less to maturity, are amortized to
maturity based on their cost if acquired within 60 days of maturity or, if
already held, on the 60th day, based on the value determined on the 61st day.
Any purchase order may be rejected by the Distributor or by the Fund.
The Company has reserved the right to redeem in-kind but does not
intend to do so under normal circumstances.
Directors and Officers
The following is a list of the Company's Directors and Officers, their
dates of birth and a brief statement of their present positions and principal
occupations during the past five years.
*John Pasco, III (4/10/45)
Chairman, Director, and Treasurer
1500 Forest Ave, Suite 223; Richmond, VA 23229
Mr. Pasco is Treasurer and Director of Commonwealth Shareholder
Services, Inc., the Company's Administrator, since 1985. Director,
President and Treasurer of Commonwealth Capital Management, Inc. (a
registered Investment Advisor) since 1983. Director and shareholder of
Fund Services, Inc., the Company's Transfer and Disbursing Agent, since
1987 and shareholder of Commonwealth Fund Accounting, Inc. which
provides bookkeeping services to Star Bank. Mr. Pasco is also a
certified public accountant.
*Henry Schlegel (1/24/53)
January 24, 1953 (44)
Director
450 Park Avenue, New York, NY 10022
Mr. Schlegel is a Director, the President and the Chief Executive
Officer of Vontobel USA, Inc. (since 1988).
-27-
<PAGE>
Samuel Boyd, Jr. (9/18/40)
Director
10808 Hob Nail Court, Potomac, MD 20854
Mr. Boyd is currently the Manager of the Customer Services Operations
and Accounting Division of the Potomac Electric Power Company. Mr.
Boyd is also a certified public accountant.
William E. Poist (6/11/39)
Director
5272 River Road, Bethesda, MD 20816
Mr. Poist is a financial and tax consultant through his firm Management
Consulting for Professionals. Mr. Poist is also a certified public
accountant.
Paul M. Dickinson (11/11/47)
Director
8704 Berwickshire Drive, Richmond, VA 23229
Mr. Dickinson is currently the President of Alfred J. Dickinson, Inc.,
Realtors.
*Edwin D. Walczak (9/17/53)
Vice President of the Company and President of the
Vontobel U.S. Value Fund
450 Park Avenue, New York, NY 10022
First Vice President and Chief Investment Officer of Vontobel USA Inc.,
a registered investment advisor, since 1988. From 1984 to 1988 Mr.
Walczak was an institutional portfolio manager at Lazard Freres Asset
Management, New York.
*Sven Rump (6/2/58)
Vice President of the Company and President of the Vontobel
International Bond Fund 450 Park Avenue, New York, NY 10022
Vice President of Vontobel USA Inc. since 1993. Mr. Rump is currently
(since October 1991) a Vice President of Vontobel Asset Management,
Switzerland, and is responsible for managing fixed income mutual funds.
From October 1990 to October 1991 Mr. Rump was a Vice President of Bank
Vontobel (Switzerland) and a fixed income specialist for the private
banking group. From September 1988 to October 1990 Mr. Rump was an
Associate with J.P. Morgan Securities (Switzerland) Ltd. in the Fixed
Income Department. Mr. Rump is a Chartered Financial Analyst.
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<PAGE>
*Fabrizio Pierallini (8/14/59)
Vice President of the Company and President of the
Vontobel International Equity Fund
450 Park Avenue, New York, NY 10022
Vice President and Portfolio Manager (International Equities), Vontobel
USA Inc. since April 1994. From 1991 to 1994 Mr. Pierallini was
Associate-Director/Portfolio Manager with Swiss Bank Corporation in New
York; from 1988 to 1991 he was a VicePresident/Portfolio Manager with
SBC Portfolio Management Ltd. in Zurich, Switzerland; and from 1986 to
1988 he was an Associate/Institutional Consultant with Bank Julius Baer
in Zurich, Switzerland.
*Arpad Pongracz (12/8/58)
Vice President of the Company and President of the
Vontobel Eastern European Equity Fund
450 Park Avenue, New York, NY 10022
Vice President of Vontobel USA Inc. since January 1966. Mr. Pongracz
joined Vontobel Asset Management, Switzerland, in 1990 as an equity
analyst. He was subsequently appointed portfolio manager for all
European equity institutional accounts and mutual funds. Since 1995 he
has been head of Vontobel Asset Management's international equities
team. Prior to joining the Vontobel group, he worked at Union Bank of
Switzerland in Canada and in Switzerland as an equity analyst. Mr.
Pongracz is a Chartered Financial Analyst.
*F. Byron Parker, Jr. (1/26/43)
Secretary
810 Lindsay Court, Richmond, VA 23229
Secretary of Commonwealth Shareholder Services, Inc. since 1986.
Partner in the law firm Mustian & Parker.
- ------------------------------------
* Persons deemed to be "interested" persons of the Company, Vontobel USA Inc.
or First Dominion Capital Corp. under the 1940 Act.
The Directors of the Company received compensation from the Company, as
follows:
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<PAGE>
<TABLE>
<CAPTION>
Compensation Table
- -------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement From Registrant
Aggregate Benefits Accrued Estimated Annual and Fund
Name of Person, Compensation As Part of Fund Benefits Upon Complex Paid to
Position From Registrant Expenses Retirement Directors
- ------------------- ----------------- ---------------- ----------------- ------------------
<S> <C>
John Pasco, III $0 N/A N/A N/A
Director
Henry Schlegel $0 N/A N/A N/A
Director
Samuel Boyd, Jr. $8,000 N/A N/A N/A
Director
William E. Poist $8,000 N/A N/A N/A
Director
Paul M. Dickinson $8,000 N/A N/A N/A
Director
</TABLE>
The directors and officers of the Company, as a group, do not own 1% or
more of the Fund.
To the best knowledge of the Fund, the following persons own of record
or beneficially 5% or more of the Fund's shares, and own such shares in the
amounts indicated: (1) Marianne Conley (5.97%); (2) Arthur and Anna Kull
(9.37%); and (3) National Financial Services (20.50%).
Investment Advisor
Sand Hill Advisors, Inc. (the "Investment Advisor") manages the
investment of the assets of the Fund pursuant to an Investment Advisory
Agreement (the "Advisory Agreement"). The Advisory Agreement was effective for a
period of two years from December 29, 1994, and may be renewed thereafter only
so long as such renewal and continuance is specifically approved at least
annually by the Company's Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund, provided the continuance is also
approved by a majority of the Directors who are not "interested persons" of the
Company or the Investment Advisor by vote cast in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreement is terminable
without penalty on sixty days notice by the Company's Board of Directors or by
the Investment Advisor. The Advisory Agreement provides that it will terminate
automatically in the event of its assignment.
The Company has designated Jane H. Williams, Executive Vice President
and a Director of the Investment Advisor, as a Vice President of the Company and
President of the Fund.
Under the Advisory Agreement the monthly compensation paid to the
Investment Advisor is accrued daily at an annual rate of 1.00% of the average
daily net assets of the Fund. If the average daily net assets of the Fund exceed
$100,000,000, the fee for such assets will be computed at the annual rate of
0.75% on such excess. The fee is paid monthly within five (5) business days
after the end of the month. This fee is subject to reduction in accordance with
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<PAGE>
state expense limitation provisions. The Advisor received $27,452 and waived
$27,452 of its fee in the year ended December 31, 1995 and received $53,649 and
waived $34,043 of its fee in the year ended December 31, 1996.
The Advisory Agreement contemplates the authority of the Investment
Advisor to place orders pursuant to its investment determinations for the Fund
either directly with the issuer or with any broker or dealer. In placing orders
with brokers or dealers, the Investment Advisor will attempt to obtain the best
net price and the most favorable execution of its orders. The Investment Advisor
may purchase and sell securities to and from brokers and dealers who provide the
Fund with research advice and other services, or who sell shares of the Fund.
See "Portfolio Transactions" above.
The address of the Investment Advisor is 3000 Sand Hill Road, Building
Three, Suite 150, Menlo Park, California 94025.
Transfer Agent
Fund Services, Inc. ("FSI") is the Company's Transfer and Disbursing
Agent, pursuant to a Transfer Agent Agreement. The Transfer Agent Agreement is
dated May 1, 1991, and has been renewed each year by the Board of Directors of
the Company, including a majority of the Directors who are not interested
persons of the Company or the Transfer Agent.
John Pasco, III, Chairman of the Board of the Company and an officer
and shareholder of Commonwealth Shareholder Services, Inc. (the Administrator of
the Fund) owns one third of the stock of FSI, and, therefore, FSI may be deemed
to be an affiliate of the Company and Commonwealth Shareholder Services Inc.
Pursuant to the Transfer Agent Agreement the minimum annual fee for the
Fund is $16,500. In 1996 the Fund paid FSI $24,190.
Administrator
Commonwealth Shareholder Services, Inc. is the Company's Administrator
pursuant to an Administrative Services Agreement (the "Service Agreement"),
which is dated December 29, 1994. The Service Agreement is described in the
Fund's Prospectus. This agreement continues in effect from year to year for a
period of one year only if the Board of Directors, including a majority of the
directors who are not interested persons of the Company or the Administrator,
approve the extension at least annually. In 1996, the Fund paid $17,681 in
administrative fees.
Distribution
Shares of the Fund are sold at net asset value on a continuous basis,
without a sales charge.
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<PAGE>
First Dominion Capital Corp. (the "Distributor"), 1500 Forest Avenue,
Suite 223, Richmond, VA 23229, is the Company's principal underwriter pursuant
to a Distribution Agreement between the Company and the Distributor. John Pasco,
III, Chairman of the Board of the Company owns 100% of the stock of the
Distributor, and is its President, Treasurer and a Director.
Expenses of the Fund
The Fund will pay its expenses not assumed by the Investment Advisor,
including, but not limited to, the following: custodian; stock transfer and
dividend disbursing fees and expenses; taxes; expenses of the issuance and
redemption of Fund shares (including stock certificates, registration and
qualification fees and expenses); legal and auditing expenses; and the cost of
stationery and forms prepared exclusively for the Fund.
The allocation of the general expenses of the Fund is made on a basis
that the Company's Board of Directors deems fair and equitable, which may be
based on the relative net assets of the series of the Company or the nature of
the services performed and relative applicability to each series of the Company.
Under the Advisory Agreement, the Investment Advisor has agreed to
reimburse the Fund if the annual ordinary operating expenses of the Fund exceeds
the most stringent limits prescribed by any state in which the Fund's shares are
offered for sale. This expense limitation is calculable based on the aggregate
net assets of the Fund. Expenses which are not subject to this limitation are
interest, taxes and extraordinary expenses. Expenditures, including costs
incurred in connection with the purchase or sale of portfolio securities, which
are capitalized in accordance with generally accepted accounting principles
applicable to investment companies, are accounted for as capital items and not
as expenses. Reimbursement, if any, will be on a monthly basis, subject to
year-end adjustment and limited to the amount of the advisory fee due from the
Fund.
Investors should understand that the Fund's expense ratio can be
expected to be higher than investment companies investing in domestic securities
since the cost of maintaining the custody of foreign securities paid by the Fund
is higher.
Special Shareholder Services
As described briefly in the Prospectus, the Fund offers the following
shareholder services:
Regular Account: The regular account allows for voluntary investments
to be made at any time. Available to individuals, custodians, corporations,
trusts, estates, corporate retirement plans and others, investors are free to
make additions and withdrawals to or from their account as often as they wish.
Simply use the Account Application provided with the Prospectus to open your
account.
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<PAGE>
Telephone Transactions: You may redeem shares or transfer into another
fund by telephone if you request this service at the time you complete the
initial Account Application. If you do not elect this service at that time, you
may do so at a later date by putting your request in writing to the Transfer
Agent and having your signature guaranteed.
The Fund employs reasonable procedures designed to confirm the
authenticity of your instructions communicated by telephone and, if it does not,
it may be liable for any losses due to unauthorized or fraudulent transactions.
As a result of this policy, a shareholder authorizing telephone redemption bears
the risk of loss which may result from unauthorized or fraudulent transactions
which the Fund believes to be genuine. When you request a telephone redemption
or transfer, you will be asked to respond to certain questions designed to
confirm your identity as a shareholder of record. Your cooperation with these
procedures will protect your account and the Fund from unauthorized
transactions.
Invest-A-Matic Account: Any shareholder may utilize this feature, which
provides for automatic monthly investments into your account. Upon your request,
the Transfer Agent will withdraw a fixed amount each month from your checking
account for investment into your account. This does not require you to make a
commitment for a fixed period of time. You may change the monthly investment,
skip a month or discontinue your Invest-A-Matic Plan as desired by notifying the
Transfer Agent. This feature requires a separate Plan application, in addition
to the Account Application. To obtain an application, or to receive more
information, please call the offices of the Company.
Individual Retirement Account (IRA) - All wage earners under 70-1/2,
even those who participate in a company sponsored or government retirement plan,
may establish their own IRA. You can contribute 100% of your earnings up to
$2,000 (or $2,250 with a spouse who is not a wage earner, for years prior to
1997). Starting in 1997, even a spouse who does not earn compensation can
contribute up to $2,000 per year to his or her own IRA. The deductibility of
such contributions will be determined under the same rules as for contributions
made by individuals with earned income. A special IRA program is available for
corporate employers under which the employers may establish IRA accounts for
their employees in lieu of establishing corporate retirement plans. Known as
SEP-IRA's (Simplified Employee PensionIRA), they free the corporate employer of
many of the recordkeeping requirements of establishing and maintaining a
corporate retirement plan trust.
If you have received a lump sum distribution from another qualified
retirement plan, you may rollover all or part of that distribution into your
Fund IRA. Your rollover contribution is not subject to the limits on annual IRA
contributions. By acting within applicable time limits of the distribution you
can continue to defer Federal Income Taxes on your lump sum contribution and on
any income that is earned on that contribution.
How to Establish Retirement Accounts: Please call the Company to
obtain information regarding the establishment of individual retirement plan
accounts. The plan custodian charges nominal fees in connection with plan
establishment and maintenance. These fees are detailed in
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<PAGE>
the plan documents. You may wish to consult with your attorney or other tax
advisor for specific advice concerning your tax status and plans.
General Information and History
The Company is authorized to issue up to 500,000,000 shares of common
stock, par value $0.01 per share, of which it has presently allocated 50,000,000
shares to the Fund, 50,000,000 shares to the Vontobel International Bond Fund,
50,000,000 shares to the Vontobel EuroPacific Fund, 50,000,000 shares to the
Vontobel U.S. Value Fund and 50,000,000 shares to the Vontobel Eastern European
Equity Fund. The Board of Directors can allocate the remaining authorized but
unissued shares to any series of the Company, or may create additional series
and allocate shares to such series. Each series is required to have a suitable
investment objective, policies and restrictions, to maintain a separate
portfolio of securities suitable to its purposes, and to generally operate in
the manner of a separate investment company as required by the 1940 Act.
If additional series were to be formed, the rights of existing series
shareholders would not change, and the objective, policies and investments of
each series would not be changed. A share of any series would continue to have a
priority in the assets of that series in the event of a liquidation.
The shares of each series when issued will be fully paid and nonassessable,
will have no preference over other shares of the same series as to conversion,
dividends, or retirement, and will have no preemptive rights. The shares of any
series will be redeemable from the assets of that series at any time at a
shareholder's request at the current net asset value of that series determined
in accordance with the provisions of the 1940 Act and the rules thereunder. The
Company's general corporate expenses (including administrative expenses) will be
allocated among the series in proportion to net assets or as determined in good
faith by the Board.
The investment advisory fees payable to Sand Hill Advisors, Inc. and
Vontobel USA Inc. by each series and the expense limitation guarantee formula of
each series will be based upon the separate assets of each series.
Voting and Control - Each outstanding share of the Company is entitled to
one vote for each full share of stock and a fractional share of stock. All
shareholders vote on matters which concern the corporation as a whole. Election
of Directors or ratification of the auditor are examples of matters to be voted
upon by all shareholders. The Company is not required to hold a meeting of
shareholders each year. The Company intends to hold annual meetings when it is
required to do so by the Maryland General Corporate Law or the 1940 Act. Each
series shall vote separately on matters (1) when required by the General
Corporation Law of Maryland, (2) when required by the 1940 Act and (3) when
matters affect only the interest of the particular series. An example of a
matter affecting only one series might be a proposed change in an investment
restriction of one series. The shares will not have cumulative voting rights,
which
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<PAGE>
means that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors if they choose to do so.
Limitation on Use of Name - The Advisory Agreement for the Fund authorizes
the Company to utilize the name "Sand Hill." The Company agrees that if the
Advisory Agreement is terminated it will promptly redesignate the name of the
Sand Hill Portfolio Manager Fund to eliminate any reference to the name "Sand
Hill" or any derivation thereof unless the Investment Advisor waives this
requirement in writing.
Code of Ethics - The Company has adopted a Code of Ethics which imposes
certain restrictions on the authority of portfolio managers and certain other
personnel of the Fund and its advisors governing personal securities activities
and investments of those persons and has instituted procedures to its Code of
Ethics to require such investment personnel to report such activities to the
compliance officer. The Code is reviewed and updated annually.
Performance
Current yield and total return are the two primary methods of measuring
investment performance. Occasionally, however, the Fund may include its
distribution rate in sales literature. Yield, in its simplest form, is the ratio
of income per share derived from the Fund's portfolio investments to the current
maximum offering price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. Total return, on the other
hand, is the total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the change in the
value of the original investment, expressed as a percentage of the purchase
price. The distribution rate is the amount of distributions per share made by
the Fund over a twelve-month period divided by the current maximum offering
price.
Performance quotations by investment companies are subject to certain
rules adopted by the Securities and Exchange Commission (the "Commission").
These rules require the use of standardized performance quotations, or
alternatively, that every non-standardized performance quotation furnished by
the Fund be accompanied by certain standardized performance information computed
as required by the Commission. Current yield and total return quotations used by
the Fund are based on the standardized methods of computing performance mandated
by the Commission.
Yield. As indicated below, current yield is determined by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders
during the 30 day base period. According to the Commission formula:
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<PAGE>
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.
Total Return. The Fund's average annual total returns for the periods
indicated are as follows:
One-Year Period Ended From Inception to
Fund Name 12/31/96 12/31/96
--------- --------------------- -----------------
Sand Hill Portfolio Manager Fund 19.57% 15.51%
As the following formula indicates, the average annual total return is
determined by multiplying a hypothetical initial purchase order of $1,000 by the
average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and reinvested)
for the stated period less any fees charged to all shareholder accounts and
annualizing the result. The calculation assumes the maximum sales load is
deducted from the initial $1,000 purchase order and that all dividends and
distributions are reinvested at the public offering price on the reinvestment
dates during the period. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year or since inception period
and the deduction of all applicable charges and fees. According to the
Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
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<PAGE>
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year periods (or
fractional portion thereof).
Sales literature pertaining to the Fund may quote a distribution rate
in addition to the yield or total return. The distribution rate is the amount of
distributions per share made by the Fund over a twelve-month period divided by
the current maximum offering price. The distribution rate differs from the yield
because it measures what the Fund paid to shareholders rather than what the Fund
earned from investments. It also differs from the yield because it may include
dividends paid from premium income from option writing, if applicable, and
short-term capital gains in addition to dividends from investment income. Under
certain circumstances, such as when there has been a change in the amount of
dividend payout, or a fundamental change in investment policies, it might be
appropriate to annualize the distributions paid over the period such policies
were in effect, rather than using the distributions paid during the past twelve
months.
Occasionally, statistics may be used to specify the Fund's volatility
or risk. Measures of volatility or risk are generally used to compare the Fund's
net asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market as represented by the Standard & Poor's 500 Stock Index. A beta of more
than 1.00 indicates volatility greater than the market, and a beta of less than
1.00 indicates volatility less than the market. Another measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability of
net asset value or total return around an average, over a specified period of
time. The premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Regardless of the method used, past performance is not necessarily
indicative of future results, but is an indication of the return to shareholders
only for the limited historical period used.
Comparisons and Advertisements
- ------------------------------
To help investors better evaluate how an investment in the Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss yield, total return, or Fund volatility as reported by various financial
publications. Advertisements may also compare yield, total return, or volatility
(as calculated above) to yield, total return, or volatility as reported by other
investments, indices, and averages. The following publications, indices, and
averages may be used:
(a) Dow Jones Composite Average or its component averages - an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks (Dow Jones Utilities
Average), and 20 transportation company stocks. Comparisons of performance
assume reinvestment of dividends.
-37-
<PAGE>
(b) Standard & Poor's 500 Stock Index or its component indices -an
unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40
utilities stocks, and 20 transportation stocks. Comparisons of
performance assume reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices
- -unmanaged indices of all industrial, utilities, transportation, and finance
stocks listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index - represents the return on the market
value of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
(e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income
Analysis, and Lipper Mutual Fund Indices - measures total return and average
current yield for the mutual fund industry. Ranks individual mutual fund
performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales charges.
(f) CDA Mutual Fund Report, published by CDA Investment Technologies,
Inc. - analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
(g) Mutual Fund Source Book and other material, published by Morningstar,
Inc. - provides proprietary ratings and analyzes price, yield, risk, and total
return for equity funds.
(h) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, and Money magazines - rate fund performance over
specified time periods.
(i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services, in major expenditure groups.
(j) Standard & Poor's 100 Stock Index - an unmanaged index based on the
price of 100 bluechip stocks, including 92 industrials, 1 utility, 2
transportation companies, and 5 financial institutions. The S&P 100 Stock
Index is a smaller more flexible index for option trading.
In assessing such comparisons of yield, total return, or volatility, an
investor should keep in mind that the composition of the investments in the
reported indices and averages in not identical to the Fund's portfolio, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its figures. In addition there can be no assurance that the
Fund will continue this performance as compared to such other averages.
-38-
<PAGE>
Financial Statements
The books of the Fund will be audited at least once each year by Tait,
Weller and Baker, of Philadelphia, PA, independent public accountants.
-39-
<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND RATINGS:
- -------------------------------------------------------------------
Aaa - Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
Moody's applies numerical modifiers 1,2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, modified 2 indicated a mid-range rating, and the modifier 3
indicates that the issue ranks at the lower end of the rating category.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements,
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
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<PAGE>
B - Bonds which are rated B generally lack characteristics of the
desirable investment assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
MOODY'S SHORT-TERM DEBT RATINGS:
- --------------------------------
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1 - Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established access
to range of financial markets and assured sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime 3 - Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
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<PAGE>
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
- -------------------------------------------------------
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation, indicating an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from highest rated issues only to a small degree.
Plus(+) or Minus(-) - The ratings from AA to CCC may be modified by the
addition of a plus or a minus sign, which shows relative standing
within the major rating categories.
A - Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB is the lowest and
CC is the highest degree of speculation. While such debt will have some quality
and protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
-42-
<PAGE>
Investment Advisor: Sand Hill Advisors, Inc.
3000 Sand Hill Road
Building Three, Suite 150
Menlo Park, CA 94025
Distributor: First Dominion Capital Corp.
1500 Forest Ave., Suite 223
Richmond, VA 23229
Independent Auditors: Tait, Weller & Baker
Two Penn Center Plaza
Suite 700
Philadelphia, PA 19102
Transfer Agent: For account information, wire purchases or
redemptions, call or write to the Fund's
Transfer Agent:
Fund Services, Inc.
P.O. Box 26305
Richmond, VA 23260-6305
(800) 628-4077 Toll Free
More Information: For 24-hour, 7-days-a-week price information
call 1-800-527-9500.
For information on any series of the
Company, investment plans, or other
shareholder services, call the Company at
1-800-527-9500 during normal business hours,
or write the Company at 1500 Forest Avenue,
Suite 223, Richmond, VA 23229
-43-
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
1. Included in Part A:
(a) For the Vontobel U.S. Value Fund,
Vontobel International Equity Fund
(formerly named, Vontobel EuroPacific
Fund), Vontobel Eastern European Equity
Fund and Vontobel International Bond
Fund:
o Financial Highlights.
(b) For the Sand Hill Portfolio Manager
Fund:
o Financial Highlights.
2. Incorporated by reference in Part A from the
Annual Report to Shareholders of each of the
series of the registrant filed on February 28, 1997:
(a) For each of the Vontobel U.S. Value
Fund, Vontobel International Equity Fund
(formerly named, Vontobel EuroPacific
Fund), Vontobel Eastern European Equity
Fund and Vontobel International Bond
Fund:
o Report of Independent Auditors
dated January 17, 1997 relating to
the Financial Statements for fiscal
periods ended December 31, 1996.
o Schedule of Portfolio Investments
as of December 31, 1996 (audited);
o Statement of Assets and Liabilities
at December 31, 1996 (audited);
o Statement of Operations for the
year ended December 31, 1996
(audited);
o Statements of Changes in Net Assets
for the years ended December 31,
1995 and December 31, 1996 (as
applicable) (audited);
o Financial Highlights for years (or
period) ended December 31, 1996 and
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<PAGE>
each previous year (or
period) ended December 31
through the later of the
year of inception of the
fund or 1987, as applicable
(audited);
o Notes to Financial Statements dated
December 31, 1996 (audited).
(b) For the Sand Hill Portfolio Manager
Fund:
o Report of Independent Auditors
relating to the Financial
Statements for fiscal periods ended
December 31, 1996.
o Schedule of Portfolio Investments
as of December 31, 1996 (audited);
o Statement of Assets and Liabilities
at December 31, 1996 (audited);
o Statement of Operations for the
year ended December 31, 1996
(audited);
o Statements of Changes in Net Assets
for the years ended December 31,
1995 and December 31, 1996
(audited);
o Financial Highlights for years
ended December 31, 1995 and
December 31, 1996 (audited);
o Notes to Financial Statements dated
December 31, 1996 (audited).
3. Included in Part B: None
(b) Exhibits.
1. Articles of Incorporation of Registrant are
incorporated herein by reference to Post-
Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
2-78931) as filed with the Securities and
Exchange Commission (the "Commission") on
November 1, 1983.
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<PAGE>
(a) Articles Supplementary of Registrant are
incorporated herein by reference to:
(1) Post-Effective Amendment No. 4 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 29, 1984;
(2) Post-Effective Amendment No. 11 to
Registrant's Registration Statement
on Form N-1A (2-78931) as filed
with the Commission on February 28,
1989.
(3) Post-Effective Amendment No. 15 to
Registrant's Registration Statement
on Form N-1A (2-78931) as filed
with the Commission on January 29,
1990.
(4) Post-Effective Amendment No. 23 to
Registrant's Registration Statement
on Form N-1A (2-78931) as filed
with the Commission on December 13,
1993.
(5) Post-Effective Amendment No. 25 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April 29,
1994.
(6) Post-Effective Amendment No. 27 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 19, 1994.
(7) Articles Supplementary dated May 10,
1995 and Articles Supplementary
dated November 6, 1995 as filed
with the Commission on November 9,
1995 in Post-Effective Amendment
No. 30 to Registrant's Registration
Statement on Form N-1A (File No. 2-
78931).
(b) Articles of Amendment of Registrant are
incorporated herein by reference to:
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<PAGE>
(1) Post-Effective Amendment No. 19 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on March 1,
1991.
(2) Post-Effective Amendment No. 27 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 19, 1994.
(3) Articles of Amendment dated
February 26, 1997, changing
the name of the Registrant,
are filed herewith as
Exhibit 24(b)1.(c).
2. By-Laws of Registrant are incorporated herein
by reference to Post-Effective Amendment No.
