<PAGE>
Registration Nos. 33-70116
811-8036
As filed with the Securities and Exchange Commission on April 29, 1996
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 8
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
(Check appropriate box or boxes)
THE OFFITBANK INVESTMENT FUND, INC.
(Exact name of Registrant as specified in charter)
237 Park Avenue
New York, New York 10017
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 845-8406
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Wallace Mathai-Davis
Secretary and Treasurer
The OFFITBANK Investment Fund, Inc.
237 Park Avenue
New York, New York 10017
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(Name and Address of Agent for Service)
with a copy to:
Gary S. Schpero, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
(212) 455-2000
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective: (check appropriate box)
X immediately upon filing pursuant to paragraph (b)
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on (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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on (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of rule 485
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If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
--- previously filed post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has previously filed a declaration of registration of an indefinite
number of shares of Capital Stock, $.001 par value per share, of all series of
the Registrant, now existing or hereafter created. Registrant's 24f-2 Notice
for the fiscal year ended December 31, 1995 was filed on February 29, 1996.
<PAGE>
EXPLANATORY NOTE: THIS AMENDMENT TO THE REGISTRATION STATEMENT CONTAINS
TWO FORMS OF PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. THE FIRST
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION RELATE TO OFFITBANK HIGH
YIELD FUND, OFFITBANK INVESTMENT GRADE GLOBAL DEBT FUND, OFFITBANK GLOBAL
CONVERTIBLE FUND, OFFITBANK EMERGING MARKETS FUND AND OFFITBANK LATIN
AMERICA TOTAL RETURN FUND. THE SECOND RELATE TO OFFITBANK NATIONAL
MUNICIPAL FUND, OFFITBANK CALIFORNIA MUNICIPAL FUND AND OFFITBANK NEW YORK
MUNICIPAL FUND.
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
Under the Securities Act of 1933
N-1A Item No. Location
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Part A Prospectus Caption
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Item 1. Cover Page . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . Prospectus Summary; Expense Information
Item 3. Condensed Financial
Information. . . . . . . . Financial Highlights
Item 4. General Description of
Registrant . . . . . . . . Prospectus Summary; Investment
Objectives and Policies; Other
Investment Policies and Risks; Special
Risk Considerations; The Transfer;
Limiting Investment Risks; Additional
Information; Appendix A; Appendix B
Item 5. Management of the Fund . . Management;Fund Expenses
Item 5A. Management's Discussion
of Fund Performance. . . . Not Applicable
Item 6. Capital Stock and Other
Securities . . . . . . . . Dividends and Distributions; Taxes;
Additional Information; Reports to
Shareholders
Item 7. Purchase of Securities
Being Offered. . . . . . . Management; Purchase of Shares; Net
Asset Value
Item 8. Redemption or Repurchase . Redemption of Shares; Shareholder
Services
Item 9. Legal Proceedings. . . . . Not Applicable
<PAGE>
Statement of Additional
Part B Information Caption
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Item 10. Cover Page . . . . . . . . Cover Page
Item 11. Table of Contents. . . . . Table of Contents
Item 12. General Information and
History. . . . . . . . . . Not Applicable
Item 13. Investment Objectives and
Policies . . . . . . . . . Additional Information on Portfolio
Instruments; Additional Risk
Considerations; Investment Limitations
Item 14. Management of the
Registrant . . . . . . . . Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities . . . . . . . . General Information
Item 16. Investment Advisory and
Other Services . . . . . . Management of the Fund
Item 17. Brokerage Allocation . . . Portfolio Transactions
Item 18. Capital Stock and Other
Securities . . . . . . . . General Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered. . . . . . . Management; Purchase of Shares;
Redemption of Shares; Shareholder
Services
Item 20. Tax Status . . . . . . . . Additional Information Concerning Taxes
Item 21. Underwriters . . . . . . . Distributor
Item 22. Calculation of
Performance Data . . . . . Performance Information
Item 23. Financial Statements . . . Report of Independent Accountants;
Financial Statements
<PAGE>
Part C
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Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PART A
<PAGE>
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OFFITBANK High Yield Fund
OFFITBANK Emerging Markets Fund
OFFITBANK Investment Grade Global Debt Fund
OFFITBANK Global Convertible Fund
OFFITBANK Latin America Total Return Fund
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PROSPECTUS
APRIL 29, 1996
THE
[LOGO]INVESTMENT FUND, INC.
<PAGE>
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The OFFITBANK Investment Fund, Inc. currently intends to offer eight no-load
mutual funds designed to meet a variety of investment objectives.
INVESTORS LOOKING TO BROADEN THE INVESTMENT
EXPOSURE IN THEIR PORTFOLIOS SHOULD CONSIDER:
High Yield Fund
Emerging Markets Fund
Investment Grade Global Debt Fund
Global Convertible Fund
Latin America Total Return Fund
INVESTORS SEEKING TO MAXIMIZE AFTER-TAX TOTAL RETURNS SHOULD CONSIDER:
National Municipal Fund
California Municipal Fund
New York Municipal Fund
For more complete information on any of the OFFITBANK Funds listed above,
refer to the Fund's prospectus.
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The text above is not part of the Prospectus.
<PAGE>
PROSPECTUS
THE [LOGO] INVESTMENT FUND, INC.
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INVESTMENT PORTFOLIOS:
[LOGO]HIGH YIELD FUND
[LOGO]EMERGING MARKETS FUND
[LOGO]INVESTMENT GRADE GLOBAL DEBT FUND
[LOGO]GLOBAL CONVERTIBLE FUND
[LOGO]LATIN AMERICA TOTAL RETURN FUND
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The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end,
management investment company that currently intends to offer eight separate,
no-load, non-diversified investment portfolios which each have a different
investment objective. This Prospectus relates to the following five portfolios
(each a "Fund"), each of which offers two classes of shares, Select Shares and
Advisor Shares:
The OFFITBANK HIGH YIELD FUND'S primary investment objective is high current
income. Capital appreciation is a secondary objective.
The OFFITBANK EMERGING MARKETS FUND'S investment objective is to provide
investors with a competitive total return by focusing on current yield and
opportunities for capital appreciation.
The OFFITBANK INVESTMENT GRADE GLOBAL DEBT FUND'S investment objective is to
achieve a competitive fixed-income total return.
The OFFITBANK GLOBAL CONVERTIBLE FUND'S investment objective is to maximize
total return from a combination of capital appreciation and investment income.
The OFFITBANK LATIN AMERICA TOTAL RETURN FUND'S investment objective is to
maximize total investment return from a combination of capital appreciation and
current income.
Select Shares may be purchased from and redeemed through the Company's
distributor. Advisor Shares must be purchased or redeemed through a Shareholder
Servicing Agent, which is a financial institution that has entered into an
agreement with the Company to provide various shareholder services to the
beneficial owners of shares. Shares of each class of any Fund may be exchanged
for shares of the same class of any other Fund or for shares of the same class
of other portfolios of the Company not covered by this Prospectus. The
investment objectives of these other portfolios are described below. Information
about these portfolios is contained in a separate Prospectus and Statement of
Additional Information, each dated April 29, 1996 and each of which is available
from OFFITBANK without charge by calling 1-800-618-9510.
The OFFITBANK NATIONAL MUNICIPAL FUND'S investment objective is to maximize
total after-tax return, consistent with a prudent level of credit risk.
The OFFITBANK CALIFORNIA MUNICIPAL FUND'S investment objective is to
maximize total after-tax return for California residents, consistent with a
prudent level of credit risk.
The OFFITBANK NEW YORK MUNICIPAL FUND'S investment objective is to maximize
total after-tax return for New York residents, consistent with a prudent level
of credit risk.
EACH FUND MAY INVEST IN HIGH YIELD, HIGH RISK DEBT SECURITIES WHICH ARE
CONSIDERED SPECULATIVE AND SUBJECT TO CERTAIN RISKS. SEE "INVESTMENT OBJECTIVES
AND POLICIES" AND "SPECIAL RISK CONSIDERATIONS". There can be no assurance that
the Funds' investment objectives will be achieved.
OFFITBANK serves as the Funds' investment adviser (the "Adviser"). The
Adviser is a New York State chartered trust company which currently manages in
excess of $6.5 billion in assets principally invested in global fixed income
securities.
The address of the Company is 237 Park Avenue, Suite 910, New York, New York
10017. Yield and other information regarding the Funds may be obtained by
calling the Company at 1-800-618-9510.
This Prospectus briefly sets forth certain information about the Funds that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Funds, contained in a Statement of Additional Information dated April 29, 1996,
as it may be amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission (the "Commission") and is available to
investors without charge by calling 1-800-618-9510. The Statement of Additional
Information is incorporated in its entirety by reference into this Prospectus.
INVESTORS ARE ADVISED THAT SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATES OF OFFITBANK, NOR
ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THE COMPANY IS NOT AUTHORIZED TO
ENGAGE IN THE BUSINESS OF BANKING.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------
April 29, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Expense Information......................................... 7
Financial Highlights........................................ 9
Investment Objectives and Policies.......................... 10
Other Investment Policies................................... 15
Special Risk Considerations................................. 22
Limiting Investment Risks................................... 31
Management.................................................. 32
Dividends and Distributions................................. 34
Purchase of Shares.......................................... 35
Redemption of Shares........................................ 36
Shareholder Services........................................ 38
Net Asset Value............................................. 38
Taxes....................................................... 39
Performance Information..................................... 41
The Transfer................................................ 41
Additional Information...................................... 42
Reports to Shareholders..................................... 42
Appendix A.................................................. A-1
Appendix B.................................................. B-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
PROSPECTUS SUMMARY
WHAT ARE THE FUNDS?
OFFITBANK High Yield Fund (the "High Yield Fund"), OFFITBANK Emerging Markets
Fund (the "Emerging Markets Fund"), OFFITBANK Investment Grade Global Debt Fund
(the "Global Debt Fund"), OFFITBANK Global Convertible Fund (the "Global
Convertible Fund") and OFFITBANK Latin America Total Return Fund (the "Latin
America Total Return Fund") (each a "Fund" and, collectively, the "Funds") are
no-load, separate, non-diversified investment portfolios of The OFFITBANK
Investment Fund, Inc. (the "Company"), an open-end management investment company
incorporated in Maryland on September 8, 1993. Each Fund offers two classes of
shares, Select Shares and Advisor Shares. See "What Classes of Shares does each
Fund Offer?", below. As of the date of this Prospectus, the Global Debt and
Global Convertible Funds have not yet commenced investment operations. The
Company is not authorized to engage in the business of banking.
WHAT ARE THE FUNDS' OBJECTIVES AND POLICIES?
The HIGH YIELD FUND'S primary investment objective is high current income.
Capital appreciation is a secondary objective. The High Yield Fund invests,
under normal circumstances, at least 65% of its total assets in U.S. corporate
fixed income securities rated below investment grade, offering potential returns
that are sufficiently high to justify the greater investment risks.
The EMERGING MARKETS FUND'S investment objective is to provide investors with a
competitive total investment return by focusing on current yield and
opportunities for capital appreciation. The Fund seeks to achieve its investment
objective by investing primarily in corporate and sovereign debt securities of
emerging market countries. Under normal circumstances, the Emerging Markets Fund
will invest at least 80% of its total assets in debt instruments denominated in
any currency, including U.S. dollars, but may invest up to 20% of its total
assets in equity securities. See "Limiting Investment Risks".
The GLOBAL DEBT FUND'S investment objective is to achieve a competitive fixed
income total investment return. Total investment return is the combination of
income and changes in value. Under normal circumstances, the Global Debt Fund
invests at least 75% of its total assets in a wide range of investment grade
debt securities issued anywhere in the world, including the United States, and
denominated in any currency, including U.S. dollars. Up to 25% of the Fund's
total assets may be invested in below investment grade debt securities.
The GLOBAL CONVERTIBLE FUND'S investment objective is to maximize total return
from a combination of capital appreciation and investment income. The Fund will
seek to achieve its objective by investing primarily in an internationally
diversified portfolio of convertible debt securities, convertible preferred
stocks and "synthetic" convertible securities consisting of a combination of
debt securities or preferred stock and warrants or options. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
traditional convertible securities and may invest up to 35% of its total assets
in synthetic convertible securities. The Fund may invest anywhere in the world,
including the United States, and its investments may be denominated in any
currency, including U.S. dollars. All or a portion of the Fund's assets may be
invested in below investment grade debt securities.
The LATIN AMERICA TOTAL RETURN FUND'S investment objective is to maximize total
investment return from a combination of capital appreciation and current income.
The Fund will seek to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in a combination of equity
securities and debt securities (including convertible debt securities) of Latin
American issuers (as defined in this Prospectus). While the relative portion of
the Fund's total assets allocated between equity and debt securities of Latin
American issuers will vary from time to time, depending on market conditions and
investment opportunities, the Fund does not intend to invest more than 80% of
its total assets in either asset class of securities at any one time.
3
<PAGE>
WHO IS THE FUNDS' INVESTMENT ADVISER?
OFFITBANK (the "Adviser"), a New York State chartered trust company, provides
investment advisory services to the Funds. Under its charter, the Adviser may
neither accept deposits nor make loans except for deposits or loans arising
directly from its exercise of the fiduciary powers granted it under the New York
Banking Law. The Adviser's principal business is the rendering of discretionary
investment management services to high net worth individuals and family groups,
foundations, endowments and corporations. The Adviser specializes in global
asset management and offers its clients a complete range of investments in
capital markets throughout the world. The Adviser currently manages in excess of
$6.5 billion in assets principally invested in global fixed income securities
and serves as investment adviser to sixteen registered investment companies (or
portfolios thereof). For its services as investment adviser, the Adviser is
entitled to receive from each Fund a monthly fee based upon the average daily
net assets of such Fund at the following annual rates: .85% for the first
$200,000,000 of assets, .75% for the next $400,000,000 of assets and .65% for
amounts in excess of $600,000,000 of assets in the case of the High Yield Fund;
90% for the first $200,000,000 of assets and .80% for amounts in excess thereof
in the case of the Emerging Markets Fund; .80% for the first $200,000,000 of
assets and .70% for amounts in excess thereof in the case of the Global Debt
Fund; .90% in the case of the Global Convertible Fund and 1.00% in the case of
the Latin America Total Return Fund. The investment advisory fee for each Fund
is higher than that paid by most investment companies, but is comparable to that
paid by other investment companies that have similar investment strategies. See
"Management".
WHAT CLASSES OF SHARES DOES EACH FUND OFFER?
As of April 29, 1996, shares of any Fund outstanding were reclassified as
"Select Shares" and each Fund began offering a new class of shares, designated
as "Advisor Shares", in addition to Select Shares. Select Shares and Advisor
Shares have different expense levels. See "Expense Information".
HOW DO YOU PURCHASE AND REDEEM SHARES OF THE FUNDS?
Select Shares of the Funds may be purchased from the Company's distributor,
OFFIT Funds Distributor, Inc., at the next determined net asset value per share.
The minimum initial investment for Select Shares of each of the Funds is
$250,000. The minimum for subsequent investments for Select Shares of each Fund
is $10,000.
Advisor Shares must be purchased through a Shareholder Servicing Agent. Advisor
Shares are subject to such investment minimums and other terms and conditions as
may be imposed by Shareholder Servicing Agents from time to time.
The Company's officers are authorized to waive the minimum initial and
subsequent investment requirements. See "Purchase of Shares". Each Fund has
adopted a Plan of Distribution which permits the reimbursement by such Fund of
distribution expenses with respect to each class of shares of the Fund on an
annual basis. See "Management--Distributor".
Each Fund redeems shares on any business day at the next determined net asset
value. There is no redemption fee charged by the Fund. The redemption price may
be more or less than the purchase price. Advisor Shares must be redeemed through
a Shareholder Servicing Agent. See "Redemption of Shares".
WHEN DO THE FUNDS PAY DIVIDENDS AND MAKE DISTRIBUTIONS?
The High Yield and Global Debt Funds intend to declare dividends daily and pay
dividends monthly, the Emerging Markets and Latin America Total Return Funds
intend to declare dividends daily and pay dividends quarterly and the Global
Convertible Fund intends to declare and pay dividends quarterly. Shareholders of
each Fund will receive dividends in additional Fund shares of the same class or
may elect to receive cash. It is anticipated that the expenses incurred by each
class of shares of each Fund will differ and, accordingly, that the dividends
distributed with respect to each class will differ. See "Dividends and
Distributions".
4
<PAGE>
WHAT ARE THE SPECIAL RISK CONSIDERATIONS FOR INVESTORS IN THE FUNDS?
SHARE PRICE FLUCTUATIONS. Each Fund's net asset value and its share price will
fluctuate, reflecting fluctuations in the market value of its portfolio
positions. The value of the securities held by each Fund generally fluctuates,
to varying degrees, based on, among other things, (1) interest rate movements
and, for debt securities, their duration, (2) changes in the actual and
perceived creditworthiness of the issuers of such securities, (3) changes in any
applicable foreign currency exchange rates, (4) social, economic or political
factors, (5) factors affecting the industry in which the issuer operates, such
as competition or technological advances, and (6) factors affecting the issuer
directly, such as management changes or labor relations.
NON-U.S. ISSUERS. Individual foreign economies in general and those of Latin
American and other emerging market countries in particular may differ favorably
or unfavorably and significantly from the U.S. economy in such respects as the
rate of growth of gross domestic product or gross national product, rate of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, structural unemployment and balance of payments position. A
Fund's investments in foreign securities generally involve certain special risks
and considerations not typically associated with investments in U.S. securities,
including risks relating to (i) economic, political and social factors; (ii)
more substantial government involvement in the economy; (iii) restrictions on
foreign investment and repatriation of capital; (iv) foreign exchange matters,
including fluctuations in the rate of exchange between the dollar and the
applicable foreign currency, exchange control regulations and costs associated
with conversion of investment principal and income from one currency to another;
(v) higher rates of inflation; and (vi) differences between the securities
markets of the United States and those in other countries. Factors contributing
to differences between the securities markets of the United States and those in
other countries include greater price volatility, less liquidity and smaller
market capitalization of the securities markets, the fact that a relatively
small number of companies may represent a substantial portion of market
capitalization, delays or other material difficulties in connection with
clearance and settlement of securities transactions, the lack of sufficient
capital to expand market operations, the possibility of permanent or temporary
termination of trading, greater spreads between bid and ask prices for
securities and the absence of uniform accounting, auditing and financial
reporting standards, practices and disclosure requirements, such that certain
material disclosures may not be made and less information may be available to
investors investing in non-U.S. securities than to investors investing in U.S.
securities, and less government supervision and regulation. See "Special Risk
Considerations--Securities of Non-U.S. Issuers".
A Fund's participation in the currency, options and futures markets involves
certain risks and transaction costs. Each of these risks generally is greater
for investments in Latin America and emerging markets because of the special
risks associated with investing in such markets. An investment in the Emerging
Markets, Global Convertible and Latin America Total Return Funds, and to the
extent they invest in emerging markets securities, the High Yield and Global
Debt Funds, should be considered speculative. Certain foreign countries may
impose withholding taxes on income earned and/or gains realized by the Funds in
connection with investments in such countries.
SOVEREIGN DEBT. Certain Funds may also invest in sovereign debt of emerging
markets countries, including "Brady Bonds" which are debt securities issued or
guaranteed by foreign governments in exchange for existing external commercial
bank indebtedness. These securities involve a high degree of risk because the
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal and/or interest when due
in accordance with the terms of such debt. Sovereign debt securities in which
the Funds will invest are widely considered to have a credit quality below
investment grade. As a result, such securities may be regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations.
CONVERTIBLE SECURITIES. The value of a convertible security is a function of its
"investment value" (determined by its yield in comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates and
the yield of similar non-convertible securities, with investment value declining
as interest rates increase and increasing as interest rates decline. The
conversion value of a convertible security
5
<PAGE>
is influenced by changes in the market price of the underlying common stock. If,
because of a low price of the underlying common stock, the conversion value is
low relative to the investment value, the price of the convertible security is
governed principally by its investment value. To the extent the market price of
the underlying common stock approaches or exceeds the conversion price, the
price of the convertible security will be increasingly influenced by its
conversion value, and the convertible security may sell at a premium over its
conversion value to the extent investors place value on the right to acquire the
underlying common stock while holding a fixed income security. If no capital
appreciation occurs on the underlying common stock, this premium may not be
fully recovered.
As a result of the conversion feature, the interest rate or dividend preference
on a convertible security, while generally offering a yield greater than that on
the underlying common stock, is generally less than it would be if the security
was not convertible. In addition, although the Adviser believes that convertible
securities available in the market generally contain provisions adequate to
protect the value of the securities from dilution, in the absence of adequate
anti-dilution provisions dilution in the value of a Fund's holding may occur in
the event the underlying stock is subdivided, additional securities are issued,
a stock dividend is declared, or the issuer enters into another type of
corporate transaction which increases its outstanding equity securities.
HIGH YIELD, HIGH RISK DEBT SECURITIES. All or a substantial portion of the
securities purchased by the High Yield, Emerging Markets, Global Convertible and
Latin America Total Return Funds, and, at the time of investment, up to 25% of
the total assets of the Global Debt Fund, may be high yield, high risk debt
securities. Investment by the Funds in such securities involves a high degree of
credit risk. Such investments are regarded as speculative by the major rating
agencies.
NON-DIVERSIFIED FUNDS. Each Fund normally invests in a substantial number of
issuers; however, each Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the value of
its shares may fluctuate more than the shares of a diversified fund.
OTHER INVESTMENT POLICIES. In addition, prospective investors in the Funds
should consider the following factors: (1) each Fund may invest in repurchase
agreements, which entail a risk of loss should the seller default in its
obligation to repurchase the security which is the subject of the transaction;
(2) each Fund may lend its investment securities, which entails a risk of loss
should the borrower fail financially; (3) each Fund may purchase securities on a
when-issued basis, which may decline or appreciate in market value prior to
their actual delivery to the Fund; (4) each Fund may invest a portion of its
assets in various types of derivative instruments (including futures contracts,
options on futures contracts and options on securities, currencies and indices),
which entail certain costs and risks including imperfect correlation between the
value of the security being hedged and the value of the particular derivative
instrument, and the risk that a Fund could not close out a position in such a
derivative instrument when it would be most advantageous to do so; (5) each Fund
may invest in mortgage-backed and/or asset-backed securities, the value of which
may be highly sensitive to interest rate changes; (6) each Fund may invest in
structured products, including among others, inverse floaters, spread trades and
notes linked by a formula to the price of an underlying instrument or currency,
all of which generally are subject to greater volatility than an investment
directly in the underlying market or security; and (7) certain Funds may borrow
money from banks, a speculative technique known as leveraging.
See "Special Risk Considerations" for additional information regarding certain
risks associated with investment in the Funds.
6
<PAGE>
EXPENSE INFORMATION
The following Expense Summary lists the costs and expenses that a
shareholder can expect to incur as an investor in Select Shares or Advisor
Shares of each Fund.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SELECT ADVISOR
SHARES SHARES
----------- -----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................. None None
Sales Load Imposed on Reinvested Dividends.................................................. None None
Redemption Fee.............................................................................. None None
Exchange Fee................................................................................ None None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<CAPTION>
SELECT ADVISOR
FUND SHARES SHARES
- -------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
HIGH YIELD FUND
Advisory Fee.............................................................................. 0.80% 0.80%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (after waivers)***......................................................... 0.25% 0.50%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 1.05% 1.30%
----- -----
----- -----
EMERGING MARKETS FUND
Advisory Fee.............................................................................. 0.90% 0.90%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (after waivers)***......................................................... 0.60% 0.85%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 1.50% 1.75%
----- -----
----- -----
GLOBAL DEBT FUND
Advisory Fee (after waiver)*.............................................................. 0.36% 0.36%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (estimated, after waivers)***.............................................. 0.94% 1.19%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 1.30% 1.55%
----- -----
----- -----
GLOBAL CONVERTIBLE FUND
Advisory Fee (after waiver)*.............................................................. 0.70% 0.70%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (estimated, after waivers)***.............................................. 0.80% 1.05%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 1.50% 1.75%
----- -----
----- -----
LATIN AMERICA TOTAL RETURN FUND
Advisory Fee (after waiver)*.............................................................. 0.00% 0.00%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (estimated, after waivers)***.............................................. 2.00% 2.25%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 2.00% 2.25%
----- -----
----- -----
</TABLE>
- --------------
* Reflects current waivers of advisory fees for the Global Debt, Global
Convertible and Latin America Total Return Funds. The Adviser has agreed to
voluntarily waive all or a portion of its advisory fee to the extent
necessary to maintain the Total Fund Operating Expenses for the Global Debt,
Global Convertible and Latin America Total Return Funds at the levels set
forth in the table above. Absent such voluntary waivers, the ratio of
advisory fees to average net assets would be 0.80% for the Global Debt Fund,
0.90% for the Global Convertible Fund and 1.00% for the Latin America Total
Return Fund.