1 to Registrant's Registration Statement on
Form N-1A (File No. 2-78931) as filed with
the Commission on November 1, 1983.
(a) Amendment to By-Laws is incorporated
herein by reference to Post-Effective
Amendment No. 4 to Registrant's
Registration Statement on Form N-1A
(File No. 2-78931) as filed with the
Commission on October 29, 1984.
3. Not Applicable.
4. (a) Specimen of security issued by the:
(1) Vontobel International Equity Fund
series of the Registrant is
incorporated herein by reference to
Post-Effective Amendment No. 19 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on March 1,
1991.
(2) Vontobel U.S. Value Fund series of
the Registrant is incorporated
herein by reference to Post-
Effective Amendment No. 19 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on March
1, 1991.
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<PAGE>
(3) Vontobel International Bond Fund
series of the Registrant is
incorporated herein by reference to
Post-Effective Amendment No. 23 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
December 13, 1993.
(4) Sand Hill Portfolio Manager Fund
series of the Registrant is
incorporated herein by reference to
Post-Effective Amendment No. 27 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 19, 1994.
(5) Vontobel Eastern European Equity
Fund series of the Registrant is
incorporated herein by reference to
Post-Effective Amendment No. 30 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
November 9, 1995.
5. (a) Investment Advisory Agreement between
Vontobel USA, Inc. and the Registrant on
behalf of the:
(1) Vontobel International Equity Fund
series (dated July 14, 1992) is
incorporated herein by reference to
Post-Effective Amendment No. 22 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April 30,
1993.
(2) Vontobel U.S. Value Fund series
(dated July 14, 1992) is
incorporated by reference to Post-
Effective Amendment No. 22 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April 30,
1993.
(3) Vontobel International Bond Fund
series (dated February 10, 1994) is
incorporated herein by reference to
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<PAGE>
Post-Effective Amendment No. 25 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April 29,
1994.
(4) Vontobel Eastern European Equity
Fund series (dated February 14,
1996) is incorporated herein by
reference to Post-Effective
Amendment No. 31 of Registrant's
Registration Statement on Form N-1A
(File No. 2-78931) as filed with
the Commission on April 29, 1996.
(b) Investment Advisory Agreement between
Sand Hill Advisors, Inc. and the
Registrant on behalf of the:
(1) Sand Hill Portfolio Manager Fund
series (dated December 29, 1994) is
incorporated herein by reference to
Post-Effective Amendment No. 27 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 18, 1994.
6. (a) Distribution Agreement between Newport
Distributors, Inc. and the Registrant
(dated January 1, 1994) is incorporated
herein by reference to Post-Effective
Amendment No. 25 to Registrant's
Registration Statement on Form N-1A
(File No. 2-78931) as filed with the
Commission on April 29, 1994.
(b) Form of Selling Dealer Agreement between
Newport Distributors, Inc. and the
selling dealers is incorporated herein
by reference to Post-Effective Amendment
No. 19 of Registrant's Registration
Statement on Form N-1A (File No. 2-
78931) as filed with the Commission on
March 1, 1991.
(c) Form of Foreign Broker Dealer Selling
Agreement between Newport Distributors,
Inc. and the foreign selling broker
dealers is incorporated by reference to
Post-Effective Amendment No. 20 of
Registrant's Registration Statement on
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<PAGE>
Form N-1A (File No. 2-78931) as filed
with the Commission on April 24, 1992.
7. Not Applicable.
8. (a) Custodian Agreement between Brown
Brothers Harriman & Co. and the
Registrant (dated November 10, 1992) is
incorporated herein by reference to
Post-Effective Amendment No. 22 of
Registrant's Registration Statement on
Form N-1A, (File No. 2-78931) as filed
with the Commission on April 20, 1993.
(b) Custodian Agreement between Star Bank
and the Registrant on behalf of the
Vontobel U.S. Value Fund (dated August 1,
1996) is filed herewith as Exhibit
24(b)8.(b).
(c) Custodian Agreement between Star Bank
and the Registrant on behalf of the Sand
Hill Portfolio Manager Fund (dated
August 1, 1996) is filed herewith as
Exhibit 24(b)8.(c).
9. (a) Transfer Agency Agreement, as amended,
between Fund Services, Inc. and the
Registrant is incorporated herein by
reference to Post-Effective Amendment
No. 16 of Registrant's Registration
Statement on Form N-1A, (File No. 2-
78931) as filed on April 27, 1990.
(b) Administrative Services Agreement
between Commonwealth Shareholder
Services, Inc. and the Registrant on
behalf of the:
(1) Vontobel International Equity Fund
series and Vontobel U.S. Value Fund
series (dated July 14, 1992) is
incorporated by reference to Post-
Effective Amendment No. 22 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April 30,
1993.
(2) Vontobel International Bond Fund
series (dated February 10, 1994) is
incorporated herein by reference to
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<PAGE>
Post-Effective Amendment No. 25 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on April 29,
1994.
(3) Sand Hill Portfolio Manager Fund
series (dated December 29, 1994) is
incorporated herein by reference to
Post-Effective Amendment No. 27 of
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
October 18, 1994.
(4) Vontobel Eastern European Equity
Fund series (dated February 15,
1996) is incorporated by reference
to Post-Effective Amendment No. 31
of Registrant's Registration
Statement on Form N-1A (File No. 2-
78931) as filed with the Commission
on April 29, 1996.
(c) Fund Accounting Servicing Agreement
(dated August 1, 1996) between Star
Bank and the Registrant on behalf of
the Vontobel U.S. Value Fund series
is filed herewith as Exhibit
24(b)9.(c).
(d) Fund Accounting Servicing Agreement
(dated August 1, 1996) between Star
Bank and the Registrant on behalf of
the Sand Hill Portfolio Manager Fund
series is filed herewith as Exhibit
24(b)9.(d).
10. Opinion of Counsel is incorporated herein by
reference to the Registrant's Rule 24f-2
Notice, which was filed with the Commission
on February 28, 1997.
11. Auditor's consent is attached hereto as
Exhibit 24(b)11.
12. Not applicable.
13. Not applicable.
14. (a) Custodial Account Agreement for
Individual Retirement Accounts is
incorporated herein by reference to
Post-Effective Amendment No. 22 to
Registrant's Registration Statement on
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<PAGE>
Form N-1A (File No. 2-78931) as filed
with the Commission on April 30, 1993.
(b) Disclosure Statement for Individual
Retirement Accounts is incorporated by
reference to Post-Effective Amendment
No. 22 to Registrant's Registration
Statement on Form N-1A (File No. 2-
78931) as filed with the Commission on
April 30, 1993.
(c) Custodial Account Agreement and
Disclosure Document dated February 16,
1996 on behalf of the Vontobel Eastern
European Equity Fund series is
incorporated herein by reference to
Post-Effective Amendment No. 31 to
Registrant's Registration Statement on
Form N-1A (File No. 2-78931) as filed
with the Commission on April 29, 1996.
15. Not Applicable.
16. (a) Schedule(s) of computation of
performance quotation(s) on behalf of
the:
(1) Vontobel International Equity Fund
series is attached hereto as
Exhibit 24(b)16.(a)(1).
(2) Vontobel U.S. Value Fund series is
attached hereto as Exhibit
24(b)16.(a)(2).
(3) Vontobel International Bond Fund
series is attached hereto as
Exhibit 24(b)16.(a)(3).
(4) Sand Hill Portfolio Manager Fund
series is attached hereto as
Exhibit 24(b)16.(a)(4).
(5) Vontobel Eastern European Equity
Fund series is attached
hereto as Exhibit
24(b)16.(a)(5).
17. (a) Financial Data Schedule on behalf of
the:
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<PAGE>
(1) Vontobel International Equity Fund
series is attached hereto as
Exhibit 24(b)17.(a)(1).
(2) Vontobel U.S. Value Fund series is
attached hereto as Exhibit
24(b)17.(a)(2).
(3) Vontobel International Bond Fund
series is attached hereto as
Exhibit 24(b)17.(a)(3).
(4) Sand Hill Portfolio Manager Fund
series is attached hereto as
Exhibit 24(b)17.(a)(4).
(5) Vontobel Eastern European Equity
Fund series is attached hereto as
Exhibit 24(b)17.(a)(5).
18. Not applicable.
19. (a) Powers-of-Attorney for:
(1) Samuel Boyd, Jr. and William E.
Poist are incorporated herein by
reference to Post-Effective
Amendment No. 2 to Registrant's
Registration Statement on Form N-1A
(File No. 2-78931) as filed with
the Commission on December 17,
1983.
(2) Paul M. Dickinson is incorporated
herein by reference to Post-
Effective Amendment No. 10 to
Registrant's Registration Statement
on Form N-1A (File No. 2-78931) as
filed with the Commission on
February 25, 1987.
(3) Henry Schlegel is filed herewith as
Exhibit 24(b)19.(a)(3).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
None.
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ITEM 26. NUMBER OF HOLDERS OF SECURITIES: As of January 31,
1997:
Number of
Title of Class Record Holders
-------------- --------------
Vontobel International Equity Fund 1,158
Vontobel U.S. Value Fund 1,597
Vontobel International Bond Fund 63
Sand Hill Portfolio Manager Fund 74
Vontobel Eastern European Equity Fund 4,839
ITEM 27. INDEMNIFICATION.
Incorporated by reference from PEA No. 1, filed
November 1, 1983, as modified in, and incorporated by
reference from, PEA No. 3, filed March 1984.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
(a) Vontobel USA, Inc., the investment advisor to the
Vontobel U.S. Value Fund series, the Vontobel
International Equity Fund series, the Vontobel
International Bond Fund series and the Vontobel Eastern
European Equity Fund series provides investment
advisory services consisting of portfolio management
for a variety of individuals and institutions and as of
December 31, 1996, had approximately $1.4 billion in
assets under management.
For information as to any other business, profession, vocation
or employment of a substantial nature in which each director,
officer or partner of Vontobel USA, Inc. (the "Advisor") is or
has been, at any time during the past two fiscal years,
engaged for his own account or in the capacity of director,
officer, employee, partner or trustee, reference is made to
the Advisor's Form ADV (File #801-21953), currently on file
with the Commission as required by the Investment Advisors Act
of 1940, as amended.
(b) Sand Hill Advisors, Inc, (formerly Conway, Williams & Foster,
Inc.), the investment advisor to the Sand Hill Portfolio
Manager Fund series, provides investment advisory services
consisting of portfolio management for a variety of
individuals and institutions and as of December 31, 1996, had
approximately $235 million in assets under management.
For information as to any other business, profession, vocation
or employment of a substantial nature in which each director,
officer or partner of Sand Hill Advisors, Inc. (the "Advisor")
is or has been, at any time during the past two fiscal years,
engaged for his
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own account or in the capacity of director, officer, employee,
partner or trustee, reference is made to the Advisor's Form
ADV (File #801-17601), currently on file with the Commission
as required by the Investment Advisors Act of 1940, as
amended.
ITEM 29. PRINCIPAL UNDERWRITER.
(a) None.
(b)
Positions and Positions and
Name and Principal Offices With Offices with
Business Address Underwriter Registrant
---------------- ----------- ----------
John Pasco, III President, Chief Chairman &
1500 Forest Avenue Financial Officer, Treasurer &
Suite 223 Treasurer, Director
Richmond, VA 23229
Mary T. Pasco Director Assistant
1500 Forest Avenue Secretary
Suite 223
Richmond, VA 23229
Lori J. Martin Vice President None
1500 Forest Ave. & Assistant Sec.
Suite 223
Richmond, VA 23229
F. Byron Parker, Jr. Secretary Secretary
Mustian & Parker
Two Paragon Place
Suite 100
6802 Paragon Place
Richmond, VA 23230
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books or other documents of the Registrant
required to be maintained by ss.31(a) of the Investment
Company Act of 1940, as amended, and the rules promulgated
thereunder are kept in several locations:
(a) Shareholder account records (including share ledgers,
duplicate confirmations, duplicate account
statements, and applications forms) of each series of
the Registrant are maintained by
C-12
<PAGE>
its transfer agent, Fund Services, Inc., at 1500
Forest Avenue, Suite 111, Richmond, VA 23229.
(b) Investment records:
(1) including research information, records
relating to the placement of brokerage
transactions, memorandums regarding
investment recommendations for supporting
and/or authorizing the purchase or sale of
assets, information relating to the placement
of securities transactions, and certain
records concerning investment recommendations
of the Vontobel International Equity Fund,
Vontobel U.S. Value Fund, Vontobel
International Bond Fund and Vontobel Eastern
European Equity Fund series of the Registrant
are maintained at each series' investment
advisor, Vontobel USA, Inc., at 450 Park
Avenue, New York, NY 10022.
(2) including research information, records
relating to the placement of brokerage
transactions, memorandums regarding
investment recommendations for supporting
and/or authorizing the purchase or sale of
assets, information relating to the placement
of securities transactions, and certain
records concerning investment recommendations
of the Sand Hill Portfolio Manager Fund
series are maintained at the series'
investment advisor, Sand Hill Advisors, Inc.,
at 3000 Sand Hill Road, Building 3, Suite
150, Menlo Park, CA 94025.
(c) Accounts and records for portfolio securities and
other investment assets, including cash:
(1) of the Vontobel International Equity Fund,
Vontobel International Bond Fund and
Vontobel Eastern European Equity Fund series
are maintained in the custody of the
Registrant's custodian bank, Brown Brothers
Harriman & Co., at 40 Water St., Boston, MA
02109.
(2) of the Sand Hill Portfolio Manager Fund and
Vontobel U.S. Value Fund series are
maintained in the custody of the Registrant's
custodian bank, Star Bank, 425 Walnut Street,
P.O. Box 1118, Cincinnati, Ohio 45201-1118.
C-13
<PAGE>
(d) Accounting records, including general ledgers,
supporting ledgers, pricing computations, etc.:
(1) of the Vontobel International Equity Fund,
Vontobel International Bond Fund and
Vontobel Eastern European Equity Fund series
are maintained by the Registrant's
accounting services agent, Brown Brothers
Harriman & Co., at 40 Water Street, Boston,
MA 02109.
(2) of the Vontobel U.S. Value Fund series and
Sand Hill Portfolio Manager Fund series are
maintained by the Registrant's accounting
services agent, Star Bank, 425 Walnut Street,
P.O. Box 1118, Cincinnati, Ohio 45201-1118
(e) Administrative records, including copies of the
charter, by-laws, minute books, agreements,
compliance records and reports, certain
shareholder communications, etc., are kept at the
Registrant's principal office, at 1500 Forest
Avenue, Suite 223, Richmond, VA 23229, by the
Registrant's Administrator, Commonwealth
Shareholder Services, Inc., whose address is the
same as Registrant's.
(f) Records relating to distribution of shares of the
Registrant are maintained by the Registrant's
distributor, First Dominion Capital Corp. at 1500
Forest Avenue, Suite 223, Richmond, VA 23229.
ITEM 31. MANAGEMENT SERVICES. There are no management-related
service contracts not discussed in Parts A or B of this
Form.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant hereby undertakes to furnish each
person to whom a Prospectus for one or more of the
series of the Registrant is delivered with a copy of
the relevant latest annual report to shareholders,
upon request and without charge.
C-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of the Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Richmond, and the Commonwealth of Virginia on
the 14th day of March, 1997.
VONTOBEL FUNDS, INC.
Registrant
By /s/ John Pasco, III
-------------------------
John Pasco, III, Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated below.
(Signature) (Title) (Date)
/s/ John Pasco, III Director, Chairman March 14, 1997
- -------------------- & Treasurer
John Pasco, III
Henry Schlegel* Director March 14, 1997
- --------------------
Henry Schlegel
Samuel Boyd, Jr.* Director March 14, 1997
- --------------------
Samuel Boyd, Jr.
Paul M. Dickinson* Director March 14, 1997
- --------------------
Paul M. Dickinson
William E. Poist* Director March 14, 1997
- --------------------
William E. Poist
/s/ John Pasco, III
- --------------------
John Pasco, III
Attorney-In-Fact*
* Pursuant to Powers-of-Attorney on file.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EDGAR EXHIBIT NO.: FORM N-1A EXHIBIT NO.:
- ------------------ ----------------------
<S> <C>
EX-99.B1 Articles of Amendment dated February 26, 24(b)1.(c)
1997 changing the name of the Registrant
are attached hereto as Exhibit
24(b)1.(c).
EX-99.B8.1 Custodian Agreement between Star Bank 24(b)8.(b)
and the Registrant on behalf of the
Vontobel U.S. Value Fund (dated August
1, 1996) is filed herewith as Exhibit
24(b)8.(b).
EX-99.B8.2 Custodian Agreement between Star 24(b)8.(c)
Bank and the Registrant on behalf of
the Sand Hill Portfolio Manager Fund
(dated August 1, 1996) is filed
herewith as Exhibit 24(b)8.(c).
EX-99.B9.1 Fund Accounting Servicing Agreement 24(b)9.(c)
(dated August 1, 1996) between Star
Bank and the Registrant on behalf of
the Vontobel U.S. Value Fund series
is filed herewith as Exhibit
24(b)9.(c).
EX-99.B9.2 Fund Accounting Servicing Agreement 24(b)9.(d)
(dated August 1, 1996) between Star
Bank and the Registrant on behalf of
the Sand Hill Portfolio Manager Fund
series is filed herewith as Exhibit
24(b)9.(d).
EX-99.B11 Auditor's consent is attached hereto as 24(b)11
Exhibit 24(b)11.
EX-99.B16.1 Schedule of computation of 24(b)16.(a)(1)
performance quotation(s) for the
Vontobel International Equity Fund
series is attached hereto as
Exhibit 24(b)16.(a)(1).
EX-99.B16.2 Schedule of computation of performance 24(b)16.(a)(2)
quotation(s) for the Vontobel U.S. Value
Fund series is attached hereto as
Exhibit 24(b)16.(a)(2).
EX-99.B16.3 Schedule for computation of performance 24(b)16.(a)(3)
quotation(s) for the Vontobel
International Bond Fund series is
attached hereto as Exhibit 24(b)16.(a)(3).
EX-99.B16.4 Schedule for computation of performance 24(b)16.(a)(4)
quotation(s) for the Sand Hill Portfolio Manager
Fund series is attached hereto as Exhibit
24(b)16.(a)(4).
EX-99.B16.5 Schedule for computation of performance 24(b)16.(a)(5)
quotation(s) for the Vontobel Eastern
European Equity Fund series is attached hereto as
Exhibit 24(b)16.(a)(5).
EX-27.1 Financial Data Schedule on behalf of the 24(b)17.(a)(1)
Vontobel International Equity Fund series is
attached hereto as Exhibit 24(b)17.(a)(1).
EX-27.2 Financial Data Schedule on behalf of the 24(b)17.(a)(2)
Vontobel U.S. Value Fund series is
attached hereto as Exhibit
24(b)17.(a)(2).
EX-27.3 Financial Data Schedule on behalf of 24(b)17.(a)(3)
the Vontobel International Bond Fund
series is attached hereto as Exhibit
24(b)17.(a)(3).
EX-27.4 Financial Data Schedule on behalf of 24(b)17.(a)(4)
the Sand Hill Portfolio Manager Fund
series is attached hereto as Exhibit
24(b)17.(a)(4).
EX-27.5 Financial Data Schedule on behalf of 24(b)17.(a)(5)
the Vontobel Eastern European Equity
Fund series is attached hereto as
Exhibit 24(b)17.(a)(5).
EX-99.B19 Power-of-Attorney for Henry Schlegel is 24(b)19.(a)(3)
filed herewith as Exhibit
24(b)19.(a)(3).
</TABLE>
THE WORLD FUNDS, INC.
(hereby renamed Vontobel Funds, Inc.)
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
(to change the name of the corporation
and a series of the corporation)
The World Funds, Inc., a Maryland corporation having its
principal office in Baltimore, Maryland (the "Corporation") hereby certifies, in
accordance with Section 2-605 of the Maryland General Corporation Law (the
"GCL"), to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation, at a meeting
held on February 26, 1997, determined it to be in the best interest of the
Corporation to change the name of the Corporation from The World Funds, Inc. to
Vontobel Funds, Inc., and to change the name of the Vontobel EuroPacific Fund
series to the Vontobel International Equity Fund series.
SECOND: In furtherance thereof, the Board of Directors adopted
resolutions to amend the Articles of Incorporation to change the name of the
Corporation to Vontobel Funds, Inc., and to change the name of the Vontobel
EuroPacific Fund series to the Vontobel International Equity Fund series.
THIRD: These Articles of Amendment changing the name of the
Corporation and changing the name of the Vontobel EuroPacific Fund series have
been approved by a majority of the entire Board of Directors pursuant to
authority contained in the Articles of Incorporation of the Corporation and
Section 2-605 of the GCL.
FOURTH: The Corporation is registered as an open-end company
under the Investment Company Act of 1940, as amended, and this amendment is
limited to changes expressly permitted by Section 2-605 of the GCL to be made
without action by the stockholders.
FIFTH: These Articles of Amendment shall be effective upon
the close of business of the day of filing with the Maryland Department of
Assessments and Taxation.
<PAGE>
IN WITNESS WHEREOF, The World Funds, Inc. has caused these
Articles of Amendment to be signed in its name and on its behalf this 26th day
of February, 1997.
THE WORLD FUNDS, INC.
By /s/ John Pasco III
-----------------------------------
John Pasco III
Chairman and Chief Executive Officer
ATTEST:
/s/ F. Byron Parker, Jr.
- -------------------------------
Name: F. Byron Parker, Jr.
Title: Secretary
THE UNDERSIGNED, Chairman and Chief Executive Officer of THE
WORLD FUNDS, INC., who executed on behalf of the said Corporation the foregoing
Articles of Amendment, of which this instrument is made a part, hereby
acknowledges, in the name of and on behalf of said Corporation, said Articles of
Amendment to be the corporate act of said Corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the approval thereof are true in all
material respects, under the penalties of perjury.
/s/ John Pasco III
----------------------
John Pasco, III
-2-
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our reports each dated January 17, 1997 on the
financial statements and financial highlights of Vontobel EuroPacific Fund,
Vontobel U.S. Value Fund, Vontobel International Bond Fund, Vontobel Eastern
European Equity Fund, and Sand Hill Portfolio Manager Fund, each a series of
shares of Vontobel Funds, Inc. (formerly "The World Funds, Inc."). Such
financial statements and financial highlights appear in the 1996 Annual Reports
to Shareholders which are incorporated by reference in the Prospectus filed in
Post-Effective Amendment Number 33 to the Registration Statement on Form N-1A of
Vontobel Funds, Inc. We also consent to the references to our firm in such
Registration Statement and Prospectus.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
March 7, 1997
ANNUAL REPORT
TO SHAREHOLDERS
VONTOBEL
EASTERN EUROPEAN EQUITY FUND
A SERIES of
Vontobel Funds, Inc.
a "Series" Investment Company
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
VONTOBEL EASTERN EUROPEAN EQUITY FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, the fund's closing Net Asset Value stood at $14.89, producing a
return of 48.9% since the fund's inception on February 15. For the same period,
the Nomura Research Inc. Eastern European Index (ex-Russia) gained 23.9%. During
the second half fund assets quadrupled from $15,012,850 to $61,376,507,
reflecting the region's skyrocketing markets and another strong year of mutual
fund inflows. The fund made no year-end distributions of income and capital
gains.
1996 was a momentous year for investors in Central and Eastern European equities
as the more advanced markets (Hungary, Poland and the Czech Republic)
consolidated their credibility, attracting an estimated flow of US$ 5 billion in
new funds to the region's bourses. Russia, Hungary and Poland ranked among the
world's five top-performing markets, in both local currency and US dollar terms.
Poland, Hungary and the Czech Republic became members of the OECD and moved a
step closer to membership in the European Union sometime early next decade.
Continuing the process of improving their budgetary discipline, they succeeded
in creating a broad band of stability of real exchange rates. They now boast
credit ratings either at or just below investment grade. Russia too was rated
for the first time in its history, and its successful placement of a US$ 1
billion 5-year bond issue in international capital markets underscored the
improved credit standings of Central and Eastern European nations.
Since inception in February 1996, the fund's portfolio holdings have been
concentrated in the three core markets of Central Europe, i.e., Poland, Hungary
and the Czech Republic. At year end these markets represented some 75% of total
portfolio assets. In the second quarter we committed assets to Russia at a time
when pre-election fears rattled the markets. Based on steeply falling inflation
and interest rates and sheer cheapness, the Russian market presented an
attractive investment opportunity, despite political uncertainty and concerns
about President Yeltsin's heart surgery. Our exposure to the Russian market grew
from 5% going into the second quarter 1996 to 16% of portfolio assets at year
end.
During the last quarter we shifted assets from Poland to Hungary, where the
valuations tend to be more attractive. Hungary also offers the largest number of
restructured firms demonstrating strong growth, profitability, generation of
free cash flow and sound financials. We also established a small position in the
nascent Croatian market.
Of the four major markets in which we invest, we are the most cautious about the
the Czech Republic. We are not finding the same quality stocks as are available
elsewhere in the region, valuations are relatively high, and earnings growth
low. Foreign investors are still holding back, waiting for the enactment of
legal changes to improve the transparency of their markets. With many companies
technically bankrupt, Czech banks are burdened with nonperforming loans. In
anticipation of looming problems in the banking sector, we took some profits and
reduced our allocation from 10% to 8% in the second half.
Our investment approach is bottom-up. We search for companies that have
demonstated their ability to consistently generate strong free cash flow, and we
buy them when they are trading
<PAGE>
at substantial discounts to fair value. We like companies that are strong in
both domestic and export markets, that manufacture and sell commercially viable
products and services, and that have experienced, shareholder-oriented
managements. We have found companies meeting these standards primarily in
Hungarian pharmaceutical, construction and bank stocks, as well as in Polish
banks, consumer goods and construction-related issues. In Russia our holdings
are concentrated in energy, utility, telecommunications and oil stocks.
We are focusing increased attention on the markets of Russia, Croatia, Romania,
the Baltics and Ukraine; among the least expensive markets in the world, they
will, we believe, soon outpace the returns of emerging markets in other regions.
As investors become more and more knowledgeable about the region, we expect
liquidity conditions to improve dramatically. Too, as capital inflows increase,
these markets should experience less volatility going forward. Contrariwise, any
dramatic change in the direction of US interest rates might have an adverse
impact on these markets' liquidity, as demonstrated in July when Eastern
European markets sold off on fears of a Fed rate hike. Considering their
performance in the first half, this pause was not unhealthy and in any case was
temporary. The Russian market was notable for its resilience. After selling off
on worries about Yeltsin's health, it recovered by the end of September. As
Russia's economic health improves, and as the regulatory framework for capital
markets strengthens, the market is likely to show a further rise in 1997. For
now, given the lower level of liquidity of the Russian market compared to others
in the region, we are keeping most of our individual positions under 2%. At this
point, we foresee limiting our maximum exposure to this market to 30%. We
reiterate our caution to shareholders that this fund is suitable only for
investors who already have exposure to international equity markets, who are
familiar with the risk of investing in international securities, and,
importantly, who have a long-term horizon.
Despite the spectacular performance of some of these markets last year, the
outlook for Eastern Europe remains bright as earnings growth of 30-35% can be
purchased for an average P/E 97E of below 12X. Eastern European companies will
enjoy greater visibility in international equity portfolios now that Russia has
been added to IFC's Emerging Market Index, and Hungary and the Czech Republic
have joined Poland in Morgan Stanley's Emerging Market Index. The fact that
Russian debt has been rated by four major credit agencies should also help to
increase the comfort level of wary foreign investors. Lastly, monetary and
fiscal policy are restrictive, leading to declining rates of inflation in every
country. The economies of Eastern Europe are at the threshold of a long secular
upswing comparable only to that of Southeast Asia eight years ago.