7
<PAGE>
** Each Fund is authorized to spend, with respect to each class of its shares,
up to 0.25% of net assets annually in accordance with a Plan of Distribution
to reimburse its distributor for activities primarily intended to result in
the sale of shares. The amounts set forth in the table above reflect the
current waiver by the Distributor of its right to seek reimbursement under
the Plan of Distribution with respect to each class of shares. Such waiver
may be terminated at any time. See "Management--Distributor".
*** As of the date of this Prospectus, the Global Debt and Global Convertible
Funds had not commenced investment operations. In addition, the Latin
America Total Return Fund commenced investment operations on February 12,
1996. The amounts set forth for "Other Expenses" for these Funds are
therefore based on estimates for the current fiscal year, after giving
effect to current waivers of administration fees. Such waivers may be
terminated at any time. "Other Expenses" include audit, administration,
custody, shareholder servicing, legal, registration, transfer agency and
miscellaneous other charges. Absent the aforementioned waivers, the ratio of
"Other Expenses" to average net assets would be (i) 0.33% and 0.58% for the
Select Shares and Advisor Shares, respectively, of the High Yield Fund, (ii)
0.68% and 0.93% for the Select Shares and Advisor Shares, respectively, of
the Emerging Markets Fund, (iii) 1.09% and 1.34% for the Select Shares and
Advisor Shares, respectively, of the Global Debt Fund, (iv) 0.95% and 1.20%
for the Select Shares and Advisor Shares, respectively, of the Global
Convertible Fund and (v) 2.15% and 2.40% for the Select Shares and Advisor
Shares, respectively, of the Latin America Total Return Fund.
+ Absent the voluntary waivers referred to above, the ratio of "Total Fund
Operating Expenses" to average net assets would be (i) 1.38% and 1.63% for
the Select Shares and Advisor Shares, respectively, of the High Yield Fund,
(ii) 1.83% and 2.08% for the Select Shares and Advisor Shares, respectively,
of the Emerging Markets Fund, (iii) 2.14% and 2.39% for the Select Shares
and Advisor Shares, respectively, of the Global Debt Fund, (iv) 2.10% and
2.35% for the Select Shares and Advisor Shares, respectively, of the Global
Convertible Fund and (v) 3.40% and 3.65% for the Select Shares and Advisor
Shares, respectively, of the Latin America Total Return Fund.
For additional information with respect to the expenses identified in the table
above, see "Management" in this Prospectus and "Management" and "Distributor" in
the Statement of Additional Information.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) a 5%
annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
LATIN
AMERICA
HIGH EMERGING GLOBAL GLOBAL TOTAL
YIELD FUND MARKETS FUND DEBT FUND CONVERTIBLE FUND RETURN FUND
------------------------ ------------------------ ------------------------ ------------------------ -----------
SELECT ADVISOR SELECT ADVISOR SELECT ADVISOR SELECT ADVISOR SELECT
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year......... $ 11 $ 13 $ 15 $ 18 $ 13 $ 16 $ 15 $ 18 $ 20
3 years........ $ 33 $ 41 $ 47 $ 55 $ 41 $ 44 $ 47 $ 55 $ 63
5 years........ $ 58 $ 71 $ 82 $ 95 -- -- -- -- --
10 years....... $ 128 $ 157 $ 179 $ 206 -- -- -- -- --
<CAPTION>
ADVISOR
SHARES
-----------
<S> <C>
1 year......... $ 23
3 years........ $ 70
5 years........ --
10 years....... --
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND RATE OF RETURN, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. Moreover, while the example assumes a 5% annual return, each Fund's
actual performance will vary and may result in actual returns that are greater
or less than 5%. The foregoing table has not been audited by the Funds'
independent accountants.
Long-term shareholders in mutual funds with Rule 12b-1 fees may pay more than
the economic equivalent of the maximum front-end sales charge permitted by rules
of the National Association of Securities Dealers, Inc.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth per-share data for a share of capital stock
outstanding of the High Yield and Emerging Markets Funds, respectively, and
other selected information for the year ended December 31, 1995 and the period
from commencement of investment operations of each Fund to December 31, 1994.
The information presented below for the periods ended December 31, 1995 and
December 31, 1994, has been audited by Price Waterhouse LLP, the Company's
independent accountants, whose unqualified opinion thereon is included in the
Company's Annual Report and in the Statement of Additional Information, which
are both available upon request and without charge. The information below should
be read in conjunction with the financial statements and the related notes
thereto, which are also contained in the Statement of Additional Information.
Further information about the Company's performance is contained in its Annual
Report. Financial highlights are not presented for Advisor Shares since no such
shares were outstanding during the periods presented. As of the close of
business on April 29, 1996, all existing shares of the High Yield and Emerging
Markets Funds were reclassified as "Select Shares".
<TABLE>
<CAPTION>
HIGH YIELD FUND EMERGING MARKETS FUND
-------------------------------- --------------------------------
FOR THE FOR THE
YEAR FOR THE YEAR FOR THE
ENDED PERIOD ENDED ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994* 1995 1994*
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period................. $ 9.25 $ 10.00 $ 8.84 $ 10.00
--------------- --------------- ------- -------
Income (loss) from investment operations
Net investment income.............................. 0.90 0.72 0.90 0.81
Net realized and unrealized gains (losses)......... 0.67 (0.75) 1.07 (1.16)
--------------- --------------- ------- -------
Total from investment operations................. 1.57 (0.03) 1.97 (0.35)
--------------- --------------- ------- -------
Less dividends and distributions
Dividends (from net investment income)............. (0.89) (0.72) (0.60) (0.81)
Distributions (from realized gains)................ (0.01) -- -- --
Return of Capital.................................. -- -- (0.30) --
--------------- --------------- ------- -------
Total dividends and distributions................ (0.90) (0.72) (0.90) (0.81)
--------------- --------------- ------- -------
Net Asset Value, End of Period....................... $ 9.92 $ 9.25 $ 9.91 $ 8.84
--------------- --------------- ------- -------
--------------- --------------- ------- -------
Total Return+........................................ 17.72% (-0.27)% 23.38 (-3.82 )%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in thousands)........... $ 479,090 $ 222,317 $ 49,250 $ 28,117
Ratio of Expenses to Average Net Assets............ 1.05%(2) 1.14%(1)(2) 1.50%(2) 1.50%(1)(2)
Ratio of Net Income to Average Net Assets.......... 9.38% 8.97%(1) 9.97% 10.39%(1)
Portfolio Turnover Rate............................ 34% 42% 60% 47%
</TABLE>
- ------------------
* The High Yield Fund and the Emerging Markets Fund commenced operations as a
registered investment company on March 2, 1994 and March 8, 1994,
respectively.
+ Total return is based on the change in net asset value during the period
and assumes reinvestment of all dividends and distributions.
(1) Annualized.
(2) Reflects voluntary waivers of fees and reimbursement of expenses. Without
such waivers and reimbursements, the ratios of expenses to average net
assets would have been 1.13% and 1.22% for the High Yield Fund for the
periods ended December 31, 1995, and December 31, 1994, respectively, and
1.73% and 1.80% for the Emerging Markets Fund for the periods ended
December 31, 1995, and December 31, 1994, respectively.
This table does not include information with respect to the Global Debt, Global
Convertible and Latin America Total Return Funds. As of December 31, 1995, these
Funds had not yet commenced investment operations.
9
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the Funds are set forth below. The
investment objective of each Fund is fundamental and may not be changed without
the affirmative vote of a majority of its outstanding shares. Of course, there
can be no assurance that these objectives will be achieved.
OFFITBANK HIGH YIELD FUND
The High Yield Fund's primary investment objective is high current income.
Capital appreciation is a secondary objective. The Fund seeks to achieve its
objectives by investing, under normal circumstances, at least 65% of its total
assets in U.S. corporate fixed income securities (including debt securities,
convertible securities and preferred stocks) which are lower rated or unrated at
the time of investment. In addition, the Fund seeks to invest in debt securities
which are (i) "seasoned" senior securities (as defined below) and offer
sufficiently high potential yields to justify the greater investment risk, (ii)
judged by the Adviser to be more creditworthy than generally perceived in the
marketplace, or (iii) issued by once creditworthy companies that are now
considered a high risk investment generally due to changing industry conditions,
a change in company capitalization or a reduction of earning power. The Fund
seeks capital appreciation opportunities in those special situations in which an
issuer's senior securities sell at a substantial discount in relation to their
liquidation value, or in which the creditworthiness of an issuer is believed, in
the judgment of the Adviser, to be improving. For purposes of this Prospectus, a
"senior" security of an issuer is any security entitled to preference over the
issuer's common stock in the distribution of income or assets upon liquidation.
Securities offering the high yield and appreciation potential
characteristics that the High Yield Fund seeks are generally found in mature
cyclical or depressed industries and highly leveraged companies. The Adviser
attempts to identify securities the underlying fundamentals of which are
improving or are sufficiently strong to sustain the issuer. The Adviser also
attempts to identify securities in which the asset values ultimately supporting
the credit are sufficient so that attractive returns are achievable in the event
of bankruptcy, reorganization or liquidation of the issuer. Some of the Fund's
securities may be obtained as a result of the issuer's reorganization or may be
in default or arrears.
In selecting a security for investment by the High Yield Fund, the Adviser
considers the following factors, among others: (i) the current yield, the yield
to maturity where appropriate, and the price of the security relative to other
securities of comparable quality and maturity, (ii) the balance sheet and
capital structure of the issuer, (iii) the market price of the security relative
to its face value, (iv) the rating, or absence of a rating, by Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Services, Inc. ("Moody's") or Duff &
Phelps Credit Rating Co. ("D&P"), (v) the variety of issuers and industries
represented in the Fund's portfolio, and (vi) management of the issuer. Industry
trends and fundamental developments that may affect an issuer are also analyzed,
including factors such as liquidity, profitability and asset quality. The
Adviser is free to invest in high yield, high risk debt securities of any
maturity and duration and the interest rates on such securities may be fixed or
floating.
The High Yield Fund invests primarily in "seasoned" senior securities. The
Fund defines a "seasoned" security as any security whose issuer has been
operating in its current form for a considerable period of time. The Fund
generally does not invest in original issue high yield securities of newly
formed, highly leveraged corporations but reserves the right to do so. An
additional risk associated with such investments is the unproven credit quality
of newly formed corporations because of the lack of any operating history.
The higher yields sought by the High Yield Fund are generally obtainable
from non-investment grade securities (I.E., rated BB or lower by S&P or D&P, or
Ba or lower by Moody's, or if unrated, of equivalent quality as determined by
the Adviser). See Appendix A to this Prospectus for a description of ratings of
S&P, Moody's and D&P. Investments in high yield, high risk debt securities
involve comparatively greater risks, including price volatility and the risk of
default in the timely payment of interest and principal, than higher rated
securities. Some of such investments may be non-performing or in default when
purchased. See "Special Risk Considerations--High Yield, High Risk Debt
Securities".
10
<PAGE>
Although the High Yield Fund's investments are primarily in U.S. corporate
securities, it may also invest in foreign corporate debt securities, sovereign
debt, municipal securities and mortgage-backed debt having many of the
characteristics of its corporate portfolio. The Adviser does not currently
anticipate seeking investments in the common stock of any issuers. However, the
Fund may acquire securities convertible into common stock or receive common
stock in lieu of dividends, interest, or principal.
OFFITBANK EMERGING MARKETS FUND
The investment objective of the Emerging Markets Fund is to provide a
competitive total investment return by focusing on current yield and
opportunities for capital appreciation. The Fund seeks to achieve its objective
by investing primarily in corporate and sovereign debt instruments of emerging
market countries. Under normal circumstances, the Fund will invest at least 80%
of its total assets in debt instruments, but may invest up to 20% of its total
assets in equity securities. As used in this Prospectus, an "emerging market
country" is any country that is considered to be an emerging or developing
country by the International Bank for Reconstruction and Development (the "World
Bank") or the International Finance Corporation, or is determined by the Adviser
to have per capita gross domestic product below $7,500 (in 1994 dollars). Under
normal circumstances, the Fund will be invested in at least three different
countries. Subject to the restriction that the Fund will not invest 25% or more
of its total assets in obligations issued by any one country, its agencies,
instrumentalities or political subdivisions, there is no limit on the amount the
Fund may invest in issuers located in any one country, or in securities
denominated in the currency of any one country, in order to take advantage of
what the Adviser believes to be favorable yields, currency exchange conditions
or total investment return potential. The Fund's investments may be denominated
in any currency, including U.S. dollars. See "Limiting Investment Risks".
The Emerging Markets Fund seeks to benefit from investment opportunities
deriving from long-term improving economic and political conditions, and other
positive trends and developments in emerging market countries. Accordingly, the
Fund is intended primarily for long-term investors and should not be considered
as a vehicle for trading purposes. The continuation of a long-term international
trend encouraging greater market orientation and economic growth may result in
local or international political, economic or financial developments that could
benefit the capital markets in emerging market countries.
An "emerging market country" debt instrument or equity security, as used in
this Prospectus, means an instrument or security (a) of an issuer organized or
with more than 50% of its business activities in such emerging market country,
(b) denominated in such country's currency or with a primary trading market in
such emerging market country, (c) of a company which derives at least 50% of its
gross revenues from goods produced, sales made, services performed or
investments in such emerging market country, or (d) issued or guaranteed by the
government of such emerging market country, its agencies, political subdivisions
or instrumentalities, or the central bank of such country. Determinations as to
eligibility will be made by the Adviser based on publicly available information
and inquiries made to companies. See "Special Risk Considerations--Securities of
Non-U.S. Issuers" and "--High Yield, High Risk Debt Securities".
In selecting particular debt instruments for the Emerging Markets Fund, the
Adviser intends to consider factors such as liquidity, price volatility, tax
implications, interest rate sensitivity, foreign currency exchange risks,
counterparty risks and technical market considerations. The Adviser is free to
invest in debt instruments of any maturity and duration and interest rates on
such securities may be fixed or floating. Debt instruments in which the Fund may
invest will not be required to meet a minimum rating standard and a substantial
amount of such instruments are expected to be non-investment grade securities
(I.E., rated BB or lower by S&P or D&P, or Ba or lower by Moody's, or if
unrated, of comparable quality as determined by the Adviser). See Appendix A to
this Prospectus for a description of ratings of S&P, Moody's and D&P.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of interest and principal, than higher rated securities. Some of such
investments may be non-performing securities or securities in default when
purchased. See "Special Risk Considerations--High Yield, High Risk Debt
Securities".
The Emerging Markets Fund may invest up to 20% of its total assets in common
stocks, preferred stocks, detachable warrants and other equity securities that
may or may not be listed or traded on a
11
<PAGE>
recognized securities exchange. The Fund intends that such investments in equity
securities often will be related to the Fund's investments in debt instruments,
such as those equity securities received upon the exercise of convertible debt
instruments or attached warrants, or those equity securities acquired pursuant
to investment opportunities deriving from the Fund's activities in emerging
market debt markets. The equity securities purchased by the Fund may include
American Depositary Receipts, European Depositary Receipts and interests in
investment companies.
OFFITBANK INVESTMENT GRADE GLOBAL DEBT FUND
The Global Debt Fund's investment objective is to achieve a competitive
fixed income total investment return combining capital appreciation and current
income. The Global Debt Fund will invest in an actively managed portfolio
consisting primarily of investment grade debt securities issued by issuers
located anywhere in the world, including the United States and denominated in
any currency, including U.S. dollars. Under normal circumstances, at least 75%
of the Fund's total assets will be invested in investment grade debt securities,
or if unrated, of comparable quality in the judgment of the Adviser. Up to 25%
of the Fund's total assets may be invested in debt securities rated below
investment grade, or if unrated, of comparable quality in the judgment of the
Adviser. Debt securities rated below investment grade are high yield, high risk
securities and may include non-performing securities or securities in default.
The asset mix will be selected to take advantage of inter- and intra-market
yield spreads, market sector opportunities, and potential currency appreciation
consistent with the Fund's total investment return objective. See "Limiting
Investment Risks".
The Global Debt Fund intends to invest in a wide range of debt securities
including, but not limited to, bonds, convertible securities, debentures, notes,
commercial paper, mortgage-backed securities, asset-backed securities, loan
participations and assignments, certificates of deposit and cash equivalents.
The issuers of such securities may be corporations, supranational agencies, or
governments, including their political subdivisions, agencies, or
instrumentalities. The percentage of the Fund's total assets in any particular
currency, including the U.S. dollar, will vary depending upon the economics of
the respective countries, trade flows, capital market trends, yield spreads and
political risks, among other factors.
Although the Global Debt Fund is not limited to any region, country or
currency, the Adviser currently expects to invest the Fund's assets primarily
within the major markets of Europe, Asia, Australia, Canada, Latin America and
the United States, and in securities denominated in the currencies of those
countries or regions or denominated in multinational currency units such as the
European Currency Unit. Under normal circumstances, the Fund will be invested in
at least three different countries, one of which may be the United States.
Subject to the requirement that the Fund may not invest 25% or more of its total
assets in obligations issued by the government of any one country, its agencies
or instrumentalities (other than the United States), there is no limit on the
amount the Fund may invest in issuers located in any one country, or in
securities denominated in the currency of any one country. The Fund's
investments may be denominated in any currency, including U.S. dollars. Under
normal circumstances, the Fund will invest at least 65% of its total assets in
non-U.S. dollar-denominated securities. The Fund also may invest up to 15% of
its total assets in sovereign and corporate debt securities of emerging market
countries that are rated below investment grade or if unrated, of comparable
quality in the judgment of the Adviser.
The following factors, among others, will be considered by the Adviser in
selecting portfolio securities for the Global Debt Fund: (i) the quality of the
debt securities and specifically, whether such securities are rated at least BBB
by S&P or D&P, or Baa by Moody's, or if unrated, are of comparable quality as
determined by the Adviser; (ii) the yield relative to other debt securities of
comparable quality and maturity in the same currency; (iii) the likelihood, in
the opinion of the Adviser, that the currencies in which the debt securities are
payable will strengthen against other currencies in the intermediate term,
taking into account the yield and price of such securities in each particular
currency; (iv) the diversification of the portfolio, taking into account the
availability in the market of securities of international issuers which meet the
Fund's quality, rating, yield and price criteria; and (v) whether any foreign
withholding taxes are applicable with
12
<PAGE>
respect to the securities. See Appendix A to this Prospectus for a description
of ratings of S&P, Moody's and D&P. The Adviser will be free to invest in debt
securities of any maturity and duration and the interest rates on such
securities may be fixed or floating.
The Global Debt Fund will purchase securities denominated in the currency of
countries where the Adviser believes that the interest rate environment, as well
as the general economic climate, provide investment opportunities consistent
with the Fund's total investment return objective. Investments are evaluated
primarily on the strength of the issuer, the relevant currency and the interest
rate climate of the particular country. Currency is judged on the basis of
fundamental economic criteria (E.G., inflation levels and trends, growth rate
forecasts, balance of payment status and economic policies) as well as technical
and political data. In addition, interest rates are evaluated on the basis of
differentials or anomalies that may exist between different countries.
OFFITBANK GLOBAL CONVERTIBLE FUND
The investment objective of the Global Convertible Fund is to maximize total
return from a combination of capital appreciation and investment income. The
Fund will seek to achieve its objective by investing primarily in an
internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and "synthetic" convertible securities consisting
of a combination of debt securities or preferred stock and warrants or options.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in traditional convertible securities and may invest up to 35% in
synthetic convertible securities. All or a portion of the Fund's total assets
may be invested in below investment grade debt securities. Under normal
circumstances, the Fund will be invested in at least three different countries,
one of which may be the United States. Subject to the restriction that the Fund
will not invest 25% or more of its total assets in obligations issued by any one
country, its agencies, instrumentalities or political subdivisions, there is no
limit on the amount the Fund may invest in issuers located in any one country,
or in securities denominated in the currency of any one country. The Fund's
investments may be denominated in any currency, including U.S. dollars.
In evaluating proposed investments the Adviser will seek to maximize the
total return on the Fund's portfolio in terms of U.S. dollars. In this regard,
the Adviser will consider factors that relate both to various securities markets
and to specific securities traded in those markets. In evaluating markets, the
Adviser will consider such factors as the condition and growth potential of
various economies and securities markets, currency and taxation factors
(including the applicability and rate of withholding taxes) and other pertinent
financial, social, national and political factors. In analyzing convertible
securities, the Adviser will consider both the yield on the convertible security
and the potential capital appreciation that is offered by the underlying common
stock. There can be no assurance that the Fund will achieve its investment
objective.
The convertible securities to be held by the Fund include any corporate debt
security or preferred stock that may be converted into underlying shares of
common stock and include both traditional convertible securities and synthetic
convertible securities. The common stock underlying convertible securities may
be issued by a different entity than the issuer of the convertible securities.
Convertible securities entitle the holder to receive interest payments paid on
corporate debt securities or the dividend preference on a preferred stock until
such time as the convertible security matures or is redeemed or until the holder
elects to exercise the conversion privilege. "Synthetic" convertible securities,
as such term is used herein, are created by combining separate securities which
possess the two principal characteristics of a true convertible security, fixed
income and the right to acquire equity securities. See "Special Risk
Considerations-- Convertible Securities" below for additional information
concerning traditional convertible securities and synthetic convertible
securities eligible for purchase by the Fund.
The Adviser believes that the characteristics of convertible securities make
them appropriate investments for an investment company seeking a high total
return from capital appreciation and investment income. These characteristics
include the potential for capital appreciation as the value of the underlying
common stock increases, the relatively high yield received from dividend or
interest payments as compared to common stock dividends and decreased risk of
decline in value relative to the underlying common stock
13
<PAGE>
due to their fixed income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible security is
generally less than would be the case if the securities were issued in
nonconvertible form.
Although the Global Convertible Fund may invest in securities denominated in
any currency that are convertible into common stocks of companies located
throughout the world, it is expected that a majority of its assets will be
invested in securities denominated in U.S. dollars, or currencies of Pacific
Basin or Western European countries and convertible into equity securities of
United States, Pacific Basin or Western European corporations. To the extent the
Fund acquires synthetic convertible securities, it is expected that the debt
securities or preferred stock will principally be denominated in U.S. dollars,
or Pacific Basin or Western European currencies and the warrants or options will
principally be exercisable to purchase equity securities of U.S., Pacific Basin
or Western European issuers.
Under normal circumstances, the Fund may invest up to 20% of its assets in
other types of securities, including equity securities and nonconvertible debt
securities of U.S. and non-U.S. issuers.
The Global Convertible Fund has established no rating criteria for the debt
securities in which it may invest and such securities may not be rated at all
for creditworthiness. Securities rated in the medium to lower rating categories
of nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the capacity
to pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price and risk of default than
securities in higher rating categories. See "Special Risk Considerations--High
Yield, High Risk Debt Securities." In purchasing such securities, the Fund will
rely on the Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Adviser will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Adviser
believes will be in default. See Appendix A to this Prospectus for a description
of ratings of S&P, Moody's and D&P.
OFFITBANK LATIN AMERICA TOTAL RETURN FUND
The Latin America Total Return Fund's investment objective is to maximize
total investment return from a combination of capital appreciation and current
income. The Fund will seek to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in a combination of equity
securities and debt securities (including convertible debt securities) of Latin
American issuers, as defined below. While the relative portion of the Fund's
total assets allocated between equity and debt securities of Latin American
issuers will vary from time to time, depending on market conditions and
investment opportunities, the Fund does not intend to invest more than 80% of
its total assets in either asset class of securities at any one time.
The Latin America Total Return Fund seeks to benefit from investment
opportunities deriving from long-term improving economic and political
conditions, and other positive trends and developments in Latin American
countries. Accordingly, the Fund is intended primarily for long-term investors
and should not be considered as a vehicle for trading purposes. The Adviser
believes that the continuation of a long-term international trend encouraging
greater market orientation and economic growth may result in local or
international political, economic or financial developments that could benefit
the capital markets in Latin American countries.
For purposes of this Prospectus, Latin American issuers are: (i) companies
organized under the laws of a Latin American country; (ii) companies whose
securities are principally traded in Latin American countries; (iii)
subsidiaries of companies described in clause (i) or (ii) above that issue debt
securities guaranteed by, or securities payable with (or convertible into) the
stock of, companies described in clause (i) or (ii); (iv) companies that derive
at least 50% of their revenues from either goods produced or services performed
in Latin America or sales made in Latin America; and (v) the government of any
Latin American country and its agencies and instrumentalities and any public
sector entity fully or partly owned by any such government, agency or
instrumentality. For purposes of this Prospectus, "Latin America" currently
consists
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of the countries of Argentina, the Bahamas, Barbados, Belize, Bolivia, Brazil,
Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador,
French Guiana, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, the
Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and
Tobago, Uruguay and Venezuela.
The Latin America Total Return Fund's assets will be allocated among the
countries in Latin America in accordance with the Adviser's judgment as to where
the best investment opportunities exist. The Fund is not limited with respect to
the proportion of its total assets that may be invested in the securities of
issuers located in any one Latin American country.
The governments of some Latin American countries, to varying degrees, have
been engaged in programs of selling part or all of their stakes in
government-owned or government-controlled enterprises ("privatizations"). The
Adviser believes that privatizations may offer investors opportunities for
significant capital appreciation and intends to invest assets of the Fund in
privatizations in appropriate circumstances. The ability of foreign persons,
such as the Fund, to participate in privatizations in certain Latin American
countries may be limited by local law, or the terms on which the Fund may be
permitted to participate may be less advantageous than those for local
investors. There can be no assurance that privatization programs will continue
or be successful.
In selecting equity investments for the Fund, the Adviser seeks to identify
and invest in companies it believes offer potential for long-term capital
appreciation. In evaluating prospective investments, the Adviser will utilize
internal financial, economic and credit analysis resources as well as
information obtained from other sources. In selecting industries and companies
for investment, the Adviser will consider factors such as overall growth
prospects, competitive position in domestic and export markets, technology,
research and development, productivity, labor costs, raw material costs and
sources, profit margins, return on investment, capital resources, government
regulation and management.
Up to 80% of the total assets of the Fund may be invested at any one time in
debt securities of Latin American issuers. In selecting particular debt
securities for the Fund, the Adviser intends to consider the same factors as for
the Emerging Markets Fund. All or a substantial amount of the debt securities in
which the Fund may invest will be high yield, high risk debt securities which
are unrated and comparable in quality to debt securities rated below investment
grade (i.e., rated BB or lower by S&P and D&P, or Ba or lower by Moody's, or if
unrated, of comparable quality as determined by the Adviser). See Appendix A to
this Prospectus for a description of ratings of S&P, Moody's and D&P.
Investments in high yield, high risk debt securities are considered to be
speculative and involve comparatively greater risks, including price volatility
and the risk of default in the timely payment of interest and principal, than
investment grade securities or securities of comparable value. Some of such
investments may be non-performing securities or securities in default when
purchased. See "Special Risk Considerations--High Yield, High Risk Debt
Securities".
OTHER INVESTMENT POLICIES
GENERAL
The Funds may utilize many of the same investment techniques and certain
Funds may invest in similar securities. Investors should note, however, that the
Funds will invest their assets in accordance with their respective investment
objectives and policies described above. Accordingly, the Adviser expects that
each Fund's investment portfolio will be distinct.
FOREIGN SECURITIES
Each Fund may invest in securities of foreign issuers. Such investments may
be denominated in foreign currencies. Thus, a Fund's net asset value will be
affected by changes in exchange rates. See "Special Risk
Considerations--Securities of Non-U.S. Issuers".
STRUCTURED PRODUCTS
Each Fund may invest in interests in entities organized and operated solely
for the purpose of restructuring the investment characteristics of certain debt
obligations. This type of restructuring involves the
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deposit with or purchase by an entity, such as a corporation or trust, of
specified instruments (such as commercial bank loans or Brady Bonds) and the
issuance by that entity of one or more classes of securities ("structured
products") backed by, or representing interests in, the underlying instruments.
The cash flow on the underlying instruments may be apportioned among the newly
issued structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. The Funds may invest in structured products which represent derived
investment positions based on relationships among different markets or asset
classes.
The Funds may also invest in other types of structured products, including
among others, inverse floaters, spread trades and notes linked by a formula to
the price of an underlying instrument or currency. Investments in structured
products generally are subject to greater volatility than an investment directly
in the underlying market or security. Total return on the structured product is
derived by linking return to one or more characteristics of the underlying
instrument. Because certain structured products of the type in which the Funds
anticipate they will invest may involve no credit enhancement, the credit risk
of those structured products generally would be equivalent to that of the
underlying instruments. Although a Fund's purchase of structured products would
have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leverage for purposes of the
limitations placed on the extent of each Fund's assets that may be used for
borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, each Fund's investment in
these structured products may be limited by the restrictions contained in the
1940 Act. See "Other Investment Companies" below. Structured products are
typically sold in private placement transactions, and there currently is no
active trading market for structured products. As a result, certain structured
products in which a Fund invests may be deemed illiquid and subject to the 15%
limitation described below under "Illiquid Securities".
DEPOSITORY RECEIPTS AND DEPOSITORY SHARES
Each Fund may invest in American Depository Receipts ("ADRs") or other
similar types of depository receipts or other similar securities, such as
American Depository Shares, European Depository Shares and Global Depository
Shares, convertible into securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. Generally, ADRs
in registered form are designed for use in U.S. securities markets. As a result
of the absence of established securities markets and publicly owned corporations
in certain foreign countries as well as restrictions on direct investment by
foreign entities, a Fund may be able to invest in such countries solely or
primarily through ADRs or similar securities and government approved investment
vehicles. The Adviser expects that a Fund, to the extent of its investment in
ADRs, will invest predominantly in ADRs sponsored by the underlying issuers. The
Funds, however, may invest in unsponsored ADRs. Issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs.
CONVERTIBLE SECURITIES
The High Yield, Emerging Markets, Global Debt and Latin America Total Return
Funds may, and the Global Convertible Fund will, invest in convertible
securities. See "Investment Objectives and Policies-- OFFITBANK Global
Convertible Fund" for a description of convertible securities. Convertible
securities have several unique investment characteristics such as (1) higher
yields than common stocks, but lower yields than comparable nonconvertible
securities, (2) a lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics, and (3) the potential for
capital appreciation if the market price of the underlying common stock
increases.
The High Yield, Global Debt and Emerging Markets Funds have no current
intention of converting any convertible securities they may own into equity
securities or holding them as an equity investment upon conversion, although
they may do so for temporary purposes. A convertible security might be subject
to
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redemption at the option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by a Fund is
called for redemption, such Fund may be required to permit the issuer to redeem
the security, convert it into the underlying common stock or sell it to a third
party.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Each Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a domestic or foreign entity and one or
more financial institutions ("Lenders"). The majority of the Funds' investments
in Loans in Latin America and other emerging markets are expected to be in the
form of participations ("Participations") in Loans and assignments
("Assignments") of portions of Loans from third parties. Participations
typically will result in a Fund having a contractual relationship only with the
Lender, not with the borrower. Such Fund will have the right to receive payments
of principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and such Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by the Adviser
to be creditworthy. Creditworthiness will be judged based on the same credit
analysis performed by the Adviser when purchasing marketable securities. When
the Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan. However, since assignments are arranged
through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Fund as the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
A Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and it is anticipated that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on a Fund's ability to dispose of particular Assignments
or Participations when necessary to meet a Fund's liquidity needs or in response
to a specific economic event, such as a deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for Assignments and
Participations also may make it more difficult for a Fund to assign a value to
those securities for purposes of valuing such Fund's portfolio and calculating
its net asset value. Each Fund currently treats investments in Participations
and Assignments as illiquid for purposes of its limitation on investments in
illiquid securities. See "Illiquid Securities" below. However, each Fund may
revise its policy in the future based upon further review of the liquidity of
Assignments and Participations. Any determination to treat an Assignment or
Participation as liquid would be made based on procedures adopted by the Board
of Directors.
MORTGAGE-RELATED SECURITIES
Each Fund may invest in mortgage-related securities, consistent with their
respective investment objectives and policies, that provide funds for mortgage
loans made to residential home owners. These include securities, such as
collateralized mortgage obligations and stripped mortgage-backed securities
which represent interests in pools of mortgage loans made by lenders such as
savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled for sale to investors (such as a Fund) by
various government, government-related and private organizations.
The Adviser expects that government, government-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-
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term fixed rate mortgages. As new types of mortgage-related securities are
developed and offered to investors, the Adviser will, consistent with each
Fund's investment objectives and policies, consider making investments in such
new types of securities.
ASSET-BACKED SECURITIES
Each Fund may invest in asset-backed securities in accordance with its
respective investment objectives and policies. Asset-backed securities represent
an undivided ownership interest in a pool of installment sales contracts and
installment loans collateralized by, among other things, credit card receivables
and automobiles. In general, asset-backed securities and the collateral
supporting them are of shorter maturity than mortgage loans. As a result,
investment in these securities should result in greater price stability for a
Fund.
Asset-backed securities are often structured with one or more types of
credit enhancement. For a description of the types of credit enhancement that
may accompany asset-backed securities, see "Additional Information on Portfolio
Instruments--Asset-Backed Securities" in the Statement of Additional
Information. The Funds will not limit their investments to asset-backed
securities with credit enhancements. Although asset-backed securities are not
generally traded on a national securities exchange, such securities are widely
traded by brokers and dealers, and to such extent will not be considered
illiquid for the purposes of the Funds' limitation on investment in illiquid
securities.
U.S. MUNICIPAL SECURITIES
The High Yield Fund may invest in U.S. dollar denominated municipal
obligations in seeking to achieve its investment objectives. Such investments
may include municipal bonds issued at a discount, in circumstances where the
Adviser determines that such investments would facilitate the High Yield Fund's
ability to achieve its investment objectives. Dividends on shares attributable
to interest on municipal securities held by the High Yield Fund will not be
exempt from federal income taxes.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities consistent with its investment
policies. Each Fund may lend portfolio securities in an amount up to 30% of its
total assets to broker-dealers, major banks or other recognized domestic
institutional borrowers of securities. Such loans will be against collateral,
consisting of cash or securities which is equal at all times to at least 100% of
the value of the securities loaned. Such loans would involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the Adviser
to be of good standing and only when, in the Adviser's judgment, the income to
be earned from the loans justifies the attendant risks. The voting rights, if
any, associated with the loaned portfolio securities may pass to the borrower
with the lending of the securities. The Fund's Directors will be obligated to
call loans to vote proxies or otherwise obtain rights to vote or consent if a
material event affecting such investment is to occur.
REPURCHASE AGREEMENTS
Each Fund may purchase instruments from financial institutions, such as
banks and U.S. broker-dealers, subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). The seller
under a repurchase agreement will be required to maintain the value of the
securities subject to the agreement at not less than the repurchase price.
Default by the seller would, however, expose the relevant Fund to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying obligations.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow by entering into reverse repurchase agreements.
Pursuant to such agreements, a Fund would sell portfolio securities to financial
institutions, such as banks and broker-dealers, and agree to repurchase them at
an agreed upon date, price and interest payment. When effecting reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. A reverse repurchase agreement involves the
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risk that the market value of the portfolio securities sold by a Fund may
decline below the price of the securities the Fund is obligated to repurchase,
which price is fixed at the time the Fund enters into such agreement.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A Fund may enter into a forward contract,
for example, if it enters into a contract for purposes of transaction hedges,
position hedges or cross-hedges. Each Fund's custodian will place cash not
available for investment or U.S. government securities or other high quality
debt securities in a separate account having a value equal to the aggregate
amount of such Fund's commitments under forward contracts entered into with
respect to position hedges, cross-hedges and transaction hedges, to the extent
they do not already own the security subject to the transaction hedge. If the
value of the securities placed in a separate account declines, additional cash
or securities will be placed in the account on a daily basis so that the value
of the account will equal the amount of such Fund's commitments with respect to
such contracts. If the party with which a Fund enters into a forward contract
becomes insolvent or breaches its obligation under the contract, then the Fund
may lose the ability to purchase or sell a currency as desired. See Appendix B
to this Prospectus and "Additional Information on Portfolio Instruments" in the
Statement of Additional Information.
BRADY BONDS
Each Fund may invest in "Brady Bonds", which are debt securities issued or
guaranteed by foreign governments in exchange for existing external commercial
bank indebtedness under a plan announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989. To date, over $154 billion (face amount) of Brady
Bonds have been issued by the governments of thirteen countries, the largest
proportion having been issued by Argentina, Brazil, Mexico and Venezuela. Brady
Bonds have been issued only recently, and accordingly, they do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market.
Each Fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds which have been issued to date are rated BB or
B by S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.
SHORT SALES
Each Fund may make short sales of securities "against the box". A short sale
is a transaction in which a Fund sells a security it does not own in
anticipation that the market price of that security will decline. In a short
sale "against the box", at the time of sale, a Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.
BORROWING
The Global Debt and Latin America Total Return Funds are authorized to
borrow money from banks denominated in any currency in an amount up to 25% of
their respective total assets (including the amount borrowed), less all
liabilities and indebtedness other than the borrowings and may use the proceeds
of such borrowings for investment purposes. The Global Debt and Latin America
Total Return Funds will borrow
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for investment purposes only when the Adviser believes that such borrowings will
benefit the applicable Fund, after taking into account considerations such as
the costs of the borrowing and the likely investment returns on the securities
purchased with the borrowed monies.
Borrowing for investment purposes is known as leveraging, which is a
speculative practice. Such borrowing creates the opportunity for increased net
income and appreciation but, at the same time, involves special risk
considerations. For example, leveraging will exaggerate changes in the net asset
value of the applicable Fund's shares and in the yield on the Fund's portfolio.
Although the principal of such borrowings will be fixed, the Fund's assets may
change in value during the time the borrowing is outstanding. By leveraging the
Fund, changes in net asset value may be greater in degree than if leverage was
not employed. If the income from the assets obtained with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the Fund will be
less than if borrowing were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced.
The Global Debt and Latin America Total Return Funds may, in addition to
engaging in the transactions described above, borrow money for temporary or
emergency purposes (including, for example, clearance of transactions, share
repurchases or payments of dividends to shareholders) in an amount not exceeding
5% of the value of the applicable Fund's total assets (including the amount
borrowed).
WHEN-ISSUED AND FORWARD COMMITMENT TRANSACTIONS
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a forward commitment basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities at a
set price with payment and delivery taking place beyond the normal settlement
date, allow such Fund to lock in what the Adviser believes to be an attractive
price or yield on a security it owns or intends to purchase or sell, regardless
of future changes in interest rates or securities prices. No income accrues to
the purchaser of a security on a when-issued or forward commitment basis prior
to delivery. When a Fund purchases securities on a when-issued basis or engages
in forward commitment transactions, it sets aside securities or cash with its
custodian equal to the payment that will be due. Engaging in when-issued and
forward commitment transactions can cause greater fluctuation in a Fund's net
asset value and involves a risk that yields or prices available in the market on
the delivery date may be more advantageous to such Fund than those received in
each transaction.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS
Each Fund may invest in zero coupon securities and convertible debt or other
debt securities acquired at a discount. A substantial portion of the Global Debt
and Emerging Markets Funds' sovereign debt securities may be acquired at a
discount. The Funds will only purchase such securities to the extent consistent
with their respective investment objectives. These investments involve special
risk considerations. Zero coupon securities are debt securities that pay no cash
income but are sold at substantial discounts from their value at maturity. The
entire return of a zero coupon security consists of the amortization of
discount. Each Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay
all or a portion of their interest in the form of debt or equity securities. The
High Yield and Global Debt Funds will only purchase pay-in-kind bonds that pay
all or a portion of their interest in the form of debt securities. The Emerging
Markets, Global Convertible and Latin America Total Return Funds may receive
payments from pay-in-kind bonds in the form of both debt and equity securities
provided that such equity securities do not cause each of these Funds to exceed
their respective investment limitation in equity securities. Zero coupon
securities and pay-in-kind bonds may be issued by a wide variety of corporate
and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates than does the value of
ordinary interest-bearing debt securities with similar maturities. Under current
federal income tax law, the Funds are required to accrue as income each year the
value of securities received in respect of pay-in-kind bonds and a portion of
the original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition,
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the Funds will elect similar treatment for any market discount with respect to
debt securities acquired at a discount. Accordingly, the Funds may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate current cash to satisfy certain distribution requirements. See "Taxes".
ILLIQUID SECURITIES
No Fund will knowingly invest more than 15% of the value of its net assets
in illiquid securities, including securities which are not readily marketable,
time deposits and repurchase agreements not terminable within seven days.
Illiquid assets are assets which may not be sold or disposed of in the ordinary
course of business within seven days at approximately the value at which a Fund
has valued the investment. Securities that have readily available market
quotations are not deemed illiquid for purposes of this limitation (irrespective
of any legal or contractual restrictions on resale). The Funds may purchase
securities that are not registered under the Securities Act of 1933, as amended,
but which can be sold to qualified institutional buyers in accordance with Rule
144A under that Act ("Rule 144A securities"). Rule 144A securities generally
must be sold to other qualified institutional buyers. If a particular investment
in Rule 144A securities is not determined to be liquid, that investment will be
included within the 15% limitation on investment in illiquid securities. The
ability to sell Rule 144A securities to qualified institutional buyers is a
recent development and it is not possible to predict how this market will
mature. The Fund may also invest in commercial obligations issued in reliance on
the so-called "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the federal securities
laws, and generally is sold to institutional investors such as the Fund who
agree that they are purchasing the paper for investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper normally is resold to other institutional
investors like the Fund through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus providing
liquidity. The Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. See "Additional Risk
Considerations--Illiquid Securities" in the Statement of Additional Information.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets in the
securities of other investment companies. Each Fund may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company. No Fund
intends to invest in such investment companies unless, in the judgment of the
Adviser, the potential benefits of such investment justify the payment of any
premium to net asset value of the investment company or of any sales charge.
Each Fund will indirectly bear its proportionate share of any management fees
and other expenses paid by investment companies in which it invests in addition
to the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
Each Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with a Fund's investment
objectives and legally permissible for such Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
Each Fund retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with each Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Funds temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/ or invest up to 100% of their respective
assets in high quality debt securities or money market instruments of U.S. or
foreign issuers, and most or all of each Fund's investments may be made in the
United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of Fund shares or
to meet ordinary daily cash needs, each Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.
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HEDGING AND DERIVATIVES
Each Fund may use, as portfolio management strategies, cross currency
hedges, interest rate transactions, commodity futures contracts in the form of
futures contracts on securities, securities indices and foreign currencies, and
related options transactions. Each Fund also may enter into forward foreign
currency contracts and options transactions to hedge in connection with currency
and interest rate positions and in order to enhance the Fund's income or gain.
See "Special Risk Considerations--Hedging and Derivatives" and Appendix B to
this Prospectus.
PORTFOLIO TURNOVER
The Funds will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because emerging markets can be
especially volatile, securities of Latin American and other emerging market
countries may at times be held only briefly. It is not anticipated that, under
normal conditions, the portfolio turnover will not exceed the following rates in
any one year: 75% for the High Yield Fund; 200% for the Emerging Markets Fund;
100% for the Global Debt Fund; 100% for the Global Convertible Fund; and 150%
for the Latin America Total Return Fund. A high rate of portfolio turnover (100%
or more) involves correspondingly greater brokerage commission expenses and/or
markups and markdowns, which will be borne directly by each Fund and indirectly
by each Fund's shareholders. High portfolio turnover may also result in the
realization of substantial net capital gains; to the extent net capital gains
are realized, any distributions derived from such gains on securities held for
less than one year are taxable at ordinary income tax rates for federal income
tax purposes. The portfolio turnover rate for the fiscal year ended December 31,
1995 was 34% for the High Yield Fund and 60% for the Emerging Markets Fund. The
portfolio turnover rate for the fiscal period ended December 31, 1994 was 42%
for the High Yield Fund and 47% for the Emerging Markets Fund. See "Taxes" and
"Portfolio Transactions" in the Statement of Additional Information.
SPECIAL RISK CONSIDERATIONS
GENERAL
Each Fund's net asset value will fluctuate, reflecting fluctuations in the
market value of its portfolio positions and its net currency exposure. The value
of the securities held by each Fund generally fluctuates, to varying degrees,
based on, among other things, (1) interest rate movements and, for debt
securities, their duration, (2) changes in the actual and perceived
creditworthiness of the issuers of such securities, (3) changes in any
applicable foreign currency exchange rates, (4) social, economic or political
factors, (5) factors affecting the industry in which the issuer operates, such
as competition or technological advances, and (6) factors affecting the issuer
directly, such as management changes or labor relations. There is no assurance
that any Fund will achieve its investment objectives.
SECURITIES OF NON-U.S. ISSUERS
Most of the Emerging Markets and Latin America Total Return Funds' assets,
and a significant portion of the Global Debt and Global Convertible Funds'
assets, will be invested in the securities of non-U.S. issuers. A portion of the
High Yield Fund's assets may also be invested in the securities of non-U.S.
issuers. Investors should recognize that investing in securities of non-U.S.
issuers involves certain risks and special considerations, including those set
forth below, which are not typically associated with investing in securities of
U.S. issuers. Further, certain investments of these Funds, and investment
techniques in which they may engage involve risks, including those set forth
below. There is generally no limit on the amount that the Emerging Markets,
Global Debt and Global Convertible Funds may invest in issuers located in any
one country, or in securities denominated in the currency of any one country.
Therefore, to the extent these Funds concentrate their investments in only a few
countries, they may be more susceptible to factors adversely affecting
particular countries than comparable funds that are not so concentrated.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many countries in which the Funds
will invest, and the Latin American and other emerging market countries in
particular, may be subject to a substantially greater degree of social,
political and economic instability than is the case in the United States, Japan
and Western European countries. Such instability may result from, among other
things, some or all of the following:
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(i) authoritarian governments or military involvement in political and economic
decision-making, and changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies and terrorist activities; (iv)
hostile relations with neighboring countries; and (v) drug trafficking. Social,
political and economic instability could significantly disrupt the principal
financial markets in which the Funds invest and adversely affect the value of
the Funds' assets.
Individual foreign economies in general and those of Latin American and
other emerging market countries in particular, may differ favorably or
unfavorably and significantly from the U.S. economy in such respects as the rate
of growth of gross domestic product or gross national product, rate of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, structural unemployment and balance of payments position.
Governments of many of these countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In some cases,
the government owns or controls many companies, including some of the largest in
the country. Accordingly, government actions in the future could have a
significant effect on economic conditions in many countries, including Latin
American and other emerging market countries, which could affect private sector
companies and the Funds, and on market conditions, prices and yields of
securities in the Funds' portfolios. There may be the possibility of
nationalization or expropriation of assets, or future confiscatory levels of
taxation affecting the Funds. In the event of nationalization, expropriation or
other confiscation, a Fund may not be fairly compensated for its loss and could
lose its entire investment in the country involved.
INVESTMENT AND REPATRIATION RESTRICTIONS. Investment by the Funds in
non-U.S. issuers may be restricted or controlled to varying degrees. These
restrictions may limit or preclude investment in certain of such issuers or
countries and may increase the costs and expenses of the Funds. For example,
certain countries require governmental approval prior to investments by foreign
persons in the country or in a particular company or industry sector or limit
investment by foreign persons to only a specific class of securities of a
company which may have less advantageous terms (including price) than securities
of the company available for purchase by nationals. Certain countries may also
restrict or prohibit investment opportunities in issuers or industries deemed
important to national interests. As a result of investment restrictions the
Funds may, in certain countries, such as Mexico, invest through intermediary
vehicles or trusts. In addition, the repatriation of both investment income and
capital from some of these countries requires governmental approval and if there
is a deterioration in a country's balance of payments or for other reasons, a
country may impose temporary restrictions on foreign capital remittances abroad.
Even where there is no outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects of the operation of the
Funds.
The Funds could be adversely affected by delays in, or a refusal to grant
any required governmental approval for repatriation of capital, as well as by
the application to a Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, a Fund was unable to distribute
substantially all of its net investment income and long-term capital gains
within applicable time periods, the Fund could be subject to U.S. federal income
and excise taxes which would not otherwise be incurred and may cease to qualify
for the favorable tax treatment afforded to regulated investment companies under
the Internal Revenue Code of 1986, as amended (the "Code"), in which case it
would become subject to U.S. federal income tax on all of its income and gains.
See "Taxes".
CURRENCY FLUCTUATIONS. Because the High Yield Fund may invest a portion of
its assets, and the Emerging Markets, Global Debt, Global Convertible and Latin
America Total Return Funds may invest a substantial portion of their assets in
the securities of non-U.S. issuers which are denominated in foreign currencies,
the strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the Funds' investment performance. A decline in the value of
any particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of each Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's net asset value and
any net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.
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The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the United States, and other economic and financial conditions affecting the
world economy.
Although the Funds value their assets daily in terms of U.S. dollars, the
Funds do not intend to convert their holdings of foreign currencies into U.S.
dollars on a daily basis. A Fund 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 ("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 sell that currency to the dealer.
INFLATION. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and Latin
American and other emerging market countries in particular. In an attempt to
control inflation, wage and price controls have been imposed at times in certain
countries.
MARKET CHARACTERISTICS; DIFFERENCES IN SECURITIES MARKETS. The securities
markets in many countries, and in Latin American and other emerging market
countries in particular, generally have substantially less volume than the New
York Stock Exchange, and equity securities of most companies listed on such
markets may be less liquid and more volatile than equity securities of U.S.
companies of comparable size. Some of the stock exchanges outside of the United
States and in Latin American and other emerging market countries, to the extent
that established securities markets even exist, are in the earlier stages of
their development. A high proportion of the shares of many foreign companies may
be held by a limited number of persons, which may limit the number of shares
available for investment by the Funds. A limited number of issuers in most, if
not all, of these securities markets may represent a disproportionately large
percentage of market capitalization and trading volume. In addition, the
application of certain 1940 Act provisions may limit the Funds' ability to
invest in certain non-U.S. issuers and to participate in public offerings in
these countries. The limited liquidity of certain non-U.S. securities markets
may also affect the Funds' ability to acquire or dispose of securities at the
price and time it wishes to do so.