Arpad Pongracz, CFA
President
January 31, 1997
2
<PAGE>
[GRAPH GOES HERE]
Eastern European Fund EEEI
02/15/96 $10,000.00 $10,000.00
12/31/96 $14,890.00 $12,394.00
3
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY DESCRIPTION VALUE
- ---------- -------------------------------------------------------------------------------- -----------
<S> <C> <C>
COMMON STOCK AND WARRANTS: 93.44%
CROATIA: 3.60%
42,000 Pliva D D GDR Reg S $ 2,226,000
-----------
CZECH REPUBLIC: 8.14%
50,000 Central European Media Class A* 1,587,500
50,000 Ckd Praha Holding AS* 751,921
44,355 Skoda Koncern* 1,573,798
9,000 Spt Telecom AS* 1,120,491
-----------
5,033,710
-----------
HUNGARY: 36.89%
12,100 Cofinec Sponsored GDR 359,975
73,000 Danubius Hotel & Spa* 1,918,677
38,682 Egis Gyogyzergyar 2,259,440
5,000 Gedeon Richter Ltd GDR Reg S 290,000
61,400 Graboplast Rt Regd 2,077,044
2,846 Inter Europa Bank 651,218
150,000 Mol Magyar Olay Es Gazipari Rt 1,873,840
78,500 Otp Bank GDR 1,393,375
7,000 Pannonplast Muanua Reg S 257,576
67,122 Pannonplast Muanyagipari 2,469,857
29,500 Primagaz Hungaria Co Ltd 1,366,450
43,500 Richter Gedeon Vegyeszeti Gyar Rt. 2,542,208
15,700 Scala Ece Ltd. Bearer* 2,182,276
200,000 Tiszai Vegyi Kombinat GDR 2,200,000
23,000 Zalakeramia AG 974,335
-----------
22,816,271
-----------
POLAND: 29.04%
42,000 Agros Holdings Series C* 1,105,880
13,000 Bank Przemyslowo Handlowy 838,739
1,230,000 Big Bank /Bank Inicjatyw G 1,715,840
56,000 Computerland Poland SA* 1,386,622
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY DESCRIPTION VALUE
- ---------- -------------------------------------------------------------------------------- -----------
<S> <C> <C>
110,000 Elektrim SA 997,419
115,716 Exbud SA* 1,069,427
153,570 Mostostal Zabrze-Holding SA 792,647
60,000 Polfa Kunto SA Series A* 1,778,615
225,000 Polifarb Ciesxyn Bearer 1,247,646
177,500 Polifarb Wroclaw Bearer 1,002,825
114,025 Rolimpex SA 886,782
47,000 Stalex Port A Shares* 460,591
18,000 Vilniaus Bankas AB GDR 747,000
300,000 Wielkopolski Bk Kredutwy* 2,029,713
26,000 Zaklady Metali Lekkich* 1,904,164
-----------
17,963,910
-----------
RUSSIA: 15.77%
12,000 AO Mosenergo Spon ADR Reg S 357,000
14,000,000 Credit Suisse Fin Russian Ctf 1,281,000
140,000 Norilsk Nickel Ord. Shs Warrant 11/14/97 721,000
1,500,000 CSFP Certs. Surgutneftegaz Series 3 622,500
210,000 CSFP Certs Rostelekom Series 3 504,000
37 Irkutsken Ergo RDC 1,054,500
23,000 Lukoil Oil Co Sponsored ADR 1,069,500
36,000 Mosenergo AO Spon ADR 1,089,000
29 Rostelecom RDC 696,000
77 Norilisk RDC-ADR shs. 404,250
15 Trading House Gum RDC 420,000
65,000 Vimpel Communications Spon ADR 1,535,625
-----------
9,754,375
-----------
TOTAL COMMON STOCKS AND WARRANTS:
(Cost: $49,991,135) 57,794,266
-----------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<S> <C> <C>
SHORT TERM INVESTMENTS: 4.20%
$2,600,000 Bank of Tokyo-Mitsubishi; 4.75%; 1/2/97 2,600,000
-----------
TOTAL SHORT TERM INVESTMENTS:
(Cost: $2,600,000) 2,600,000
-----------
TOTAL INVESTMENTS:
(Cost: $52,591,135)** 97.64% 60,394,266
Other assets, net 2.36% 1,458,378
-------- -----------
NET ASSETS 100.00% $61,852,644
-------- -----------
-------- -----------
</TABLE>
*Non-income producing
**Cost for Federal income tax purposes is $52,562,264 and consists of:
<TABLE>
<S> <C> <C>
Gross unrealized appreciation $ 9,422,900
Gross unrealized depreciation (1,590,890)
-----------
Net unrealized appreciation $ 7,832,010
-----------
-----------
</TABLE>
ADR -- Security represented is held by the custodian bank in the form of
American Depository Receipts.
GDR -- Security represented is held by the custodian bank in the form of Global
Depository Receipts.
RDC -- Security represented is held by the custodian bank in the form of Russian
Depository Certificates.
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
_______________________________________________________________
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (identified cost of $52,591,135)(Notes 1 & 3) $ 60,394,266
Cash (including foreign currencies) 560,594
Receivables
Capital stock sold 1,722,006
Interest 343 1,722,349
----------
Other assets 58,288
------------
TOTAL ASSETS 62,735,497
------------
LIABILITIES
Payables
Securities purchased 826,370
Capital stock redeemed 10,390
Investment management fees 46,093
----------
TOTAL LIABILITIES 882,853
------------
NET ASSETS $ 61,852,644
------------
------------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
($61,852,644 / 4,153,090 shares outstanding) $ 14.89
------------
------------
At December 31, 1996 there were 50,000,000 shares of $.01 par value
stock authorized and the components of net assets are:
Paid in capital $ 55,154,756
Net unrealized gain on investments and currency transactions 7,806,051
Accumulated loss on investments (1,108,163)
------------
Net Assets $ 61,852,644
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
STATEMENT OF OPERATIONS
February 15* to December 31, 1996
_______________________________________________
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest $ 343
Dividend (Net of foreign
tax withheld of $7,797) 90,079
Other 63,596
---------
Total income $ 154,018
Expenses:
Investment management fees (Note 2) 302,021
Organization 9,871
Custodian and accounting fees (Note 3) 76,287
Transfer agent fees (Note 2) 16,073
Recordkeeping and administrative services (Note 2) 49,388
Legal and audit fees 2,669
Filing fees and registration (Note 2) 6,330
Shareholder servicing and reports (Note 2) 24,618
Other 3,444
---------
Total expenses 490,701
Custodian fee waiver (76,287)
-----------
Expenses, net 414,414
-----------
Net investment loss (260,396)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized loss on investments (1,006,591)
Net realized loss on foreign currencies conversions (50,713)
Net increase in unrealized appreciation on investments and foreign
currencies 7,806,051
-----------
Net gain on investments 6,748,747
-----------
Net increase in net assets resulting from operations $ 6,488,351
-----------
-----------
</TABLE>
*Commencement of operations
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
February 15,* to December 31, 1996
______________________________________________
<TABLE>
<S> <C>
OPERATIONS
Net investment loss ($ 260,396)
Net realized (loss) on investments and foreign currencies (1,057,304)
Net unrealized appreciation of investments and currencies 7,806,051
-----------------
Net increase in net assets resulting from operations 6,488,351
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from capital share transactions** 55,364,293
-----------------
Net increase in net assets 61,852,644
Net assets at beginning of period 0
-----------------
NET ASSETS at the end of the period (Includes undistributed net investment income of $0) $61,852,644
-----------------
-----------------
</TABLE>
*Commencement of operations
**A summary of capital share transactions follows:
<TABLE>
<CAPTION>
FEBRUARY 15,* TO
DECEMBER 31, 1996
-------------------------------
SHARES VALUE
--------- -----------------
<S> <C> <C>
Shares sold 5,134,390 $69,104,233
Shares redeemed (981,300) (13,739,940)
--------- -----------------
Net increase 4,153,090 $55,364,293
--------- -----------------
--------- -----------------
</TABLE>
*Commencement of operations
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
__________________________________
<TABLE>
<CAPTION>
FEBRUARY 15,* TO
DECEMBER 31, 1996
-----------------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 10.00
-----------------
Income from investment operations-
Net investment loss (0.06)
Net realized and unrealized gain on investments 4.95
-----------------
Total from investment operations 4.89
-----------------
Net asset value, end of period $ 14.89
-----------------
-----------------
Total Return 48.90%
Ratios/Supplemental Data
Net assets, end of period (000's) $61,853
Ratio to average net assets-
Expenses (A) 2.02%**
Expenses-net (B) 1.71%**
Net investment loss (1.07)%**
Portfolio turnover rate 38.69%
Average commission rate paid per share $0.0737
</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.
*Commencement of operations
**Annualized
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996
_______________________________________________________________
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES -- The Vontobel Eastern European Equity
Fund (the "Fund") is a series of Vontobel Funds, Inc. ("VFI") which is
registered under The Investment Company Act of 1940, as amended, as a
diversified open-end management company. The Fund was established in February,
1996 as a series of VFI which has allocated to the Fund 50,000,000 of its
500,000,000 shares of $.01 par value common stock.
The objective of the Fund is to seek to achieve capital appreciation by
investing in a carefully selected and continuously managed diversified portfolio
consisting primarily of equity securities.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION. Investments traded on stock exchanges 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 Fund's 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. Temporary investments in
U.S. dollar denominated short-term investments are valued at amortized cost,
which approximates market. 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.
B. FEDERAL INCOME TAXES. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
C. SECURITY TRANSACTIONS AND DIVIDENDS. Security transactions are accounted for
on the trade date. The cost of securities sold is determined generally on a
first-in, first-out basis. Dividends are recorded on the ex-dividend date.
11
<PAGE>
D. 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 historical exchange rates. Income and expenses are translated
at approximate rates prevailing when accrued or incurred. Foreign securities and
currency transactions may involve certain considerations and risks not typically
associated with those of domestic origin.
E. DISTRIBUTION TO SHAREHOLDERS. Distribution from 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 generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions, net operating losses and post-October capital and
currency losses.
F. USE OF ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, 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.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS AND OTHER -- Pursuant
to an Investment Advisory Agreement, the Advisor, Vontobel USA, Inc. ("VUSA")
provides investment services 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.
VUSA will reimburse the Fund to the extent of its management fee to limit the
Fund's aggregate annual operating expenses (excluding taxes and brokerage
commissions), to the lowest applicable percentage limitation prescribed by any
state in which the Fund's shares are qualified for sale.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $80,336 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.20% of average daily net assets with a minimum fee of $42,500.
12
<PAGE>
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $16,073 for its services for the year ended December 31,
1996.
To discourage short term investing and recover certain administrative, transfer
agency, shareholder servicing and other costs associated with such short term
investing, the Fund charges a 2% fee on such redemption of shares held less than
six months. Such fees, net of cost recovery, are included in other income.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY -- Purchases and sales of securities other than
short-term notes aggregated $61,394,414 and $10,396,687, respectively. The
custodian has provided credits in the amount of $76,287 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund.
13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Vontobel Funds, Incorporated
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
Eastern European Equity Fund including the schedule of portfolio investments as
of December 31, 1996, and the related statements of operations and changes in
net assets, and the financial highlights for the period February 15, 1996
(commencement of operations) to December 31, 1996. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material 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, 1996, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides 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 Eastern European Equity Fund as of December 31, 1996, the results of
its operations, the changes in its net assets, and the financial highlights for
the period February 15, 1996 (commencement of operations) to December 31, 1996,
in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 17, 1997
14
<PAGE>
INVESTMENT ADVISOR:
Vontobel USA Inc.
450 Park Avenue
New York, New York 10022
DISTRIBUTOR:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
INDEPENDENT AUDITORS:
Tait, Weller and Baker
Two Penn Center, Suite 700
Philadelphia, Pennsylvania 19102-1707
TRANSFER AGENT:
For account information, wire purchase or redemptions, call or write to
Vontobel's Transfer Agent:
Fund Services, Inc.
Post Office Box 26305
Richmond, Virginia 23260
(800) 628-4077 Toll Free
MORE INFORMATION:
For 24 hour, 7 days a week price information, and for information on any
series of Vontobel Funds, Inc., investment plans, and other shareholder
services, call Commonwealth Shareholder Services at (800) 527-9500 Toll Free
NASDAQ SYMBOL: VEEEX
ANNUAL REPORT
TO SHAREHOLDERS
VONTOBEL INTERNATIONAL EQUITY FUND
A SERIES of
Vontobel Funds, Inc.
a "Series" Investment Company
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, the fund's closing Net Asset Value stood at $18.22 and net
assets totaled $151,728,309, v. $130,504,890 at the end of 1995. For the year,
the fund produced a total return of 17.0%, vs. the 6.0% return of the MSCI EAFE
Index. On December 10 the fund paid a per share distribution of $0.60 in income
and $1.19 in long-term capital gains to shareholders of record as of December 9.
Again last year, global markets turned in strong performances as economic growth
ranged from moderate to tepid, and inflation remained tame. With the exception
of the UK, central banks remained accommodative, which was the major support for
the markets' multiple expansion during the year. The fund's performance
benefited primarily from our shift in country allocation in the first quarter,
when we increased the weighting in Europe at the expense of Japan and the
emerging markets. Our top-down country allocation model had indicated a positive
expected return for Japan; however, our investment process gives as much weight
to bottom-up analysis as to top-down valuation factors. Despite the structured
approach we employ in generating quantitative calculations, we manage the
process, the process does not manage us. Since, at the beginning of the year, we
could not find a great number of attractively valued companies in Japan, we
turned instead to Europe, which offered cheap valuations from both a top-down
and bottom-up standpoint. The interdependence of our top-down and bottom-up
analysis, we believe, provides an added element of safety in our investment
process.
EUROPE: The key factors in our valuation process are the comparison of bond
market vs. equity market valuations, and the rate of change in the direction of
interest rates, both of which pointed to double-digit-return expectations for
European markets based on their historical behavior. At the end of 1996 our
overweighting in Europe was 59.1%, vs. 49.7% at the end of 1995. The combination
of falling yields, the rising US dollar and productivity improvement contributed
to the strong rise in European equities in 1996 as most bourses posted new
highs. Central bank easing, a softer German mark and strong revenues from
exports offset the drag on growth of fiscal consolidation. The economic
environment was weakened by further reductions in overcapacity, which translated
into job cuts. The lack of job creation remains a critical issue which has been
overshadowed by the focus on meeting the convergence criteria for monetary
union. With unemployment levels reaching historic highs, social security
deficits are becoming more and more difficult to finance, in particular for
France, Italy, Spain and to a lesser extent Germany. As a result, European
corporations may have to pick up part of the bill in the form of higher taxes
which, in turn, may translate into a liquidity trap.
<PAGE>
JAPAN: During our visit to Japan in December we saw signs not only that the
bubble economy was finally petering out but also signs of deflationary
tendencies that are likely to keep interest rates low. The domestic economy
remains very weak, as reflected in low levels of consumer spending, still
falling construction orders and almost nonexistent domestic capital expenditure
projects. The majority of companies we talked to are continuing to reduce the
level of domestic overcapacity and build new capacity overseas, which clearly
will remain a drag on the domestic economy.
The lack of progress in addressing the issues in the financial sector remains a
big risk for Japan. The amount of unrealized securities losses by Japanese banks
rose by about 36% in the last quarter and now represent about 22% of the banks
Tier 2 capital adequacy ratios. The banks may have to postpone their write-offs
of bed debt, further delaying the clean-up of their balance sheets in
preparation for the deregulation of financial markets (Big-Bang) in 2001. This
is yet another negative for the sector and the stock market as a whole, at lease
in the short term. Another source of negativism was the reporting season in
November, which raised questions about the sustainability of earnings growth.
Nonetheless, several stocks we own came through with surprisingly good sales and
profit growth, in particular, Fuji Photo Film, which has not only delivered
reliable profits but is using its excess cash to expand overseas distribution
for its products. The average price to earnings multiple of our Japanese
holdings is about 25X and the price sales ratio is 2.3, which represents not
only a large discount to the domestic equity markets but is comparable with
international markets. Another element of comfort is that the majority of
companies we visited are following a clear strategy of cost reduction and
re-engineering of their manufacturing process. At year end our weighting was
22.9%, vs. 29.7% at the end of 1995. After revisiting more than 28 companies, we
are open to committing another 2-3% to this market, at the right price.
EMERGING MARKETS: We were very cautious throughout 1996 but, after two years
of consolidation, we feel it's time to be more constructive on these markets.
The business cycle is improving, as well as profitability, and the supply/demand
side is not negative, as it was in 1995 when a flood of new issues was a drag on
local markets. Their absolute valuations relative to 12 and 24 months ago have
definitely improved. With the economic cycle turning increasingly positive, we
would not be surprised to see better profit growth. The main risk, of course, is
the direction of US interest rates, which remains a trigger for capital flows
into these markets; as you know, we do not take a prospective view on the
direction of interest rates.
CURRENCIES: To protect the value of the portfolio against the adverse effects
of an appreciating US dollar, we had hedge contracts covering approximately 65%
of the portfolio's exposure to the DM bloc, the French franc, the Swiss franc
and the Japanese yen. We had no hedges
2
<PAGE>
against our holdings in pound sterling, which turned out to be a good call since
the British pound was one of the few currencies to appreciate against the dollar
during the year.
OUTLOOK: Overall expected returns for international markets remain positive
from a top-down perspective. On the bottom-up side, we continue to find good
value throughout Europe but the relative attractiveness of the region has
diminished. At this point, having been largely underweight in Japan for a year,
we foresee increasing our investment there cautiously; this will depend on our
finding undervalued companies that do not depend solely on the domestic economy
but derive a large portion of sales revenues from abroad. We are also
intensifying our efforts on selective emerging markets.
Fabrizio Pierallini
President
January 31, 1997
3
<PAGE>
[GRAPH GOES HERE]
EUROPACIFIC FUND EAFE
07/06/90 $10,000.00 $10,000.00
12/31/90 $ 8,708.79 $ 8,564.00
12/31/91 $10,343.09 $ 9,401.00
12/31/92 $10,096.62 $ 8,096.00
12/31/93 $14,216.18 $10,570.00
12/31/94 $13,460.83 $11,395.53
12/31/95 $14,927.15 $12,672.97
12/31/96 $17,461.60 $13,438.45
4
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
COMMON STOCKS AND WARRANTS: 92.29%
BELGIUM: 0.76%
6,700 Barco NV NPV* $ 1,158,175
------------
FINLAND: 0.68%
20,000 Cultor Oy Ser '2' 1,031,070
------------
FRANCE: 8.44%
30,000 AXA S A 1,908,066
10,000 Bic 1,499,470
3,300 Carrefour 2,147,210
26,300 Compagnie De Suez 1,118,200
30,000 Dassault Systemes SA* 1,383,637
4,550 Grandoptical Photo Service 737,506
6,000 LVMH Moet Hennessy Louis 1,675,629
17,315 Total SA Cl B 1,408,293
15,135 Valeo 933,449
------------
12,811,460
------------
GERMANY: 7.23%
18,000 Adidas AG 1,555,758
500 Allianz AG Holdings Reg 909,800
50,000 Bayer AG 2,040,551
1,400 Bayer Motoren Werk 976,215
7,900 CKAG Colonia Konzern AG 652,002
8,500 Fresenius Med Care Spon ADR* 219,938
25,000 Fresenius Medical Care ADR* 703,125
16,500 GEHE AG 1,056,180
13,500 SGL Carbon AG 1,701,976
20,000 Veba AG 1,156,746
------------
10,972,291
------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
GREAT BRITAIN: 17.51%
1,198 BAA Ord 9,933
5,134 British Petroleum PLC Spons ADR 725,819
131,706 CRH ORD 1,367,291
253,412 Dixons Group PLC 2,357,272
51,004 Emi Group PLC 1,210,143
190,000 General Accident Ord 2,486,736
200,604 GKN ORD 3,439,984
78,833 HSBC Holdings ORD 1,762,387
250,000 Mirror Group PLC 920,791
50,000 Misys Plc 951,627
150,000 Powerscreen Intl 1,451,852
131,780 Provident Financial PLC 1,131,019
120,000 Rentokil Initial PLC 904,517
110,000 Reuters Holdings 1,418,019
130,000 Shell Transport & Trading Regd 2,253,754
135,990 Siebe 2,525,335
120,000 Smiths Industries Ord 1,648,687
------------
26,565,166
------------
IRELAND: 2.94%
200,933 Allied Irish Banks PLC 1,349,336
46,600 Elan Corp ADR* 1,549,450
238,899 Greencore Group 1,555,180
------------
4,453,966
------------
ITALY: 0.69%
250,000 Danieli & C Di Risp Savings 1,046,562
------------
NETHERLANDS: 6.37%
17,954 Aegon NV ADR 1,135,591
14,274 Aegon NV 909,130
100,000 Elsevier NV 1,689,180
20,000 Hagemeyer 1,597,779
18,086 Oce-Van Der Grinten NV 1,962,766
55,447 Vendex Int NV 2,370,367
------------
9,664,813
------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
NORWAY: 0.46%
35,000 Smedvig As Sponsored ADR B* 704,375
------------
SPAIN: 0.65%
5,000 BCO Popular ESP REG 982,822
------------
SWEDEN: 7.18%
77,000 Assa Abloy Series 'B' 1,400,166
55,000 Astra Ab Ser B Free 2,653,540
18,000 Autoliv Ab Free 789,243
40,000 Ericsson (LM) Tele Series B Free 1,237,683
9,000 Hennes & Mauritz 'B' Free 1,245,895
34,000 Kinnevik Investment Ser 'B' Free 937,354
24,000 Om Gruppen AB 721,493
4,200 Pharma Vision* 1,882,705
600 Roche Holding AG Wts 5/05/98* 19,499
------------
10,887,578
------------
SWITZERLAND: 6.16%
30,000 BZ Bank Vision 1/15/97 56,033
1,300 Nestle AG Reg 1,395,667
600 Roche Holdings Genusscheine DRC 4,668,659
200,000 Union Bank of Switzerland Wts 12/18/98* 1,285,021
2,214 Union Bank of Switzerland Bearer 1,940,248
------------
9,345,628
------------
AUSTRALIA: 0.97%
103,037 Broken Hill Proprietary Ltd 1,467,629
------------
HONG KONG: 3.14%
200,000 Cheung Kong Holdings 1,777,749
345,000 Dah Sing FCL Services 1,400,608
130,000 Sun Hung Kai Properties 1,592,540
------------
4,770,897
------------
JAPAN: 22.87%
500 Bank Of Tokyo-Mitsubishi 9,282
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
130,000 Bridgestone Corporation 2,469,562
65,000 Canon Inc 1,436,836
120,000 Eisai Co Ltd 2,362,490
114,000 Ezaki Glico Co 984,371
48,000 Fuji Photo Film Co. 1,583,283
35,000 Hitachi Maxell 773,681
24,000 Ito-Yokado 1,044,469
65,000 Jusco Co 2,205,768
110,000 Komatsu Ltd 902,340
17,000 Kyocera Corp. 1,059,839
175,000 Mitsubishi Electronics Corp 1,042,656
380,000 Mitsubishi Heavy Industries 3,018,738
200,000 Mitsui & Co 1,623,349
32,500 Murata Manufacturing Co. 1,080,433
90,000 Nikko Securities 671,445
520,000 Nippon Steel Corp 1,535,619
26 Ntt Data Corp 761,074
88,000 Omron Corp 1,656,506
28,000 Rohm Co 1,837,492
18,000 SMC 1,210,776
90,000 Taisho Pharmaceutical 2,121,578
60,000 Tokyo Broadcasting 917,019
120,000 Yamato Transport 1,243,415
220,000 Yasuda Fire & Marine Insurance 1,143,596
------------
34,695,617
------------
MALAYSIA: 2.87%
150,000 Malayan Banking BHD 1,663,037
228,000 Sime Darby Berhad 898,278
100,000 Telekom Malaysia 890,913
100,000 United Engineers 902,792
------------
4,355,020
------------
PHILIPPINES: 0.74%
136,500 Manila Electric 'B' 1,115,875
------------
SINGAPORE: 1.84%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
100,000 City Developments 900,450
100,000 Cycle & Carriage Ltd 1,222,040
85,000 Keppel Corp 662,117
------------
2,784,607
------------
THAILAND: 0.34%
54,000 Bangkok Bank PLC (Foreign) 522,187
------------
BRAZIL: 0.45%
1,250,000 Brahma PN 683,284
------------
TOTAL COMMON STOCKS AND WARRANTS: 140,019,022
(Cost: $109,640,553)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<S> <C>
SHORT TERM INVESTMENTS: 6.59%
$5,000,000 Bank of Tokyo-Mitsubishi; 4.75%; 01/02/97 5,000,000
5,000,000 Republic NY Gc Time Deposit; 4.75%; 01/02/97 5,000,000
------------
TOTAL SHORT TERM INVESTMENTS:
(Cost: $10,000,000) 10,000,000
------------
TOTAL INVESTMENTS:
(Cost: $119,640,553)** 98.88% 150,019,022
Other assets, net 1.12% 1,690,729
-------- ------------
NET ASSETS 100.00% $151,709,751
-------- ------------
-------- ------------
</TABLE>
*Non-income producing
**Cost for Federal income tax purposes is $119,640,553 and consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 33,448,491
Gross unrealized depreciation (3,056,010)
------------
Net unrealized appreciation $ 30,392,481
------------
------------
</TABLE>
ADR -- Security represented is held by the custodian bank in the form of
American Depository Receipts.