Many companies traded on securities markets in any foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country may trade at price-earning multiples higher than those of comparable
companies trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
Trading practices in certain foreign securities markets are also
significantly different from those in the United States. Brokerage commissions
and other transaction costs on the securities exchanges in many countries are
generally higher than in the United States. In addition, securities settlements
and clearance procedures in certain countries, and, in Latin American and other
emerging market countries in particular, are less developed and less reliable
than those in the United States and the Funds may be subject to delays or other
material difficulties and could experience a loss if a counterparty defaults.
Delays in settlement could
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result in temporary periods when assets of the Funds are uninvested and no
return is earned thereon. The inability of a Fund to make intended security
purchases due to settlement problems could cause such Fund to miss attractive
investment opportunities. The inability to dispose of a portfolio security due
to settlement problems could result either in losses to a Fund due to subsequent
declines in the value of such portfolio security or, if such Fund has entered
into a contract to sell the security, could result in possible liability to the
purchaser.
NON-U.S. SUBCUSTODIANS. Rules adopted under the 1940 Act permit the Funds
to maintain their non-U.S. securities and cash in the custody of certain
eligible non-U.S. banks and securities depositories. Certain banks in non-U.S.
countries may not be eligible subcustodians for the Funds, in which event the
Funds may be precluded from purchasing securities in which they would otherwise
invest, and other banks that are eligible subcustodians may be recently
organized or otherwise lack extensive operating experience. At present, custody
arrangements complying with the requirements of the Commission are available in
each of the countries in which the Adviser intends to invest. In certain
countries in which the Funds may make investments, there may be legal
restrictions or limitations on the ability of the Funds to recover assets held
in custody by subcustodians in the event of the bankruptcy of the subcustodian.
GOVERNMENT SUPERVISION; LEGAL SYSTEMS. Disclosure and regulatory standards
in certain foreign countries, including Latin American and other emerging market
countries, are in many respects less stringent than U.S. standards. There may be
less government supervision and regulation of securities exchanges, listed
companies and brokers in these countries than exists in the United States.
Brokers in some countries may not be as well capitalized as those in the United
States, so that they may be more susceptible to financial failure in times of
market, political, or economic stress, exposing the Funds to a risk of loss.
Less information may be available to the Funds than with respect to investments
in the United States and, in certain of these countries, less information may be
available to the Funds than to local market participants. In addition, existing
laws and regulations are often inconsistently applied. Foreign investors may be
adversely affected by new laws and regulations, changes to existing laws and
regulations and preemption of local laws and regulations by national laws. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.
FINANCIAL INFORMATION AND STANDARDS. Non-U.S. issuers may be subject to
accounting, auditing and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular,
the assets and profits appearing on the financial statements of certain non-U.S.
issuers may not reflect their financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting
rules may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Moreover,
substantially less information may be publicly available about non-U.S. issuers
than is available about U.S. issuers.
HIGH YIELD, HIGH RISK DEBT SECURITIES
GENERAL. The High Yield, Emerging Markets, Global Convertible and Latin
America Total Return Funds may invest all or substantially all of their
respective assets, and, at the time of investment, the Global Debt Fund may
invest up to 25% of its total assets, in high yield, high risk debt securities.
High yield, high risk debt securities are those debt securities rated below
investment grade and unrated securities of comparable quality. They offer yields
that fluctuate over time, but which generally are superior to the yields offered
by higher-rated securities. However, securities rated below investment grade
also involve greater risks, including greater price volatility and a greater
risk of default in the timely payment of principal and interest, than
higher-rated securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Certain of the debt
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securities in which the Funds may invest may have, or be considered comparable
to securities having, the lowest ratings for non-subordinated debt instruments
assigned by Moody's, S&P or D&P (I.E., rated C by Moody's or D by S&P or D&P).
Under rating agency guidelines, these securities are considered to have
extremely poor prospects of ever attaining investment grade standing, to have a
current identifiable vulnerability to default, to be unlikely to have the
capacity to pay interest and repay principal when due in the event of adverse
business, financial or economic conditions, and/or to be in default or not
current in the payment of interest or principal. Such securities are considered
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. Unrated securities
deemed comparable to these lower- and lowest-rated securities will have similar
characteristics. Accordingly, it is possible that these types of factors could,
in certain instances, reduce the value of securities held by the Funds with a
commensurate effect on the value of their respective shares. Therefore, an
investment in the Funds should not be considered as a complete investment
program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for higher-
rated securities and the secondary markets could contract under adverse market
or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on a
Fund's ability to dispose of particular portfolio investments and may limit its
ability to obtain accurate market quotations for purposes of valuing securities
and calculating net asset value. If a Fund is not able to obtain precise or
accurate market quotations for a particular security, it will become more
difficult for the Company's Board of Directors to value such Fund's portfolio
securities and the Company's Directors may have to use a greater degree of
judgment in making such valuations. Furthermore, adverse publicity and investor
perceptions about lower-rated securities, whether or not based on fundamental
analysis, may tend to decrease the market value and liquidity of such
lower-rated securities. Less liquid secondary markets may also affect each
Fund's ability to sell securities at their fair value. In addition, each of the
Funds may invest up to 15% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield, high risk debt
securities contract due to adverse economic conditions or for other reasons,
certain previously liquid securities in a Fund's portfolio may become illiquid
and the proportion of the Fund's assets invested in illiquid securities may
increase.
The ratings of fixed income securities by Moody's, S&P and D&P are a
generally accepted barometer of credit risk. They are, however, subject to
certain limitations from an investor's standpoint. The rating of an issuer is
heavily weighted by past developments and does not necessarily reflect probable
future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of difference in credit risk of securities within each rating category. See
Appendix A to this Prospectus for a description of such ratings.
CORPORATE DEBT SECURITIES. Each of the Funds may invest in corporate debt
securities. While the market values of securities rated below investment grade
and comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the market values of
certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-rated
securities. In addition, such securities generally present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default in payment of interest or principal by such issuers is significantly
greater than with investment grade securities because such securities generally
are unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
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Many fixed income securities, including certain U.S. corporate fixed income
securities in which a Fund may invest, contain call or buy-back features which
permit the issuer of the security to call or repurchase it. Such securities may
present risks based on payment expectations. If an issuer exercises such a "call
option" and redeems the security, a Fund may have to replace the called security
with a lower yielding security, resulting in a decreased rate of return for such
Fund.
SOVEREIGN DEBT SECURITIES. Each of the Funds may invest in sovereign debt
securities. Investing in sovereign debt securities will expose the applicable
Funds to the direct or indirect consequences of political, social or economic
changes in the developing and emerging countries, including those in Latin
America, that issue the securities. The ability and willingness of sovereign
obligors in developing and emerging countries or the governmental authorities
that control repayment of their external debt to pay principal and interest on
such debt when due may depend on general economic and political conditions
within the relevant country. Countries such as those in which the Funds may
invest have historically experienced, and may continue to experience, high rates
of inflation, high interest rates, exchange rate fluctuations, trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely and ultimate
payments on its external debt obligations will also be strongly influenced by
the obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings from foreign trade to service its external debt, it
may need to depend on continuing loans and aid from foreign governments,
commercial banks and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Funds may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries, including those in
Latin America, are among the world's largest debtors to commercial banks, other
governments, international financial organizations and other financial
institutions. These obligors have in the past experienced substantial
difficulties in servicing their external debt obligations, which led to defaults
on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
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rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds, and obtaining new credit to finance interest payments. Holders of
certain foreign sovereign debt securities may be requested to participate in the
restructuring of such obligations and to extend further loans to their issuers.
There can be no assurance that the Brady Bonds and other foreign sovereign debt
securities in which the Funds may invest will not be subject to similar defaults
or restructuring arrangements which may adversely affect the value of such
investments. Furthermore, certain participants in the secondary market for such
debt may be directly involved in negotiating the terms of these arrangements and
may therefore have access to information not available to other market
participants.
In addition to high yield foreign sovereign debt securities, each of the
Funds may also invest in foreign corporate securities. For a discussion of such
securities and their associated risks, see "Securities of Non-U.S. Issuers",
above.
CONVERTIBLE SECURITIES
GENERAL. Each of the Funds may invest in convertible securities. Set forth
below is additional information concerning traditional convertible securities
and "synthetic" convertible securities.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since the Global Convertible Fund will invest a
substantial portion of its assets in the U.S. market and the Euromarket where
convertible bonds have been primarily denominated in U.S. dollars, it is
expected that ordinarily a substantial portion of the convertible securities
held by the Fund will be denominated in U.S. dollars. However, the underlying
equity securities typically will be quoted in the currency of the country where
the issuer is domiciled. With respect to convertible securities denominated in a
currency different from that of the underlying equity securities, the conversion
price may be based on a fixed exchange rate established at the time the security
is issued. As a result, fluctuations in the exchange rate between the currency
in which the debt security is denominated and the currency in which the share
price is quoted will affect the value of the convertible security. The Funds may
enter into foreign currency hedging transactions in which they may seek to
reduce the impact of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (I.E., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent there are changes in interest rates or yields of similar non-convertible
securities, the investment value of the convertible security typically will
fluctuate. However, at the same time, the value of the convertible security will
be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock. If, because of a low price of the underlying common stock, the
conversion value is below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds it investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.
Holders of convertible securities have a claim on the assets of the issuer
prior to the common stockholders but may be subordinated to similar
non-convertible debt securities of the same issuer. A convertible security may
be subject to redemption at the option of the issuer at a price established in
the charter provision, indenture or other governing instrument pursuant to which
the convertible security was issued. If
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a convertible security held by a Fund is called for redemption, the Fund will be
required to redeem the security, convert it into the underlying common stock or
sell it to a third party. Certain convertible debt securities may provide a put
option to the holder which entitles the holder to cause the security to be
redeemed by the issuer at a premium over the stated principal amount of the debt
security.
SYNTHETIC CONVERTIBLE SECURITIES. "Synthetic" convertible securities are
created by combining separate securities that possess the two principal
characteristics of a true convertible security, I.E., fixed income ("fixed
income component") and the right to acquire equity securities ("convertibility
component"). The fixed income component is achieved by investing in
nonconvertible fixed income securities such as nonconvertible bonds, preferred
stocks and money market instruments. The convertibility component is achieved by
investing in warrants, exchanges or NASDAQ-listed call options or stock index
call options granting the holder the right to purchase a specified quantity of
securities within a specified period of time at a specified price or to receive
cash in the case of stock index options.
A warrant is an instrument issued by a corporation that gives a holder the
right to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of the
security underlying the warrant may not exceed the exercise price of the warrant
and the warrant may expire without any value. See "--Hedging and Derivatives"
below for a discussion of call options and stock index call options.
A synthetic convertible security differs from a traditional convertible
security in several respects. Unlike a traditional convertible security, which
is a single security having a unitary market value, a synthetic convertible
security is comprised of two or more separate securities, each with its own
market value. Therefore, the "market value" of a synthetic convertible security
is the sum of the values of its fixed income component and its convertibility
component. For this reason, the values of a synthetic convertible security and a
traditional convertible security will respond differently to market
fluctuations.
More flexibility is possible in the assembly of a synthetic convertible
security than in the purchase of a convertible security. Synthetic convertible
securities may be selected where the two components represent one issuer or are
issued by a single issuer, thus making the synthetic convertible security
similar to a traditional convertible security. Alternatively, the character of a
synthetic convertible security allows the combination of components representing
distinct issuers which will be used when the Adviser believes that such a
combination would better promote a Fund's investment objective. A synthetic
convertible security also is a more flexible investment in that its two
components may be purchased or sold separately. For example, a Fund may purchase
a warrant for inclusion in a synthetic convertible security but temporarily hold
short-term investments while postponing the purchase of a corresponding bond
pending development of more favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline in
the price of the stock or the level of the index involved in the convertibility
component, causing a decline in the value of the call option or warrant. Should
the price of the stock fall below the exercise price and remain there throughout
the exercise period, the entire amount paid for the call option or warrant would
be lost. Since a synthetic convertible security includes the fixed income
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the fixed
income instrument.
SHORT SALES
Short sales by the Funds involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested. The
Funds are permitted to engage in short sales only with respect securities
related to those in their portfolios. The Adviser therefore expects that if the
price of the securities a Fund is required to replace in connection with a short
sale increases, the value of the related securities in the Fund's portfolio will
also increase, although not necessarily in the same proportion. The Funds'
ability to make short sales will be limited by the requirement that not more
than 30% of any Fund's gross income may be derived from the sale or disposition
of securities held for less than three months to maintain such Fund's status as
a regulated investment company under the Code. See "Taxes".
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NON-DIVERSIFIED FUNDS
Each Fund is classified as a "non-diversified" fund under the 1940 Act,
which means that the Funds are not limited by the 1940 Act in the proportion of
their assets that may be invested in the obligations of a single issuer. Each
Fund, however, intends to comply with the diversification requirements imposed
by the Code for qualification as a regulated investment company. Thus, a Fund
may invest a greater proportion of its assets in the securities of a smaller
number of issuers and, as a result, will be subject to greater risk of loss with
respect to its portfolio securities.
HEDGING AND DERIVATIVES
Each of the Funds may be authorized to use a variety of investment
strategies described below to hedge various market risks (such as interest
rates, currency exchange rates and broad or specific market movements), to
manage the effective maturity or duration of debt instruments held by a Fund, or
to seek to increase the Fund's income or gain. Limitations on the portion of a
Fund's assets that may be used in connection with the investment strategies
described below are set out in Appendix B to this Prospectus.
A Fund may (if and to the extent so authorized) purchase and sell (or write)
exchange-listed and over-the-counter put and call options on securities, index
futures contracts, financial futures contracts and fixed income indices and
other financial instruments, enter into financial futures contracts, enter into
interest rate transactions, and enter into currency transactions (collectively,
these transactions are referred to in this Prospectus as "Hedging and
Derivatives"). A Fund's interest rate transactions may take the form of swaps,
caps, floors and collars, and a Fund's currency transactions may take the form
of currency forward contracts, currency futures contracts, currency swaps and
options on currencies or currency futures contracts.
Hedging and Derivatives may generally be used to attempt to protect against
possible changes in the market value of securities held or to be purchased by a
Fund resulting from securities markets or currency exchange rate fluctuations,
to protect a Fund's unrealized gains in the value of its securities, to
facilitate the sale of those securities for investment purposes, to manage the
effective maturity or duration of a Fund's securities or to establish a position
in the derivatives markets as a temporary substitute for purchasing or selling
particular securities. A Fund may use any or all types of Hedging and
Derivatives which it is authorized to use at any time; no particular strategy
will dictate the use of one type of transaction rather than another, as use of
any authorized Hedging and Derivatives will be a function of numerous variables,
including market conditions. The ability of a Fund to utilize Hedging and
Derivatives successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select a Fund's
securities. None of the Funds is a "commodity pool" (I.E., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Derivatives involving futures contracts and
options on futures contracts will be purchased, sold or entered into only for
BONA FIDE hedging, and non-hedging purposes to the extent permitted by CFTC
regulations; provided that a Fund may enter into futures contracts or options
thereon for purposes other than BONA FIDE hedging if immediately thereafter, the
sum of the amount of its initial margin and premiums on open contracts would not
exceed 5% of the liquidation value of such Fund's portfolio; provided further,
than in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation. The
use of certain Hedging and Derivatives will require that a Fund segregate cash,
U.S. government securities or other liquid high grade debt obligations to the
extent such Fund's obligations are not otherwise "covered" through ownership of
the underlying security, financial instrument or currency. Risks associated with
Hedging and Derivatives are described in Appendix B to this Prospectus. A
detailed discussion of various Hedging and Derivatives including applicable
regulations of the CFTC and the requirement to segregate assets with respect to
these transactions also appears in Appendix B.
To the extent a Fund conducts Hedging and Derivatives outside the United
States, such transactions may be subject to political, economic and legal risks
that are distinct from domestic transactions. Such risks are similar to those
applicable to investment in foreign securities described under "Securities of
Non-U.S. Issuers" above.
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LIMITING INVESTMENT RISKS
To further protect investors, the Funds have adopted the following
investment limitations:
1.
No Fund may invest 25% or more of the value of its total assets in
securities of issuers in any one industry; provided, that there is no
limitation with respect to investment in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities.
2.
The High Yield, Emerging Markets and Global Convertible Funds may not
borrow money (except that they may enter into reverse repurchase
agreements) except from banks for temporary or emergency purposes; PROVIDED,
that (a) the amount of such borrowing may not exceed 20% of the value of the
High Yield, Emerging Markets or Global Convertible Funds' total assets, as
the case may be, and (b) the High Yield, Emerging Markets and Global
Convertible Funds will not purchase portfolio securities while such
outstanding borrowing exceeds 5% of the value of such Funds' total assets.
The Global Debt and Latin America Total Return Funds may borrow money from
banks and enter into reverse repurchase agreements in an aggregate amount up
to 25% of their respective total assets (including the amount borrowed),
less all liabilities and indebtedness other than the borrowing.
3.
None of the Funds may invest an amount equal to 15% or more of the
current value of their net assets in investments that are illiquid.
The foregoing investment limitations and certain of those described in the
Statement of Additional Information under "Investment Limitations" are
fundamental policies of each of the Funds that may be changed only when
permitted by law and approved by the holders of a "majority" of such Fund's
outstanding shares. If a percentage restriction on investment or use of assets
contained in these investment limitations or elsewhere in this Prospectus or in
the Statement of Additional Information is adhered to at the time a transaction
is effected, later changes in percentage resulting from any cause other than
actions by the relevant Fund will not be considered a violation; PROVIDED, that
the restrictions on borrowing described in (2) above shall apply at all times.
As used in this Prospectus and in the Statement of Additional Information, the
term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting any particular Fund (E.G.,
approval of investment advisory contracts), means the vote of the lesser of (i)
67% of the shares of that Fund represented at a meeting if the holders of more
than 50% of the outstanding shares of such Fund are present in person or by
proxy, or (ii) more than 50% of the outstanding shares of such Fund.
Shareholders are entitled to one vote for each full share held and to fractional
votes for fractional shares held.
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MANAGEMENT
The business and affairs of the Funds are managed under the general
direction and supervision of the Company's Board of Directors. The Funds'
day-to-day operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK (the "Adviser") provides investment advisory services to the Funds
pursuant to Investment Advisory Agreements with the Company (the "Advisory
Agreements"). Subject to such policies as the Company's Board of Directors may
determine, the Adviser makes investment decisions for the Funds. The Advisory
Agreements provide that, as compensation for services, the Adviser is entitled
to receive from each Fund a monthly fee at the following annual rates based upon
the average daily net assets of such Fund: .85% for the first $200,000,000 of
assets, .75% for the net $400,000,000, and .65% for amounts in excess of
$600,000,000 in the case of the High Yield Fund; .90% for the first $200,000,000
of assets and .80% for amounts in excess thereof in the case of the Emerging
Markets Fund; .80% for the first $200,000,000 of assets and .70% for amounts in
excess thereof in the case of the Global Debt Fund; .90% for the Global
Convertible Fund; and 1.00% for the Latin America Total Return Fund .
The Adviser is a New York State chartered trust company. Under its charter,
the Adviser may neither accept deposits nor make loans except for deposits or
loans arising directly from its exercise of the fiduciary powers granted it
under the New York Banking Law. The Adviser's principal business is the
rendering of discretionary investment management services to high net worth
individuals and family groups, foundations, endowments and corporations. The
Adviser specializes in global asset management and offers its clients a complete
range of investments in capital markets throughout the world. The Adviser
currently manages in excess of $6.5 billion in assets and serves as investment
adviser to sixteen registered investment companies (or portfolios thereof). The
principal business address of the Adviser is 520 Madison Avenue, New York, New
York 10022.
PORTFOLIO MANAGERS. Stephen T. Shapiro serves as the portfolio manager for
the High Yield Fund. Mr. Shapiro is a Managing Director of the Adviser and has
been associated with the Adviser since 1983. Dr. Wallace Mathai-Davis and
Richard M. Johnston serve as portfolio managers of the Emerging Markets Fund.
Dr. Mathai-Davis is a Managing Director of the Adviser and has been associated
with the Adviser since 1986. Dr. Mathai-Davis will also serve as portfolio
manager of the Global Convertible Fund. Mr. Johnston is a Managing Director of
the Adviser and has been director of Latin American investments since 1992. From
1988 to 1992, Mr. Johnston was Vice President, International Corporate Finance,
at Salomon Brothers Inc. Mr. Johnston and Eric H. Anderson serve as the
portfolio managers of the Latin America Total Return Fund. Before joining the
Adviser in 1994, Mr. Anderson was Vice President and Director of Research at
Afin Casa de Bolsa, SA de CV, Mexico City and Afin Securities, New York, from
1992 to 1994. From 1986 to 1992, Mr. Anderson was a senior investment analyst
and a senior audit analyst for Teachers Insurance and Annuity Association. Jack
D. Burks will serve as the portfolio manager for the Global Debt Fund. Mr. Burks
is a Managing Director of the Adviser and he joined the Adviser in 1985.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
Furman Selz LLC ("Furman Selz") serves as the Company's administrator and
generally assists the Company in all aspects of its administration and
operation. As compensation for its administrative services, Furman Selz receives
a monthly fee based upon an annual rate of .15% of the aggregate average daily
net assets of the Funds.
The Chase Manhattan Bank, N.A. serves as custodian of the assets of the
Funds. The principal address of the custodian is 4 MetroTech Center, Brooklyn,
New York 11245. Furman Selz has entered into an agreement with the Company for
the provision of transfer agency and dividend disbursing services for the Funds.
The principal business address of the transfer agent is 230 Park Avenue, New
York, New York 10169.
A further discussion of the terms of the Company's administrative, custody
and transfer agency arrangements is contained in the Statement of Additional
Information.
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DISTRIBUTOR
Shares in each Fund are sold on a continuous basis by the Company's
distributor, OFFIT Funds Distributor, Inc. (the "Distributor"), a wholly-owned
subsidiary of Furman Selz. The Distributor's principal offices are located at
230 Park Avenue, New York, New York 10169.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of its shares, each Fund is authorized
to spend up to 0.25% of its net assets annually with respect to each class of
shares of the Fund in accordance with a Plan of Distribution (the "Plan")
pursuant to Rule 12b-1 promulgated under the 1940 Act. Activities for which the
Distributor may be reimbursed include (but are not limited to) the development
and implementation of direct mail promotions and advertising for the Funds and
the preparation, printing and distribution of prospectuses for the Funds to
recipients other than existing shareholders.
Although it is anticipated that some promotional activities will be
conducted on a Company-wide basis, payments made by the Funds under the Plan
will generally be used to finance the distribution of shares of the Funds.
Expenses incurred in connection with Company-wide activities may be allocated
pro rata among all portfolios and classes of the Company on the basis of their
relative net assets. Allocation of expenses on the basis of relative net assets
may result in the subsidization by larger portfolios or classes of the
distribution of shares of smaller portfolios or classes.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents") with respect to Advisor
Shares. Shareholder administrative support services will be performed by
Shareholder Servicing Agents for their customers who beneficially own Advisor
Shares. Such services may include, among other things: assisting in aggregating
and processing purchase, exchange and redemption transactions; placing net
purchase and redemption orders with the Company's distributor; transmitting and
receiving funds in connection with customer orders to purchase or redeem shares;
processing dividend payments; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's positions in the Funds; transmitting, on behalf of the
Company, proxy statements, annual reports, updating prospectuses and other
communications from the Company to the shareholders of the Funds; and receiving,
tabulating and transmitting to the Company proxies executed by shareholders with
respect to meetings of shareholders of the Fund. Customers may have or be given
the right to vote shares held of record by Shareholder Servicing Agents.
For the services provided, the Company's Shareholder Servicing Plan permits
each Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.25% of the average daily net asset value of Advisor Shares of the Fund for
which such Shareholder Servicing Agents provide services for the benefit of
customers. Shareholder Servicing Agents will provide their customers with a
schedule of any credits, fees or of the terms or conditions that may be
applicable to the investment of customer assets in each Fund's Advisor Shares.
REGULATORY MATTERS
OFFITBANK is a trust company chartered under the New York Banking Law and is
supervised and examined thereunder by the New York Banking Department. OFFITBANK
is prohibited by its charter from accepting deposits other than deposits arising
directly from its exercise of the fiduciary powers granted under the New York
Banking Law and, accordingly, is not an insured depository institution for
purposes of the Federal Deposit Insurance Act or any other banking law or
regulation.
Banking laws and regulations, as currently interpreted by the New York
Banking Department, prohibit New York State chartered trust companies from
controlling, or distributing the shares of, a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit such
trust companies generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such trust
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companies from acting as investment adviser, administrator, transfer agent or
custodian to such an investment company or from purchasing shares of such a
company as agent for and upon the order of a customer. OFFITBANK believes that
it may perform the services described in this Prospectus with respect to the
Company without violation of such laws or regulations. OFFITBANK is not a member
of the Federal Reserve System and is not subject to the Glass-Steagall Act, the
Bank Holding Company Act of 1956 or any other federal banking law or regulation
that might affect its ability to perform such services.
If the Adviser were prohibited from performing the services described in
this Prospectus with respect to the Funds, it is expected that the Company's
Board of Directors would recommend to each Fund's shareholders that they approve
new agreements with another entity or entities qualified to perform such
services and selected by the Board of Directors. The Company does not anticipate
that investors would suffer any adverse financial consequences as a result of
these occurrences.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by any or all of the Funds to the
organizations retained to provide services for the Funds may be waived from time
to time in order to increase such Funds' net investment income available for
distribution to shareholders.
Except as noted below, OFFITBANK and Furman Selz bear all expenses in
connection with the performance of their advisory and administrative services.
The Company bears the expenses incurred in its operations, including:
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Company); fees payable to the
Commission; state securities qualification fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges of its custodian and
transfer agent; certain insurance costs; auditing and legal expenses; fees of
independent pricing services; costs of shareholders' reports and shareholder
meetings; and any extraordinary expenses. The Company also pays for brokerage
fees and commissions, if any, in connection with the purchase of portfolio
securities, and reimburses the Company's distributor for certain expenses
incurred by it in connection with activities primarily intended to result in the
sale of shares of any of the Funds. The Global Convertible and Latin America
Total Return Funds shall bear their own organizational expenses and each Fund
bears other expenses directly attributable to that Fund. Other expenses of the
Company are allocated among the Company's investment portfolios and classes
thereof based on their relative net assets. Expenses are allocated to a
particular class of a portfolio based on either expenses identifiable to the
class or relative net assets of the class and other classes of the portfolios.
DIVIDENDS AND DISTRIBUTIONS
The High Yield and Global Debt Funds will declare dividends of substantially
all of their net investment income daily and pay those dividends monthly, the
Emerging Markets and Latin America Total Return Funds will declare dividends
daily and pay dividends quarterly and the Global Convertible Fund will declare
and pay dividends quarterly. Each Fund will distribute, at least annually,
substantially all net capital gains, if any, earned by such Fund. Each Fund will
inform shareholders of the amount and nature of all such income or gains.
Dividends are paid in the form of additional shares of the same class of the
same Fund, unless the shareholder of record has elected prior to the date of
distribution to receive payment in cash. Such election, or any revocation
thereof, must be made in writing to such Fund's transfer agent and will become
effective with respect to dividends paid after its receipt. Dividends that are
otherwise taxable are taxable to investors whether received in cash or in
additional shares of a Fund. It is anticipated that expenses incurred by each
class of shares of each Fund will differ and, accordingly, that the dividends
distributed with respect to each class will differ.
Shares purchased will begin earning dividends on the business day on which
federal funds are available in payment for such shares. Shares redeemed will
earn dividends through the date of redemption. Net investment income of the
Funds for a Saturday, Sunday or a holiday will be declared as a dividend on the
prior business day. Investors who redeem all or a portion of a Fund's shares
prior to a dividend payment date will receive all dividends declared but unpaid
on those shares at the time of their redemption.
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PURCHASE OF SHARES
SELECT SHARES
Select Shares of each Fund may be purchased at the net asset value per share
next determined after receipt of the purchase order. See "Net Asset Value".
INITIAL INVESTMENTS BY WIRE
Subject to acceptance by the Company, Select Shares of each Fund may be
purchased by wiring federal funds ($250,000 minimum) to Chase Manhattan Bank
(see instructions below). A completed Account Application should be forwarded to
the Company at the address noted below under "Initial Investments by Mail" in
advance of the wire. For each Fund, notification must be given to the Company at
1-800-618-9510 prior to 4:15 p.m., New York time, on the business day prior to
the wire date. (Prior notification must also be received from investors with
existing accounts.) Funds should be wired through the Federal Reserve Bank of
New York to:
CHASE MANHATTAN BANK
ONE CHASE MANHATTAN PLAZA
NEW YORK, NY 10001
ABA# 1010-0362-1
ACCOUNT# 031-1-78511
FBO THE OFFITBANK INVESTMENT FUND, INC.
Ref (Fund Name and Account Number)
Federal funds purchases will be accepted only on a day on which the Company
and the custodian bank are open for business.
INITIAL INVESTMENTS BY MAIL
Subject to acceptance by the Company, an account may be opened by completing
and signing an Account Application and mailing it to the Company at the address
noted below, together with a check ($250,000 minimum) payable to The OFFITBANK
Investment Fund, Inc.:
The OFFITBANK Investment Fund, Inc.
237 Park Avenue, Suite 910
New York, New York 10017
The Fund(s) to be purchased should be designated on the Account Application.
Subject to acceptance by the Company, payment for the purchase of Select Shares
received by mail will be credited to a shareholder's account at the net asset
value per share of the Fund next determined after receipt. Such payment need not
be converted into federal funds (monies credited to the Company's custodian bank
by a Federal Reserve Bank) before acceptance by the Company.
ADDITIONAL INVESTMENTS
Additional investments may be made at any time (minimum investment $10,000)
by purchasing Select Shares of any Fund at net asset value by mailing a check to
the Company at the address noted under "Initial Investments by Mail" (payable to
The OFFITBANK Investment Fund, Inc.) or by wiring monies to the custodian bank
as outlined above. For each Fund, notification must be given to the Company at
1-800-618-9510 prior to 4:15 p.m., New York time, on the business day prior to
the wire date.
SHAREHOLDER ORGANIZATIONS
Select Shares of the Company's Funds may also be sold to corporations or
other institutions such as trusts, foundations or broker-dealers purchasing for
the accounts of others ("Shareholder Organizations"). Investors purchasing and
redeeming shares of the Funds through a Shareholder Organization may be charged
a transaction-based fee or other fee for the services of such organization. Each
Shareholder Organization is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Customers of Shareholder
Organizations should read this Prospectus in light of the terms governing
accounts with their
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organization. The Company does not pay to or receive compensation from
Shareholder Organizations for the sale of Select Shares. The Company's officers
are authorized to waive the minimum initial and subsequent investment
requirements.
IRA ACCOUNTS
The Company has available a form of Individual Retirement Account ("IRA")
which may be obtained from the Distributor that permits the IRA to invest in
Select Shares of the Funds. The minimum investment for all such retirement plans
is $250,000. Investors desiring information regarding investments through IRAs
should write or telephone the Company.
ADVISOR SHARES
All purchase orders for Advisor Shares must be placed through a Shareholder
Servicing Agent. Orders for purchases of Advisor Shares will be executed at the
net asset value per share next determined after an order has been transmitted to
and accepted by the Company's distributor. Advisor Shares are subject to such
investment minimums and other terms and conditions as may be imposed by
Shareholder Servicing Agents from time to time. Shareholder Servicing Agents may
offer additional services to their customers. For further information as to how
to direct a Shareholder Servicing Agent to purchase Advisor Shares of any Fund
on his/her behalf, a customer should contact his/her Shareholder Servicing Agent
or the Company's distributor.
OTHER PURCHASE INFORMATION
The Company reserves the right, in its sole discretion, to suspend the
offering of shares of its Funds or to reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interests of
the Company.
Purchases of a Fund's shares will be made in full and fractional shares of
the Fund calculated to three decimal places. In the interest of economy and
convenience, certificates for shares will not be issued except at the written
request of the shareholder. Certificates for fractional shares, however, will
not be issued.
REDEMPTION OF SHARES
SELECT SHARES
Select Shares of each Fund of the Company may be redeemed by mail, or, if
authorized, by telephone. No charge is made for redemptions. The value of Select
Shares redeemed may be more or less than the purchase price, depending on the
market value of the investment securities held by the Fund.
BY MAIL
Each Fund will redeem its Select Shares at the net asset value next
determined after the request is received in "good order". The net asset values
per share of the Company's Funds are determined as of 4:15 p.m., New York time,
on each day that the New York Stock Exchange, Inc. (the "NYSE"), the Company is
open for business. Requests should be addressed to The OFFITBANK Investment
Fund, Inc., 237 Park Avenue, Suite 910, New York, New York 10017.
Requests in "good order" must include the following documentation:
(a) the share certificates, if issued;
(b) a letter of instruction, if required, or a stock assignment
specifying the number of shares or dollar amount to be redeemed,
signed by all registered owners of the shares in the exact names in which
they are registered;
(c) any required signature guarantees (see "Signature Guarantees" below);
and
(d) other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit sharing plans and other organizations.
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SIGNATURE GUARANTEES
To protect shareholder accounts, the Fund and its transfer agent from fraud,
signature guarantees are required to enable the (36) Fund to verify the identity
of the person who has authorized a redemption from an account. Signature
guarantees are required for (1) redemptions where the proceeds are to be sent to
someone other than the registered shareholder(s) and the registered address, and
(2) share transfer requests. Signature guarantees may be obtained from certain
eligible financial institutions, including but not limited to, the following:
banks, trust companies, credit unions, securities brokers and dealers, savings
and loan associations and participants in the Securities Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP"). Shareholders
may contact the Fund at 1-800-618-9510 for further details.
BY TELEPHONE
Provided the Telephone Redemption Option has been authorized, a redemption
of Select Shares may be requested by calling the Company at 1-800-618-9510 and
requesting that the redemption proceeds be mailed to the primary registration
address or wired per the authorized instructions. Select Shares cannot be
redeemed by telephone if share certificates are held for those shares. If the
Telephone Redemption Option or the Telephone Exchange Option (as described
below) is authorized, the Company and its transfer agent may act on telephone
instructions from any person representing himself or herself to be a shareholder
and believed by the Company or its transfer agent to be genuine. The transfer
agent's records of such instructions are binding and shareholders, not the
Company or its transfer agent, bear the risk of loss in the event of
unauthorized instructions reasonably believed by the Company or its transfer
agent to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated are genuine and, if it does not, it may be liable
for any losses due to unauthorized or fraudulent instructions. The procedures
employed by the Company in connection with transactions initiated by telephone
include tape recording of telephone instructions and requiring some form of
personal identification prior to acting upon instructions received by telephone.
SYSTEMATIC WITHDRAWAL PLAN
An owner of Select Shares with a net asset value of $10,000 or more shares
of a Fund may elect to have periodic redemptions made from his/her account to be
paid on a monthly, quarterly, semiannual or annual basis (the "Systematic
Withdrawal Plan," or the "Plan"). The maximum withdrawal per year under the
Systematic Withdrawal Plan is 12% of the account value at the time of the
election. A number of Select Shares sufficient to make the scheduled redemption
will normally be redeemed on the date selected by the shareholder. Depending on
the size of the payment requested and fluctuations in the net asset value of the
shares redeemed, redemptions for the purpose of making payments under the
Systematic Withdrawal Plan may reduce or even exhaust the account. A shareholder
may request that the payments under the Plan be sent to a predesignated bank or
other designated party.
ADVISOR SHARES
All redemption orders for Advisor Shares must be placed through a
Shareholder Servicing Agent in accordance with instructions or limitations
pertaining to an investor's account with his/her Shareholder Servicing Agent.
Redemption orders for Advisor Shares are effected at the net asset value next
determined after the order is received by the Company's distributor. While no
redemption fee is imposed by the Funds, Shareholder Servicing Agents may charge
their customers' accounts for redemption services. A customer should contact
his/her Shareholder Servicing Agent or the Company's distributor for further
information regarding redemption of Advisor Shares, including the availability
of wire or telephone redemption privileges, or whether the customer may elect to
participate in a systematic withdrawal plan.
FURTHER REDEMPTION INFORMATION
Redemption proceeds for shares of the Company recently purchased by check
may not be distributed until payment for the purchase has been collected, which
may take up to fifteen business days from the purchase date. Shareholders can
avoid this delay by utilizing the wire purchase option.
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Other than as described above, payment of the redemption proceeds will be
made within seven days after receipt of an order for a redemption. The Company
may suspend the right of redemption or postpone the date at times when the NYSE
or the bond market is closed or under any emergency circumstances as determined
by the Commission.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Company to make payment
wholly or partly in cash, the Company may pay the redemption proceeds in whole
or in part by a distribution in-kind of readily marketable securities held by a
Fund in lieu of cash in conformity with applicable rules of the Commission.
Investors generally will incur brokerage charges on the sale of portfolio
securities so received in payment of redemptions.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Shares of each class of any Fund may be exchanged for shares of the same
class of any other Fund or for shares of the same class of the Company's other
portfolios that are listed on the cover page of this Prospectus based on the
respective net asset values of the shares involved. The exchange privilege is
only available, however, with respect to the Funds or portfolios that are
registered for sale in a shareholder's state of residence. In addition, with
respect to Select Shares, shareholders must transfer a minimum of $50,000 of
assets between Funds or portfolios for each transfer. The Company imposes no
exchange fees. Exchange requests with respect to Select Shares should be sent to
The OFFITBANK Investment Fund, Inc., 237 Park Avenue, Suite 910, New York, New
York 10017 or, if the Telephone Exchange Option has been authorized, by calling
the Company at 1-800-618-9510. See "Redemption of Shares--By Telephone" above.
Shareholders should note that an exchange between Funds or portfolios is
considered a sale and purchase of shares for tax purposes. A shareholder who
holds Advisor Shares should consult his/her Shareholder Servicing Agent to
determine the availability of and terms and conditions imposed on exchanges with
the other Funds and portfolios of the Company.
TRANSFER OF REGISTRATION
The registration of Company shares may be transferred by writing to The
OFFITBANK Investment Fund, Inc., 237 Park Avenue, Suite 910, New York, New York
10017. As in the case of redemptions, the written request must be received in
good order as defined above.
NET ASSET VALUE
The net asset value per share for each class of shares of each Fund is
calculated once daily at 4:15 p.m., New York time, Monday through Friday, except
on days on which the NYSE is closed. The NYSE currently is scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas or on the preceding
Friday or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. The net asset value per share for each class of shares of
each Fund is determined as of the close of regular trading on the NYSE and is
computed by dividing the value of the net assets attributable to each class of
such Fund by the total number of shares of the class of the Fund outstanding.
Equity securities held by a Fund are valued at the last sale price on the
exchange or in the principal over-the-counter market in which such securities
are traded, as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. Debt securities
held by a Fund generally are valued based on quoted bid prices. Short-term debt
investments having maturities of 60 days or less are amortized to maturity based
on their cost, and if applicable, adjusted for foreign exchange translation.
Securities for which market quotations are not readily available are valued
at fair value determined in good faith by or under the direction of the
Company's Board of Directors. Securities quoted in foreign currencies initially
will be valued in the currency in which they are denominated and then will be
translated into U.S. dollars at the prevailing foreign exchange rate. Securities
may be valued by independent pricing services which use prices provided by
market-makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics.
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TAXES
Each Fund intends to qualify for taxation as a regulated investment company
("RIC") under the Code. If so qualified, each Fund will not be subject to
federal income taxes with respect to net investment income and net realized
long-term capital gains, if any, that are distributed to its shareholders,
provided that the Fund distributes each taxable year (i) at least 90% of its
investment company taxable income (as that term is defined in the Code, without
regard to the deduction for dividends paid), and (ii) at least 90% of the excess
of its tax-exempt interest income net of certain deductions allocable to such
income. Each Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code, applicable to regulated
investment companies generally will be applied to each Fund separately, rather
than to the Company as a whole. In addition, net realized long-term capital
gains, investment company taxable income and operating expenses will be
determined separately for each Fund. Dividends, either in cash or reinvested in
shares, paid by a Fund from net investment income will be taxable to
shareholders as ordinary income.
Whether paid in cash or additional shares of a Fund, and regardless of the
length of time the shares in such Fund have been owned by the shareholder,
distributions from long-term capital gains are taxable to shareholders as such.
Shareholders are notified annually by the Company as to federal tax status of
dividends and distributions paid by a Fund. Such dividends and distributions may
also be subject to state and local taxes.
Exchanges and redemptions of shares in a Fund are generally taxable events
for federal income tax purposes. Individual shareholders may also be subject to
state and local taxes on such exchanges and redemptions.
Each Fund intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of a non-deductible 4% federal excise
tax. To do so, each Fund intends to distribute an amount at least equal to (i)
98% of its calendar year ordinary income, (ii) 98% of its capital gains net
income (the excess of short and long-term capital gain over short and long-term
capital loss) for the one-year period ending October 31st, (iii) 98% of its net
foreign exchange income and (iv) 100% of any undistributed ordinary or capital
gain net income from the prior calendar year. Although dividends generally will
be treated as distributed when paid, dividends declared in October, November or
December, payable to shareholders of record on a specified date in one of those
months and paid during the following January will be treated as having been
distributed by a Fund (and received by the shareholders) on December 31 of the
year declared.
A Fund may be subject to certain taxes imposed by foreign countries with
respect to dividends, capital gains and other income. If a Fund qualifies as a
regulated investment company, if certain distribution requirements are satisfied
and if more than 50% in value of a Fund's total assets at the close of any
taxable year consists of stocks or securities of foreign corporations, which for
this purpose should include obligations issued by foreign governmental issuers,
a Fund may elect to treat any foreign income taxes paid by it that can be
treated as income taxes under U.S. income tax regulations as paid by its
shareholders. The Emerging Markets and Latin America Total Return Funds expect
to, and the Global Debt and Global Convertible Funds may, qualify for this
election. Each of these Funds may make such an election in a taxable year in
which it is qualified to make the election. For any year that a Fund makes such
an election, an amount equal to the foreign income taxes paid by a Fund that can
be treated as income taxes under U.S. income tax principles will be included in
the income of its shareholders and each shareholder will be entitled (subject to
certain limitations) to credit the amount included in his income against his
U.S. tax liabilities, if any, or to deduct such amount from his U.S. taxable
income, if any. Shortly after any year for which it makes such an election, the
Fund will report to its shareholders, in writing, the amount per share of such
foreign income taxes that must be included in each shareholder's gross income
and the amount that will be available for deductions or credit. In general, a
shareholder may elect each year whether to claim deductions or credits for
foreign taxes. No deductions for foreign taxes may be claimed, however, by
non-corporate shareholders (including certain foreign shareholders as described
below) who do not itemize deductions. If a shareholder elects to credit foreign
taxes, the amount of credit that may be claimed in any year may not exceed the
same proportion of the U.S. tax against which such credit is taken that the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable
39
<PAGE>
income. For this purpose, the Fund expects that the capital gains its
distributes to its shareholders, whether dividends or capital gain
distributions, will generally not be treated as foreign source taxable income.
If the Fund makes this election, a shareholder will be treated as receiving
foreign source income in an amount equal to the sum of his proportionate share
of foreign income taxes paid by the Fund and the portion of dividends paid by
the Fund representing income earned from foreign sources. This limitation must
be applied separately to certain categories of income and the related foreign
taxes.
Ordinary income dividends paid by a Fund to shareholders who are
non-resident aliens or foreign entities will be subject to a 30% withholding tax
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law or the income is "effectively connected" with a U.S.
trade or business. Generally, subject to certain exceptions, capital gain
dividends paid to non-resident shareholders or foreign entities will not be
subject to U.S. tax. Non-resident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
If a Fund purchases shares in "passive foreign investment companies"
("PFICs"), the Fund may be subject to U.S. federal income tax on a portion of
any "excess distribution" or gain from the disposition of the shares even if the
income is distributed as a taxable dividend by the Fund to its shareholders.
Additionally, charges in the nature of interest may be imposed on either a Fund
or its shareholders with respect to deferred taxes arising from excess
distributions or gains. Alternatively, a Fund may be able to elect to treat the
PFIC as a "qualified electing fund" and the Fund would instead be required to
annually include in income a portion of the ordinary earnings and net capital
gains of the PFIC regardless of whether distributed. Such amounts would be
subject to the 90% and calendar year RIC distribution requirements. While it is
possible that the fund may invest in PFICs, it is not anticipated such
investments would be material.
A Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number, (ii) the Internal Revenue Service ("IRS") notifies the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (iii)
when required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding.
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide.
Investors should consult their tax advisers concerning a prospective investment
in the Fund.
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PERFORMANCE INFORMATION
From time to time the Funds may advertise certain information about their
performance. The Funds may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. With respect to the High
Yield Fund, standardized total return figures may include the performance of the
predecessor Partnership to the Fund, as described below and in the Statement of
Additional Information. Nonstandardized total return differs from the
standardized total return only in that it may be related to a nonstandard period
or is presented in the aggregate rather than as an annual average. In addition,
the Funds may make available information as to their respective "yield" and
"effective yield" over a thirty-day period, as calculated in accordance with the
Commission's prescribed formula. The "effective yield" assumes that the income
earned by an investment in a Fund is reinvested, and will therefore be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Total return and yield quotations are computed separately for each
class of shares of a Fund. Each Fund presents performance information for each
class of shares commencing with the Fund's inception (or the inception of the
Partnership with respect to the High Yield Fund). Performance information for
each class of shares may also reflect performance for time periods prior to the
introduction of such class, and the performance for such prior time periods will
not reflect any fees and expenses payable by such class that were not borne by
the Fund prior to the introduction of such class.
The performance of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia and Far East Index or Morgan Stanley Capital International World
Index. The performance information may also include evaluations of the Funds
published by nationally recognized ranking services and by various national or
local financial publications, such as BUSINESS WEEK, FORBES, FORTUNE,
INSTITUTIONAL INVESTOR, MONEY, THE WALL STREET JOURNAL, BARRON'S, CHANGING
TIMES, MORNINGSTAR, MUTUAL FUND VALUES, U.S.A. TODAY OR THE NEW YORK TIMES or
other industry or financial publications.
A FUND'S PERFORMANCE INFORMATION IS HISTORICAL, WILL FLUCTUATE AND SHOULD
NOT BE CONSIDERED AS REPRESENTATIVE OF FUTURE RESULTS. The Commission's formulas
for calculating performance are described under "Performance Information" in the
Statement of Additional Information.
THE TRANSFER
On March 1, 1994, the High Yield Fund exchanged its shares (now Select
Shares) for portfolio securities of The Senior Securities Fund, L.P. (the
"Partnership"), a Delaware limited partnership, after which the Partnership
dissolved and distributed shares of the High Yield Fund received pro rata to its
partners. Following this transfer (the "Transfer"), partners of the Partnership
who participated in the Transfer constituted all of the shareholders of the High
Yield Fund, except for shares representing seed capital contributed to the Fund
by the Distributor. No gain or loss was recognized by the Partnership or the
participating partners upon the Transfer. The Transfer may result in adverse tax
consequences to future shareholders of the High Yield Fund if the Fund sells
appreciated securities acquired in the Transfer. In such case, the amount of the
gain would be taxable to future shareholders as well as to shareholders who
received High Yield Fund shares in the Transfer. The effect of this for future
shareholders would be to immediately tax them on a distribution that represents
a return of the purchase price of their shares rather than an increase in the
value of their investment. The effect on shareholders who received High Yield
Fund shares in the Transfer would be to reduce their potential liability for tax
on capital gains by spreading it over a larger asset base.
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As stated above, the investment performance of the High Yield Fund may
include the performance of the Partnership. The investment objective and
policies of the High Yield Fund are in all material respects equivalent to those
of the Partnership. While the High Yield Fund is managed in a manner that is in
all material respects equivalent to the management of the Partnership, the Fund
is subject to certain restrictions on its investment activities under the 1940
Act and the Code to which the Partnership was not subject. Had the Partnership
been registered under the 1940 Act and subject to the provisions of the Code,
its investment performance may have been adversely affected. Operating expenses
incurred by the High Yield Fund may be higher than expenses that would have been
incurred by the Partnership had it continued to operate as a private investment
partnership. Past performance of the High Yield Fund (including the performance
of the Partnership) should not be interpreted as indicative of the High Yield
Fund's future performance.
ADDITIONAL INFORMATION
ORGANIZATION AND CAPITAL STOCK
The Company was incorporated under the laws of the State of Maryland on
September 8, 1993. The Company operates as an open-end investment company and is
not authorized to engage in the business of banking. The authorized capital
stock of the Company consists of 10,000,000,000 shares having a par value of
$.001 per share. The Company's Articles of Incorporation, together with Articles
Supplementary, currently authorize the issuance of eight classes of shares,
corresponding to shares of OFFITBANK High Yield Fund, OFFITBANK Emerging Markets
Fund, OFFITBANK Investment Grade Global Debt Fund, OFFITBANK Global Convertible
Fund, OFFITBANK Latin America Total Return Fund, OFFITBANK National Municipal
Fund, OFFITBANK California Municipal Fund and OFFITBANK New York Municipal Fund.
Effective April 29, 1996, all of the outstanding shares of each of the Funds
were reclassified as "Select Shares" and each Fund began offering a new class of
shares, designated as "Advisor Shares." The per-share net asset value of each
class of shares in a Fund is calculated separately and may differ as between
classes as a result of different fees or expenses payable by the classes and the
allocation of certain class-specific expenses to the appropriate class to which
such expenses apply. The Company's Board of Directors may, in the future,
authorize the issuance of additional classes of capital stock representing
shares of additional investment portfolios or additional classes of shares of
the Funds.