9
<PAGE>
FORWARD CURRENCY CONTRACTS OUTSTANDING
December 31, 1996
<TABLE>
<CAPTION>
FACE VALUE CONTRACT DELIVERY APPRECIATION/
(U.S. DOLLAR) PRICE DATE (DEPRECIATION)
------------- -------- -------- --------------
<S> <C>
Swiss Franc (Sell) 7,587,253 1.3180 03/12/97 $ 61,156
Deutsche Mark (Sell) 16,175,995 1.5455 03/12/97 (147,920)
French Franc (Sell) 5,352,910 5.2308 03/12/97 (66,683)
Japanese Yen (Sell) 23,235,031 111.9000 03/12/97 558,998
--------------
$ 405,551
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
_______________________________________________________________
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost of $119,640,553)
(Notes 1 & 3) $ 150,019,022
Cash 89,125
Receivables
Capital stock sold 30,638
Dividends and interest 259,437
Receivable for forward currency contracts 52,351,189
Investments sold 1,066,884 53,708,148
----------
Other assets 27,887
-----------------
TOTAL ASSETS 203,844,182
-----------------
LIABILITIES
Payables 51,945,638
Forward currency contracts payable at market
value-proceeds $52,351,189
Investment management fees 115,166
Capital stock redeemed 24,903 52,085,707
----------
Accrued expenses 48,724
-----------------
TOTAL LIABILITIES 52,134,431
-----------------
NET ASSETS $ 151,709,751
-----------------
-----------------
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER SHARE
($151,709,751 / 8,326,006 shares outstanding) $ 18.22
-----------------
-----------------
At December 31, 1996 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $ 116,310,818
Net unrealized gain on investments and currency transactions 30,795,911
Undistributed net realized gains on investments and foreign currencies
4,603,022
-----------------
Net Assets $ 151,709,751
-----------------
-----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1996
____________________________________________________
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Interest $ 5,118
Dividend (Net of foreign
tax withheld of $286,821) 2,142,026
----------
Total income $ 2,147,144
-----------
Expenses:
Investment management fees (Note 2) 1,280,135
Custodian and accounting fees (Note 3) 291,295
Transfer agent fees (Note 2) 68,948
Recordkeeping and administrative services (Note 2) 277,840
Legal and audit fees 62,684
Filing fees and registration (Note 2) 27,704
Shareholder servicing and reports (Note 2) 44,299
Other 178,782
----------
Total expenses 2,231,687
Custodian fee waiver (291,295)
-----------
Expenses, net 1,940,392
-----------
Net investment income 206,752
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 12,528,935
Net realized gain on foreign currency conversions and forward
currency contracts 5,833,337
Net increase in unrealized appreciation on investments and foreign
currencies 3,375,302
-----------
Net gain on investments 21,737,574
-----------
Net increase in net assets resulting from operations $21,944,326
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Years ended December 31
_________________________________________________________
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C>
OPERATIONS
Net investment income $ 206,752 $ 612,578
Net realized gain on investments and foreign currencies 18,362,272 6,186,774
Net realized loss on futures 0 (356,414)
Net unrealized appreciation of investments and currencies 3,375,302 4,814,821
Net appreciation of futures contracts 0 169,100
------------ ------------
Net increase in net assets resulting from operations 21,944,326 11,426,859
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ($.03 and $.17 per share, respectively) (206,752) (1,228,470)
Net realized gain from investment transactions ($1.76 and $.70 per
share, respectively) (13,391,354) (5,058,407)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from capital share transactions* 12,858,641 (12,808,764)
------------ ------------
Net increase in net assets 21,204,861 (7,668,782)
Net assets at beginning of period 130,504,890 138,173,672
------------ ------------
NET ASSETS at the end of the period (Includes undistributed net
investment income of $0 and $0 respectively.) $151,709,751 $130,504,890
------------ ------------
------------ ------------
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ -------------------------
SHARES VALUE SHARES VALUE
---------- ----------- ---------- ------------
<S> <C>
Shares sold 2,028,975 $36,708,062 3,178,461 $ 51,928,675
Shares reinvested from distributions 699,320 12,545,808 268,820 4,615,632
Shares redeemed (2,020,237) (36,395,229) (4,342,318) (69,353,071)
---------- ----------- ---------- ------------
Net increase (decrease) 708,058 $12,858,641 (895,037) ($12,808,764)
---------- ----------- ---------- ------------
---------- ----------- ---------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
______________________________________________
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $17.13 $16.23 $17.22 $12.23 $12.67
------ ------ ------ ------ ------
Income from investment operations-
Net investment income 0.03 0.16 0.01 0.08 0.08
Net realized and unrealized gain (loss) on
investments 2.85 1.61 (0.92) 4.91 (0.38)
------ ------ ------ ------ ------
Total from investment operations 2.88 1.77 (0.91) 4.99 (0.30)
------ ------ ------ ------ ------
Less distributions-
Distributions from net investment income (0.03) (0.17) (0.08) 0 (0.08)
Distributions from realized gains (1.76) (0.70) 0 0 0
Distributions in excess of realized gains 0 0 0 0 (0.06)
------ ------ ------ ------ ------
Total distributions (1.79) (0.87) (0.08) -- (0.14)
------ ------ ------ ------ ------
Net asset value, end of period $18.22 $17.13 $16.23 $17.22 $12.23
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return 16.98% 10.91% (5.28%) 40.80% (2.37%)
Ratios/Supplemental Data
Net assets, end of period (000's) $151,710 $130,505 $138,174 $136,932 $47,761
Ratio to average net assets-
Expenses (A) 1.60% 1.63% 1.54% 1.77% 1.98%
Expenses-net (B) 1.39% 1.53% 1.54% 1.77% 1.98%
Net investment income 0.15% 0.41% 0.08% 0.85% 0.79%
Portfolio turnover rate 54.58% 68.43% 34.04% 10.66% 27.42%
Average commission rate paid per share $0.0279 -- -- -- --
</TABLE>
(A) Expense ratio has been increased to include additional custodian fees in
1996 and 1995 which were offset by custodian fee credits. Prior to 1995,
custodian fee credits reduced expense ratios.
(B) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996
_______________________________________________________________
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES -- The Vontobel International Equity Fund
(the "Fund") is a series of Vontobel Funds, Inc. ("VFI") which is registered
under The Investment Company Act of 1940, as amended, as a diversified open-end
management company. The Fund was established in December, 1984 as a series of
VFI which has allocated to the Fund 50,000,000 of its 500,000,000 shares of $.01
par value common stock.
The investment objective of the Fund is to achieve capital appreciation by
investing in a continuously managed diversified portfolio of equity securities.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION. Investments traded on stock exchanges 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 Fund's 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. Temporary investments in
U.S. dollar denominated short-term investments are valued at amortized cost,
which approximates market. 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.
B. FEDERAL INCOME TAXES. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
C. SECURITY TRANSACTIONS AND DIVIDENDS. Security transactions are accounted for
on the trade date. The cost of securities sold is determined generally on a
first-in, first-out basis. Dividends are recorded on the ex-dividend date.
D. 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 historical exchange rates. Income and expenses are
15
<PAGE>
translated at approximate rates prevailing when accrued or incurred. Foreign
securities and currency transactions may involve certain considerations and
risks not typically associated with those of domestic origin.
E. FORWARD CURRENCY CONTRACTS. Forward sales of currencies are undertaken to
hedge certain assets denominated in currencies that Vontobel USA, Inc.("VUSA"),
the Fund's 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 Fund records 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 Fund
could be at risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably.
F. FUTURES CONTRACTS. Initial margin deposits required upon entering into
futures contracts are satisfied by the segregation of specific securities or
cash, as collateral, for the account of the broker (the Fund's agent in
acquiring the futures position). During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received depending upon whether unrealized gains or losses are incurred.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. Risks include the possibility of an
illiquid market and that a change in the value of the contract may not correlate
with changes in the securities being hedged.
G. DISTRIBUTION TO SHAREHOLDERS. Distribution from 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 generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions and futures, equalization and post-October capital
and currency losses.
H. In preparing financial statements in conformity with generally accepted
accounting principles, 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.
16
<PAGE>
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS -- Pursuant to an
Investment Advisory Agreement, the Advisor, Vontobel USA, Inc. ("VUSA") provides
investment services for an annual fee of 1.0% on the first $100 million of
average daily net assets and .75% on average daily net assets over $100 million.
VUSA will reimburse the Fund to the extent of its management fee to limit the
Fund's aggregate annual operating expenses (excluding taxes and brokerage
commissions), to the lowest applicable percentage limitation prescribed by any
state in which the Fund's shares are qualified for sale. For the year ended
December 31, 1996, no reimbursement was necessary.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $297,410 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.20% of average daily net assets with a minimum fee of $42,500.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $68,948 for its services for the year ended December 31,
1996.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY -- Purchases and sales of securities other than
short-term notes aggregated $72,331,271 and $77,630,591 respectively. The
Custodian has provided credits in the amount of $291,295 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund.
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Vontobel Funds, Incorporated
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
International Equity Fund including the schedule of portfolio investments as of
December 31, 1996, and the related statement 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 five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material 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, 1996, 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 International Equity Fund as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 17, 1997
18
<PAGE>
INVESTMENT ADVISOR:
Vontobel USA Inc.
450 Park Avenue
New York, New York 10022
DISTRIBUTOR:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
INDEPENDENT AUDITORS:
Tait, Weller and Baker
Two Penn Center, Suite 700
Philadelphia, Pennsylvania 19102-1707
TRANSFER AGENT:
For account information, wire purchase or redemptions, call or write to
Vontobel's Transfer Agent:
Fund Services, Inc.
Post Office Box 26305
Richmond, Virginia 23260
(800) 628-4077 Toll Free
MORE INFORMATION:
For 24 hour, 7 days a week price information, and for information on any series
of Vontobel Funds, Inc., investment plans, and other shareholder services, call
Commonwealth Shareholder Services at (800) 527-9500 Toll Free
NASDAQ SYMBOL: VNEPX
ANNUAL REPORT
TO SHAREHOLDERS
VONTOBEL INTERNATIONAL EQUITY FUND
A SERIES of
Vontobel Funds, Inc.
a "Series" Investment Company
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
VONTOBEL INTERNATIONAL EQUITY FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, the fund's closing Net Asset Value stood at $18.22 and net
assets totaled $151,728,309, v. $130,504,890 at the end of 1995. For the year,
the fund produced a total return of 17.0%, vs. the 6.0% return of the MSCI EAFE
Index. On December 10 the fund paid a per share distribution of $0.60 in income
and $1.19 in long-term capital gains to shareholders of record as of December 9.
Again last year, global markets turned in strong performances as economic growth
ranged from moderate to tepid, and inflation remained tame. With the exception
of the UK, central banks remained accommodative, which was the major support for
the markets' multiple expansion during the year. The fund's performance
benefited primarily from our shift in country allocation in the first quarter,
when we increased the weighting in Europe at the expense of Japan and the
emerging markets. Our top-down country allocation model had indicated a positive
expected return for Japan; however, our investment process gives as much weight
to bottom-up analysis as to top-down valuation factors. Despite the structured
approach we employ in generating quantitative calculations, we manage the
process, the process does not manage us. Since, at the beginning of the year, we
could not find a great number of attractively valued companies in Japan, we
turned instead to Europe, which offered cheap valuations from both a top-down
and bottom-up standpoint. The interdependence of our top-down and bottom-up
analysis, we believe, provides an added element of safety in our investment
process.
EUROPE: The key factors in our valuation process are the comparison of bond
market vs. equity market valuations, and the rate of change in the direction of
interest rates, both of which pointed to double-digit-return expectations for
European markets based on their historical behavior. At the end of 1996 our
overweighting in Europe was 59.1%, vs. 49.7% at the end of 1995. The combination
of falling yields, the rising US dollar and productivity improvement contributed
to the strong rise in European equities in 1996 as most bourses posted new
highs. Central bank easing, a softer German mark and strong revenues from
exports offset the drag on growth of fiscal consolidation. The economic
environment was weakened by further reductions in overcapacity, which translated
into job cuts. The lack of job creation remains a critical issue which has been
overshadowed by the focus on meeting the convergence criteria for monetary
union. With unemployment levels reaching historic highs, social security
deficits are becoming more and more difficult to finance, in particular for
France, Italy, Spain and to a lesser extent Germany. As a result, European
corporations may have to pick up part of the bill in the form of higher taxes
which, in turn, may translate into a liquidity trap.
<PAGE>
JAPAN: During our visit to Japan in December we saw signs not only that the
bubble economy was finally petering out but also signs of deflationary
tendencies that are likely to keep interest rates low. The domestic economy
remains very weak, as reflected in low levels of consumer spending, still
falling construction orders and almost nonexistent domestic capital expenditure
projects. The majority of companies we talked to are continuing to reduce the
level of domestic overcapacity and build new capacity overseas, which clearly
will remain a drag on the domestic economy.
The lack of progress in addressing the issues in the financial sector remains a
big risk for Japan. The amount of unrealized securities losses by Japanese banks
rose by about 36% in the last quarter and now represent about 22% of the banks
Tier 2 capital adequacy ratios. The banks may have to postpone their write-offs
of bed debt, further delaying the clean-up of their balance sheets in
preparation for the deregulation of financial markets (Big-Bang) in 2001. This
is yet another negative for the sector and the stock market as a whole, at lease
in the short term. Another source of negativism was the reporting season in
November, which raised questions about the sustainability of earnings growth.
Nonetheless, several stocks we own came through with surprisingly good sales and
profit growth, in particular, Fuji Photo Film, which has not only delivered
reliable profits but is using its excess cash to expand overseas distribution
for its products. The average price to earnings multiple of our Japanese
holdings is about 25X and the price sales ratio is 2.3, which represents not
only a large discount to the domestic equity markets but is comparable with
international markets. Another element of comfort is that the majority of
companies we visited are following a clear strategy of cost reduction and
re-engineering of their manufacturing process. At year end our weighting was
22.9%, vs. 29.7% at the end of 1995. After revisiting more than 28 companies, we
are open to committing another 2-3% to this market, at the right price.
EMERGING MARKETS: We were very cautious throughout 1996 but, after two years
of consolidation, we feel it's time to be more constructive on these markets.
The business cycle is improving, as well as profitability, and the supply/demand
side is not negative, as it was in 1995 when a flood of new issues was a drag on
local markets. Their absolute valuations relative to 12 and 24 months ago have
definitely improved. With the economic cycle turning increasingly positive, we
would not be surprised to see better profit growth. The main risk, of course, is
the direction of US interest rates, which remains a trigger for capital flows
into these markets; as you know, we do not take a prospective view on the
direction of interest rates.
CURRENCIES: To protect the value of the portfolio against the adverse effects
of an appreciating US dollar, we had hedge contracts covering approximately 65%
of the portfolio's exposure to the DM bloc, the French franc, the Swiss franc
and the Japanese yen. We had no hedges
2
<PAGE>
against our holdings in pound sterling, which turned out to be a good call since
the British pound was one of the few currencies to appreciate against the dollar
during the year.
OUTLOOK: Overall expected returns for international markets remain positive
from a top-down perspective. On the bottom-up side, we continue to find good
value throughout Europe but the relative attractiveness of the region has
diminished. At this point, having been largely underweight in Japan for a year,
we foresee increasing our investment there cautiously; this will depend on our
finding undervalued companies that do not depend solely on the domestic economy
but derive a large portion of sales revenues from abroad. We are also
intensifying our efforts on selective emerging markets.
Fabrizio Pierallini
President
January 31, 1997
3
<PAGE>
[GRAPH GOES HERE]
EUROPACIFIC FUND EAFE
07/06/90 $10,000.00 $10,000.00
12/31/90 $ 8,708.79 $ 8,564.00
12/31/91 $10,343.09 $ 9,401.00
12/31/92 $10,096.62 $ 8,096.00
12/31/93 $14,216.18 $10,570.00
12/31/94 $13,460.83 $11,395.53
12/31/95 $14,927.15 $12,672.97
12/31/96 $17,461.60 $13,438.45
4
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
COMMON STOCKS AND WARRANTS: 92.29%
BELGIUM: 0.76%
6,700 Barco NV NPV* $ 1,158,175
------------
FINLAND: 0.68%
20,000 Cultor Oy Ser '2' 1,031,070
------------
FRANCE: 8.44%
30,000 AXA S A 1,908,066
10,000 Bic 1,499,470
3,300 Carrefour 2,147,210
26,300 Compagnie De Suez 1,118,200
30,000 Dassault Systemes SA* 1,383,637
4,550 Grandoptical Photo Service 737,506
6,000 LVMH Moet Hennessy Louis 1,675,629
17,315 Total SA Cl B 1,408,293
15,135 Valeo 933,449
------------
12,811,460
------------
GERMANY: 7.23%
18,000 Adidas AG 1,555,758
500 Allianz AG Holdings Reg 909,800
50,000 Bayer AG 2,040,551
1,400 Bayer Motoren Werk 976,215
7,900 CKAG Colonia Konzern AG 652,002
8,500 Fresenius Med Care Spon ADR* 219,938
25,000 Fresenius Medical Care ADR* 703,125
16,500 GEHE AG 1,056,180
13,500 SGL Carbon AG 1,701,976
20,000 Veba AG 1,156,746
------------
10,972,291
------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
GREAT BRITAIN: 17.51%
1,198 BAA Ord 9,933
5,134 British Petroleum PLC Spons ADR 725,819
131,706 CRH ORD 1,367,291
253,412 Dixons Group PLC 2,357,272
51,004 Emi Group PLC 1,210,143
190,000 General Accident Ord 2,486,736
200,604 GKN ORD 3,439,984
78,833 HSBC Holdings ORD 1,762,387
250,000 Mirror Group PLC 920,791
50,000 Misys Plc 951,627
150,000 Powerscreen Intl 1,451,852
131,780 Provident Financial PLC 1,131,019
120,000 Rentokil Initial PLC 904,517
110,000 Reuters Holdings 1,418,019
130,000 Shell Transport & Trading Regd 2,253,754
135,990 Siebe 2,525,335
120,000 Smiths Industries Ord 1,648,687
------------
26,565,166
------------
IRELAND: 2.94%
200,933 Allied Irish Banks PLC 1,349,336
46,600 Elan Corp ADR* 1,549,450
238,899 Greencore Group 1,555,180
------------
4,453,966
------------
ITALY: 0.69%
250,000 Danieli & C Di Risp Savings 1,046,562
------------
NETHERLANDS: 6.37%
17,954 Aegon NV ADR 1,135,591
14,274 Aegon NV 909,130
100,000 Elsevier NV 1,689,180
20,000 Hagemeyer 1,597,779
18,086 Oce-Van Der Grinten NV 1,962,766
55,447 Vendex Int NV 2,370,367
------------
9,664,813
------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
NORWAY: 0.46%
35,000 Smedvig As Sponsored ADR B* 704,375
------------
SPAIN: 0.65%
5,000 BCO Popular ESP REG 982,822
------------
SWEDEN: 7.18%
77,000 Assa Abloy Series 'B' 1,400,166
55,000 Astra Ab Ser B Free 2,653,540
18,000 Autoliv Ab Free 789,243
40,000 Ericsson (LM) Tele Series B Free 1,237,683
9,000 Hennes & Mauritz 'B' Free 1,245,895
34,000 Kinnevik Investment Ser 'B' Free 937,354
24,000 Om Gruppen AB 721,493
4,200 Pharma Vision* 1,882,705
600 Roche Holding AG Wts 5/05/98* 19,499
------------
10,887,578
------------
SWITZERLAND: 6.16%
30,000 BZ Bank Vision 1/15/97 56,033
1,300 Nestle AG Reg 1,395,667
600 Roche Holdings Genusscheine DRC 4,668,659
200,000 Union Bank of Switzerland Wts 12/18/98* 1,285,021
2,214 Union Bank of Switzerland Bearer 1,940,248
------------
9,345,628
------------
AUSTRALIA: 0.97%
103,037 Broken Hill Proprietary Ltd 1,467,629
------------
HONG KONG: 3.14%
200,000 Cheung Kong Holdings 1,777,749
345,000 Dah Sing FCL Services 1,400,608
130,000 Sun Hung Kai Properties 1,592,540
------------
4,770,897
------------
JAPAN: 22.87%
500 Bank Of Tokyo-Mitsubishi 9,282
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
130,000 Bridgestone Corporation 2,469,562
65,000 Canon Inc 1,436,836
120,000 Eisai Co Ltd 2,362,490
114,000 Ezaki Glico Co 984,371
48,000 Fuji Photo Film Co. 1,583,283
35,000 Hitachi Maxell 773,681
24,000 Ito-Yokado 1,044,469
65,000 Jusco Co 2,205,768
110,000 Komatsu Ltd 902,340
17,000 Kyocera Corp. 1,059,839
175,000 Mitsubishi Electronics Corp 1,042,656
380,000 Mitsubishi Heavy Industries 3,018,738
200,000 Mitsui & Co 1,623,349
32,500 Murata Manufacturing Co. 1,080,433
90,000 Nikko Securities 671,445
520,000 Nippon Steel Corp 1,535,619
26 Ntt Data Corp 761,074
88,000 Omron Corp 1,656,506
28,000 Rohm Co 1,837,492
18,000 SMC 1,210,776
90,000 Taisho Pharmaceutical 2,121,578
60,000 Tokyo Broadcasting 917,019
120,000 Yamato Transport 1,243,415
220,000 Yasuda Fire & Marine Insurance 1,143,596
------------
34,695,617
------------
MALAYSIA: 2.87%
150,000 Malayan Banking BHD 1,663,037
228,000 Sime Darby Berhad 898,278
100,000 Telekom Malaysia 890,913
100,000 United Engineers 902,792
------------
4,355,020
------------
PHILIPPINES: 0.74%
136,500 Manila Electric 'B' 1,115,875
------------
SINGAPORE: 1.84%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
100,000 City Developments 900,450
100,000 Cycle & Carriage Ltd 1,222,040
85,000 Keppel Corp 662,117
------------
2,784,607
------------
THAILAND: 0.34%
54,000 Bangkok Bank PLC (Foreign) 522,187
------------
BRAZIL: 0.45%
1,250,000 Brahma PN 683,284
------------
TOTAL COMMON STOCKS AND WARRANTS: 140,019,022
(Cost: $109,640,553)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<S> <C>
SHORT TERM INVESTMENTS: 6.59%
$5,000,000 Bank of Tokyo-Mitsubishi; 4.75%; 01/02/97 5,000,000
5,000,000 Republic NY Gc Time Deposit; 4.75%; 01/02/97 5,000,000
------------
TOTAL SHORT TERM INVESTMENTS:
(Cost: $10,000,000) 10,000,000
------------
TOTAL INVESTMENTS:
(Cost: $119,640,553)** 98.88% 150,019,022
Other assets, net 1.12% 1,690,729
-------- ------------
NET ASSETS 100.00% $151,709,751
-------- ------------
-------- ------------
</TABLE>
*Non-income producing
**Cost for Federal income tax purposes is $119,640,553 and consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 33,448,491
Gross unrealized depreciation (3,056,010)
------------
Net unrealized appreciation $ 30,392,481
------------
------------
</TABLE>
ADR -- Security represented is held by the custodian bank in the form of
American Depository Receipts.
9
<PAGE>
FORWARD CURRENCY CONTRACTS OUTSTANDING
December 31, 1996
<TABLE>
<CAPTION>
FACE VALUE CONTRACT DELIVERY APPRECIATION/
(U.S. DOLLAR) PRICE DATE (DEPRECIATION)
------------- -------- -------- --------------
<S> <C>
Swiss Franc (Sell) 7,587,253 1.3180 03/12/97 $ 61,156
Deutsche Mark (Sell) 16,175,995 1.5455 03/12/97 (147,920)
French Franc (Sell) 5,352,910 5.2308 03/12/97 (66,683)
Japanese Yen (Sell) 23,235,031 111.9000 03/12/97 558,998
--------------
$ 405,551
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
_______________________________________________________________
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost of $119,640,553)
(Notes 1 & 3) $ 150,019,022
Cash 89,125
Receivables
Capital stock sold 30,638
Dividends and interest 259,437
Receivable for forward currency contracts 52,351,189
Investments sold 1,066,884 53,708,148
----------
Other assets 27,887
-----------------
TOTAL ASSETS 203,844,182
-----------------
LIABILITIES
Payables 51,945,638
Forward currency contracts payable at market
value-proceeds $52,351,189
Investment management fees 115,166
Capital stock redeemed 24,903 52,085,707
----------
Accrued expenses 48,724
-----------------
TOTAL LIABILITIES 52,134,431
-----------------
NET ASSETS $ 151,709,751
-----------------
-----------------
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER SHARE
($151,709,751 / 8,326,006 shares outstanding) $ 18.22
-----------------
-----------------
At December 31, 1996 there were 50,000,000 shares of $.01 par value stock
authorized and the components of net assets are:
Paid in capital $ 116,310,818
Net unrealized gain on investments and currency transactions 30,795,911
Undistributed net realized gains on investments and foreign currencies
4,603,022
-----------------
Net Assets $ 151,709,751
-----------------
-----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1996
____________________________________________________
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Interest $ 5,118
Dividend (Net of foreign
tax withheld of $286,821) 2,142,026
----------
Total income $ 2,147,144
-----------
Expenses:
Investment management fees (Note 2) 1,280,135
Custodian and accounting fees (Note 3) 291,295
Transfer agent fees (Note 2) 68,948
Recordkeeping and administrative services (Note 2) 277,840
Legal and audit fees 62,684
Filing fees and registration (Note 2) 27,704
Shareholder servicing and reports (Note 2) 44,299
Other 178,782
----------
Total expenses 2,231,687
Custodian fee waiver (291,295)
-----------
Expenses, net 1,940,392
-----------
Net investment income 206,752
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on investments 12,528,935
Net realized gain on foreign currency conversions and forward
currency contracts 5,833,337
Net increase in unrealized appreciation on investments and foreign
currencies 3,375,302
-----------
Net gain on investments 21,737,574
-----------
Net increase in net assets resulting from operations $21,944,326
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Years ended December 31
_________________________________________________________
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C>
OPERATIONS
Net investment income $ 206,752 $ 612,578
Net realized gain on investments and foreign currencies 18,362,272 6,186,774
Net realized loss on futures 0 (356,414)
Net unrealized appreciation of investments and currencies 3,375,302 4,814,821
Net appreciation of futures contracts 0 169,100
------------ ------------
Net increase in net assets resulting from operations 21,944,326 11,426,859
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ($.03 and $.17 per share, respectively) (206,752) (1,228,470)
Net realized gain from investment transactions ($1.76 and $.70 per
share, respectively) (13,391,354) (5,058,407)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from capital share transactions* 12,858,641 (12,808,764)
------------ ------------
Net increase in net assets 21,204,861 (7,668,782)
Net assets at beginning of period 130,504,890 138,173,672
------------ ------------
NET ASSETS at the end of the period (Includes undistributed net
investment income of $0 and $0 respectively.) $151,709,751 $130,504,890
------------ ------------
------------ ------------
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ -------------------------
SHARES VALUE SHARES VALUE
---------- ----------- ---------- ------------
<S> <C>
Shares sold 2,028,975 $36,708,062 3,178,461 $ 51,928,675
Shares reinvested from distributions 699,320 12,545,808 268,820 4,615,632
Shares redeemed (2,020,237) (36,395,229) (4,342,318) (69,353,071)
---------- ----------- ---------- ------------
Net increase (decrease) 708,058 $12,858,641 (895,037) ($12,808,764)
---------- ----------- ---------- ------------
---------- ----------- ---------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
______________________________________________
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $17.13 $16.23 $17.22 $12.23 $12.67
------ ------ ------ ------ ------
Income from investment operations-
Net investment income 0.03 0.16 0.01 0.08 0.08
Net realized and unrealized gain (loss) on
investments 2.85 1.61 (0.92) 4.91 (0.38)
------ ------ ------ ------ ------
Total from investment operations 2.88 1.77 (0.91) 4.99 (0.30)
------ ------ ------ ------ ------
Less distributions-
Distributions from net investment income (0.03) (0.17) (0.08) 0 (0.08)
Distributions from realized gains (1.76) (0.70) 0 0 0
Distributions in excess of realized gains 0 0 0 0 (0.06)
------ ------ ------ ------ ------
Total distributions (1.79) (0.87) (0.08) -- (0.14)
------ ------ ------ ------ ------
Net asset value, end of period $18.22 $17.13 $16.23 $17.22 $12.23
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return 16.98% 10.91% (5.28%) 40.80% (2.37%)
Ratios/Supplemental Data
Net assets, end of period (000's) $151,710 $130,505 $138,174 $136,932 $47,761
Ratio to average net assets-
Expenses (A) 1.60% 1.63% 1.54% 1.77% 1.98%
Expenses-net (B) 1.39% 1.53% 1.54% 1.77% 1.98%
Net investment income 0.15% 0.41% 0.08% 0.85% 0.79%
Portfolio turnover rate 54.58% 68.43% 34.04% 10.66% 27.42%
Average commission rate paid per share $0.0279 -- -- -- --
</TABLE>
(A) Expense ratio has been increased to include additional custodian fees in
1996 and 1995 which were offset by custodian fee credits. Prior to 1995,
custodian fee credits reduced expense ratios.