Holders of a Fund's shares will vote in the aggregate, and not by series or
class, with shareholders of the Company's other current and future portfolios on
all matters, except where voting by portfolio or class is required by law or
where the matter involved affects only one portfolio or class. Under the
corporate law of Maryland, the Company's state of incorporation, and the
Company's By-Laws (except as required under the 1940 Act), the Company is not
required and does not currently intend to hold annual meetings of shareholders
for the election of directors. Shareholders, however, do have the right to call
for a meeting to consider the removal of one or more of the Company's directors
if such a request is made, in writing, by the holders of at least 10% of the
Company's outstanding voting securities. A more complete statement of the voting
rights of shareholders is contained in the Statement of Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
Furman Selz provided the initial capital for the Company and currently is
the sole and controlling shareholder of the Global Debt Fund.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York, serves as counsel to the Company.
REPORTS TO SHAREHOLDERS
Each Fund sends shareholders semi-annual and audited annual reports, each of
which include listings of investment securities held by each Fund at the end of
the period covered. In an effort to reduce the Funds' printing and mailing
costs, the Funds may consolidate the mailing of their semi-annual and annual
reports by household. This consolidation means that a household having multiple
accounts with the identical address of record would receive a single copy of
each report. When a Fund's annual report is combined with the Prospectus into a
single document, the Fund will mail the combined document to each shareholder to
comply with legal requirements. Any shareholder who does not want this
consolidation to apply to his or her account should contact the Company or the
Funds' transfer agent.
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APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") and Duff &
Phelps Credit Rating Co. ("D&P") that are applicable to certain obligations in
which certain of the Company's Funds may invest.
MOODY'S CORPORATE AND BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. 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.
A--Bonds which are rated A possess many favorable investment qualities 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
characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
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
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 applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates or return on funds employed,
conservative
A-1
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capitalization structures 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 a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory 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, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired. The D rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-2
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A-3--Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B--Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
D&P COMMERCIAL PAPER RATINGS
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
trusts, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection facts. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
A-3
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Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient
to insure against disruption in debt service. Operating factors and market
access may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
Bonds rated in the Baa or BBB categories are considered to have adequate
capacity to pay principal and interest. However, such bonds may have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds.
After purchase by a Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by such Fund. Neither event
will require a sale of such security by such Fund. However, the Adviser will
consider such event in its determination of whether such Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Funds will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-4
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APPENDIX B
HEDGING AND DERIVATIVES
Each Fund may be authorized to use a variety of investment strategies to
hedge various market risks (such as interest rates, currency exchange rates and
broad or specific market movements), to manage the effective maturity or
duration of debt instruments held by the Fund, or, with respect to certain
strategies, to seek to increase the Fund's income or gain (such investment
strategies and transactions are referred to herein as "Hedging and
Derivatives"). The description of each Fund indicates which, if any, of these
types of transactions may be used by such Fund.
A detailed discussion of Hedging and Derivatives follows below. No Fund
which is authorized to use any of these investment strategies will be obligated,
however, to pursue any of such strategies and no Fund makes any representation
as to the availability of these techniques at this time or at any time in the
future. In addition, a Fund's ability to pursue certain of these strategies may
be limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools. To the extent not otherwise
restricted by the Commission, the CFTC, the Code or its investment objectives
and policies, a Fund may utilize, without limitation, Hedging and Derivatives.
See "Additional Information Concerning Taxes" in the Statement of Additional
Information.
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 Hedging and Derivatives involving
options require segregation of Fund 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.
A Fund's purchase of a put option on a security, for example, 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 of such
instrument by giving the Fund the right to sell the instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. 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 the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's inability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the
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possible reasons for the absence of a liquid option market on an exchange are:
(1) insufficient trading interest in certain options, (2) restrictions on
transactions imposed by an exchange, (3) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities, including reaching daily price limits, (4) interruption
of the normal operations of the OCC or an exchange, (5) inadequacy of the
facilities of an exchange or the OCC to handle current trading volume or (6) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the relevant market for
that option on that exchange would cease to exist, although any such outstanding
options on that exchange would 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 would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are determined by
negotiation of the parties. It is anticipated that any Fund authorized to use
OTC options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A Fund
will enter into OTC option transactions only with U.S. 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
that are deemed creditworthy by the Adviser. In the absence of a change in the
current position of the staff of the Commission, OTC options purchased by a Fund
and the amount of the Fund's obligation pursuant to an OTC option sold by the
Fund (the cost of the sell-back plus the in-the-money amount, if any) or the
value of the assets held to cover such options will be deemed illiquid.
If a 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 held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
If and to the extent authorized to do so, a Fund may purchase and sell call
options on securities and on Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the OTC markets, and on securities indices,
currencies and futures contracts. All calls sold by a Fund must be "covered",
that is, the Fund must own the securities subject to the call, must own an
offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though a Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose 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 that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
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If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. In selling put
options, a Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate, currency or market changes, for duration
management and for permissible non-hedging purposes. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
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 that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC and generally will be entered into only
for bona fide hedging, risk management (including duration management) or other
permissible non-hedging purposes. Maintaining a futures contract or selling an
option on a futures contract will typically require a Fund to deposit with a
financial intermediary, as security for its obligations, an amount of cash or
other specified assets ("initial margin") that initially is from 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 daily as the mark-to-market value of the futures contract fluctuates.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
No Fund will enter into a futures contract or option thereon for purposes
other than bona fide hedging if, immediately thereafter, the sum of the amount
of its initial margin and premiums required to maintain permissible non-hedging
positions in futures contracts and options thereon would exceed 5% of the
liquidation value of the Fund's net assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below under "Use
of Segregated and Other Special Accounts".
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, a Fund may purchase and sell call
and put options on securities indices and other financial indices. In so doing,
the Fund 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, options on indices settle by cash
settlement; that is, 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 comprising 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.
B-3
<PAGE>
CURRENCY TRANSACTIONS
If and to the extent authorized to do so, a Fund may engage in currency
transactions with Counterparties to hedge the value of portfolio securities
denominated in particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange-listed and OTC options
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars". A Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.
Except as provided in this Prospectus, a Fund's dealings in forward currency
contracts and other currency transactions such as futures contracts, options,
options on futures contracts and swaps will be limited to hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A 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 by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of a Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors". If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts".
COMBINED TRANSACTIONS
If and to the extent authorized to do so, a Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Derivatives, as part of a single or combined strategy when, in the judgment
of the Adviser, it is in the best interests of the 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 will normally be
entered into by a Fund based on the Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase the risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may be authorized to enter into interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. A Fund will
enter into these transactions primarily to seek to preserve a
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<PAGE>
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities a Fund anticipates
purchasing at a later date. A Fund will use these transactions for
non-speculative purposes and will not sell interest rate caps or floors if it
does not own securities or other instruments providing the income the Fund may
be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). A currency swap is an agreement to
exchange cash flows on a notional amount based on changes in the values of the
reference indices. An index swap is an agreement to exchange cash flows on a
national principal amount based on changes in the values of the reference index.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling the cap to the extent that a specified
index exceeds a predetermined interest rate. The purchase of an interest rate
floor entitles the purchaser to receive payments of interest on a notional
principal amount from the party selling the interest rate floor to the extent
that a specified index falls below 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 the floor to the extent that a specific
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 with a
predetermined range of interest rates or values.
Provided the contract so permits, a Fund will usually enter into interest
rate swaps on a net basis, that is, the two payments streams are netted out in a
cash settlement on the payment date or dates specified in the instrument, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. A
Fund will not enter into any swap, cap, floor, collar or other derivative
transaction unless the Counterparty is deemed creditworthy by the Adviser. If a
Counterparty defaults, a Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the Adviser based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 15% restriction on investments in securities that are not
readily marketable.
Each Fund will maintain cash and appropriate liquid assets (I.E., high grade
debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If a Fund enters into a swap agreement on a
net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If a
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts".
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, a Fund may make investments in
Eurodollar instruments, which are typically dollar-denominated futures contracts
or options on those contracts that are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
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RISK FACTORS
Hedging and Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of the Hedging and Derivatives could result in losses greater than
if they had not been used. Use of put and call options could result in losses to
a 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, or cause a Fund to hold a security
it might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's 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 it will tend to limit any
potential gain to a Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium.
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. Further, the risk exists 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.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies 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 contracts are subject to the same risks that apply
to the use of futures contracts 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 contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Losses resulting from the use of Hedging and Derivatives will reduce a
Fund's net asset value, and possibly income, and the losses can be greater than
if Hedging and Derivatives had not been used.
RISKS OF HEDGING AND DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Derivatives may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and will be subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of positions taken as part of
non-U.S. Hedging and Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of data on which to make trading decisions than in the United States, (3) delays
in a Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lower trading volume and liquidity.
B-6
<PAGE>
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Derivatives by a Fund will require, among other
things, that the Fund segregate cash, liquid high grade debt obligations or
other assets with its custodian, or a designated sub-custodian, to the extent
the Fund's obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument 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 debt obligations at least equal to the current amount of
the obligation must be segregated with the custodian or sub-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. A
call option on securities written by a Fund, for example, 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 debt obligations 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 that correlate with the index or to segregate
liquid high grade debt obligations equal to the excess of the index value over
the exercise price on a current basis. A put option on securities written by a
Fund will require the Fund to segregate liquid high grade debt obligations equal
to the exercise price. Except when a Fund enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the Fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency, liquid securities
denominated in that currency equal to a Fund's obligations or to segregate
liquid high grade debt obligations equal to the amount of the Fund's
obligations.
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, although a Fund will not be
required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above 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 on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt securities or other acceptable assets. A
Fund will accrue the net amount of the excess, if any, of its obligations
relating to swaps over its entitlements with respect to each swap on a daily
basis and will segregate with its custodian, or designated sub-custodian, an
amount of cash or liquid high grade debt obligations having an aggregate value
equal to at least the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Fund's net obligation, if any.
Hedging and Derivatives may be covered by means other than those described
above when consistent with applicable regulatory policies. A Fund may also enter
into offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Hedging and Derivatives. A Fund could purchase a put option, for example, 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 it holds a
futures contracts or forward contract, a Fund could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Hedging and Derivatives may also be
offset in combinations. If the offsetting transaction terminates at the time of
or after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
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<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
- -----------------------------------------------------------------------------
OFFICERS AND DIRECTORS
Morris W. Offit
CHAIRMAN OF THE BOARD, PRESIDENT AND
DIRECTOR
Edward J. Landau
DIRECTOR
The Very Reverend
James Parks Morton
DIRECTOR
Wallace Mathai-Davis
SECRETARY AND TREASURER
John J. Pileggi
ASSISTANT TREASURER
Joan V. Fiore
ASSISTANT SECRETARY
Sheryl Hirschfeld
ASSISTANT SECRETARY
Gordon Forrester
ASSISTANT TREASURER
INVESTMENT ADVISER
OFFITBANK
520 Madison Avenue
New York, NY 10022-4213
DISTRIBUTOR
OFFIT Funds Distributor, Inc.
230 Park Avenue
New York, NY 10169
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3909
ADMINISTRATOR, TRANSFER AND DIVIDEND DISBURSING
AGENT
Furman Selz LLC
230 Park Avenue
New York, NY 10169
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
<PAGE>
The OFFITBANK Investment Fund, Inc.
237 Park Avenue, Suite 910, New York, NY 10017
(212) 758-9600
OF0395
<PAGE>
PART B
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
237 Park Avenue, Suite 910
New York, New York 10017
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
April 29, 1996
The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end,
management investment company that currently intends to offer eight portfolios
offering a variety of investment alternatives. This Statement of Additional
Information relates to the following five portfolios:
OFFITBANK High Yield Fund
OFFITBANK Emerging Markets Fund
OFFITBANK Investment Grade Global Debt Fund
OFFITBANK Global Convertible Fund
OFFITBANK Latin America Total Return Fund
(individually, a "Fund", and collectively, the "Funds"). This Statement of
Additional Information sets forth information about the Company applicable to
each of the five Funds.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Company's
Prospectus dated April 29, 1996 (the "Prospectus"). This Statement of Additional
Information contains additional information to that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or calling the Company at the
address and telephone number set forth above.
Information about the Company's three other portfolios, OFFITBANK National
Municipal Fund, OFFITBANK California Municipal Fund, and OFFITBANK New York
Municipal Fund, is contained in a Prospectus and related Statement of Additional
Information, both dated April 29, 1996. The Prospectus and Statement of
Additional Information relating to these portfolios may be obtained without
charge by writing or calling the Company at the address and the telephone number
set forth above.
<PAGE>
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TABLE OF CONTENTS
Page
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ADDITIONAL RISK CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . 7
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES . . . . . . . . . . . . 14
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PERFORMANCE CALCULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . . 20
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS. . . . . . . . . . . . . 2
ADDITIONAL RISK CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . 9
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 10
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . 13
DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES . . . . . . . . . . 17
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 19
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
<PAGE>
PERFORMANCE CALCULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . . 24
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
The following information relates to or supplements the description of the
Funds' investment policies contained in the Prospectus.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. A repurchase agreement is a
transaction in which the seller of a security commits itself at the time of the
sale to repurchase that security from the buyer at a mutually agreed upon time
and price. The Funds will enter into repurchase agreements only with dealers,
domestic banks or recognized financial institutions which, in the opinion of the
Adviser based on guidelines established by the Company's Board of Directors,
present minimal credit risks. The Adviser will monitor the value of the
securities underlying the repurchase agreement at the time the transaction is
entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always exceeds the repurchase price. In
the event of default by the seller under the repurchase agreement, the Fund may
incur costs and experience time delays in connection with the disposition of the
underlying securities.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. A reverse
repurchase agreement is a borrowing transaction in which the Fund transfers
possession of a security to another party, such as a bank or broker/dealer, in
return for cash, and agrees to repurchase, the security in the future at an
agreed upon price, which includes an interest component. Whenever the Funds
enter into reverse repurchase agreements as described in the Prospectus, they
will place in a segregated custodian account liquid assets having a value equal
to the repurchase price (including accrued interest) and will subsequently
monitor the account to ensure such equivalent value is maintained. Reverse
repurchase agreements are considered to be borrowings by the Funds under the
Investment Company Act of 1940, as amended (the "1940 Act").
ASSET-BACKED SECURITIES
Each of the Funds may invest in asset-backed securities. Asset-backed
securities are generally issued as pass through certificates, which represent
undivided fractional ownership interests in the underlying pool of assets, or as
debt instruments, and are generally issued as the debt of a special purpose
entity organized solely for the purpose of owning such assets and issuing such
debt. Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or other enhancement issued by a financial institution
unaffiliated with the entities issuing the securities. Assets which, to date,
have been used to back asset-backed securities include motor vehicle installment
sales contracts or installment loans secured by motor vehicles, and receivables
from revolving credit (credit card) agreements.
3
<PAGE>
Asset-backed securities present certain risks which are, generally, related
to limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. If the letter of
credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized. Because asset-backed securities are relatively new,
the market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
CREDIT SUPPORT. Asset-backed securities often contain elements of credit
support to lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying asset. Liquidity protection ensures that
the pass through of payments due on the installment sales contracts and
installment loans which comprise the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The Funds will not pay any additional fees for
such credit support. However, the existence of credit support may increase the
market price of the security.
DEPOSITORY RECEIPTS
Each Fund may hold equity securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), American Depository Shares ("ADSs") and
European Depository Receipts ("EDRs"), or other securities convertible into
securities of eligible issuers. These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. ADRs and ADSs typically are issued by an American bank or trust
company which evidences ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depository
Receipts ("CDRs"), are receipts issued in Europe typically by foreign banks and
trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs and ADSs in registered form are designed for use in
United States securities markets and EDRs and CDRs in bearer form are designed
for use in European securities markets. For purposes of the Fund's investment
policies, the Fund's investments in ADRs, ADSs, EDRs, and CDRs will be deemed to
be investments in the equity securities representing securities of foreign
issuers into which they may be converted.
WARRANTS OR RIGHTS
Warrants or rights may be acquired by each of the Funds in connection with
other securities or separately, and provide the applicable Fund with the right
to purchase at a later date other securities of the issuer. As a condition of
its continuing registration in a state, each Fund has undertaken that its
investment in warrants or rights, valued at the lower of cost or market, will
not exceed 5% of the value of its net assets and not more than 2% of such assets
will be invested in warrants and rights which are not listed on the American or
New York Stock Exchange. Warrants or rights acquired by a Fund in units or
attached to securities will be deemed to be without value for purpose of this
restriction. These limits are not fundamental policies of the Funds and may be
changed by the Company's Board of Directors without shareholder approval.
4
<PAGE>
BORROWING
The Global Debt and Latin America Total Return Funds' borrowings will not
exceed 25% of each Fund's respective total assets (including the amount
borrowed), less all liabilities and indebtedness other than the borrowings and
may use the proceeds of such borrowings for investment purposes. The Fund may
borrow for leveraging purposes. The High Yield, Emerging Markets and Global
Convertible Funds borrowings will not exceed 20% of their respective total
assets and is permitted only for temporary or emergency purposes other than to
meet redemptions. Any borrowing by the Funds may cause greater fluctuation in
the value of their shares than would be the case if the Funds did not borrow. In
the event that the Funds employ leverage, they would be subject to certain
additional risks. Use of leverage creates an opportunity for greater growth of
capital but would exaggerate any increases or decreases in the Funds' net asset
values. When the income and gains on securities purchased with the proceeds of
borrowings exceed the costs of such borrowings, the Funds' earnings or net asset
values will increase faster than otherwise would be the case; conversely, if
such income and gains fail to exceed such costs, the Funds' earnings or net
asset values would decline faster than would otherwise be the case.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A Fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security ("transaction hedge"). Additionally, for example, when a
Fund believes that a foreign currency may suffer a substantial decline against
the U.S. dollar, it may enter into a forward sale contract to sell an amount of
that foreign currency approximating the value of some or all of such Fund's
portfolio securities denominated in such foreign currency. Conversely, when a
Fund believes that the U.S. dollar may suffer a substantial decline against
foreign currency, it may enter into a forward purchase contract to buy that
foreign currency for a fixed dollar amount ("position hedge"). In this
situation, a Fund may, in the alternative, enter into a forward contract to sell
a different foreign currency for a fixed U.S. dollar amount where such Fund
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which portfolio securities of the Fund are denominated
("cross-hedge"). Each Fund's custodian will place cash not available for
investment or U.S. government securities or other liquid high quality debt
securities in a separate account having a value equal to the aggregate amount of
such Fund's commitments under forward contracts entered into with respect to
position hedges, cross-hedges and transaction hedges, to the extent they do not
already own the security subject to the transaction hedge. If the value of the
securities placed in a separate account declines, additional cash or securities
will be placed in the account on a daily basis so that the value of the account
will equal the amount of such Fund's commitments with respect to such contracts.
As an alternative to maintaining all or part of the separate account, a Fund may
purchase a call option permitting such Fund to purchase the amount of foreign
currency being hedged by a forward sale contract at a price no higher than the
forward contract price or a Fund may purchase a put option permitting such Fund
to sell the amount of foreign currency subject to a forward purchase contract at
a price as high or higher than the forward contract price. Unanticipated changes
in currency prices may result in poorer overall performance for a Fund than if
it had not entered into such contracts. If the party with which a Fund enters
into a forward contract becomes insolvent or breaches its obligation under the
contract, then the Fund may lose the ability to purchase or sell a currency as
desired.
LOANS OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. Securities loans are made to broker/dealers or institutional investors
pursuant to agreements requiring that the loans continuously be secured by
collateral at least equal at all times to the value of the securities lent plus
any accrued interest, "marked to market" on a daily
5
<PAGE>
basis. The collateral received will consist of cash, U.S. short-term government
securities, bank letters of credit or such other collateral as may be permitted
under the Fund's investment program and by regulatory agencies and approved by
the Company's Board of Directors. While the securities loan is outstanding, the
Fund will continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund has a right to call each loan
and obtain the securities on five business days' notice. To the extent
applicable, the Fund will not have the right to vote equity securities while
they are being lent, but it will call in a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans only will be made to firms deemed by
the Adviser to be of good standing and will not be made unless, in the judgment
of the Adviser, the consideration to be earned from such loans would justify the
risk.
U.S. GOVERNMENT OBLIGATIONS
Except for temporary defensive purposes, no Fund will invest more than 25%
of its net assets in securities issued or guaranteed by the U.S. government or
by its agencies or instrumentalities. Such securities in general include a wide
variety of U.S. Treasury obligations consisting of bills, notes and bonds, which
principally differ only in their interest rates, maturities and times of
issuance. Securities issued or guaranteed by U.S. government agencies and
instrumentalities are debt securities issued by agencies or instrumentalities
established or sponsored by the U.S. government.
In addition to the U.S. Treasury obligations described above, the Funds may
invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(e.g., obligations of the Federal Home Loan Mortgage Corporation). In the case
of obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and
that have been established or sponsored by the U.S. government include, in
addition to those identified above, the Bank for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
As stated in the Prospectus, bank obligations that may be purchased by each
Fund include certificates of deposit, bankers' acceptances and fixed time
deposits. A certificate of deposit is a short-term negotiable certificate issued
by a commercial bank against funds deposited in the bank and is either interest-
bearing or purchased on a discount basis. A banker's acceptance is a short-term
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction. The borrower is liable for payment as is
the bank, which unconditionally guarantees to pay the draft at its face amount
on the maturity date. Fixed time deposits are obligations of branches of U.S.
banks or foreign banks which are payable at a stated maturity date and bear a
fixed rate of interest. Although fixed time deposits do not have a market, there
are no contractual
6
<PAGE>
restrictions on the right to transfer a beneficial interest in the deposit to a
third party. The Funds do not consider fixed time deposits illiquid for purposes
of the restriction on investment in illiquid securities.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be made
and the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by a Fund,
the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by a Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.
VARIABLE AND FLOATING RATE INSTRUMENTS
Securities purchased by each Fund may include variable and floating rate
instruments, which provide for adjustments in the interest rate on certain reset
dates or whenever a specified interest rate index changes, respectively.
Variable and floating rate instruments are subject to the credit quality
standards described in the Prospectus. In some cases the Fund may require that
the obligation to pay the principal of the instrument be backed by a letter or
line of credit or guarantee. Although a particular variable or floating rate
demand instrument might not be actively traded in a secondary market, in some
cases, the Fund may be entitled to principal on demand and may be able to resell
such notes in the dealer market. With respect to the floating and variable rate
notes and demand notes described in the Prospectus, the Adviser will consider
the earning power, cash flows and other liquidity ratios of the issuers or
guarantors of such notes and will continuously monitor their financial ability
to meet payment obligations when due.
ADDITIONAL RISK CONSIDERATIONS
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
See "Limiting Investment Risks" in the Prospectus. The sale of restricted or
illiquid securities require more time and result in higher brokerage charges or
dealer discounts and other selling expenses than the sale of securities eligible
for trading on securities exchanges or in the over-the-counter markets.
Restricted securities often sell at a price lower than similar securities that
are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933 and commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, are liquid or illiquid. The Board has
delegated the function of making day to day determinations of liquidity to the
Adviser, pursuant to guidelines reviewed by the Board. The Adviser takes into
account a number of factors in reaching
7
<PAGE>
liquidity decisions, including, but not limited to: (i) the frequency of
trading in the security; (ii) the number of dealers who make quotes for the
security; (iii) the number of dealers who have undertaken to make a market in
the security; (iv) the number of other potential purchasers; and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). The Adviser
will monitor the liquidity of securities in each Fund's portfolio and report
periodically on such decisions to the Board of Directors.
NON-U.S. WITHHOLDING TAXES
A Fund's net investment income from foreign issuers may be subject to non-
U.S. withholding taxes, thereby reducing the Fund's net investment income. See
"Additional Information Concerning Taxes".
INVESTMENT LIMITATIONS
In addition to the restrictions described under "Limiting Investment Risks"
in the Prospectus, each Fund may not:
1. purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase and sell currency forward
contracts, options on foreign currencies and may otherwise engage in
transactions in foreign currencies;
2. make loans, except that a Fund may (a) (i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in
loans and participations in accordance with its investment objectives
and policies, (b) make loans of portfolio securities and (c) enter
into repurchase agreements with respect to portfolio securities;
3. underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with a Fund's investment
program may be deemed to be an underwriting;
4. purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein);
5. purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5% of
a Fund's total assets in the case of any one other investment company
and 10% of such total assets in the case of all other investment
companies in the aggregate. This restriction shall not apply to
investment company securities received or acquired by a Fund pursuant
to a merger or plan of reorganization;
6. purchase securities on margin (except for delayed delivery or when-
issued transactions or such short-term credits as are necessary for
the clearance of transactions, and except for initial and variation
margin payments in connection with the use of options, futures
contracts, options thereon or forward currency contracts; a Fund may
also make deposits of margin in connection with futures and forward
contracts and options thereon);
7. sell securities short (except for short positions in a futures
contract or forward contract or short sales against the box and except
in connection with Hedging and Derivatives);
8
<PAGE>
8. invest for the purpose of exercising control over management of any
company;
9. invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;
10. pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings;
11. investment in stock or bond futures and/or options on futures unless
(i) not more than 5% of a Fund's total assets are required as deposit
to secure obligations under such futures and/or options on futures
contracts, provided, however, 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 such 5%;
12. invest in puts, call, straddles or spreads, except as described in
(11) above;
13. invest in warrants, valued at the lower of cost or market, in excess
of 5% of the value of its total assets. Included within that amount,
but not to exceed 2% of the value of the Fund's net assets, may be
warrants that are not listed on the New York Stock Exchange or
American Stock Exchange or an exchange with comparable listing
requirements, except that the limitation in this sentence shall not
apply to the Latin America Total Return Fund;
14. purchase or retain securities of an issuer if those officers or
Directors of the Fund or its investment adviser who own more than 1/2
of 1% of such issuer's securities together own more than 5% of the
securities of such issuer; and
15. invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous operation.
If a percentage restriction on investment or use of assets set forth above
is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
Investment restrictions (1) through (6) described above and those set forth
in the Prospectus under "Limiting Investment Risks" are fundamental policies of
the Funds which may be changed only when permitted by law and approved by the
holders of a majority of a Fund's outstanding voting securities, as described
under "General Information -- Capital Stock". Restrictions (7) through (15) are
nonfundamental policies of the Funds, and may be changed by a vote of the
Company's Board of Directors.
9
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the
Company for the past five years are listed below.
Positions Principal
Held With Occupation(s)
Name and Address the Company Past 5 Years
- ---------------- ----------- -------------
Morris W. Offit* Chairman of the Board, President and Director,
OFFITBANK President and Director OFFITBANK (1983-
520 Madison Avenue present).
New York, NY 10022
Age: 59 Years
Edward J. Landau Director Member, Lowenthal,
Lowenthal, Landau, Landau, Fischer &
Fischer & Bring, P.C. Bring, P.C. (1960 -
250 Park Avenue present); Director,
New York, NY 10177 Revlon Group Inc.
Age: 66 Years (cosmetics), Revlon
Consumer Products Inc.
(cosmetics), Pittsburgh
Annealing Box (metal
fabricating) and Clad
Metals Inc. (cookware).
The Very Reverend James Director Dean of Cathedral of
Parks Morton St. John the Divine
Cathedral of St. John (1972 - present).
the Divine
1047 Amsterdam Avenue
New York, NY 10025
Age: 66 Years
Wallace Mathai-Davis Secretary and Treasurer Managing Director,
OFFITBANK OFFITBANK (1986-
520 Madison Avenue present).
New York, NY 10022
Age: 51 Years
John J. Pileggi Assistant Treasurer Senior Managing
Furman Selz LLC Director, Furman Selz
230 Park Avenue LLC (1984 - present).
New York, NY 10169
Age: 37 Years
Joan V. Fiore Assistant Secretary Managing Director and
Furman Selz LLC Counsel, Furman Selz
230 Park Avenue LLC (1991 - present);
New York, NY 10169 Attorney, Securities
Age: 39 Years and Exchange Commission
(1986 - 1991).
- --------------
* "Interested person" as defined in the 1940 Act.
10
<PAGE>
Gordon M. Forrester Assistant Treasurer Managing Director,
Furman Selz LLC Furman Selz LLC (1987 -
230 Park Avenue present).
New York, NY 10169
Age: 35 Years
The Company pays each Director who is not also an officer or affiliated
person an annual fee of $3,000 and a fee of $500 for each Board of Directors and
Board committee meeting attended and are reimbursed for all out-of-pocket
expenses relating to attendance at meetings. Directors who are affiliated with
the Adviser do not receive compensation from the Company but are reimbursed for
all out-of-pocket expenses relating to attendance at meetings.
DIRECTOR COMPENSATION
(for fiscal period ended December 31, 1995)
<TABLE>
<CAPTION>
Pension or Total
Aggregate Retirement Compensation
Name of Compensa- Benefits Accrued Estimated Annual From Registrant
Person, tion from As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Directors
- -------- ---------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Morris W. Offit $-0- -0- -0- $-0-
Edward J. Landau $5,500 -0- -0- $5,500
The Very Reverend
James Parks Morton $5,000 -0- -0- $5,000
</TABLE>
As of February 16, 1996, the Directors and officers, as a group, did not
own 1% or more of the Company.
INVESTMENT ADVISER
The Company has retained OFFITBANK, a New York State chartered trust
company, to act as its investment adviser (the
11
<PAGE>
"Adviser"). The advisory agreements (the "Advisory Agreements") between the
Adviser and the Company provide that the Adviser shall manage the operations of
the Company, subject to policy established by the Board of Directors of the
Company. Pursuant to the Advisory Agreements, the Adviser manages the Company's
investment portfolios, directs purchases and sales of the portfolio securities
and reports thereon to the Company's officers and directors regularly. In
addition, the Adviser pays the compensation of the Company's officers, employees
and directors affiliated with the Adviser. The Company bears all other costs of
its operations, including the compensation of its directors not affiliated with
the Adviser.
For its services under the Advisory Agreements, the Adviser receives from
each Fund an advisory fee. The fee is payable monthly at an annual rate of .85%
of the first $200,000,000; .75% on the next $400,000,000 and .65% on amounts in
excess of $600,000,000 in excess of OFFITBANK High Yield Fund's average daily
net assets; .90% of the first $200,000,000 and .80% on amounts in excess thereof
of OFFITBANK Emerging Markets Fund's average daily net assets; .80% of the first
$200,000,000 and .70% on amounts in excess thereof of OFFITBANK Investment Grade
Global Debt Fund's average daily net assets; .90% of OFFITBANK Global
Convertible Fund's average daily net assets; and 1.00% of OFFITBANK Latin
America Total Return Fund's average daily net assets. The Adviser may waive all
or part of its fee from time to time in order to increase a Fund's net
investment income available for distribution to shareholders. The Funds will not
be required to reimburse the Adviser for any advisory fees waived. For the
fiscal year ended December 31, 1995, the High Yield Fund paid the Adviser
$2,884,016 in advisory fees. The Adviser earned $312,096, but waived $52,155,
in advisory fees for the Emerging Markets Fund. For the fiscal period ended
December 31, 1994, the Adviser earned fees of $1,185,535 for the High Yield Fund
and $187,360 for the Emerging Markets Fund. The Adviser waived fees of $45,799
for the Emerging Markets Fund.
The Advisory Agreement with respect to the High Yield, Global Debt and
Emerging Markets Funds was approved by each Fund's sole shareholder, Furman Selz
LLC, ("Furman Selz"), on December 29, 1993. The Advisory Agreement for these
Funds was recently re-approved by the Company's Board of Directors on December
21, 1995. The Advisory Agreement relating to the Latin America Total Return and
Global Convertible Funds was approved by the Company's Board of Directors on
January 31, 1995 and by such Funds' sole shareholder, Furman Selz. Unless sooner
terminated, the Advisory Agreements will continue in effect until February 6,
1997, with respect to the High Yield, Global Debt and Emerging Markets Funds,
and until February 7, 1997 with respect to the Latin America Total Return and
Global Convertible Funds, and each Advisory Agreement from year to year
thereafter if such continuance is approved at least annually by the Company's
Board of Directors or by a vote of a majority (as defined under "General
Information -- Capital Stock") of the outstanding shares of each Fund, and, in
either case, by a majority of the directors who are not parties to the contract
or "interested persons" (as defined in the 1940 Act) of any party by votes cast
in person at a meeting called for such purpose. The Advisory Agreements may each
be terminated by the Company or the Adviser on 60 days' written notice, and will
terminate immediately in the event of its assignment.
DISTRIBUTOR
OFFIT Funds Distributor, Inc., a wholly-owned subsidiary of Furman Selz
(the "Distributor"), with its principal office at 230 Park Avenue, New York, New
York 10169, distributes the shares of the Company. Under a distribution
agreement with the Company (the "Distribution Agreement"), the Distributor, as
agent of the Company, agrees to use its best efforts as sole distributor of the
Company's shares. Solely for the purpose of reimbursing the Distributor for its
expenses incurred in certain activities primarily intended to result in the sale
of shares of the Funds, the Company has adopted a Plan of Distribution (the
"Plan") under Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. Under the
Plan and Distribution Agreement, each Fund is authorized to spend up to 0.25% of
its average daily net assets annually with respect to each class of the Fund's
Shares to reimburse the Distributor for such activities, which are summarized in
the Prospectus. For the fiscal periods ended December 31, 1995 and December 31,
1994, no distribution costs were incurred by the Funds.
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<PAGE>
The Plan, together with the Distribution Agreement, will continue in effect
with respect to a particular Fund from year to year if such continuance is
approved at least annually by the Company's Board of Directors and by a majority
of the Directors who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan ("Qualified
Directors") and who are not "interested persons" (as defined in the 1940 Act) of
any party by votes cast in person at a meeting called for such purpose. In
approving the continuance of the Plan and the Distribution Agreement, the
Directors must determine that the Plan is in the best interest of the
shareholders of each Fund. The Plan was approved by Furman Selz, as sole
shareholder of High Yield, Global Debt and Emerging Markets Funds, on December
29, 1993 and on October 17, 1994 with respect to the Global Convertible and
Latin America Total Return Funds. The Plan, together with the Distribution
Agreement, was unanimously re-approved by the Company's Board of Directors on
December 21, 1995 with respect to all the Funds. The Plan, as amended to
reflect each Fund's Advisor Shares, was re-approved by the Company's Board of
Directors on April 15, 1996.
The Plan requires that, at least quarterly, the Board of Directors must
review a written report prepared by the Treasurer of the Company enumerating the
amounts expended and purposes therefor under the Plan. Rule 12b-1 also requires
that the selection and nomination of Directors who are not "interested persons"
of the Company be made by such Qualified Directors.
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES
Furman Selz provides the Company with administrative, fund accounting,
dividend disbursing and transfer agency services pursuant to a Fund
Administration Agreement dated as of February 7, 1994 (the "Administration
Agreement") with respect to the High Yield, Global Debt and Emerging Markets
Funds, as supplemented as of February 8, 1995 with respect to the Global
Convertible and Latin America Total Return Funds. The services provided by and
the fees payable to Furman Selz for such services are described in the
Prospectus. The Administration Agreement was recently re-approved by the
Company's Board of Directors on December 21, 1995 and will continue in effect
until February 6, 1997 and from year to year thereafter if such continuance is
approved at least annually by the Company's Board of Directors and by a majority
of the Directors who are not parties to such Agreement or "interested persons"
(as defined in the 1940 Act).
Pursuant to the Administration Agreement, Furman Selz performs certain
administrative and clerical services, including certain accounting services,
facilitation of redemption requests, exchange privileges, and account
adjustments, development of new shareholder services and maintenance of certain
books and records; and certain services to the Company's shareholders, including
assuring that investments and redemptions are completed efficiently, responding
to shareholder inquiries and maintaining a flow of information to shareholders.
Furman Selz also furnishes office space and certain facilities reasonably
necessary for the performance of its services under the Administration
Agreement, and provides the office space, facilities, equipment and personnel
necessary to perform the following services for the Company; Securities and
Exchange Commission ("Commission") compliance, including record keeping,
reporting requirements and registration statements and proxies; supervision of
Company operations, including custodian, accountants and counsel and other
parties performing services or operational functions for the Company. Pursuant
to the Administration Agreement, the Company pays Furman Selz a monthly fee
which on an annualized basis will not exceed .15% of the average daily net
assets of the Company.
For the fiscal year ended December 31, 1995, Furman Selz was entitled to
fees of $536,814 for the High Yield Fund and $52,016 for the Emerging Markets
Fund. Of such fees earned, Furman Selz waived $268,407 and $26,008 for the High
Yield Fund and the Emerging Markets Fund, respectively.
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<PAGE>
For the fiscal period ended December 31, 1994, Furman Selz was entitled to
fees of $209,211 for the High Yield Fund and $26,454 for the Emerging Markets
Fund. Of such fees earned, Furman Selz waived $104,606 and $15,613 for the High
Yield Fund and the Emerging Markets Fund, respectively.
Furman Selz serves as the Company's Transfer Agent and Dividend Disbursing
Agent pursuant to a Transfer Agency Agreement dated as of February 7, 1994 (the
"Transfer Agency Agreement") with respect to the High Yield, Global Debt and
Emerging Markets Funds, as supplemented as of February 8, 1995 with respect to
the Global Convertible and Latin America Total Return Funds. Under the Transfer
Agency Agreement, Furman Selz has agreed, among other things, to: (i) issue and
redeem shares of each Fund; (ii) transmit all communications by each Fund to its
shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Directors concerning the Funds' operations. Under the Transfer Agency
Agreement, Furman Selz is entitled to a fee of $15.00 per account per year. The
Transfer Agency Agreement was recently re-approved at the December 21, 1995
Board of Directors Meeting and continues in effect until February 6, 1997 and
from year to year thereafter if such continuance is approved at least annually
by the Company's Board of Directors and by a majority of the Directors who are
not "interested persons" (as defined in the 1940 Act) of any party, and such
Agreement may be terminated by either party on 60 days' written notice. For the
fiscal year December 31, 1995, Furman Selz was entitled to fees of $21,360 and
$4,418 for the High Yield Fund and the Emerging Markets Fund, respectively. For
the fiscal period ended December 31, 1994, Furman Selz was entitled to fees of
$9,110 and $3,407 for the High Yield Fund and the Emerging Markets Fund,
respectively. Of such fees earned in 1994, Furman Selz waived $949 for the High
Yield Fund and $291 for the Emerging Markets Fund for this period.
The Chase Manhattan Bank, N.A. (the "Custodian") serves as the Company's
custodian pursuant to custodian agreements with the Company dated February 7,
1994 with respect to the High Yield, Global Debt and Emerging Markets Funds, and
February 8, 1995 with respect to the Global Convertible and Latin America Total
Return Funds (the "Custodian Agreements"). The Custodian is located at 4
MetroTech Center, 18th Floor, Brooklyn, New York 11245. Under the Custodian
Agreements, the Custodian has agreed to (i) maintain a separate account or
accounts in the name of each Fund; (ii) hold and disburse portfolio securities
on account of each Fund; (iii) collect and receive all income and other payments
and distributions on account of each Fund's portfolio securities; (iv) respond
to correspondence by security brokers and others relating to its duties; and (v)
make periodic reports to the Company's Board of Directors concerning the Funds'
operations. The Custodian is authorized under the Custodian Agreements to
establish separate accounts for the Funds' foreign securities with
subcustodians, provided that the Custodian remains responsible for the
performance of all of its duties under the Custodian Agreements. The Custodian
is entitled to receive monthly fees under the Custodian Agreements based upon
the types of assets held by each Fund, at the annual rate of .0865% on the first
$10 million and .05% on amounts in excess thereof for assets held in the United
States and .20% on the first $10 million and .15% on amounts in excess thereof
for assets held outside the United States, except that with respect to assets
held in certain emerging market countries, the annual fee shall be .30% of such
Fund's assets held in the particular type of security.
For the fiscal year ended December 31, 1995 the Custodian received $233,846
and $43,367 from the High Yield and Emerging Markets Funds, respectively. The
Custodian received $88,865 from the High Yield Fund and $40,949 from the
Emerging Markets Fund for the fiscal period ended December 31, 1994.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Company's Board of Directors, the Adviser is primarily
responsible for the Company's portfolio decisions and the placing of the
Company's portfolio transactions. The High Yield Fund and the Emerging Markets
Fund did not pay any brokerage commissions for the fiscal periods ended
December 31, 1995 and December 31, 1994.
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<PAGE>
Fixed-income and certain short-term securities normally will be purchased
or sold from or to dealers serving as market makers for the securities at a net
price, which may include dealer spreads and underwriting commissions. Purchases
and sales of securities on a stock exchange are effected through brokers who
charge a commission. In the over-the-counter market, securities are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer. In placing orders, it is the policy of the Company to
obtain the best results taking into account the dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities involved. While the Adviser
generally seeks a competitive price in placing its orders, the Company may not
necessarily be paying the lowest price available.
Trading practices in certain emerging market and Latin American countries
are significantly different from those in the United States, and these
differences may have adverse consequences on the investment operations of the
Emerging Markets, Global Debt, Global Convertible and Latin America Total Return
Funds. Brokerage commissions and other transaction costs on the securities
exchanges of emerging market and Latin American countries are generally higher
than in the United States. In addition, securities settlements and clearance
procedures in emerging market countries are less developed and less reliable
than those in the United States and the Funds may be subject to delays or other
material difficulties. Delays in settlement could result in temporary periods
when assets of the Funds are uninvested and no return is earned thereon. The
inability of a Fund to make intended security purchases due to settlement
problems could cause such Fund to miss attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a Fund due to subsequent declines in the value of
such portfolio security or, if such Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Factors relating to brokers in emerging market and Latin American countries
may also expose the Funds' to risks in connection with the execution of
portfolio transactions. There may be less government supervision and regulation
of securities exchanges and brokers in these countries than exists in the United
States. Brokers in these countries may not be as well capitalized as those in
the United States, so that they may be more susceptible to financial failure in
times of market, political, or economic stress, exposing the Funds to a risk of
loss in the event of such failure.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the
Commission. Affiliated persons of the Company, or affiliated persons of such
persons, may from time to time be selected to execute portfolio transactions for
the Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees or other remuneration received by other brokers in connection
with comparable transactions. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length agency
transaction.
Investment decisions for the Company are made independently from those for
other funds and accounts advised or managed by the Adviser. Such other funds and
accounts may also invest in the same securities as the Company. If those funds
or accounts are prepared to invest in, or desire to dispose of, the same
security at the same time as the Company, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Company or the price paid or received by the Company. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Company with those to be sold or
purchased for other funds or accounts in order to obtain best execution.
15
<PAGE>
PURCHASE OF SHARES
For information pertaining to the manner in which shares of each class of
each Fund are offered to the public, see "Purchase of Shares" in the Prospectus.
The Company reserves the right, in its sole discretion, to (i) suspend the
offering of shares of its Funds, and (ii) reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interest of
the Company. The officers of the Company may, from time to time, waive the
minimum initial and subsequent investment requirements.
REDEMPTION OF SHARES
For information pertaining to the manner in which each class of each Fund
may be redeemed, see "Redemption of Shares" in the Prospectus. The Company may
suspend redemption privileges or postpone the date of payment (i) during any
period that the New York Stock Exchange (the "NYSE") or the bond market is
closed, or trading on the NYSE is restricted as determined by the Commission,
(ii) during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for a Fund to
dispose of securities owned by it, or fairly to determine the value of its
assets, and (iii) for such other periods as the Commission may permit.
Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of a Fund, such Fund may pay the
redemption price, in whole or in part, by a distribution in kind.
The Company has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part in investment securities or in cash, as the Board of
Directors may deem advisable; however, payment will be made wholly in cash
unless the Board of Directors believes that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Company. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Company's Prospectus under "Net Asset Value" and
redeeming shareholders would normally incur brokerage expenses if they converted
these securities to cash.
No charge is made by a Fund for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by a Fund.
PERFORMANCE CALCULATIONS
The Company may from time to time quote various performance figures to
illustrate the past performance of each class of shares of its Funds.
Performance quotations by investment companies are subject to rules adopted by
the Commission, which require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
Fund be accompanied by certain standardized performance information computed as
required by the Commission. An explanation of the Commission methods for
computing performance follows.
TOTAL RETURN
A Fund's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5 and 10 year periods (or, if shorter,
the period since inception of the Fund) that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes that all dividends and distributions are reinvested when paid. The
quotation assumes the amount was completely redeemed at the end of each 1, 5 and
10 year period (or, if shorter, the period since inception of the Fund) and the
deduction of all
16
<PAGE>
applicable Fund expenses on an annual basis. Average annual total return is
calculated according to the following formula:
P (1+T)to the nth power = 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 stated period
Each Fund presents performance information for each class of shares
commencing with the Fund's inception (or the inception of the Partnership with
respect to the High Yield Fund). Performance information for each class of
shares may also reflect performance for time periods prior to the introduction
of such class, and the performance for such prior time periods will not reflect
any fees and expenses, payable by such class that were not borne by the Fund
prior to the introduction of such class.
All of the outstanding shares of the Funds were reclassified as "Select
Shares" as of April 29, 1996, and Funds began to offer a new class of shares,
"Advisor Shares." The percentages shown in the tables below are based on the
fees and expenses actually paid by each Fund for the periods presented, rather
than the fees and expenses currently payable by each class of shares, which in
certain cases are different (as indicated in the footnotes to the tables).
The following tables set forth the average annual total returns for each
class of shares of each of the High Yield Fund and the Emerging Markets Fund for
certain time periods ended December 31, 1995.
High Yield Fund
---------------
Select Advisor
Shares Shares*
------ -------
1 year 17.72% 17.72%
5 years 18.81% 18.81%
10 years 11.93% 11.93%
- ---------------
* The return figures do not reflect the distribution and service fees
currently paid with respect to the Advisor Shares of the Fund.
Emerging Markets Fund
---------------------
Select Advisor
Shares Shares*
------ -------
1 year 23.38% 23.38%
since inception (March 8, 1994) 9.84% 9.84%
- ---------------
* The return figures do not reflect the distribution and service fees
currently paid with respect to the Advisor Shares of the Fund.
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<PAGE>
As described in the Prospectus under the caption "Expense Information," the
High Yield Fund and the Emerging Markets Funds have been and still are subject
to certain fee waivers. Absent such waivers, the returns shown above would be
lower.
The Funds may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating aggregate total return can be expressed as follows:
Aggregate Total Return = [ ( ERV )- 1 ]
---
P
In addition to total return, each Fund may quote performance in terms of a
30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the Commission and can be expressed as follows:
Yield = 2[( a-b ) + 1)to the 6th power -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.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by a Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Undeclared earned income, computed in accordance
with generally accepted accounting principles, may be subtracted from the
maximum offering price calculation required pursuant to "d" above.
The 30-day yield (before reclassification of the existing shares of each
Fund to "Select Shares" and the offering of Advisor Shares) for the High Yield
Fund and the Emerging Markets Fund for the period ended December 31, 1995, was
11.29% and 9.19%, respectively.
The performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc. or other independent services which monitor the
performance of investment companies, and may be quoted in advertising in terms
of their rankings in each applicable universe. In addition, the Company may use
performance data reported in financial and industry publications, including
BARRON'S, BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY,
MORNINGSTAR, MUTUAL FUND VALUES, THE WALL STREET JOURNAL, THE NEW YORK TIMES AND
U.S.A. TODAY.
18
<PAGE>
A Fund may include in advertising or sales literature discussions or
illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting), investment
management techniques, policies or investment suitability of a Fund, economic
and political conditions and the relationship between sectors of the economy and
the economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks and bonds. From
time to time advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well as
the views of the Adviser as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund. In addition,
selected indicies may be used to illustrate historic performace of select asset
classes.
ADDITIONAL INFORMATION CONCERNING TAXES
The following discussion is only a brief summary of certain additional tax
considerations affecting the Company, its Funds and its shareholders. No attempt
is made to present a detailed explanation of all federal, state and local tax
concerns, and the discussion set forth here and in the Prospectus is not
intended as a substitute for careful tax planning. Investors are urged to
consult their own tax advisers with specific questions relating to federal,
state or local taxes.
IN GENERAL
Each Fund intends to qualify as a regulated investment company (a "RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and to continue to so qualify. Qualification as a RIC requires, among other
things, that each Fund: (a) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stocks or
securities; (b) derive less than 30% of its gross income in each taxable year
from the sale or other disposition of any of the following held for less than
three months: (i) stock or securities, (ii) options, futures, or forward
contracts, or (iii) foreign currencies (or foreign currency options, futures or
forward contracts) that are not directly related to its principal business of
investing in stock or securities (or options and futures with respect to stocks
or securities) (the "30% limitation"); and (c) diversify its holdings so that,
at the end of each quarter of each taxable year, (i) at least 50% of the market
value of a Fund's assets is represented by cash, cash items, U.S. government
securities, securities of other regulated investment companies and other
securities with such other securities limited, in respect of any issuer, to an
amount not greater than 5% of the value of a Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than U.S. government
securities or the securities of other regulated investment companies) of any one
issuer.
Investors should consider the tax implications of buying shares just prior
to distribution. Although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those purchasing just prior to a
distribution will receive a distribution which will nevertheless be taxable to
them.
Gain or loss, if any, on the sale or other disposition of shares of each of
the Funds will generally result in capital gain or loss to shareholders.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. If a shareholder sells or
otherwise disposes of a share of a Fund before holding it for more than six
months, any loss on the sale or other disposition of such share shall be treated
as a long-term capital loss to the extent of any capital gain dividends received
by the shareholder with respect to such share, or shall be disallowed to the
extent of any exempt-interest dividend. Currently, the maximum federal income
tax rate imposed on individuals with respect to net realized long-term capital
gains is
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<PAGE>
limited to 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to net realized short-term capital gains (which are
taxed at the same rates as ordinary income) is 39.6%.