(B) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996
_______________________________________________________________
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES -- The Vontobel International Equity Fund
(the "Fund") is a series of Vontobel Funds, Inc. ("VFI") which is registered
under The Investment Company Act of 1940, as amended, as a diversified open-end
management company. The Fund was established in December, 1984 as a series of
VFI which has allocated to the Fund 50,000,000 of its 500,000,000 shares of $.01
par value common stock.
The investment objective of the Fund is to achieve capital appreciation by
investing in a continuously managed diversified portfolio of equity securities.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION. Investments traded on stock exchanges 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 Fund's 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. Temporary investments in
U.S. dollar denominated short-term investments are valued at amortized cost,
which approximates market. 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.
B. FEDERAL INCOME TAXES. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
C. SECURITY TRANSACTIONS AND DIVIDENDS. Security transactions are accounted for
on the trade date. The cost of securities sold is determined generally on a
first-in, first-out basis. Dividends are recorded on the ex-dividend date.
D. 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 historical exchange rates. Income and expenses are
15
<PAGE>
translated at approximate rates prevailing when accrued or incurred. Foreign
securities and currency transactions may involve certain considerations and
risks not typically associated with those of domestic origin.
E. FORWARD CURRENCY CONTRACTS. Forward sales of currencies are undertaken to
hedge certain assets denominated in currencies that Vontobel USA, Inc.("VUSA"),
the Fund's 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 Fund records 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 Fund
could be at risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably.
F. FUTURES CONTRACTS. Initial margin deposits required upon entering into
futures contracts are satisfied by the segregation of specific securities or
cash, as collateral, for the account of the broker (the Fund's agent in
acquiring the futures position). During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received depending upon whether unrealized gains or losses are incurred.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. Risks include the possibility of an
illiquid market and that a change in the value of the contract may not correlate
with changes in the securities being hedged.
G. DISTRIBUTION TO SHAREHOLDERS. Distribution from 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 generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions and futures, equalization and post-October capital
and currency losses.
H. In preparing financial statements in conformity with generally accepted
accounting principles, 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.
16
<PAGE>
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS -- Pursuant to an
Investment Advisory Agreement, the Advisor, Vontobel USA, Inc. ("VUSA") provides
investment services for an annual fee of 1.0% on the first $100 million of
average daily net assets and .75% on average daily net assets over $100 million.
VUSA will reimburse the Fund to the extent of its management fee to limit the
Fund's aggregate annual operating expenses (excluding taxes and brokerage
commissions), to the lowest applicable percentage limitation prescribed by any
state in which the Fund's shares are qualified for sale. For the year ended
December 31, 1996, no reimbursement was necessary.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $297,410 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky and certain shareholder
servicing on an hourly rate basis. For other administrative services, CSS
receives 0.20% of average daily net assets with a minimum fee of $42,500.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $68,948 for its services for the year ended December 31,
1996.
Certain officers and/or directors of the Fund are also officers and/or directors
of VUSA, CSS, and FSI.
NOTE 3-INVESTMENTS/CUSTODY -- Purchases and sales of securities other than
short-term notes aggregated $72,331,271 and $77,630,591 respectively. The
Custodian has provided credits in the amount of $291,295 against custodian and
accounting charges based on credits on uninvested cash balances of the Fund.
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Vontobel Funds, Incorporated
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
International Equity Fund including the schedule of portfolio investments as of
December 31, 1996, and the related statement 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 five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material 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, 1996, 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 International Equity Fund as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 17, 1997
18
<PAGE>
INVESTMENT ADVISOR:
Vontobel USA Inc.
450 Park Avenue
New York, New York 10022
DISTRIBUTOR:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
INDEPENDENT AUDITORS:
Tait, Weller and Baker
Two Penn Center, Suite 700
Philadelphia, Pennsylvania 19102-1707
TRANSFER AGENT:
For account information, wire purchase or redemptions, call or write to
Vontobel's Transfer Agent:
Fund Services, Inc.
Post Office Box 26305
Richmond, Virginia 23260
(800) 628-4077 Toll Free
MORE INFORMATION:
For 24 hour, 7 days a week price information, and for information on any series
of Vontobel Funds, Inc., investment plans, and other shareholder services, call
Commonwealth Shareholder Services at (800) 527-9500 Toll Free
NASDAQ SYMBOL: VNEPX
ANNUAL REPORT
TO SHAREHOLDERS
VONTOBEL
U.S. VALUE FUND
A SERIES of
Vontobel Funds, Inc.
a "Series" Investment Company
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
VONTOBEL U.S. VALUE FUND - ANNUAL REPORT 1997
Dear Shareholder:
At December 31, the fund's closing Net Asset Value stood at $13.78 and net
assets totaled $69,551,657, vs. $54,939,906 at the end of 1995. On December 10
the fund paid a per share distribution of $1.41 in income and $0.88 in long-term
capital gains to shareholders of record on December 9.
For the second consecutive year, holders of U.S. stocks in 1996 experienced
total returns well above the historical trendline. Perhaps the most notable
aspect of the market's move over the past twelve months was the heady
outperformance of large-cap stocks. The Dow Jones Industrial Average, comprised
of 30 of America's largest, most well-known companies, led the pack in 1996,
providing a total return of 28.7% for the year, well ahead of the broader
Standard & Poor's 500's 23.0% total return, and almost double the return on the
Russell 2000, an index representing relatively small companies. Much of the gain
in U.S. equities came in the powerful post-election rally, which accounted for
the bulk of the fourth-quarter gains of 10.2% and 8.3%, respectively, in the
DJIA and S&P 500. The Vontobel U.S. Value Fund trailed the broader large-cap
averages, providing investors with total returns of 7.8% in the final quarter of
the year and 21.3% over the 12-month span.
While not necessarily pleased about trailing the S&P 500 benchmark, we were not
surprised, either. Strict adherence to an investment style that dictates the
sale of securities held as they approach established price targets prompted us
to reduce the fund's holdings in many companies during the year. Gillette, for
example, represented 4.4% of total assets at the start of 1996. This great
company met everyone's expectations over the course of the year, and entered
into an agreement to purchase Duracell in the fourth quarter, further capturing
investors' imaginations. We sold the last of the fund's Gillette shares shortly
after the acquisition was announced. Coca-Cola shares represented 8.6% of total
fund assets at January 1st. By mid-May, and into a strong advance, we sold the
last of those shares, although we subsequently repurchased the stock in
December. Because we experienced difficulty in identifying compelling new
investments in 1996, the fund carried a large cash position throughout much of
the year, which penalized performance to the extent that cash underperformed
stocks in 1996.
We claim no skill in calling the direction of either the economy or the markets.
We note, though, that the past few years' combination of relatively low interest
rates and soaring corporate profitability in a gradually expanding national
economy has been a remarkably rewarding environment for U.S. stockholders, who
have responded by pouring new money into stocks. The consensus seems to call for
more of the same in 1997. While we can't point to any one factor that will
necessarily go wrong, we could point to many factors that might go wrong.
<PAGE>
Inflation could emerge now that everyone believes it has been vanquished.
Profits could disappoint, possibly due to fierce competitive pressures or a
drop-off in spending by heavily indebted consumers. Perhaps Alan Greenspan,
concerned about "irrational exuberance" in the stock market, will tighten
credit.
In examining and rejecting many individual companies for possible investment,
it's not so much that we don't like the companies, but that we feel their stock
prices do not offer the safety of principal and promise of a satisfactory return
that we seek. Investors in the Vontobel U.S. Value Fund should be aware that we
intend to stick our investment discipline. Until we find compelling investment
ideas on our terms, we'll hold cash, possibly resulting in underperformance in
an "ebullient" market. On the plus side, we'll be well prepared to buy when the
market presents us with opportunity.
Ed Walczak
President
January 31, 1997
2
<PAGE>
[GRAPH GOES HERE]
US VALUE S&P 500
03/30/90 $10,000.00 $10,000.00
12/31/90 $ 9,010.85 $ 9,714.00
12/31/91 $12,370.63 $12,270.00
12/31/92 $14,343.49 $12,817.00
12/31/93 $15,205.24 $13,722.00
12/31/94 $15,215.10 $13,510.78
12/31/95 $21,355.82 $18,588.13
12/31/96 $25,900.56 $22,857.66
3
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
COMMON STOCK: 65.61%
BANKING: 6.93%
51,146 California Center Bank $ 792,763
24,832 Hanmi Bank* 297,984
------------
13,800 Wells Frago & Co. 3,722,550
------------
4,813,297
------------
BEVERAGE: 2.20%
29,000 Coca Cola 1,526,125
------------
CREDIT AND FINANCE: 2.55%
31,360 American Express 1,771,840
------------
FOOD-PROCESSING: 4.08%
50,500 Wrigley Co. 2,840,625
------------
INDUSTRIAL: 1.10%
16,000 Cleveland Cliffs 726,000
2,000 New Holland 41,750
------------
767,750
------------
INSURANCE-DIVERSIFIED: 14.36%
38,000 American International Group 4,113,500
68,700 Horace Mann Educators Corp. 2,773,763
115,450 Old Republic International Corp. 3,102,719
------------
9,989,982
------------
INSURANCE-PROPERTY/CASUALITY: 14.01%
96,700 Chubb Corp. 5,197,625
49,000 Cincinnati Financial 3,178,875
22,425 Orion Capital 1,370,728
------------
9,747,228
------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES SECURITY VALUE
- ---------- -------- ------------
<S> <C>
INSURANCE-LIFE: 3.05%
10,400 Reliastar Financial Corp. 600,600
16,700 Torchmark 843,350
9,400 UNUM Corp. 679,150
------------
2,123,100
------------
OTHER FINANCIAL: 2.90%
23,924 Federal National Mtg. 891,169
10,200 Federal Home Loan Mtg. 1,123,275
------------
2,014,444
------------
PUBLISHING AND BROADCAST: 10.57%
59,224 Walt Disney Co. 4,123,471
43,100 Gannett Co. 3,227,112
------------
7,350,583
------------
RESTAURANTS: 3.86%
59,400 McDonald's Corp. 2,687,850
------------
TOTAL COMMON STOCKS:
(Cost: $39,093,581) 45,632,824
------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<S> <C>
U.S. GOVT. SECURITIES: 27.07%
$4,000,000 U.S. Treasury Bill maturity date 01/16/97; 4.6722% 3,992,800
4,000,000 U.S. Treasury Bill maturity date 01/23/97; 4.6764% 3,989,200
4,000,000 U.S. Treasury Bill maturity date 01/30/97; 4.6806% 3,985,600
3,500,000 U.S. Treasury Note maturity date 05/01/97; 5.159% 3,441,690
3,500,000 U.S. Treasury Note maturity date 06/12/97; 5.2536% 3,421,110
------------
TOTAL U.S. GOVERNMENT SECURITIES:
(Cost: $18,829,195) 18,830,400
------------
TOTAL INVESTMENTS:
(Cost: $57,922,776)* 92.68% 64,463,224
Other assets, net 7.32% 5,088,433
-------- ------------
------------
NET ASSETS 100.00% $ 69,551,657
-------- ------------
-------- ------------
</TABLE>
* Cost for Federal income tax purpose is $57,922,776 and net unrealized
appreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 6,582,424
Gross unrealized depreciation (41,975)
------------
Net unrealized appreciation $ 6,540,449
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
_____________________________________________________________________________________________________
<S> <C>
ASSETS
Investments at value (Identified cost of $57,922,776)
(Notes 1 & 3) $64,463,224
Cash 4,138,782
Receivables:
Dividend and interest 84,777
Capital stock sold 421,134
Securities sold 410,330 916,241
-----------
Deferred organization costs 54,594
Prepaid expenses 10,661
Other assets 23,275
-----------------
TOTAL ASSETS 69,606,777
-----------------
LIABILITIES
Investment management fees payable 55,120
-----------
55,120
-----------------
TOTAL LIABILITIES
NET ASSETS $69,551,657
-----------------
-----------------
NET ASSET VALUE OFFERING
AND REDEMPTION PRICE PER SHARE
($69,551,657/5,046,792 shares outstanding) $ 13.78
-----------------
-----------------
At December 31, 1996 there were 50,000,000 shares of $.01 par value stock
authorized and components of net assets are:
Paid in capital $53,313,618
Undistributed net realized gain on investments 9,697,591
Net unrealized appreciation of investments 6,540,448
-----------
Net Assets $69,551,657
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1996
<TABLE>
______________________________________________________________________________________________________
<S> <C>
INVESTMENT INCOME
Income:
Interest $537,493
Dividend 763,105
--------
Total income $ 1,300,598
Expenses:
Investment management fees (Note 2) 620,780
Transfer agent fees (Note 2) 75,835
Recordkeeping and administrative services (Note 2) 126,056
Legal and audit fees 15,586
Filing fees and registration (Note 2) 13,481
Shareholder servicing and reports (Note 2) 33,483
Custodian fees (Note 3) 33,231
Amortization of organization cost 25,765
Other 15,733
--------
959,950
Custodian fee waiver (33,231)
Management fee waiver (22,437)
-----------
Total expenses 904,282
-----------
Net investment income 396,316
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investments 11,188,744
Net change in unrealized appreciation on investments 158,072
-----------
Net gain on investments 11,346,816
-----------
Net increase in net assets resulting from operations $11,743,132
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C>
OPERATIONS
Net investment income $ 396,316 $ 146,804
Net realized gain on investments 11,188,744 5,377,553
Change in unrealized appreciation (depreciation) of investments 158,072 7,554,055
------------ ------------
Net increase in net assets resulting from operations 11,743,132 13,078,412
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income ($.19 and $.04 per share) (468,857) (74,261)
Net realized gain from investment transaction ($2.10 and $1.15
per share) (5,158,503) (2,060,752)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from capital share transactions* 8,332,548 14,307,777
------------ ------------
Net increase in net assets 14,448,320 25,251,176
Net assets at beginning of period 55,103,337 29,852,161
------------ ------------
NET ASSETS at the end of the period (including undistributed net investment
income of $0 and $72,541, respectively) $ 69,551,657 $ 55,103,337
------------ ------------
------------ ------------
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1995
------------------------ -------------------------
SHARES VALUE SHARES VALUE
---------- ----------- ---------- ------------
<S> <C>
Shares sold 5,091,561 $70,799,337 3,591,066 $ 46,834,241
Shares reinvested from dividend 397,818 5,485,919 149,147 1,974,662
Shares redeemed (4,602,188) (67,952,708) (2,489,941) (34,501,126)
---------- ----------- ---------- ------------
Net increase 887,191 $ 8,332,548 1,250,272 $ 14,307,777
---------- ----------- ---------- ------------
---------- ----------- ---------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
____________________________________________________________________________________________________
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 13.25 $ 10.26 $ 12.64 $ 12.00 $11.36
------- ------- ------- ------- ------
Income from investment operations-
Net investment income 0.17 0.05 0.09 0.16 0.10
Net realized and unrealized
gain (loss) on investments 2.65 4.09 (0.08) 0.56 1.70
------- ------- ------- ------- ------
Total from investment operations 2.82 4.14 0.01 0.72 1.80
------- ------- ------- ------- ------
Less distributions-
Distributions from net investment income (0.19) (0.04) (0.23) (0.02) (0.10)
Distributions from realized gains on
investments (2.10) (1.11) (2.16) (0.06) (1.06)
------- ------- ------- ------- ------
Total distributions (2.29) (1.15) (2.39) (0.08) (1.16)
------- ------- ------- ------- ------
Net asset value, end of period $ 13.78 $ 13.25 $ 10.26 $ 12.64 $12.00
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Total Return 21.28% 40.36% 0.02% 6.00% 6.30%
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Ratios/Supplemental Data
Net assets, end of period (000) $69,552 $55,103 $29,852 $34,720 $31,335
Ratio to average net assets-(A)
Expenses (B) 1.48% 1.65% 1.62% 1.82% 1.96%
Expenses-net (C) 1.43% 1.50% 1.62% 1.82% 1.96%
Net investment income 0.63% 0.38% 0.76% 1.23% 0.76%
Portfolio turnover rate 108.36% 95.93% 98.90% 137.32% 99.66%
Average brokerage commissions per share $0.0883 -- -- -- --
</TABLE>
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by .04% in 1996, 0.06% in 1995 and 0.09% in 1990.
(B) Expense ratio has been increased to include additional custodian fees in
1996 and 1995 which were offset by custodian fee credits, prior to 1995
custodian fee credits reduced expense ratios.
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996
________________________________________________________________________________
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES -- Vontobel U.S. Value Fund (the "Fund")
is a series of Vontobel Funds, Inc. ("VFI") which is registered under The
Investment Company Act of 1940, as amended, as a diversified open-end management
company. The Fund was established in March 30, 1990, as a series of VFI which
has allocated to the Fund 50,000,000 shares of its 500,000,000 shares of $.01
par value common stock. the following is a summary of significant accounting
policies consistently followed by the fund. The policies are in conformity with
generally accepted accounting principles.
The investment objective of the fund is to achieve long-term capital returns in
excess of the broad market by investing in a continuously managed portfolio of
U.S. equity securities.
A. SECURITY VALUATION. Investments in securities traded on a national securities
exchange or included in the nasdaq national market system are valued at the last
reported sales price; other securities traded in the over-the-counter market and
listed securities for which no sale is reported on that date are valued at the
last reported bid price. Short-term investments (securities with a remaining
maturity of sixty days or less) are valued at cost which, when combined with
accrued interest, approximates market value.
B. FEDERAL INCOME TAXES. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
C. SECURITY TRANSACTIONS AND DIVIDENDS. As is common in the industry, security
transactions are accounted for on the trade date. Dividend income is recorded on
the ex-dividend date.
D. DEFERRED ORGANIZATIONAL EXPENSES. All of the expenses of VFI incurred in
connection with its organization and the public offering of its shares have been
assumed by the series funds of VFI. The organization expenses allocable to
Vontobel U.S. Value Fund are being amortized over a period of fifty-seven (57)
months. Reorganization costs assumed in the acquisition of Centurion Growth Fund
(see Note 5) amounted to $90,899 and will be amortized over a period of five (5)
years.
E. ACCOUNTING ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, 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.
11
<PAGE>
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS -- Pursuant to an
Investment Advisory Agreement, the Advisor, Vontobel USA Inc. ("VUSA") provides
investment services for an annual fee of 1.0% of the first $100 million of
average daily net assets and .75% on average daily net assets over $100 million.
VUSA will reimburse the fund to the extent of its advisory fee to limit the
fund's aggregate annual operating expenses (excluding taxes, brokerage
commissions, amortization of organization expenses), to the lowest applicable
percentage limitation prescribed by any state in which the fund's shares are
qualified for sale. VUSA has agreed to reduce its management fee by $22,500 per
year for four years commencing January 1, 1995.
As provided in the administrative agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its administrative agent, $147,596 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky filings and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives .20% of average daily net assets, with a minimum fee of
$30,000.
Fund Services, Inc. ("FSI") is the fund's transfer and dividend disbursing
agent. FSI received $75,835 for its services for the year ended December 31,
1996.
Certain officers and/or directors of the fund are also officers and/or directors
of CSS and FSI.
NOTE 3-PURCHASES AND SALES OF SECURITIES -- Purchases and sales of securities
other than short-term notes aggregated $89,866,849 and $84,570,050 respectively.
The Custodian has provided credits in the amount of $33,231 against custodian
and accounting charges based on credits on uninvested cash balances of the Fund.
NOTE 4-DISTRIBUTIONS TO SHAREHOLDERS -- 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 generally accepted accounting
principles. These distribution differences are primarily due to differing
treatments for equalization and post-October capital losses.
NOTE 5-ACQUISITION OF CENTURION GROWTH FUND -- On December 27, 1994, Vontobel
U.S. Value Fund acquired all of the assets and liabilities of Centurion Growth
Fund. The acquisition was accomplished by the tax-free exchange of 730,811
shares (valued at $7,490,812) of Vontobel U.S. Value Fund for 902,983 shares of
Centurion Growth Fund. The manager has agreed to limit expenses for the Vontobel
U.S. Value Fund to 1.5% for the period of December 27, 1994 through December 31,
1996. The net assets of the acquired Fund as of December 27, 1994 consisted of
paid in capital of $7,490,812.
The net assets of Vontobel U.S. Value Fund immediately after the acquisition
amounted to $33,546,177.
12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Shareholders and Board Of Directors of
Vontobel Funds, Incorporated
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of Vontobel
U.S. Value Fund, a series of Vontobel Funds, Inc., including the schedule of
portfolio investments as of December 31, 1996, and the related statement 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 five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmations of securities owned as of
December 31, 1996, 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 as of December 31, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended in conformity with generally accepted accounting
principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 17, 1997
13
<PAGE>
INVESTMENT ADVISOR:
Vontobel USA Inc.
450 Park Avenue
New York, New York 10022
DISTRIBUTOR:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
INDEPENDENT AUDITORS:
Tait, Weller and Baker
Two Penn Center, Suite 700
Philadelphia, Pennsylvania 19102-1707
TRANSFER AGENT:
For account information, wire purchase or redemptions, call or write to
Vontobel's Transfer Agent:
Fund Services, Inc.
Post Office Box 26305
Richmond, Virginia 23260
(800) 628-4077 Toll Free
MORE INFORMATION:
For 24 hour, 7 days a week price information, and for information on any
series of Vontobel Funds, Inc., investment plans, and other shareholder
services, call Commonwealth Shareholder Services at (800) 527-9500 Toll Free
NASDAQ SYMBOL: VUSVX
ANNUAL REPORT
TO SHAREHOLDERS
SAND HILL
PORTFOLIO MANAGER
FUND
A SERIES of
The World Funds, Inc.
a "Series" Investment Company
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
[GRAPH GOES HERE]
Sand Hill S&P 500
01/01/95 $10,000.00 $10,000.00
12/31/95 $11,160.09 $13,758.00
12/31/96 $13,344.01 $16,918.21
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
NUMBER
OF MARKET
SHARES SECURITY VALUE
- -------- -------- ----------
<S> <C>
COMMON STOCK: 73.16%
BASIC INDUSTRY: 1.97%
7,100 Material Sciences $ 127,800
----------
CAPITAL GOODS: 4.47%
2,000 Dover Corp. 100,500
3,000 Osmonics 66,000
300 Sumitomo Electric ADR 41,871
1,000 W.W. Grainger 80,250
----------
288,621
----------
CONGLOMERATE: 2.74%
6,900 Cheung Kong Holdings ADR 61,328
2,431 Desc, S.A. De C.V. ADR 53,482
15,800 Sime Darby BHD ADR 62,249
----------
177,059
----------
CONSUMER DURABLES: 4.87%
1,000 Johnson Controls 82,875
3,000 Leggett & Platt Inc. 103,875
300 Matsushita Electric ADR 48,975
1,200 Sony Corp ADR 78,750
----------
314,475
----------
CONSUMER NON-DURABLES: 7.39%
3,000 Avery Dennison 106,125
700 Colgate Palmolive 64,575
800 Panamerican Beverage 37,500
700 Procter & Gamble 75,338
3,100 Sara Lee Corp 115,475
1,400 Sherwin Williams 78,400
----------
477,413
----------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
NUMBER
OF MARKET
SHARES SECURITY VALUE
- -------- -------- ----------
<S> <C>
CONSUMER SERVICES: 4.01%
1,200 Carlton Communications ADR 53,400
3,100 Choice Hotels International 54,637
1,800 Walgreen 72,000
3,500 Whole Foods Markets 78,750
----------
258,787
----------
ENERGY: 8.30%
700 Atlantic Richfield 92,837
500 British Petroleum ADR 70,687
1,200 Mobil 146,700
6,200 Nabors Industries 119,350
1,500 Western Atlas Inc 106,312
----------
535,886
----------
FINANCE: 10.14%
2,900 AXA ADR 91,350
1,100 Banco de Santander ADR 69,850
1,000 Develop Bk of Singapore ADR 54,045
5,000 Hang Seng Bank Ltd ADR 60,763
1,700 MBIA Inc. 172,125
3,500 PXRE Corp. 87,938
2,300 Regions Financial Corp 118,881
----------
654,952
----------
HEALTH CARE: 8.75%
2,200 Astra AB ADR 107,800
2,000 Becton Dickinson & Co. 86,750
3,100 Manor Care 84,088
600 Roche Holdings ADR 46,540
2,100 Schering Plough Corp 135,975
2,300 United Healthcare 103,788
----------
564,941
----------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NUMBER
OF MARKET
SHARES SECURITY VALUE
- -------- -------- ---------
<S> <C>
TECHNOLOGY: 10.06%
600 3Com 44,025
2,800 Adaptec 112,000
1,000 Adobe Systems Inc 37,375
2,000 E M C Corp 66,250
2,430 Ericsson ADR 73,356
700 Intel 91,656
1,400 Hewlett Packard 70,350
3,000 Sabre Group Holding A 83,625
1,800 Sungard Data Systems 71,100
----------
649,737
----------
R E I T: 3.94%
4,000 Apartment Investment & Management Co 112,500
5,500 J P Realty 142,313
----------
254,813
----------
UTILITIES: 6.52%
1,800 Ameritech Corp 109,125
4,100 Frontier Corp. 92,762
15,000 Hong Kong Electric ADR 49,837
3,100 Hong Kong Telecom 50,375
3,000 Nipsco Industies 118,875
----------
420,974
----------
TOTAL COMMON STOCKS:
(Cost: $3,704,865) 4,725,458
----------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- --------
<S> <C>
U.S. GOVT. SECURITIES: 20.22%
$100,000 U.S. Treasury Note
maturity date 10/31/99; 7.50% 103,750
200,000 U.S. Treasury Note
maturity date 02/28/01; 5.625% 196,125
200,000 U.S. Treasury Note
maturity date 02/15/03; 6.25% 199,876
200,000 U.S. Treasury Note
maturity date 02/15/04; 5.875% 194,813
300,000 U.S. Treasury Note
maturity date 05/15/05; 6.5% 302,250
300,000 U.S. Treasury Note
maturity date 05/15/06; 6.875% 309,375
----------
TOTAL U.S. GOVERNMENT SECURITIES:
(Cost: $1,294,657) 1,306,189
----------
TOTAL INVESTMENTS:
(Cost: $4,999,522)* 93.38% 6,031,647
Other assets, net 6.62% 427,778
-------- ----------
NET ASSETS 100.00% $6,459,425
-------- ----------
-------- ----------
</TABLE>
*Cost for Federal income tax purpose is $4,999,522 and net unrealized
appreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation $1,090,678
Gross unrealized depreciation (58,553)
----------
Net unrealized appreciation $1,032,125
----------
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
_______________________________________________________________________________________________________
DECEMBER 31, 1996
--------------------------------
<S> <C>
ASSETS
Investments at value (Identified cost of $4,999,522)
(Notes 1 & 3) $ 6,031,647
Cash 366,379
Receivables:
Dividend and interest 25,467
Receivable from manager 8,799
-----------
34,266
Deferred organization costs 23,305
Prepaid expenses 3,828
-----------------
TOTAL ASSETS 6,459,425
-----------------
NET ASSETS $ 6,459,425
-----------------
-----------------
NET ASSET VALUE OFFERING AND
REDEMPTION PRICE PER SHARE
($6,459,425/504,705 shares outstanding) $ 12.79
-----------------
-----------------
At December 31, 1996 there were 50,000,000 shares of $.01 par
value stock authorized and components of net assets are:
Paid in capital $ 5,354,034
Undistributed net realized gain on investments 73,266
Net unrealized appreciation of investments 1,032,125
Net Assets $ 6,459,425
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________
YEAR ENDED
DECEMBER 31, 1996
---------------------
<S> <C>
INVESTMENT INCOME
Income:
Interest $81,560
Dividend 94,169
-------
Total income $ 175,729
Expenses:
Investment management fees (Note 2) 53,649
Transfer agent fees (Note 2) 24,190
Custodian and accounting fees (Note 3) 51,123
Legal & audit fees 5,195
Registration fees 2,250
Recordkeeping and administrative services (Note 2) 16,294
Shareholder servicing and reports (Note 2) 6,779
Organization expense amortization 4,140
Other 4,564
-------
168,184
Custodian fee credits (27,040)
Reimbursement by manager (34,049)
----------
Total expenses 107,095
----------
Net investment income 68,634
----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investments 230,479
Net increase in unrealized appreciation on investments 740,807
----------
Net gain on investments 971,286
----------
Net increase in net assets resulting from operations $1,039,920
----------
----------
</TABLE>
*Commencement of operations
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
___________________________________________________________________________________
JANUARY 2, 1995
YEAR ENDED TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C>
OPERATIONS
Net investment income $ 68,634 $ 14,079
Net realized gain on investments 230,479 3,594
Change in unrealized appreciation of investments 740,807 291,318
----------------- -----------------
Net increase in net assets resulting from operations 1,039,920 308,991
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income ($.15 and $.05 per share) (72,905) (17,898)
Capital gains ($.33 per share) (155,461)
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from capital share
transactions* 1,622,851 3,733,927
----------------- -----------------
Net increase in net assets 2,434,405 $ 4,025,020
Net asset at beginning of period 4,025,020 0
----------------- -----------------
NET ASSETS at the end of the period (including
undistributed net investment income of $0 and $4,270) $ 6,459,425 $ 4,025,020
----------------- -----------------
----------------- -----------------
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
JANUARY 2, 1995*
YEAR ENDED TO
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
SHARES VALUE SHARES VALUE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Shares sold 199,556 $2,332,804 384,304 $3,964,257
Shares reinvested from dividend 17,744 225,708 1,554 17,229
Shares redeemed (75,044) (935,661) (23,410) (247,559)
------- ---------- ------- ----------
Net increase 142,256 $1,622,851 362,448 $3,733,927
------- ---------- ------- ----------
------- ---------- ------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
______________________________________________________________________________________
JANUARY 2, 1995*
YEAR ENDED TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 11.11 $ 10.00
----------------- -----------------
Income from investment operations-
Net investment income 0.14 0.06
Net realized and unrealized gain on investments 2.02 1.10
----------------- -----------------
Total from investment operations 2.16 1.16
----------------- -----------------
Less distributions-
Distributions from net investment income (0.15) (0.05)
Distributions from capital gains (0.33)
----------------- -----------------
Total distributions (0.48) (0.05)
----------------- -----------------
Net asset value, end of period (000's) $ 12.79 $ 11.11
----------------- -----------------
----------------- -----------------
Total Return 19.57% 11.60%
Ratios/Supplemental Data
Net assets, end of period(000's) $ 6,459 $ 4,025
Ratio to average net assets-(A)
Expenses (B) 2.50% 3.03%**
Expense ratio-net (C) 2.00% 1.90%**
Net investment income 1.29% 0.52%**
Portfolio turnover rate 32.97% 40.96%
Average brokerage commission per share $0.0581 --
</TABLE>
*Commencement of operations
**Annualized
(A) Management fee waivers reduced the expense ratios and increased the net
investment income ratio by .64% in 1996 and 1.00% in 1995.
(B) Expense ratio has been increased to include custodian fees which were offset
by custodian credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1996
_______________________________________________________________________________
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES -- The Sand Hill Portfolio Manager Fund
(the "Fund") is a series of The World Funds, Inc. ("TWF") which is registered
under The Investment Company Act of 1940, as amended, as a diversified open-end
management company. The Fund was established in January 2, 1995, as a series of
TWF which has allocated to the Fund 50,000,000 shares of its 500,000,000 shares
of $.01 par value common stock. The following is a summary of significant
accounting policies consistently followed by the Fund. The policies are in
conformity with generally accepted accounting principles.
The investment objective of the Fund is to maximize total return by investing in
equity securities, debt securities and short term investments.
A. SECURITY VALUATION. Investments in securities traded on a national securities
exchange or included in the NASDAQ National Market System are valued at the last
reported sales price; other securities traded in the over-the-counter market and
listed securities for which no sale is reported on that date are valued at the
last reported bid price. Short-term investments (securities with a remaining
maturity of sixty days or less) are valued at cost which, when combined with
accrued interest, approximates market value.
B. FEDERAL INCOME TAXES. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
C. SECURITY TRANSACTIONS AND DIVIDENDS. As is common in the industry, security
transactions are accounted for on the trade date. Dividend income is recorded on
the ex-dividend date.
D. DEFERRED ORGANIZATIONAL EXPENSES. All of the expenses of TWF incurred in
connection with its organization and the public offering of its shares have been
assumed by the series funds of TWF. The organization expenses allocable to Sand
Hill Portfolio Manager Fund are being amortized over a period of fifty-seven
(57) months.
E. DISTRIBUTIONS TO SHAREHOLDERS. 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 generally accepted accounting
principles. These distribution differences primarily result from different
treatments of equalization and post-October capital losses.
10
<PAGE>
F. ACCOUNTING ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, 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.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS -- Pursuant to an
Investment Advisory Agreement, the Advisor, Sand Hill Advisors ("SHA") provides
investment services for an annual fee of 1.0% of the first $100 million of
average daily net assets and .75% on average daily net assets over $100 million.
SHA will reimburse the Fund to the extent of its advisory fee to limit the
Fund's aggregate annual operating expenses (excluding taxes and brokerage
commissions), to the lowest applicable percentage limitation prescribed by any
state in which the Fund's shares are qualified for sale. For the year ended
December 31, 1996, a voluntary reimbursement of $34,043 was made.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its Administrative Agent, $17,681 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky filings and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives .20% of average daily net assets, with a minimum fee of
$60,000, of which $43,706 has been waived.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $24,190 for its services for the year ended December 31,
1996.
Certain officers and/or directors of the Fund are also officers and/or directors
of CSS and FSI.
NOTE 3-PURCHASES AND SALES OF SECURITIES -- Purchases and sales of securities
other than short-term notes aggregated $3,129,441 and $1,688,861 respectively.
The Custodian has provided credits in the amount of $24,083 against custodian
and accounting charges based on credits on uninvested cash balances of the Fund.
11
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
The World Funds, Incorporated
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of the Sand
Hill Portfolio Manager Fund, a series of The World Funds, Inc., including the
schedule of portfolio investments as of December 31, 1996, and the related
statements of operations for the year then ended and the statement of changes in
net assets and the financial highlights for each of the two years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material 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, 1996, 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 audit provides 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
Sand Hill Portfolio Manager Fund as of December 31, 1996, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for each of the two years in the period then ended, in
conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 17, 1997
12
<PAGE>
INVESTMENT ADVISOR:
Sand Hill Advisors, Inc.
3000 Sand Hill Road
Building Three, Suite 150
Menlo Park, California 94025-7111
DISTRIBUTOR:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
INDEPENDENT AUDITORS:
Tait, Weller and Baker
Two Penn Center, Suite 700
Philadelphia, Pennsylvania 19102-1707
TRANSFER AGENT:
For account information, wire purchase or redemptions, call or write to
Sand Hill's Transfer Agent:
Fund Services, Inc.
Post Office Box 26305
Richmond, Virginia 23260
(800) 628-4077 Toll Free
MORE INFORMATION:
For 24 hour, 7 days a week price information, and for information on any
series of The World Funds, Inc., investment plans, and other shareholder
services, call Commonwealth Shareholder Services at (800) 527-9500 Toll Free
VONTOBEL FUNDS, INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned officer and/or director of
Vontobel Funds, Inc. hereby appoints John Pasco, III, his true and lawful
attorney to execute in his name, place and stead and on his behalf a
registration statement of Form N-1A for the registration pursuant to the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, of shares of said Corporation's Common Stock, and any and all
amendments to said Registration Statement (including post-effective amendments),
and all instruments necessary or incidental in connection therewith and to file
the same with the U.S. Securities and Exchange Commission. Said attorney shall
have full power and authority to do and perform in the name and on behalf of the
undersigned every act whatsoever requisite or desirable to be done in the
premises, as fully and to all intents and purposes as the undersigned might or
could do, the undersigned hereby ratifying and approving all such acts of said
attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
28th day of February, 1997.
/s/ HENRY SCHLEGEL
-------------------
Henry Schlegel
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the _____ day of
___________, 1996, by and between The World Funds, Inc., (the "Fund"), an
open-end diversified investment business corporation organized under the laws of
Maryland and having its office at 1500 Forest Drive Suite 223, Richmond,
Virginia, 23229 for the benefit of the Vontobel U.S. Value Fund series (the
"Series"), and Star Bank, National Association, (the "Custodian"), a national
banking association having its principal office at 425 Walnut Street,
Cincinnati, Ohio, 45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement
to provide for the custody and safekeeping of the assets of the Series as
required by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Series' Securities and moneys at any time owned by the Series during the term of
this Agreement (the "Series Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless
the context otherwise requires, shall have the following meanings:
Authorized Person - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized by
the Board of Directors of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Book-Entry System - the Federal Reserve Bank book-entry system for
United States Treasury securities and federal agency securities.
Depository - The Depository Trust Company ("DTC"), a limited purpose
trust company its successor(s) and its nominee(s) or any other person or
clearing agent
Dividend and Transfer Agent - the dividend and transfer agent
appointed, from time to time, pursuant to a written agreement between the
dividend and transfer agent and the Fund
Foreign Securities - a) securities issued and sold primarily outside of
the United States by a foreign government, a national of any foreign country, or
a corporation or other organization incorporated or organized under the laws of
any foreign country or; b) securities issued or guaranteed by the government of
the United States, by any state, by any political subdivision or agency thereof,
or by any entity organized under the laws of the United States or of any state
thereof, which have been issued and sold primarily outside of the United States.
Money Market Security - debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including certificates
of deposit, bankers' acceptances, repurchase agreements and reverse repurchase
agreements with respect to the same), and time deposits of domestic banks and
thrift institutions whose deposits are insured by the Federal Deposit Insurance
Corporation, and short-term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase and sale, all of which mature in not more than
thirteen (13) months.
Officers - the Chairman, President, Secretary, Treasurer, Controller,
and Senior Vice President of the Fund listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Oral Instructions - verbal instructions received by the Custodian from
an Authorized Person (or from a person that the Custodian reasonably believes in
good faith to be an Authorized Person) and confirmed by Written Instructions in
such a manner that such Written Instructions are received by the Custodian not
later than the business day immediately following receipt of such Oral
Instructions.
Prospectus - the Fund's then currently effective prospectus and
Statement of Additional Information, as filed with and declared effective from
time to time by the Securities and Exchange Commission.
Security or Securities - Money Market Securities, common stock,
preferred stock, options, financial futures, bonds, notes, debentures, corporate
debt securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
Written Instructions - communication received in writing by the
Custodian from an Authorized Person.
ARTICLE II
Documents and Notices to be Furnished by the Fund
A The following documents, including any amendments thereto,
will be provided contemporaneously with the execution of the Agreement, to the
Custodian by the Fund:
1. A copy of the Articles of Incorporation of the Fund certified
by the Secretary.
2. A copy of the By-Laws of the Fund certified by the Secretary.
3. A copy of the resolution of the Board of Directors of the Fund
appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectus of the Series.
5. A Certificate of the President and Secretary of the Fund
setting forth the names and signatures of the Officers of the Fund.
B. The Fund agrees to notify the Custodian in writing of the
appointment of any Dividend and Transfer Agent.
ARTICLE III
Receipt of Fund Assets
A. During the term of this Agreement, the Fund will deliver or
cause to be delivered to the Custodian all moneys constituting Series
Assets. The Custodian shall be entitled to reverse any deposits made on the
Fund's behalf where such deposits have been entered and moneys are not
finally collected within 30 days of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or
cause to be delivered to the Custodian all Securities constituting Series
Assets. The Custodian will not have any duties or responsibilities with
respect to such Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the
account(s) of the Series any and all payments for shares of the Series issued
or sold from time to time as they are received from the Fund's distributor or
Dividend and Transfer Agent or from the Fund itself.
ARTICLE IV
Disbursement of Fund Assets
A. The Fund shall furnish to the Custodian a copy of the
resolution of the Board of Directors of the Fund, certified by the Fund's
Secretary, either (i) setting forth the date of the declaration of any dividend
or distribution in respect of shares of the Series, the date of payment thereof,
the record date as of which Fund shareholders entitled to payment shall be
determined, the amount payable per share to Series shareholders of record as
of that date, and the total amount to be paid by the Dividend and Transfer
Agent on the payment date, or (ii) authorizing the declaration of dividends and
distributions in respect of shares of the Fund on a daily basis and authorizing
the Custodian to rely on a Certificate setting forth the date of the
declaration of any such dividend or distribution, the date of payment thereof,
the record date as of which Series shareholders entitled to payment shall be
determined, the amount payable per share to Series shareholders of record as
of that date, and the total amount to be paid by the Dividend and Transfer Agent
on the payment date.
On the payment date specified in such resolution or Certificate
described above, the Custodian shall segregate such amounts from moneys held for
the account of the Series so that they are available for such payment.
B. Upon receipt of Written Instructions so directing it, the
Custodian shall segregate amounts necessary for the payment of redemption
proceeds to be made by the Dividend and Transfer Agent from moneys held for the
account of the Series so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting
forth the name and address of the person to whom such payment is to be
made, the amount of such payment, and the purpose for which payment is to be
made, the Custodian shall disburse amounts as and when directed from the
Series Assets. The Custodian is authorized to rely on such directions and
shall be under no obligation to inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian
shall disburse moneys from the Series Assets in payment of the Custodian's
fees and expenses as provided in Article VIII hereof.
E. Upon receipt of a Certificate directing payment and setting
forth the name and address of the person to whom such payment is to be
made, the amount of such payment, and the purpose for which payment is to be
made, the Custodian shall disburse amounts to any imprest account
maintained for the Series as and when directed from the Series Assets. The
Custodian is authorized to rely on such directions and shall be under no
obligation to inquire as to the propriety of such directions.
ARTICLE V
Custody of Fund Assets
A. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund for the
assets of the Series, subject only to draft or order by the Custodian acting
pursuant to the terms of this Agreement, and shall hold all cash received by it
from or for the account of the Series, other than cash maintained by the Fund
in a bank account established and used by the Series in accordance with Rule
17f-3 under the Act. Moneys held by the Custodian on behalf of the Series may
be deposited by the Custodian to its credit as Custodian in the banking
department of the Custodian. Such moneys shall be deposited by the Custodian
in its capacity as such, and shall be withdrawable by the Custodian only in
such capacity.
B. The Custodian shall hold all Securities delivered to it in
safekeeping in a separate account or accounts maintained at Star Bank, N.A. for
the benefit of the Series.
C. All Securities held which are issued or issuable only in
bearer form, shall be held by the Custodian in that form; all other Securities
held for the Series shall be registered in the name of the Custodian or its
nominee. The Fund agrees to furnish to the Custodian appropriate instruments
to enable the Custodian to hold, or deliver in proper form for transfer, any
Securities that it may hold for the account of the Fund and which may, from
time to time, be registered in the name of the Series.
D. With respect to all Securities held for the Series, the
Custodian shall on a timely basis (concerning items 1 and 2 below, as
defined in the Custodian's Standards of Service Guide, as amended from time
to time, annexed hereto as Appendix C):
1.) Collect all income due and payable with respect to such
Securities;
2.) Present for payment and collect amounts payable upon all
Securities which may mature or be called, redeemed, or retired, or otherwise
become payable;
3.) Surrender Securities in temporary form for definitive
Securities; and
4.) Execute, as agent, any necessary declarations or certificates
of ownership under the Federal income tax laws or the laws or regulations of any
other taxing authority, including any foreign taxing authority, now or hereafter
in effect.
E. Upon receipt of a Certificate and not otherwise, the Custodian
shall:
1.) Execute and deliver to such persons as may be designated in
such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as beneficial owner of any Securities may be
exercised;
2.) Deliver any Securities in exchange for other Securities or
cash issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation, or recapitalization of any corporation, or
the exercise of any conversion privilege;
3.) Deliver any Securities to any protective committee,
reorganization committee, or other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization, or sale of assets of any
corporation, and receive and hold under the terms of this Agreement such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
4.) Make such transfers or exchanges of the assets of the Fund and
take such other steps as shall be stated in said Certificate to be for the
purpose of effectuating any duly authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Fund; and
5.) Deliver any Securities held for the Series to the depository
agent for tender or other similar offers.
F. The Custodian shall promptly deliver to the Fund all notices,
proxy material and executed but unvoted proxies pertaining to shareholder
meetings of Securities held by the Fund. The Custodian shall not vote or
authorize the voting of any Securities or give any consent, waiver or
approval with respect thereto unless so directed by a Certificate or Written
Instruction.
G. The Custodian shall promptly deliver to the Fund all
information received by the Custodian and pertaining to Securities held by
the Fund with respect to tender or exchange offers, calls for redemption or
purchase, or expiration of rights.
ARTICLE VI
Purchase and Sale of Securities
A. Promptly after each purchase of Securities by the Fund for
the Series, the Fund shall deliver to the Custodian (i) with respect to
each purchase of Securities which are not Money Market Securities,
Written Instructions, and (ii) with respect to each purchase of Money Market
Securities, Written Instructions or Oral Instructions, specifying with respect
to each such purchase the;
1.) name of the issuer and the title of the Securities,
2.) principal amount purchased and accrued interest, if any,
3.) date of purchase and settlement,
4.) purchase price per unit,
5.) total amount payable, and
6.) name of the person from whom, or the broker through which,
the purchase was made. The Custodian shall, against receipt of Securities
purchased by or for the Series, pay out of the Series Assets, the total
amount payable to the person from whom or the broker through which the
purchase was made, provided that the same conforms to the total amount
payable as set forth in such Written Instructions or Oral Instructions, as
the case may be.
B. Promptly after each sale of Securities by the Fund for the
Series, the Fund shall deliver to the Custodian (i) with respect to each sale of
Securities which are not Money Market Securities, Written Instructions, and (ii)
with respect to each sale of Money Market Securities, Written Instructions or
Oral Instructions, specifying with respect to each such sale the;
1.) name of the issuer and the title of the Securities,
2.) principal amount sold and accrued interest, if any,
3.) date of sale and settlement,
4.) sale price per unit,
5.) total amount receivable, and
6.) name of the person to whom, or the broker through
which, the sale was made. The Custodian shall deliver the Securities against
receipt of the total amount receivable, provided that the same conforms to the
total amount receivable as set forth in such Written Instructions or Oral
Instructions, as the case may be.
C. On contractual settlement date, the account of the Series will
be charged for all purchased Securities settling on that day, regardless of
whether or not delivery is made. Likewise, on contractual settlement date,
proceeds from the sale of Securities settling that day will be credited to the
account of the Series, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian
will be made on a delivery versus payment basis. The Custodian may, in
its sole discretion, upon receipt of a Certificate, elect to settle a
purchase or sale transaction in some other manner, but only upon receipt
of acceptable indemnification from the Fund.
E. The Custodian shall, upon receipt of a Written Instructions so
directing it, establish and maintain a segregated account or accounts for and on
behalf of the Series. Cash and/or Securities may be transferred into such
account or accounts for specific purposes, to-wit:
1.) in accordance with the provision of any agreement among
the Fund, the Custodian, and a broker-dealer registered under the Securities and
Exchange Act of 1934, as amended, and also a member of the National Association
of Securities Dealers (NASD) (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the rules of the
Options Clearing Corporation and of any registered national securities exchange,
the Commodity Futures Trading Commission, any registered contract market, or any
similar organization or organizations requiring escrow or other similar
arrangements in connection with transactions by the Fund for the Series;
2.) for purposes of segregating cash or government
securities in connection with options purchased, sold, or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the Fund for
the Series;
3.) for the purpose of compliance by the Series with the
procedures required for reverse repurchase agreements, firm commitment
agreements, standby commitment agreements, and short sales by Act Release No.
10666, or any subsequent release or releases or rule of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies; and
4.) for other corporate purposes, only in the case of this
clause 4 upon receipt of a copy of a resolution of the Board of Directors of the
Fund, certified by the Secretary of the Fund, setting forth the purposes of such
segregated account.
F. Except as otherwise may be agreed upon by the parties hereto,
the Custodian shall not be required to comply with any Written Instructions
to settle the purchase of any Securities on behalf of the Series unless there
is sufficient cash in the account(s) at the time or to settle the sale of
any Securities from an account(s) unless such Securities are in deliverable
form. Notwithstanding the foregoing, if the purchase price of such Securities
exceeds the amount of cash in the account(s) at the time of such purchase, the
Custodian may, in its sole discretion, advance the amount of the difference
in order to settle the purchase of such Securities. The amount of any such
advance shall be deemed a loan from the Custodian to the Fund for the respective
Series payable on demand and bearing interest accruing from the date such
loan is made up to but not including the date such loan is repaid at a rate per
annum customarily charged by the Custodian on similar loans.
ARTICLE VII
Fund Indebtedness
In connection with any borrowings by the Fund for the Series, the Fund
will cause to be delivered to the Custodian by a bank or broker requiring
Securities as collateral for such borrowings (including the Custodian if the
borrowing is from the Custodian), a notice or undertaking in the form currently
employed by such bank or broker setting forth the amount of collateral. The Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
each such borrowing: (a) the name of the bank or broker, (b) the amount and
terms of the borrowing, which may be set forth by incorporating by reference an
attached promissory note duly endorsed by the Fund, or a loan agreement, (c) the
date, and time if known, on which the loan is to be entered into, (d) the date
on which the loan becomes due and payable, (e) the total amount payable to the
Series on the borrowing date, and (f) the description of the Securities securing
the loan, including the name of the issuer, the title and the number of shares
or the principal amount. The Custodian shall deliver on the borrowing date
specified in the Certificate the required collateral against the lender's
delivery of the total loan amount then payable, provided that the same conforms
to that which is described in the Certificate. The Custodian shall deliver, in
the manner directed by the Fund, such Securities as additional collateral, as
may be specified in a Certificate, to secure further any transaction described
in this Article VII. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it.
The Custodian may, at the option of the lender, keep such collateral in
its possession, subject to all rights therein given to the lender because of the
loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem appropriate.
ARTICLE VIII
Concerning the
Custodian
A. Except as otherwise provided herein, the Custodian shall not be
liable for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own gross
negligence or willful misconduct. The Fund shall defend, indemnify and hold
harmless the Custodian and its directors, officers, employees and agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Fund's duties
hereunder or any other action or inaction of the Fund or its Directors,
officers, employees or agents, except such as may arise from the negligent
action, omission, willful misconduct or breach of this Agreement by the
Custodian. The Custodian may, with respect to questions of law, apply for and
obtain the advice and opinion of counsel, at the expense of the Fund, and shall
be fully protected with respect to anything done or omitted by it in good faith
in conformity with the advice or opinion of counsel. The provisions under this
paragraph shall survive the termination of this Agreement.
B. Without limiting the generality of the foregoing, the
Custodian, acting in the capacity of Custodian hereunder, shall be under no
obligation to inquire into, and shall not be liable for:
1.) The validity of the issue of any Securities purchased by
or for the account of the Fund, the legality of the purchase thereof, or the
propriety of the amount paid therefor;
2.) The legality of the sale of any Securities by or for the
account of the Series, or the propriety of the amount for which the same are
sold;
3.) The legality of the issue or sale of any shares of the
Series, or the sufficiency of the amount to be received therefor;
4.) The legality of the redemption of any shares of the
Series, or the propriety of the amount to be paid therefor;
5.) The legality of the declaration or payment of any dividend
by the Fund in respect of shares of the Series;
6.) The legality of any borrowing by the Series on behalf of
the Fund, using Securities as collateral;
C. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount due to the Series from any
Dividend and Transfer Agent of the Fund nor to take any action to effect
payment or distribution by any Dividend and Transfer Agent of the Fund of any
amount paid by the Custodian to any Dividend and Transfer Agent of the Fund in
accordance with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not
be under any duty or obligation to take action to effect collection of any
amount, if the Securities upon which such amount is payable are in default,
or if payment is refused after due demand or presentation, unless and until
(i) it shall be directed to take such action by a Certificate and (ii) it
shall be assured to its satisfaction (including prepayment thereof) of
reimbursement of its costs and expenses in connection with any such action.
E. The Fund acknowledges and hereby authorizes the Custodian to
hold Securities through its various agents described in Appendix B annexed
hereto. The Fund hereby represents that such authorization has been duly
approved by the Board of Directors of the Fund as required by the Act.
The Custodian acknowledges that although certain Series Assets are held by
its agents, the Custodian remains primarily liable for the safekeeping of the
Series Assets.
In addition, the Fund acknowledges that the Custodian may appoint one
or more financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Series. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Fund any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist directors of registered investment companies fulfill their
responsibilities under Rule 17f-5 of the Act.
F. The Custodian shall not be under any duty or obligation to
ascertain whether any Securities at any time delivered to or held by it for the
account of the Fund are such as properly may be held by the Series under the
provisions of the Articles of Incorporation and the Fund's By-Laws.
G. The Custodian shall treat all records and other information
relating to the Fund and the Series Assets as confidential and shall not
disclose any such records or information to any other person unless (i) the
Fund shall have consented thereto in writing or (ii) such disclosure is required
by law.
H. The Custodian shall be entitled to receive and the Fund
agrees to pay to the Custodian from the assets of the Series such compensation
as shall be determined pursuant to Appendix D attached hereto, or as shall be
determined pursuant to amendments to such Appendix D. The Custodian shall be
entitled to charge against any money held by it for the account of the Series,
the amount of any of its fees, any loss, damage, liability or expense, including
counsel fees relating to such Series. The expenses which the Custodian may
charge against the account of the Series include, but are not limited to, the
expenses of agents or sub-custodians incurred in settling transactions involving
the purchase and sale of Securities of the Fund.
I. The Custodian shall be entitled to rely upon any Oral
Instructions and any Written Instructions. The Fund agrees to forward to
the Custodian Written Instructions confirming Oral Instructions in such a
manner so that such Written Instructions are received by the Custodian,
whether by hand delivery, facsimile or otherwise, not later than the following
business day on which such Oral Instructions were given. The Fund agrees that
the failure of the Custodian to receive such confirming instructions shall in
no way affect the validity of the transactions or enforceability of the
transactions hereby authorized by the Fund. The Fund agrees that the Custodian
shall incur no greater liability to the Fund for acting upon Oral
Instructions given to the Custodian hereunder concerning such transactions
than would arise as to a similar transaction pursuant to a Written
Instruction.
J. The Custodian will (i) set up and maintain proper books of
account and complete records of all transactions in the accounts maintained
by the Custodian hereunder in such manner as will meet the obligations of
the Fund under the Act, with particular attention to Section 31 thereof and
Rules 31a-1 and 31a-2 thereunder and those records are the property of the
Fund, and (ii) preserve for the periods prescribed by applicable Federal
statute or regulation all records required to be so preserved. All such books
and records shall be the property of the Fund, and shall be open to inspection
and audit at reasonable times and with prior notice by Officers and auditors
employed by the Fund.
K. The Custodian shall send to the Fund any report received on the
systems of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Fund may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and
shall have no responsibility for the management, investment or reinvestment
of the Securities from time to time owned by the Fund. The Custodian is not a
selling agent for shares of the Series and performance of its duties as
custodian shall not be deemed to be a recommendation to the Fund's
depositors or others of shares of the Series as an investment.
M. The Custodian shall take all reasonable action, that the
Fund may from time to time request, to assist the Fund in obtaining favorable
opinions from the Fund's independent accountants, with respect to the
Custodian's activities hereunder, in connection with the preparation of the
Fund's Form N-1A, Form N-SAR, or other annual reports to the Securities
and Exchange Commission.
N. The Fund hereby pledges to and grants the Custodian a
security interest in any Series Assets to secure the payment of any liabilities
of the Series to the Custodian, whether acting in its capacity as
Custodian or otherwise, or on account of money borrowed from the Custodian.
This pledge is in addition to any other pledge of collateral by the Fund to the
Custodian.
ARTICLE X
Termination
A. Either of the parties hereto may terminate this Agreement for
any reason by giving to the other party a notice in writing specifying the
date of such termination, which shall be not less than ninety (90) days after
the date of giving of such notice. If such notice is given by the Fund, it
shall be accompanied by a copy of a resolution of the Board of Directors
of the Fund, certified by the Secretary of the Fund, electing to terminate
this Agreement and designating a successor custodian or custodians. In the event
such notice is given by the Custodian, the Fund shall, on or before the
termination date, deliver to the Custodian a copy of a resolution of the
Board of Directors of the Fund, certified by the Secretary, designating a
successor custodian or custodians to act on behalf of the Fund. In the absence
of such designation by the Fund, the Custodian may designate a successor
custodian which shall be a bank or trust company having not less than
$100,000,000 aggregate capital, surplus, and undivided profits. Upon the date
set forth in such notice this Agreement shall terminate, and the Custodian,
provided that it has received a notice of acceptance by the successor custodian,
shall deliver, on that date, directly to the successor custodian all Securities
and moneys then owned by the Fund and held by it as Custodian. Upon termination
of this Agreement, the Fund shall pay to the Custodian on behalf of the Fund
such compensation as may be due as of the date of such termination. The Fund
agrees on behalf of the Fund that the Custodian shall be reimbursed for its
reasonable costs in connection with the termination of this Agreement.
B. If a successor custodian is not designated by the Fund, or by
the Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund, be deemed to be the custodian for the Fund, and the Custodian
shall thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the Book-Entry
System, which cannot be delivered to the Fund, which shall be held by the
Custodian in accordance with this Agreement.
ARTICLE XI
MISCELLANEOUS
A. Appendix A sets forth the names and the signatures of all
Authorized Persons, as certified by the Secretary of the Fund. The Fund agrees
to furnish to the Custodian a new Appendix A in form similar to the attached
Appendix A, if any present Authorized Person ceases to be an Authorized Person
or if any other or additional Authorized Persons are elected or appointed.
Until such new Appendix A shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement upon Oral
Instructions or signatures of the then current Authorized Persons as set forth
in the last delivered Appendix A.
B. No recourse under any obligation of this Agreement or for any
claim based thereon shall be had against any organizer, shareholder,
Officer, Director, past, present or future as such, of the Fund or of any
predecessor or successor, either directly or through the Fund or any such
predecessor or successor, whether by virtue of any constitution, statute or
rule of law or equity, or be the enforcement of any assessment or penalty or
otherwise; it being expressly agreed and understood that this Agreement and
the obligations thereunder are enforceable solely against the Fund, and that
no such personal liability whatever shall attach to, or is or shall be
incurred by, the organizers, shareholders, Officers, Directors of the Fund or
of any predecessor or successor, or any of them as such. To the extent that
any such liability exists, it is hereby expressly waived and released by
the Custodian as a condition of, and as a consideration for, the execution of
this Agreement.
C. The obligations set forth in this Agreement as having been
made by the Fund have been made by the Board of Directors, acting as such
Directors for and on behalf of the Fund, pursuant to the authority vested in
them under the laws of the State of Maryland, the Articles of Incorporation and
the By-Laws of the Fund. This Agreement has been executed by Officers of the
Fund as officers, and not individually, and the obligations contained herein
are not binding upon any of the Directors, Officers, agents or holders of
shares, personally, but bind only the Fund.
D. Provisions of the Prospectus and any other documents
(including advertising material) specifically mentioning the Custodian (other
than merely by name and address) shall be reviewed with the Custodian by the
Fund prior to publication and/or dissemination or distribution, and shall be
subject to the consent of the Custodian.
E. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Custodian, shall be
sufficiently given if addressed to the Custodian and mailed or delivered to it
at its offices at Star Bank Center, 425 Walnut Street, M. L. 6118, Cincinnati,
Ohio 45202, attention Mutual Fund Custody Department, or at such other place as
the Custodian may from time to time designate in writing.
F. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Fund shall be sufficiently
given when delivered to the Fund or on the second business day following
the time such notice is deposited in the U.S. mail postage prepaid and
addressed to the Fund at its office at 1500 Forest Drive Suite 223, Richmond,
Virginia, 23229 or at such other place as the Fund may from time to time
designate in writing.
G. This Agreement, with the exception of the Appendices,may
not be amended or modified in any manner except by a written agreement executed
by both parties with the same formality as this Agreement, and authorized and
approved by a resolution of the Board of Directors of the Fund.
H. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Fund or by the
Custodian, and no attempted assignment by the Fund or the Custodian shall be
effective without the written consent of the other party hereto.
I. This Agreement shall be construed in accordance with the laws of
the State of Ohio.
J. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
The World Funds, Inc.
By: /s/ JOHN PASCO, III
------------------------
John Pasco, III
ATTEST: ________________________
Title: Chairman
Star Bank, N.A.
ATTEST: By:/s/ MARSHA A. CROXTON
------------------------
Marsha A. Croxton
________________________
Title: Vice President
APPENDIX A
Authorized Persons
Specimen Signatures
Chairman:
President:
Secretary:
Treasurer:
Controller:
Adviser Employees:
Transfer Agent/Fund Accountant
Employees:
<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A. for
securities processing and
control . . .
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC
eligible Securities)
<PAGE>
APPENDIX C
Standards of Service Guide
<PAGE>
APPENDIX D
Schedule of Compensation
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the _____ day of
___________, 1996, by and between The World Funds, Inc., (the "Fund"), an
open-end diversified investment business corporation organized under the laws of
Maryland and having its office at 1500 Forest Drive Suite 223, Richmond,
Virginia, 23229 for the benefit of the Vontobel U.S. Value Fund series (the
"Series"), and Star Bank, National Association, (the "Custodian"), a national
banking association having its principal office at 425 Walnut Street,
Cincinnati, Ohio, 45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement
to provide for the custody and safekeeping of the assets of the Series as
required by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Series' Securities and moneys at any time owned by the Series during the term of
this Agreement (the "Series Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless
the context otherwise requires, shall have the following meanings:
Authorized Person - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized by
the Board of Directors of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Book-Entry System - the Federal Reserve Bank book-entry system for
United States Treasury securities and federal agency securities.
Depository - The Depository Trust Company ("DTC"), a limited purpose
trust company its successor(s) and its nominee(s) or any other person or
clearing agent.
Dividend and Transfer Agent - the dividend and transfer agent appointed,
from time to time, pursuant to a written agreement between the dividend and
transfer agent and the Fund.
Foreign Securities - a) securities issued and sold primarily outside of
the United States by a foreign government, a national of any foreign country, or
a corporation or other organization incorporated or organized under the laws of
any foreign country or; b) securities issued or guaranteed by the government of
the United States, by any state, by any political subdivision or agency thereof,
or by any entity organized under the laws of the United States or of any state
thereof, which have been issued and sold primarily outside of the United States.
Money Market Security - debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including certificates
of deposit, bankers' acceptances, repurchase agreements and reverse repurchase
agreements with respect to the same), and time deposits of domestic banks and
thrift institutions whose deposits are insured by the Federal Deposit Insurance
Corporation, and short-term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase and sale, all of which mature in not more than
thirteen (13) months.
Officers - the Chairman, President, Secretary, Treasurer, Controller,
and Senior Vice President of the Fund listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Oral Instructions - verbal instructions received by the Custodian from
an Authorized Person (or from a person that the Custodian reasonably believes in
good faith to be an Authorized Person) and confirmed by Written Instructions in
such a manner that such Written Instructions are received by the Custodian not
later than the business day immediately following receipt of such Oral
Instructions.
Prospectus - the Fund's then currently effective prospectus and
Statement of Additional Information, as filed with and declared effective from
time to time by the Securities and Exchange Commission.
Security or Securities - Money Market Securities, common stock,
preferred stock, options, financial futures, bonds, notes, debentures, corporate
debt securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
Written Instructions - communication received in writing by the
Custodian from an Authorized Person.
ARTICLE II
Documents and Notices to be Furnished by the Fund
A. The following documents, including any amendments thereto,
will be provided contemporaneously with the execution of the Agreement, to the
Custodian by the Fund:
1. A copy of the Articles of Incorporation of the Fund
certified by the Secretary.
2. A copy of the By-Laws of the Fund certified by
the Secretary.
3. A copy of the resolution of the Board of Directors of the
Fund appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectus of the Series.
5. A Certificate of the President and Secretary of the Fund
setting forth the names and signatures of the Officers of
the Fund.
B. The Fund agrees to notify the Custodian in writing of the
appointment of any Dividend and Transfer Agent.
ARTICLE III
Receipt of Fund Assets
A. During the term of this Agreement, the Fund will deliver or
cause to be delivered to the Custodian all moneys constituting Series
Assets. The Custodian shall be entitled to reverse any deposits made on the
Fund's behalf where such deposits have been entered and moneys are not
finally collected within 30 days of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or
cause to be delivered to the Custodian all Securities constituting Series
Assets. The Custodian will not have any duties or responsibilities with
respect to such Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the
account(s) of the Series any and all payments for shares of the Series issued
or sold from time to time as they are received from the Fund's distributor or
Dividend and Transfer Agent or from the Fund itself.
ARTICLE IV
Disbursement of Fund Assets
A. The Fund shall furnish to the Custodian a copy of the
resolution of the Board of Directors of the Fund, certified by the Fund's
Secretary, either (i) setting forth the date of the declaration of any dividend
or distribution in respect of shares of the Series, the date of payment
thereof, the record date as of which Fund shareholders entitled to payment
shall be determined, the amount payable per share to Series shareholders of
record as of that date, and the total amount to be paid by the Dividend and
Transfer Agent on the payment date, or (ii) authorizing the declaration of
dividends and distributions in respect of shares of the Fund on a daily basis
and authorizing the Custodian to rely on a Certificate setting forth the date of
the declaration of any such dividend or distribution, the date of payment
thereof, the record date as of which Series shareholders entitled to payment
shall be determined, the amount payable per share to Series shareholders of
record as of that date, and the total amount to be paid by the Dividend and
Transfer Agent on the payment date. On the payment date specified in such
resolution or Certificate described above, the Custodian shall segregate
such amounts from moneys held for the account of the Series so that they are
available for such payment.
B. Upon receipt of Written Instructions so directing it, the
Custodian shall segregate amounts necessary for the payment of redemption
proceeds to be made by the Dividend and Transfer Agent from moneys held for the
account of the Series so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting
forth the name and address of the person to whom such payment is to be made,
the amount of such payment, and the purpose for which payment is to be made,
the Custodian shall disburse amounts as and when directed from the Series
Assets. The Custodian is authorized to rely on such directions and shall be
under no obligation to inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian
shall disburse moneys from the Series Assets in payment of the Custodian's
fees and expenses as provided in Article VIII hereof.
E. Upon receipt of a Certificate directing payment and setting
forth the name and address of the person to whom such payment is to be made,
the amount of such payment, and the purpose for which payment is to be made,
the Custodian shall disburse amounts to any imprest account maintained for
the Series as and when directed from the Series Assets. The Custodian is
authorized to rely on such directions and shall be under no obligation to
inquire as to the propriety of such directions.
ARTICLE V
Custody of Fund Assets
A. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund for the
assets of the Series, subject only to draft or order by the Custodian acting
pursuant to the terms of this Agreement, and shall hold all cash received by it
from or for the account of the Series, other than cash maintained by the Fund
in a bank account established and used by the Series in accordance with Rule
17f-3 under the Act. Moneys held by the Custodian on behalf of the Series may
be deposited by the Custodian to its credit as Custodian in the banking
department of the Custodian. Such moneys shall be deposited by the Custodian
in its capacity as such, and shall be withdrawable by the Custodian only in
such capacity.
B. The Custodian shall hold all Securities delivered to it in
safekeeping in a separate account or accounts maintained at Star Bank, N.A. for
the benefit of the Series.
C. All Securities held which are issued or issuable only in
bearer form, shall be held by the Custodian in that form; all other Securities
held for the Series shall be registered in the name of the Custodian or its
nominee. The Fund agrees to furnish to the Custodian appropriate instruments
to enable the Custodian to hold, or deliver in proper form for transfer, any
Securities that it may hold for the account of the Fund and which may, from
time to time, be registered in the name of the Series.
D. With respect to all Securities held for the Series, the
Custodian shall on a timely basis (concerning items 1 and 2 below, as defined
in the Custodian's Standards of Service Guide, as amended from time to time,
annexed hereto as Appendix C):
1.) Collect all income due and payable with respect to
such Securities;
2.) Present for payment and collect amounts payable upon
all Securities which may mature or be called, redeemed, or retired, or otherwise
become payable;
3.) Surrender Securities in temporary form for
definitive Securities; and
4.) Execute, as agent, any necessary declarations or
certificates of ownership under the Federal income tax laws or the laws or
regulations of any other taxing authority, including any foreign taxing
authority, now or hereafter in effect.
E. Upon receipt of a Certificate and not otherwise, the Custodian
shall:
1.) Execute and deliver to such persons as may be designated
in such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as beneficial owner of any Securities may be
exercised;
2.) Deliver any Securities in exchange for other Securities
or cash issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation, or recapitalization of any corporation, or
the exercise of any conversion privilege;
3.) Deliver any Securities to any protective committee,
reorganization committee, or other person in connection with the reorganization,
definancing, merger, consolidation, recapitalization, or sale of assets of any
corporation, and receive and hold under the terms of this Agreement such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
4.) Make such transfers or exchanges of the assets of the
Fund and take such other steps as shall be stated in said Certificate to be for
the purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Fund; and
5.) Deliver any Securities held for the Series to the
depository agent for tender or other similar offers.
F. The Custodian shall promptly deliver to the Fund all notices,
proxy material and executed but unvoted proxies pertaining to shareholder
meetings of Securities held by the Fund. The Custodian shall not vote or
authorize the voting of any Securities or give any consent, waiver or approval
with respect thereto unless so directed by a Certificate or Written
Instruction.
G. The Custodian shall promptly deliver to the Fund all
information received by the Custodian and pertaining to Securities held by the
Fund with respect to tender or exchange offers, calls for redemption or
purchase, or expiration of rights.
ARTICLE VI
Purchase and Sale of Securities
A. Promptly after each purchase of Securities by the Fund for
the Series, the Fund shall deliver to the Custodian (i) with respect to
each purchase of Securities which are not Money Market Securities,
Written Instructions, and (ii) with respect to each purchase of Money Market
Securities, Written Instructions or Oral Instructions, specifying with respect
to each such purchase the;
1.) name of the issuer and the title of the
Securities,
2.) principal amount purchased and accrued
interest, if any,
3.) date of purchase and settlement,
4.) purchase price per unit,
5.) total amount payable, and
6.) name of the person from whom, or the broker through
which, the purchase was made.
The Custodian shall, against receipt of Securities purchased by or for the
Series, pay out of the Series Assets, the total amount payable to the person
from whom or the broker through which the purchase was made, provided that the
same conforms to the total amount payable as set forth in such Written
Instructions or Oral Instructions, as the case may be.
B. Promptly after each sale of Securities by the Fund for the
Series, the Fund shall deliver to the Custodian (i) with respect to each sale of
Securities which are not Money Market Securities, Written Instructions, and (ii)
with respect to each sale of Money Market Securities, Written Instructions or
Oral Instructions, specifying with respect to each such sale the;
1.) name of the issuer and the title of the Securities,
2.) principal amount sold and accrued interest, if any,
3.) date of sale and settlement,
4.) sale price per unit,
5.) total amount receivable, and
6.) name of the person to whom, or the broker through
which, the sale was made.
The Custodian shall deliver the Securities against receipt of the total amount
receivable, provided that the same conforms to the total amount receivable as
set forth in such Written Instructions or Oral Instructions, as the case may be.
C. On contractual settlement date, the account of the Series will
be charged for all purchased Securities settling on that day, regardless of
whether or not delivery is made. Likewise, on contractual settlement date,
proceeds from the sale of Securities settling that day will be credited to the
account of the Series, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian will
be made on a delivery versus payment basis. The Custodian may, in its
sole discretion, upon receipt of a Certificate, elect to settle a purchase or
sale transaction in some other manner, but only upon receipt of
acceptable indemnification from the Fund.
E. The Custodian shall, upon receipt of a Written Instructions so
directing it, establish and maintain a segregated account or accounts for and on
behalf of the Series. Cash and/or Securities may be transferred into such
account or accounts for specific purposes, to-wit:
1.) in accordance with the provision of any agreement among
the Fund, the Custodian, and a broker-dealer registered under the Securities and
Exchange Act of 1934, as amended, and also a member of the National Association
of Securities Dealers (NASD) (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the rules of the
Options Clearing Corporation and of any registered national securities exchange,
the Commodity Futures Trading Commission, any registered contract market, or any
similar organization or organizations requiring escrow or other similar
arrangements in connection with transactions by the Fund for the Series;
2.) for purposes of segregating cash or government
securities in connection with options purchased, sold, or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the Fund for
the Series;
3.) for the purpose of compliance by the Series with the
procedures required for reverse repurchase agreements, firm commitment
agreements, standby commitment agreements, and short sales by Act Release No.
10666, or any subsequent release or releases or rule of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies; and
4.) for other corporate purposes, only in the case of this
clause 4 upon receipt of a copy of a resolution of the Board of Directors of the
Fund, certified by the Secretary of the Fund, setting forth the purposes of such
segregated account.
F. Except as otherwise may be agreed upon by the parties hereto,
the Custodian shall not be required to comply with any Written Instructions
to settle the purchase of any Securities on behalf of the Series unless there
is sufficient cash in the account(s) at the time or to settle the sale of
any Securities from an account(s) unless such Securities are in deliverable
form. Notwithstanding the foregoing, if the purchase price of such Securities
exceeds the amount of cash in the account(s) at the time of such purchase, the
Custodian may, in its sole discretion, advance the amount of the difference
in order to settle the purchase of such Securities. The amount of any such
advance shall be deemed a loan from the Custodian to the Fund for the respective
Series payable on demand and bearing interest accruing from the date such
loan is made up to but not including the date such loan is repaid at a rate per
annum customarily charged by the Custodian on similar loans.
ARTICLE VII
Fund Indebtedness
In connection with any borrowings by the Fund for the Series, the Fund
will cause to be delivered to the Custodian by a bank or broker requiring
Securities as collateral for such borrowings (including the Custodian if the
borrowing is from the Custodian), a notice or undertaking in the form currently
employed by such bank or broker setting forth the amount of collateral. The Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
each such borrowing:
(a) the name of the bank or broker,
(b) the amount and terms of the borrowing, which may be set
forth by incorporating by reference an attached promissory note duly endorsed by
the Fund, or a loan agreement,
(c) the date, and time if known, on which the loan is to be
entered into,
(d) the date on which the loan becomes due and payable,
(e) the total amount payable to the Series on the borrowing
date, and
(f) the description of the Securities securing the loan,
including the name of the issuer, the title and the number of shares or the
principal amount. The Custodian shall deliver on the borrowing date
specified in the Certificate the required collateral against the lender's
delivery of the total loan amount then payable, provided that the same conforms
to that which is described in the Certificate. The Custodian shall deliver, in
the manner directed by the Fund, such Securities as additional collateral, as
may be specified in a Certificate, to secure further any transaction described
in this Article VII. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it. The Custodian may, at the option of the lender, keep such collateral in its
possession, subject to all rights therein given to the lender because of the
loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem appropriate.
ARTICLE VIII
Concerning the Custodian
A. Except as otherwise provided herein, the Custodian shall not
be liable for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own gross
negligence or willful misconduct. The Fund shall defend, indemnify and hold
harmless the Custodian and its directors, officers, employees and agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Fund's duties
hereunder or any other action or inaction of the Fund or its Directors,
officers, employees or agent, except such as may arise from the negligent
action, omission, willful misconduct or breach of this Agreement by the
Custodian. The Custodian may, with respect to questions of law, apply for and
obtain the advice and opinion of counsel, at the expense of the Fund, and shall
be fully protected with respect to anything done or omitted by it in good faith
in conformity with the advice or opinion of counsel. The provisions under this
paragraph shall survive the termination of this Agreement.
B. Without limiting the generality of the foregoing, the
Custodian, acting in the capacity of Custodian hereunder, shall be under no
obligation to inquire into, and shall not be liable for:
1.) The validity of the issue of any Securities purchased
by or for the account of the Fund, the legality of the purchase thereof, or the
propriety of the amount paid therefor;
2.) The legality of the sale of any Securities by or for
the account of the Series, or the propriety of the amount for which the same are
sold;
3.) The legality of the issue or sale of any shares of
Series, or the sufficiency of the amount to be received therefor;
4.) The legality of the redemption of any shares of the
Series, or the propriety of the amount to be paid therefor;
5.) The legality of the declaration or payment of any
dividend by the Fund in respect of shares of the Series;
6.) The legality of any borrowing by the Series on
behalf of the Fund, using Securities as collateral;
C. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount due to the Series from any
Dividend and Transfer Agent of the Fund nor to take any action to effect
payment or distribution by any Dividend and Transfer Agent of the Fund of any
amount paid by the Custodian to any Dividend and Transfer Agent of the Fund in
accordance with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not
be under any duty or obligation to take action to effect collection of any
amount, if the Securities upon which such amount is payable are in default,
or if payment is refused after due demand or presentation, unless and until
(i) it shall be directed to take such action by a Certificate and (ii) it
shall be assured to its satisfaction (including prepayment thereof) of
reimbursement of its costs and expenses in connection with any such action.
E. The Fund acknowledges and hereby authorizes the Custodian to
hold Securities through its various agents described in Appendix B annexed
hereto. The Fund hereby represents that such authorization has been duly
approved by the Board of Directors of the Fund as required by the Act.
The Custodian acknowledges that although certain Series Assets are held by
its agents, the Custodian remains primarily liable for the safekeeping of the
Series Assets.
In addition, the Fund acknowledges that the Custodian may appoint one or more
financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Series. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Fund any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist directors of registered investment companies fulfill their
responsibilities under Rule 17f-5 of the Act.
F. The Custodian shall not be under any duty or obligation to
ascertain whether any Securities at any time delivered to or held by it for the
account of the Fund are such as properly may be held by the Series under the
provisions of the Articles of Incorporation and the Fund's By-Laws.
G. The Custodian shall treat all records and other information
relating to the Fund and the Series Assets as confidential and shall not
disclose any such records or information to any other person unless (i) the Fund
shall have consented thereto in writing or (ii) such disclosure is required by
law.
H. The Custodian shall be entitled to receive and the Fund agrees
pay to the Custodian from the assets of the Series such compensation as shall be
determined pursuant to Appendix D attached hereto, or as shall be determined
pursuant to amendments to such Appendix D. The Custodian shall be entitled to
charge against any money held by it for the account of the Series, the amount of
any of its fees, any loss, damage, liability or expense, including counsel fees
relating to such Series. The expenses which the Custodian may charge against the
account of the Series include, but are not limited to, the expenses of agents or
sub-custodians incurred in settling transactions involving the purchase and sale
of Securities of the Fund.
I. The Custodian shall be entitled to rely upon any Oral
Instructions and any Written Instructions. The Fund agrees to forward to the
Custodian Written Instructions confirming Oral Instructions in such a manner so
that such Written Instructions are received by the Custodian, whether by hand
delivery, facsimile or otherwise, not later than the following business day on
which such Oral Instructions were given. The Fund agrees that the failure of
the Custodian to receive such confirming instructions shall in no way affect
the validity of the transactions or enforceability of the transactions hereby
authorized by the Fund. The Fund agrees that the Custodian shall incur no
greater liability to the Fund for acting upon Oral Instructions given to
the Custodian hereunder concerning such transactions than would arise as to
a similar transaction pursuant to a Written Instruction. J. The Custodian will
(i) set up and maintain proper books of account and complete records of all
transactions in the accounts maintained by the Custodian hereunder in such
manner as will meet the obligations of the Fund under the Act, with particular
attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder and those
records are the property of the Fund, and (ii) preserve for the periods
prescribed by applicable Federal statute or regulation all records required to
be so preserved. All suchbooks and records shall be the property of the Fund,
and shall be open to inspection and audit at reasonable times and with prior
notice by Officers and auditors employed by the Fund.
K. The Custodian shall send to the Fund any report received on the
systems of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Fund may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and
shall have no responsibility for the management, investment or reinvestment of
the Securities from time to time owned by the Fund. The Custodian is not a
selling agent for shares of the Series and performance of its duties as
custodian shall not be deemed to be a recommendation to the Fund's depositors
or others of shares of the Series as an investment.
M. The Custodian shall take all reasonable action, that the Fund
may from time to time request, to assist the Fund in obtaining favorable
opinions from the Fund's independent accountants, with respect to the
Custodian's activities hereunder, in connection with the preparation of the
Fund's Form N-1A, Form N-SAR, or other annual reports to the Securities and
Exchange Commission. N. The Fund hereby pledges to and grants the Custodian a
security interest in any Series Assets to secure the payment of any liabilities
of the Series to the Custodian, whether acting in its capacity as Custodian
or otherwise, or on account of money borrowed from the Custodian. This pledge is
in addition to any other pledge of collateral by the Fund to the Custodian.
ARTICLE X
Termination
A. Either of the parties hereto may terminate this Agreement for
any reason by giving to the other party a notice in writing specifying the
date of such termination, which shall be not less than ninety (90) days after
the date of giving of such notice.
If such notice is given by the Fund, it shall be accompanied by a copy of a
resolution of the Board of Directors of the Fund, certified by the
Secretary of the Fund, electing to terminate this Agreement and designating a
successor custodian or custodians. In the event such notice is given by the
Custodian, the Fund shall, on or before the termination date, deliver to
the Custodian a copy of a resolution of the Board of Directors of the Fund,
certified by the Secretary, designating a successor custodian or custodians
to act on behalf of the Fund. In the absence of such designation by the Fund,
the Custodian may designate a successor custodian which shall be a bank
or trust company having not less than $100,000,000 aggregate capital,
surplus, and undivided profits. Upon the date set forth in such notice this
Agreement shall terminate, and the Custodian, provided that it has received
a notice of acceptance by the successor custodian, shall deliver, on that date,
directly to the successor custodian all Securities and moneys then owned by the
Fund and held by it as Custodian. Upon termination of this Agreement, the
Fund shall pay to the Custodian on behalf of the Fund such compensation as
may be due as of the date of such termination. The Fund agrees on behalf of
the Fund that the Custodian shall be reimbursed for its reasonable costs in
connection with the termination of this Agreement.
B. If a successor custodian is not designated by the Fund, or by
the Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund, be deemed to be the custodian for the Fund, and the Custodian
shall thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the Book-Entry
System, which cannot be delivered to the
Fund, which shall be held by the Custodian in accordance with this Agreement.
ARTICLE XI
MISCELLANEOUS
A. Appendix A sets forth the names and the signatures of all
Authorized Persons, as certified by the Secretary of the Fund. The Fund agrees
to furnish to the Custodian a new Appendix A in form similar to the attached
Appendix A, if any present Authorized Person ceases to be an Authorized Person
or if any other or additional Authorized Persons are elected or appointed.
Until such new Appendix A shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement upon Oral
Instructions or signatures of the then current Authorized Persons as set forth
in the last delivered Appendix A.
B. No recourse under any obligation of this Agreement or for any
claim based thereon shall be had against any organizer, shareholder,
Officer, Director, past, present or future as such, of the Fund or of any
predecessor or successor, either directly or through the Fund or any such
predecessor or successor, whether by virtue of any constitution, statute or
rule of law or equity, or be the enforcement of any assessment or penalty or
otherwise; it being expressly agreed and understood that this Agreement and
the obligations thereunder are enforceable solely against the Fund, and that
no such personal liability whatever shall attach to, or is or shall be
incurred by, the organizers, shareholders, Officers, Directors of the Fund or
of any predecessor or successor, or any of them as such. To the extent that
any such liability exists, it is hereby expressly waived and released by
the Custodian as a condition of, and as a consideration for, the execution of
this Agreement.
C. The obligations set forth in this Agreement as having been
made by the Fund have been made by the Board of Directors, acting as such
Directors for and on behalf of the Fund, pursuant to the authority vested in
them under the laws of the State of Maryland, the Articles of Incorporation and
the By-Laws of the Fund. This Agreement has been executed by Officers of the
Fund as officers, and not individually, and the obligations contained herein
are not binding upon any of the Directors, Officers, agents or holders of
shares, personally, but bind only the Fund.
D. Provisions of the Prospectus and any other documents
(including advertising material) specifically mentioning the Custodian (other
than merely by name and address) shall be reviewed with the Custodian by the
Fund prior to publication and/or dissemination or distribution, and shall be
subject to the consent of the Custodian.
E. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Custodian, shall be
sufficiently given if addressed to the Custodian and mailed or delivered to it
at its offices at Star Bank Center, 425 Walnut Street, M. L. 6118, Cincinnati,
Ohio 45202, attention Mutual Fund Custody Department, or at such other place as
the Custodian may from time to time designate in writing.
F. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Fund shall be sufficiently
given when delivered to the Fund or on the second business day following
the time such notice is deposited in the U.S. mail postage prepaid and
addressed to the Fund at its office at 1500 Forest Drive Suite 223, Richmond,
Virginia, 23229 or at such other place as the Fund may from time to time
designate in writing.
G. This Agreement, with the exception of the Appendices, may
not be amended or modified in any manner except by a written agreement executed
by both parties with the same formality as this Agreement, and authorized and
approved by a resolution of the Board of Directors of the Fund.
H. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Fund or by the
Custodian, and no attempted assignment by the Fund or the Custodian shall be
effective without the written consent of the other party hereto.
I. This Agreement shall be construed in accordance with the laws
of the State of Ohio.
J. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
The World Funds, Inc.
By: /s/ JOHN PASCO, III
------------------------
John Pasco, III
ATTEST: ________________________
Title: Chairman
Star Bank, N.A.
ATTEST: By: /s/ MARSHA A. CROXTON
---------------------------
Marsha A. Croxton
____________________________
Title: Vice President
APPENDIX A
Authorized Persons
Specimen Signatures
Chairman:
President:
Secretary:
Treasurer:
Controller:
Adviser Employees:
Transfer Agent/Fund Accountant
Employees:
<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A. for securities
processing and control . . .
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC
eligible Securities)
<PAGE>
APPENDIX C
Standards of Service Guide
<PAGE>
APPENDIX D
Schedule of Compensation
<PAGE>
FUND ACCOUNTING SERVICE AGREEMENT
This agreement (the "Agreement") is entered into as of the _____ day of
_______, 1996 by and between The World Funds, Inc., (the "Fund"), an open-end
diversified investment business corporation organized under the laws of Maryland
and having its office at 1500 Forest Drive Suite 223, Richmond, Virginia, 23229,
for the benefit of the Vontobel U.S. Value Fund series (the "Series") and Star
Bank, National Association, (the "Star Bank"), a national banking association
having its principal office at 425 Walnut Street, Cincinnati, Ohio, 45202.
WHEREAS, the Fund desires to appoint Star Bank as an Accounting Services
Agent to maintain and keep current the books, accounts, records, journals or
other records of original entry relating to the business of the Series as set
forth in this Agreement; and
WHEREAS, the Fund will cause to be provided certain information to Star
Bank as set forth below:
NOW, THEREFORE, in consideration of the premises and mutual convenants
hereafter contained, the parties hereto agree as follows:
Section 1. DEFINITIONS
For purposes of this Agreement, the terms Oral Instructions and Written
Instructions shall mean:
(a) Oral Instructions: The term Oral Instructions shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to Star Bank in person or by telephone, telegram, telecopy or
other mechanical or documentary means lacking an original signature, by a
person or persons believed in good faith by Star Bank to be a person or persons
authorized by a resolution of the Board of Directors of the Fund, to give Oral
Instructions on behalf of the Fund.
(b) Written Instructions: The term Written Instructions shall mean an
authorization, instruction, approval, item or set of data or information of any
kind transmitted to Star Bank bearing an original signature of an authorized
person, or a copy of such document transmitted by telecopy including
transmission of such signature believed in good faith by Star Bank to be the
signature of a person authorized by a resolution of the Board of Directors of
the Fund to give Written Instructions of behalf of the Fund.
(c) The Fund shall file with Star Bank a certified copy of each resolution of
its Board of Directors authorizing execution of Written Instructions or the
transmittal of Oral Instructions as provided above.
Section 2. SCOPE OF DUTIES OF STAR BANK
<PAGE>
(a) Upon receipt of the necessary information from the Fund or its agents by
Written or Oral Instructions, Star Bank shall maintain and keep current the
following Accounts and Records relating to the business of the Series, in such
form as may be mutually agreed to between the Fund and Star Bank, and as may be
required by the Investment Company Act of 1940 (the "Act"):
(1) Cash Receipts Journal
(2) Cash Disbursements Journal
(3) Dividends Paid and Payable Schedule
(4) Purchase and Sales Journals - Portfolio Securities
(5) Subscription and Redemption Journals
(6) Security Ledgers - Transaction Report and Tax Lot Report
(7) Broker Ledger - Commission Report
(8) Daily Expense Accruals
(9) Daily Interest Accruals
(10) Daily Trial Balance
(11) Portfolio Interest Receivable and Income Journal
(12) Listing of Portfolio Holdings showing cost, market value and
percentage of portfolio comprised of each security.
(b) Star Bank shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
Section 3. LIMITATION OF LIABILITY OF STAR BANK
(a) Unless necessary information to perform the above functions is furnished by
Written or Oral Instructions to Star Bank in a timely manner to enable the
daily calculation of the Fund's net asset value at the time set by the Fund
pursuant to Rule 22c-1 under the Act, Star Bank shall incur no liability,
and the Fund shall indemnify and hold harmless Star Bank from and against
any liability arising from any failure to provide complete information or
from any discrepancy between the information received by Star Bank and used
in such calculations and any subsequent information received from the Fund
or any of its designated Agents.
(b) Star Bank may rely upon the advice of the Fund, or of counsel for the Fund
and upon statements of the Fund's independent accountants, brokers and other
persons reasonably believed by it in good faith to be expert in the matters upon
which they are consulted and for any actions reasonably taken in good faith
reliance upon such statements and without negligence or willful misconduct, Star
Bank shall not be liable to anyone.
Section 4. REPORTS
(a) The Fund shall provide to Star Bank on a quarterly basis a report of a duly
authorized officer of the Fund representing that
<PAGE>
all information furnished to Star Bank during the preceding quarter was true,
complete and correct in all material respects. Star Bank shall not be
responsible for the accuracy of any information furnished to it by the Fund or
its authorized agents, and the Fund shall hold Star Bank harmless in regard to
any liability incurred by reason of the inaccuracy of such information.
(b) Whenever, in the course of performing its duties under this Agreement,
Star Bank determines, on the basis of information supplied to Star Bank by
the Fund or its authorized agents, that a violation of applicable law has
occurred or that, to its knowledge, a possible violation of applicable law
may have occurred or, with the passage of time, would occur, Star Bank shall
promptly notify the Fund and its counsel of such violation.
Section 5. PRICING
(a) Star Bank shall perform ministerial calculations necessary to calculate the
Fund's net asset value daily, in accordance with the Fund's current prospectus
and utilizing the information described in this Section.
(b) Portfolio investments for which market value is to be determined by the use
of an automated financial service (a "Pricing Service") approved by the Fund
shall be valued based on the prices of the portfolio investment reported by such
Pricing Service except where the Fund has given or caused to be given specific
Written or Oral Instructions to utilize a different value. Notwithstanding any
information obtained from a Pricing Service, all portfolio securities shall be
given such values as the Fund shall direct by Written or Oral Instructions,
including all restricted securities and other securities requiring valuation not
readily ascertainable solely by the use of such a Pricing Service.
(c) Star Bank shall have no responsibility or liability for the accuracy of
prices quoted by any recognized Pricing Service used by it pursuant to the
preceding paragraph; for the accuracy of the information supplied by the Fund;
or for any loss, liability, damage, or cost arising out of any inaccuracy of
such data, unless Star Bank is itself negligent with respect thereto.
Section 6. RELIANCE UPON INSTRUCTIONS
(a) For all purposes under this Agreement, Star Bank is authorized to act upon
receipt of the first of any Written or Oral Instructions it receives from the
Fund or authorized agents of the Fund. In cases where the first instruction is
an Oral Instruction that is not in the form of a document or written record, a
confirmatory Written Instruction or Oral Instruction in the form of a document
or written record shall be delivered, and in cases where Star Bank receives an
Instruction, whether Written or Oral, to enter a portfolio transaction on the
records, the Fund shall cause the broker-dealer to send a written confirmation
to Star Bank.
(b) Star Bank shall be entitled to rely on the first Instruction received by it,
and for any act or omission undertaken in
<PAGE>
compliance therewith shall be free of liability and fully indemnified and held
harmless by the Fund. If additional Instructions are received by the bank prior
to Complying with the original Instruction, the sole obligation of Star Bank
with respect to any follow-up or confirmatory Written Instruction, Oral
Instruction in documentary or written form, or broker-dealer written
confirmation shall be to make reasonable efforts to detect any such discrepancy
between the original Instruction and such confirmation and to report such
discrepancy to the Fund. The Fund shall be responsible, at the Fund's expense,
for taking any action, including any reprocessing, necessary to correct any
discrepancy or error.
Section 7. OWNERSHIP OF AND ACCESS TO FUND RECORDS
(a) It is agreed that the Accounts and Records maintained by Star Bank for the
Fund are the property of the Fund, and shall be made available to the Fund
promptly upon request and shall be maintained for the periods prescribed in
Rule 31(a)-2 under the Act.
(b) Star Bank shall assist the Fund's independent auditors or, upon lawful
demand, any authorized regulatory body, in any authorized inspection or review
of the Fund's Accounts and Records.
Section 8. PROCEDURES AND COMPLIANCE
Star Bank and the Fund may from time to time adopt such procedures as they
agree upon in writing, and Star Bank may conclusively assume that any procedure
approved or directed by the Fund does not conflict with or violate any
requirements of its Prospectus, Articles of Incorporation, By-Laws, or any
rule or regulation of any regulatory body or governmental agency. The Fund
shall be responsible for notifying Star Bank of any changes in regulations or
rules which might necessitate changes in Star Bank's procedures, and for working
out such changes with Star Bank.
Section 9. COMPENSATION
In consideration of the services to be performed by Star Bank, the Fund
agrees to pay Star Bank the fees and reimbursement of out-of-pocket expenses as
set forth in the fee schedule attached hereto as Schedule A.
Section 10. HOLIDAYS
Nothing contained in this Agreement is intended to or shall require Star
Bank, in any capacity hereunder, to perform any functions or duties on any
holiday, day of special observance or any other day on which the Custodian or
the New York Stock Exchange is closed. Functions or duties normally scheduled to
be performed on such days shall be performed, and as of, the next succeeding
business day on which both the New York Stock Exchange and the Custodian are
open. Not withstanding the foregoing, Star Bank shall compute the net asset
value of the Fund on each day required pursuant to Rule 22c-1 promulgated under
the Act.
Section 11. AGENTS
<PAGE>
Star Bank reserves the right to appoint, in its sole discretion, agents
who may serve as accounting service agents, or perform any part of the duties
and responsibilities of Star Bank under this Agreement.
Section 12. TERMINATION
Either Party hereto may give written notice to the other party (the
"Termination Notice") of the termination of this Agreement. Such Termination
Notice shall state a date upon which the termination is effective (the
"Termination Date"), which shall be not less than sixty (60) days after the date
of the giving of the notice unless otherwise agreed by the parties hereto in
writing.
Section 13. NOTICE
Any notice or other communication required by or permitted to be given in
connection with this Agreement shall be in writing, and shall be delivered in
person or sent by first class mail, postage prepaid to the respective parties as
follows:
If to the Fund:
The World Funds, Inc.
1500 Forest Drive Suite 223
Richmond, VA 23229
If to Star Bank:
Star Bank, N.A.
425 Walnut Street ML 6118
Cincinnati, OH 45202
Section 14. AMENDMENTS TO BE IN WRITING
This Agreement may be amended from time to time by a writing executed by
the Fund and Star Bank. The compensation stated in Schedule A attached hereto
may be adjusted from time to time by the execution of a new schedule signed by
both of the parties.
Section 15. CONTROLLING LAW
This Agreement shall be construed in accordance with the laws of the
State of Ohio.
Section 16. JURISDICTION
Any legal action, suit or proceeding to be instituted by either party
with respect to this Agreement shall be brought by such party exclusively in the
courts of the State of Ohio or in courts of the United States for the Southern
District of Ohio, and each party, by its execution of this Agreement,
irrevocably (i) submits to such jurisdiction and (ii) consents to the service of
any process or pleadings by first class U.S. mail, postage prepaid and return
receipt requested, or by any other means from time to time authorized by the
laws of such jurisdiction.
<PAGE>
Section 17. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
Section 18. HEADINGS
The headings of paragraphs in this Agreement are for convenience of
reference only and shall not affect the meaning or construction of any provision
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
The World Funds, Inc.
ATTEST: By: /s/ JOHN PASCO III
----------------------------------
____________________ John Pasco III
Title: Chairman
Star Bank, N.A.
ATTEST: By: /s/ MARSHA A. CROXTON
---------------------------------
____________________ Marsha A. Croxton
Title: Vice President
FUND ACCOUNTING SERVICE AGREEMENT
This agreement (the "Agreement") is entered into as of the _____ day of
_______, 1996 by and between The World Funds, Inc., (the "Fund"), an open-end
diversified investment business corporation organized under the laws of Maryland
and having its office at 1500 Forest Drive Suite 223, Richmond, Virginia, 23229,
for the benefit of the Sand Hill Portfolio Manager Fund series (the "Series")
and Star Bank, National Association, (the "Star Bank"), a national banking
association having its principal office at 425 Walnut Street, Cincinnati, Ohio,
45202.
WHEREAS, the Fund desires to appoint Star Bank as an Accounting
Services Agent to maintain and keep current the books, accounts, records,
journals or other records of original entry relating to the business of the
Series as set forth in this Agreement; and
WHEREAS, the Fund will cause to be provided certain information to Star
Bank as set forth below:
NOW, THEREFORE, in consideration of the premises and mutual convenants
hereafter contained, the parties hereto agree as follows:
Section 1. DEFINITIONS
For purposes of this Agreement, the terms Oral Instructions and Written
Instructions shall mean:
(a) Oral Instructions: The term Oral Instructions shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to Star Bank in person or by telephone, telegram, telecopy or
other mechanical or documentary means lacking an original signature, by a
person or persons believed in good faith by Star Bank to be a person or persons
authorized by a resolution of the Board of Directors of the Fund, to give Oral
Instructions on behalf of the Fund.
<PAGE>
(b) Written Instructions: The term Written Instructions shall mean an
authorization, instruction, approval, item or set of data or information of any
kind transmitted to Star Bank bearing an original signature of an authorized
person, or a copy of such document transmitted by telecopy including
transmission of such signature believed in good faith by Star Bank to be the
signature of a person authorized by a resolution of the Board of Directors of
the Fund to give Written Instructions of behalf of the Fund.
(c) The Fund shall file with Star Bank a certified copy of each resolution of
its Board of Directors authorizing execution of Written Instructions or the
transmittal of Oral Instructions as provided above.
Section 2. SCOPE OF DUTIES OF STAR BANK
(a) Upon receipt of the necessary information from the Fund or its agents by
Written or Oral Instructions, Star Bank shall maintain and keep current the
following Accounts and Records relating to the business of the Series, in such
form as may be mutually agreed to between the Fund and Star Bank, and as may be
required by the Investment Company Act of 1940 (the "Act"):
(1) Cash Receipts Journal
(2) Cash Disbursements Journal
(3) Dividends Paid and Payable Schedule
(4) Purchase and Sales Journals - Portfolio Securities
(5) Subscription and Redemption Journals
(6) Security Ledgers - Transaction Report and Tax Lot Report
(7) Broker Ledger - Commission Report
(8) Daily Expense Accruals
(9) Daily Interest Accruals
(10) Daily Trial Balance
(11) Portfolio Interest Receivable and Income Journal
(12) Listing of Portfolio Holdings showing cost, market value
and percentage of portfolio comprised of each security.
(b) Star Bank shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
<PAGE>
Section 3. LIMITATION OF LIABILITY OF STAR BANK
(a) Unless necessary information to perform the above functions is furnished by
Written or Oral Instructions to Star Bank in a timely manner to enable the
daily calculation of the Fund's net asset value at the time set by the Fund
pursuant to Rule 22c-1 under the Act, Star Bank shall incur no liability,
and the Fund shall indemnify and hold harmless Star Bank from and against
any liability arising from any failure to provide complete information or from
any discrepancy between the information received by Star Bank and used in such
calculations and any subsequent information received from the Fund or any of
its designated Agents.
(b) Star Bank may rely upon the advice of the Fund, or of counsel for the Fund
and upon statements of the Fund's independent accountants, brokers and other
persons reasonably believed by it in good faith to be expert in the matters upon
which they are consulted and for any actions reasonably taken in good faith
reliance upon such statements and without negligence or willful misconduct, Star
Bank shall not be liable to anyone.
Section 4. REPORTS
(a) The Fund shall provide to Star Bank on a quarterly basis a report of a duly
authorized officer of the Fund representing that all information furnished to
Star Bank during the preceding quarter was true, complete and correct in all
material respects. Star Bank shall not be responsible for the accuracy of any
information furnished to it by the Fund or its authorized agents, and the Fund
shall hold Star Bank harmless in regard to any liability incurred by reason of
the inaccuracy of such information.
(b) Whenever, in the course of performing its duties under this Agreement,
Star Bank determines, on the basis of information supplied to Star Bank by
the Fund or its authorized agents, that a violation of applicable law has
occurred or that, to its knowledge, a possible violation of applicable law may
have occurred or, with the passage of time, would occur, Star Bank shall
promptly notify the Fund and its counsel of such violation.
<PAGE>
Section 5. PRICING
(a) Star Bank shall perform ministerial calculations necessary to calculate the
Fund's net asset value daily, in accordance with the Fund's current prospectus
and utilizing the information described in this Section.
(b) Portfolio investments for which market value is to be determined by the use
of an automated financial service (a "Pricing Service") approved by the Fund
shall be valued based on the prices of the portfolio investment reported by such
Pricing Service except where the Fund has given or caused to be given specific
Written or Oral Instructions to utilize a different value. Notwithstanding any
information obtained from a Pricing Service, all portfolio securities shall be
given such values as the Fund shall direct by Written or Oral Instructions,
including all restricted securities and other securities requiring valuation not
readily ascertainable solely by the use of such a Pricing Service.
(c) Star Bank shall have no responsibility or liability for the accuracy of
prices quoted by any recognized Pricing Service used by it pursuant to the
preceding paragraph; for the accuracy of the information supplied by the
Fund; or for any loss, liability, damage, or cost arising out of any inaccuracy
of such data, unless Star Bank is itself negligent with respect thereto.
Section 6. RELIANCE UPON INSTRUCTIONS
(a) For all purposes under this Agreement, Star Bank is authorized to act upon
receipt of the first of any Written or Oral Instructions it receives from the
Fund or authorized agents of the Fund. In cases where the first instruction
is an Oral Instruction that is not in the form of a document or written record,
a confirmatory Written Instruction or Oral Instruction in the form of a document
or written record shall be delivered, and in cases where Star Bank receives an
Instruction, whether Written or Oral, to enter a portfolio transaction on
the records, the Fund shall cause the broker-dealer to send a written
confirmation to Star Bank.
<PAGE>
(b) Star Bank shall be entitled to rely on the first Instruction received by it,
and for any act or omission undertaken in compliance therewith shall be free of
liability and fully indemnified and held harmless by the Fund. If additional
Instructions are received by the bank prior to complying with the original
Instruction, the sole obligation of Star Bank with respect to any follow-up or
confirmatory Written Instruction, Oral Instruction in documentary or written
form, or broker-dealer written confirmation shall be to make reasonable efforts
to detect any such discrepancy between the original Instruction and such
confirmation and to report such discrepancy to the Fund. The Fund shall be
responsible, at the Fund's expense, for taking any action, including any
reprocessing, necessary to correct any discrepancy or error.
Section 7. OWNERSHIP OF AND ACCESS TO FUND RECORDS
(a) It is agreed that the Accounts and Records maintained by Star Bank for the
Fund are the property of the Fund, and shall be made available to the Fund
promptly upon request and shall be maintained for the periods prescribed in
Rule 31(a)-2 under the Act.
(b) Star Bank shall assist the Fund's independent auditors or, upon lawful
demand, any authorized regulatory body, in any authorized inspection or review
of the Fund's Accounts and Records.
Section 8. PROCEDURES AND COMPLIANCE
Star Bank and the Fund may from time to time adopt such procedures as they agree
upon in writing, and Star Bank may conclusively assume that any procedure
approved or directed by the Fund does not conflict with or violate any
requirements of its Prospectus, Articles of Incorporation, By-Laws, or any rule
or regulation of any regulatory body or governmental agency. The Fund shall
be responsible for notifying Star Bank of any changes in regulations or rules
which might necessitate changes in Star Bank's procedures, and for working out
such changes with Star Bank.
Section 9. COMPENSATION
<PAGE>
In consideration of the services to be performed by Star Bank, the Fund
agrees to pay Star Bank the fees and reimbursement of out-of-pocket expenses as
set forth in the fee schedule attached hereto as Schedule A.
Section 10. HOLIDAYS
Nothing contained in this Agreement is intended to or shall require
Star Bank, in any capacity hereunder, to perform any functions or duties on any
holiday, day of special observance or any other day on which the Custodian or
the New York Stock Exchange is closed. Functions or duties normally scheduled to
be performed on such days shall be performed, and as of, the next succeeding
business day on which both the New York Stock Exchange and the Custodian are
open. Not withstanding the foregoing, Star Bank shall compute the net asset
value of the Fund on each day required pursuant to Rule 22c-1 promulgated under
the Act.
Section 11. AGENTS
Star Bank reserves the right to appoint, in its sole discretion, agents
who may serve as accounting service agents, or perform any part of the duties
and responsibilities of Star Bank under this Agreement.
Section 12. TERMINATION
Either Party hereto may give written notice to the other party (the
"Termination Notice") of the termination of this Agreement. Such Termination
Notice shall state a date upon which the termination is effective (the
"Termination Date"), which shall be not less than sixty (60) days after the date
of the giving of the notice unless otherwise agreed by the parties hereto in
writing.
Section 13. NOTICE
Any notice or other communication required by or permitted to be given
in connection with this Agreement shall be in writing, and shall be delivered in
person or sent by first class mail, postage prepaid to the respective parties as
follows:
<PAGE>
If to the Fund:
The World Funds, Inc.
1500 Forest Drive Suite 223
Richmond, VA 23229
If to Star Bank:
Star Bank, N.A.
425 Walnut Street ML 6118
Cincinnati, OH 45202
Section 14. AMENDMENTS TO BE IN WRITING
This Agreement may be amended from time to time by a writing executed
by the Fund and Star Bank. The compensation stated in Schedule A attached
hereto may be adjusted from time to time by the execution of a new schedule
signed by both of the parties.
Section 15. CONTROLLING LAW
This Agreement shall be construed in accordance with the laws of the
State of Ohio.
Section 16. JURISDICTION
Any legal action, suit or proceeding to be instituted by either party
with respect to this Agreement shall be brought by such party exclusively in the
courts of the State of Ohio or in courts of the United States for the Southern
District of Ohio, and each party, by its execution of this Agreement,
irrevocably (i) submits to such jurisdiction and (ii) consents to the service of
any process or pleadings by first class U.S. mail, postage prepaid and return
receipt requested, or by any other means from time to time authorized by the
laws of such jurisdiction.
Section 17. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such
<PAGE>
counterparts shall, together, constitute only one instrument.
Section 18. HEADINGS
The headings of paragraphs in this Agreement are for convenience of
reference only and shall not affect the meaning or construction of any provision
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
The World Funds, Inc.
ATTEST:
By: /s/ JOHN PASCO III
------------------------------
______________________ John Pasco III
Title: Chairman
Star Bank, N.A.
ATTEST:
By: /s/ MARSHA A. CROXTON
-----------------------------
____________________ Marsha A. Croxton
Title: Vice President
COMPUTATION OF PERFORMANCE
VONTOBEL INTERNATIONAL EQUITY FUND
1 Year Inception
P 1,000.00 1,000.00
T 16.98% 6.67%
N 1.0 12.0
ERV 1,169.76 2,170.63
COMPUTATION OF PERFORMANCE
VONTOBEL U. S. VALUE FUND
1 Year Inception
P 1,000.00 1,000.00
T 21.27% 15.13%
N 1.0 6.75
ERV 1,212.70 2,588.74
COMPUTATION OF PERFORMANCE
VONTOBEL INTERNATIONAL BOND FUND
1 Year Inception
P 1,000.00 1,000.00
T 7.51% 9.38%
N 1.0 2.83
ERV 1,075.09 1,289.36
COMPUTATION OF PERFORMANCE
SAND HILL PORTFOLIO MANAGER FUND
1 Year Inception
P 1,000.00 1,000.00
T 19.56% 15.51%
N 1.0 2.0
ERV 1,195.59 1,334.29
COMPUTATION OF PERFORMANCE
VONTOBEL EASTERN EUROPEAN EQUITY FUND
Inception
P 1,000.00
T 48.90%*
N 0.87%
ERV 1,489.00
* NOT ANNUALIZED
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<DIVIDEND-INCOME> 2,142,026
<INTEREST-INCOME> 5,118
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<EXPENSES-NET> 1,940,392
<NET-INVESTMENT-INCOME> 206,752
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<NET-CHANGE-FROM-OPS> 11,743,132
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<INVESTMENTS-AT-VALUE> 25,587,032
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