Each Fund's investments in options, futures contracts and forward
contracts, options on futures contracts and stock indices and certain other
securities, including transactions involving actual or deemed short sales or
foreign exchange gains or losses are subject to many complex and special tax
rules. For example, over-the-counter options on debt securities and equity
options, including options on stock and on narrow-based stock indexes, will be
subject to tax under Section 1234 of the Code, generally producing a long-term
or short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security. By contrast, each Fund's
treatment of certain other options, futures and forward contracts entered into
by a Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held
by the Funds will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Portfolios' fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or short-
term capital losses into long-term capital losses within the Funds. The
acceleration of income on Section 1256 positions may require the Funds to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Funds may be
required to dispose of portfolio securities that they otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income earned and in turn distributed to shareholders by
the Funds.
When the Funds hold options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.
As a regulated investment company, each Fund is also subject to the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months ("short-short income"). This requirement may limit the
Funds' ability to engage in options, spreads, straddles, hedging transactions,
forward or futures contracts or options on any of these positions because these
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in the case
of short sales of portfolio securities reduce the holding periods of certain
securities within the Funds, resulting in additional short-short income for the
Funds.
Each Fund will monitor its transactions in such options and contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
Each Fund is likely to make investments that produce income that is not
matched by a corresponding cash distribution to the Fund, such as investments in
certain Brady Bonds or other obligations having original issue discount (i.e.,
an amount equal to the excess of the stated redemption price of the security at
maturity over its issue price), or market discount (i.e., an amount equal to the
excess of the stated redemption price of the security over the basis of such
bond immediately after it was acquired) if the Fund elects to accrue market
discount on a current basis.
20
<PAGE>
Each Fund intends to elect to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the 30% limitation discussed above. In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction for any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed.
The tax treatment of certain securities in which each Fund may invest is
not free from doubt and it is possible that an Internal Revenue Service ("IRS")
examination of the issuers of such securities or of the Fund could result in
adjustments to the income of a Fund. An upward adjustment by the IRS to the
income of a Fund may result in the failure of such Fund to satisfy the 90%
distribution requirement described in the Prospectus necessary for such Fund to
maintain its status as a regulated investment company under the Code. In such
event, a Fund may be able to make a "deficiency dividend" distribution to its
shareholders with respect to the year under examination to satisfy this
requirement. Such distribution will be taxable as a dividend to the shareholders
receiving the distribution (whether or not a Fund has sufficient current or
accumulated earnings and profits for the year in which such distribution is
made). A downward adjustment by the IRS to the income of a Fund may cause a
portion of the previously made distribution with respect to the year under
examination not to be treated as a dividend. In such event, the portion of
distributions to each shareholder not treated as a dividend would be
recharacterized as a return of capital and reduce the shareholder's basis in the
shares held at the time of the previously made distributions. Accordingly, this
reduction in basis could cause a shareholder to recognize additional gain upon
the sale of such shareholder's shares.
Certain of a Fund's investments in structured products may, for federal
income tax purposes, constitute investments in shares of foreign corporations.
If a Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFICs"), the Fund may be subject to
U.S. federal income tax on a portion of any "excess distribution" or gain from
the disposition of the shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either a Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If a Fund were to invest
in a PFIC and (if the Fund received the necessary information available from the
PFIC, which may be difficult to obtain) elected to treat the PFIC as a
"qualified electing fund" under the Code, in lieu of the foregoing requirements,
the Fund might be required to include in income each year a portion of the
ordinary earnings and net capital gains of the PFIC, even if not distributed to
the Fund, and the amounts would be subject to the 90% and calendar year
distribution requirements described above. Because of the expansive definition
of a PFIC, it is possible that a Fund may invest a portion of its assets in
PFICs. It is not anticipated, however, that the portion of such Fund's assets
invested in PFICs will be material.
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 a Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses from the
disposition of foreign currencies, from the disposition of debt securities
denominated in a foreign currency, or from the disposition of a forward contract
denominated in a foreign currency which are attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the asset and
the date of disposition also are treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "section 988" gains or losses, increase
or decrease the amount of a Fund's investment company taxable income available
to be distributed to its shareholders as ordinary income, rather than increasing
or decreasing the amount of a Fund's net capital gain. Because section 988
losses reduce the amount of ordinary dividends a Fund will be allowed to
distribute for a taxable year, such section 988 losses may result in all or a
portion of prior dividends distributions for such year being recharacterized as
a non-taxable return of capital to shareholders, rather than as an ordinary
dividend, reducing
21
<PAGE>
each shareholder's basis in his Fund shares. To the extent that such
distributions exceed such shareholder's basis, each distribution will be treated
as a gain from the sale of shares.
BACKUP WITHHOLDING
The Funds may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to non-
corporate shareholders. This tax may be withheld from dividends if (i) the payee
fails to furnish a Fund with the payee's correct taxpayer identification number,
(ii) the Internal Revenue Service notifies a Fund that the payee has failed to
report properly certain interest and dividend income to the Internal Revenue
Service and to respond to notices to that effect, or (iii) when required to do
so, the payee fails to certify that he or she is not subject to backup
withholding.
Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.
SHAREHOLDER SERVICES
The following supplements the information regarding shareholder services
set forth in the Company's Prospectus relating to the Funds:
EXCHANGE PRIVILEGE
Shares of each class of any Fund of the Company may be exchanged for shares
of the same class of any of the other Funds or any of the Company's other
portfolios provided that, with respect to Select Shares, a shareholder exchanges
shares with a value of at least $50,000. Exchange requests with respect to
Select Shares should be sent to The OFFITBANK Investment Fund, Inc., 237 Park
Avenue, Suite 910, New York, New York 10017. Any such exchange will be based on
the respective net asset values of the shares involved. There is no sales
commission or charge of any kind. Before making an exchange, a shareholder
should consider the investment objective of the Fund or portfolio to be
purchased. Exchange requests may be made either by mail or telephone. Telephone
exchanges (referred to as "expedited exchanges") will be accepted only if the
certificates for the shares to be exchanged are held by the Company for the
account of the shareholder and the registration of the two accounts is
identical. Requests for expedited exchanges received prior to 4:15 p.m. (New
York time) will be processed as of the close of business on the same day.
Requests received after this time will be processed on the next business day.
Expedited exchanges may, upon 60 days' notice to shareholders, also be subject
to limitations as to amounts or frequency, and to other restrictions established
by the Board of Directors to assure that such exchanges do not disadvantage the
Company and its shareholders. A Shareholder who holds Advisor Shares should
consult his/her Shareholder Servicing Agent to determine the availability of and
terms and conditions imposed on exchanges with the other Funds and portfolios of
the Company.
For federal income tax purposes, an exchange between Funds or portfolios of
the Company is a taxable event, and, accordingly, a capital gain or loss may be
realized. In a revenue ruling relating to circumstances similar to the
Company's, an exchange between a series of a fund was deemed to be a taxable
event. It is likely, therefore, that a capital gain or loss would be realized on
an exchange between Funds or portfolios; shareholders may want to consult their
tax advisers for further information in this regard. The exchange privilege may
be modified or terminated at any time.
TRANSFER OF SHARES
Shareholders may transfer shares of the Company's Funds or other portfolios
to another person by written request to The OFFITBANK Investment Fund, Inc. at
the address noted above. The request should clearly identify the account and
number of shares to be transferred and include the signature of all registered
owners and
22
<PAGE>
all share certificates, if any, which are subject to the transfer. The signature
on the letter of request, the share certificate or any stock power must be
guaranteed in the same manner as described under "Redemption of Shares" in the
Prospectus. As in the case of redemptions, the written request must be received
in good order before any transfer can be made.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law. As
used in this Statement of Additional Information, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Fund and all additional investment portfolios,
means the vote of the lesser of (i) 67% of the Company's shares represented at a
meeting if the holders of more than 50% of the outstanding shares are present in
person or by proxy or (ii) more than 50% of the Company's outstanding shares.
The term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting the Company, any other single
Fund (e.g., approval of Advisory Agreements) or any single class of a Fund,
means the vote of the lesser of (i) 67% of the shares of the Fund represented at
a meeting if the holders of more than 50% of the outstanding shares of the Fund,
or of the class of shares of the Fund, if a class vote is required, are present
in person or by proxy or (ii) more than 50% of the outstanding shares of the
Fund or of the class of shares of the Fund, if a class vote is required.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held.
Each share of each class of a Fund of the Company is entitled to such
dividends and distributions out of the income earned on the assets belonging to
that Fund as are declared in the discretion of the Company's Board of Directors.
In the event of the liquidation or dissolution of the Company, shares of a class
of a Fund are entitled to receive the assets allocable to that class of shares
of such Fund which are available for distribution, and a proportionate
distribution, based upon the relative net assets of the Funds, of any general
assets not belonging to a Fund which are available for distribution. It is
anticipated that expenses incurred by each class of shares of each Fund will
differ and, accordingly, that the dividends distributed with respect to each
class will differ.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid, non-assessable, fully transferable and redeemable at
the option of the holder.
CERTAIN OWNERS OF SHARES OF THE COMPANY
As of April 24, 1996, the following persons owned of record or beneficially
5% or more of the outstanding shares of a Fund of the Company:
EMERGING MARKETS FUND SHARES OWNED PERCENTAGE
- --------------------- ------------ ----------
Jack Nash 447,539.315 6.64%
C/O Odyssey Partners LP
31 West 52nd Street
New York, NY 10019
The Nash Family Partnership 533,698.301 7.92%
C/O Odyssey Partners LP
31 West 52nd Street
New York, NY 10019
23
<PAGE>
Mall Investment LP 476,337.128 7.07%
215 Keo Way
Des Moines, IA 50309
LATIN AMERICA TOTAL RETURN FUND
- -------------------------------
OFFITBANK Capital 100,394.947 100%
Attn: Vincent Rella
520 Madison Avenue, 27th Floor
New York, NY 10022
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Company.
Price Waterhouse LLP is located at 1177 Avenue of the Americas, New York, New
York 10036.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Commission under the Securities Act of 1933 with respect to the securities
offered by the Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Statement of Additional Information
pursuant to the rules and regulations of the Commission. The Registration
Statement including the exhibits filed therewith may be examined at the office
of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
24
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
OFFITBANK INVESTMENT GRADE GLOBAL DEBT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
ASSETS:
Cash $33,333
-------
Total Assets $33,333
-------
LIABILITIES:
Commitments (Notes 1 and 2) -------
NET ASSETS:
(3,333 shares of OFFITBANK Investment Grade Global
Debt Fund, of $.001 par value of common stock issued and
outstanding) $33,333
-------
Net Asset Value per share $ 10.00
-------
NOTES TO FINANCIAL STATEMENT
NOTE 1
OFFITBANK Investment Grade Global Debt Fund (the "Fund") is a separate
non-diversified Portfolio of The OFFITBANK Investment Fund Inc. (the
"Company") which was incorporated in Maryland on September 8, 1993. The Fund
has had no operations other than those relating to organizational matters and
the issuance of 3,333 Common Shares to Furman Selz LLC ("Ferman Selz"). The
Company is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). OFFITBANK has agreed to pay the Fund's organizational
expenses. In the event that, at any time during the five year period
beginning with the date of commencement of operations, the initial shares
acquired by Furman Selz prior to such date are redeemed by any holder
thereof, the redemption proceeds payable in respect of such shares will be
reduced by the pro rata shares (based on the proportionate shares of the
initial shares redeemed to the total number of original shares outstanding at
the time of such redemption) of the then unamortized organizational expenses
as of the date of such redemption.
NOTE 2
The Company has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with OFFITBANK (the "Adviser"). The
Investment Advisory Agreement provides for the Fund to pay the Adviser an
investment advisory fee calculated and accrued daily and paid monthly at the
annual rate of .80% on the first $200,000,000 of net assets and .70% on
amounts in excess thereof of the Fund's average daily net assets. The Adviser
will provide portfolio management and certain administrative, clerical and
bookkeeping services for the Fund.
<PAGE>
Furman Selz provides the Company with administrative, fund accounting,
dividend disbursing and transfer agency services pursuant to an administration
agreement (the "Administration Agreement"). The services under the
Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include day-to-day administration of
matters related to the corporate existence of the Company, maintenance of its
records, preparation of reports, supervision of the Company's arrangement
with its custodian and assistance in the preparation of the Company's
Registration Statements under federal and state laws. Pursuant to the
Administration Agreement, the Fund will pay Furman Selz a monthly fee for its
services which on an annualized basis will not exceed .15% of the average
daily net assets of the Fund.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. (the "Distributor"), an
affiliate of Furman Selz. Under the Distribution Agreement, the
Distributor, as agent of the Company, agrees to use its best efforts as sole
distributor of the Company's shares. Under the Plan of Distribution, the Fund
is authorized to spend up to 0.25% of its average daily net assets to
compensate the Distributor for its services. The Distribution Agreement
provides that the Fund will bear the costs of the registration of its shares
with the Commission and various states and the printing of its prospectus,
statement of additional information and report to shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
The OFFITBANK Investment Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of OFFITBANK
Investment Grade Global Debt Fund (the "Fund"), a separate portfolio of The
OFFITBANK Investment Fund, Inc., at December 31, 1995, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our
audit of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
February 28, 1996
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
OFFITBANK NATIONAL MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
ASSETS:
Cash $ 50
--
Deferred Organization expenses (Note 1) 25,000
-------
Total Assets 25,050
-------
LIABILITIES:
Organization expenses payable (Note 1) 25,000
-------
Commitments (Notes 1 and 2) -------
NET ASSETS:
(5 shares of OFFITBANK National Municipal Fund,
of $.001 par value of common stock issued and
outstanding) $ 50
--
Net Asset Value per share $ 10.00
-------
NOTES TO FINANCIAL STATEMENT
NOTE 1
OFFITBANK National Municipal Fund (the "Fund") is a separate
non-diversified Portfolio of The OFFITBANK Investment Fund Inc. (the
"Company") which was incorporated in Maryland on September 8, 1993. The Fund
has had no operations other than those relating to organizational matters and
the issuance of 5 Common Shares to Furman Selz LLC ("Ferman Selz"). The
Company is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). In the event that, at any time during the five year period
beginning with the date of commencement of operations, the initial shares
acquired by Furman Selz prior to such date are redeemed by any holder
thereof, the redemption proceeds payable in respect of such shares will be
reduced by the pro rata shares (based on the proportionate shares of the
initial shares redeemed to the total number of original shares outstanding at
the time of such redemption) of the then unamortized organizational expenses
as of the date of such redemption. In the event that the Fund liquidates
before the deferred organizational expenses are full amortized, Furman Selz
shall bear such unamortized deferred organizational expenses.
<PAGE>
NOTE 2
The Company has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with OFFITBANK (the "Adviser"). The
Investment Advisory Agreement provides for the Fund to pay the Adviser an
investment advisory fee calculated and accrued daily and paid monthly at the
annual rate of .40% of the Fund's average daily net assets. The Adviser will
provide portfolio management and certain administrative, clerical and
bookkeeping services for the Fund.
Furman Selz provides the Company with administrative, fund accounting,
dividend disbursing and transfer agency services pursuant to an administration
agreement (the "Administration Agreement"). The services under the
Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include day-to-day administration of
matters related to the corporate existence of the Company, maintenance of its
records, preparation of reports, supervision of the Company's arrangement
with its custodian and assistance in the preparation of the Company's
Registration Statements under federal and state laws. Pursuant to the
Administration Agreement, the Fund will pay Furman Selz a monthly fee for its
services which on an annualized basis will not exceed .15% of the average
daily net assets of the Fund.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. (the "Distributor"), an
affiliate of Furman Selz. Under the Distribution Agreement, the Distributor,
as agent of the Company, agrees to use its best efforts as sole distributor
of the Company's shares. Under the Plan of Distribution, the Fund is
authorized to spend up to 0.25% of its average daily net assets to compensate
the Distributor for its services. The Distribution Agreement provides that
the Fund will bear the costs of the registration of its shares with the
Commission and various states and the printing of its prospectus, statement
of additional information and report to shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
The OFFITBANK Investment Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of OFFITBANK
National Municipal Fund (the "Fund"), a separate portfolio of The
OFFITBANK Investment Fund, Inc., at December 31, 1995, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our
audit of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
February 28, 1996
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
OFFITBANK CALIFORNIA MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
ASSETS:
Cash $ 50
--
Deferred Organization expenses (Note 1) 25,000
-------
Total Assets 25,050
-------
LIABILITIES:
Organization expenses payable (Note 1) 25,000
-------
Commitments (Notes 1 and 2) -------
NET ASSETS:
(5 shares of OFFITBANK National Municipal Fund,
of $.001 par value of common stock issued and
outstanding) $ 50
--
Net Asset Value per share $ 10.00
-------
NOTES TO FINANCIAL STATEMENT
NOTE 1
OFFITBANK California Municipal Fund (the "Fund") is a separate
non-diversified Portfolio of The OFFITBANK Investment Fund Inc. (the
"Company") which was incorporated in Maryland on September 8, 1993. The Fund
has had no operations other than those relating to organizational matters and
the issuance of 5 Common Shares to Furman Selz LLC ("Ferman Selz"). The
Company is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). In the event that, at any time during the five year period
beginning with the date of commencement of operations, the initial shares
acquired by Furman Selz prior to such date are redeemed by any holder
thereof, the redemption proceeds payable in respect of such shares will be
reduced by the pro rata shares (based on the proportionate shares of the
initial shares redeemed to the total number of original shares outstanding at
the time of such redemption) of the then unamortized organizational expenses
as of the date of such redemption. In the event that the Fund liquidates
before the deferred organizational expenses are full amortized, Furman Selz
shall bear such unamortized deferred organizational expenses.
<PAGE>
NOTE 2
The Company has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with OFFITBANK (the "Adviser"). The
Investment Advisory Agreement provides for the Fund to pay the Adviser an
investment advisory fee calculated and accrued daily and paid monthly at the
annual rate of .40% of the Fund's average daily net assets. The Adviser will
provide portfolio management and certain administrative, clerical and
bookkeeping services for the Fund.
Furman Selz provides the Company with administrative, fund accounting,
dividend disbursing and transfer agency services pursuant to an
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include day-to-day administration of
matters related to the corporate existence of the Company, maintenance of its
records, preparation of reports, supervision of the Company's arrangement
with its custodian and assistance in the preparation of the Company's
Registration Statements under federal and state laws. Pursuant to the
Administration Agreement, the Fund will pay Furman Selz a monthly fee for its
services which on an annualized basis will not exceed .15% of the average
daily net assets of the Fund.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. (the "Distributor"), an
affiliate of Furman Selz. Under the Distribution Agreement, the Distributor,
as agent of the Company, agrees to use its best efforts as sole distributor
of the Company's shares. Under the Plan of Distribution, the Fund is
authorized to spend up to 0.25% of its average daily net assets to compensate
the Distributor for its services. The Distribution Agreement provides that
the Fund will bear the costs of the registration of its shares with the
Commission and various states and the printing of its prospectus, statement
of additional information and report to shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
The OFFITBANK Investment Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of OFFITBANK
California Municipal Fund (the "Fund"), a separate portfolio of The
OFFITBANK Investment Fund, Inc., at December 31, 1995, in conformity with
generally accepted accounting principles, This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our
audit of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
February 28, 1996
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
AEROSPACE/DEFENSE (2.34%)
CORPORATE BONDS
Fairchild Industries Inc. Sr Notes, 12.25%, 02/01/99....................... $ 1,250,000 $ 1,300,000
Sequa Corp. Sr Notes, 8.75%, 12/15/01...................................... 4,800,000 4,536,000
Sequa Corp. Sr Sub Notes, 9.375%, 12/15/03................................. 1,000,000 932,500
Tracor, Inc. Sr Sub Notes, 10.875%, 08/15/01............................... 2,000,000 2,055,000
UNC, Inc. Sr Notes, 9.125%, 07/15/03....................................... 2,450,000 2,376,500
-------------
11,200,000
-------------
BROADCAST/TELECOMMUNICATIONS (13.33%)
CORPORATE BONDS
Adelphia Communications Sr Notes, 9.50%, 02/15/04.......................... 2,095,000(5) 1,738,850
Cablevision Industries Corp. Sr Notes, 10.75%, 01/30/02.................... 2,000,000 2,180,000
Cablevision Systems Corp. Sr Sub Notes, 10.75%, 04/01/04................... 1,000,000 1,057,500
Cablevision Systems Corp. Sr Sub Notes, 9.25%, 11/01/05.................... 3,000,000 3,116,250
Centennial Cellular Corp. Sr Notes, 8.875%, 11/01/01....................... 5,500,000 5,403,750
Century Communications Corp. Sr Notes, 9.75%, 02/15/02..................... 4,500,000 4,680,000
Continental Cablevision, Inc. Sr Sub Notes, 10.625%, 06/15/02.............. 2,250,000 2,430,000
Fundy Cable Ltd. Sr Notes, 11.00%, 11/15/05................................ 2,000,000 2,090,000
Granite Broadcasting Corp. Sr Sub Notes, 10.375%, 05/15/05................. 2,000,000 2,050,000
Le Groupe Videotron Ltee. Sr Notes, 10.625%, 02/15/05...................... 1,000,000 1,066,250
MobileMedia Communications Sr Sub Notes, 9.375%, 11/01/07.................. 2,000,000 2,060,000
Paging Network Sr Sub Notes, 10.125%, 08/01/07............................. 5,000,000 5,443,750
Pan Am Sat, L.P. Sr Notes, 9.75%, 08/01/00................................. 2,000,000 2,115,000
Rogers Cablesystems Ltd. Sr Secured 2nd Priority Notes, 9.625%, 08/01/02... 2,000,000 2,100,000
Rogers Cablesystems Ltd. Sr Secured 2nd Priority Notes, 9.65%, 01/15/14.... 2,000,000(A) 1,282,521
Rogers Cablesystems Ltd. Sr Secured 2nd Priority Notes, 10.00%, 03/15/05... 3,000,000 3,210,000
SCI Television Inc. 1st Secured Loan Fac., 7.50/9.50%, 06/30/98............ 3,087,800(3) 3,087,800
Sinclair Broadcast Group Sr Sub Notes, 10.00%, 09/30/05.................... 3,000,000 3,067,500
Storer Communications Inc. Sub Debs., 10.00%, 05/15/03..................... 3,000,000 3,003,750
Telemundo Group Sr Notes, 10.25%, 12/30/01................................. 2,000,000 1,980,000
TeleWest Plc Debs., 0/11.00%, 10/01/07..................................... 7,000,000(3) 4,208,750
Videotron Holdings Sr Discount Notes, 0/11.125%, 07/01/04.................. 2,500,000(3) 1,731,250
Videotron Ltee. Sr Sub Notes, 10.25%, 10/15/02............................. 2,500,000 2,637,500
PREFERRED STOCKS
Cablevision Systems Corp. Pfd., 11.75% Series G............................ 20,000 2,100,000
-------------
63,840,421
-------------
CHEMICALS (4.77%)
CORPORATE BONDS
Borden Chemicals & Plastics Sr Notes, 9.50%, 05/01/05...................... 1,500,000 1,546,875
Freeport-McMoran Resource Partners, L.P. Sr Sub Notes, 8.75%, 02/15/04..... 2,000,000 2,050,000
Harris Chemical North America, Inc. Sr Notes, 0/10.25%, 07/15/01........... 5,000,000(3) 4,800,000
Sherritt Gordon Ltd. Notes, 9.75%, 04/01/03................................ 2,500,000 2,643,750
Sherritt, Inc. Sr Notes, 11.00%, 03/31/04.................................. 3,000,000(A) 2,365,634
Sifto Canada Inc. Sr Notes, 8.50%, 07/15/00................................ 3,500,000 3,386,961
Terra Industries Inc. Sr Notes, 10.50%, 06/15/05........................... 3,000,000 3,307,500
Uniroyal Chemical Co., Inc. Sr Notes, 9.00%, 09/01/00...................... 2,750,000 2,750,000
-------------
22,850,720
-------------
</TABLE>
F-1
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER GROUPS (5.24%)
CORPORATE BONDS
Borg-Warner Security Corp. Sr Sub Notes, 9.125%, 05/01/03.................. $ 1,500,000 $ 1,365,000
Host Marriott Travel Plaza Sr Notes, 9.50%, 05/15/05....................... 6,500,000 6,426,875
Regency Health Services Sr Sub Notes, 9.875%, 10/15/02..................... 2,000,000 1,985,000
Revlon Inc. Sr Debs., 10.875%, 07/15/10.................................... 3,800,000 3,876,000
Samsonite Corp. Sr Notes, 11.125%, 07/15/05................................ 1,500,000 1,470,000
Sealy Corp Sr Sub Notes, 9.50%, 05/01/03................................... 2,200,000 2,233,000
Tultex Corp. Sr Notes, 10.625%, 03/15/05................................... 1,400,000 1,424,500
Westpoint Stevens, Inc. Sr Notes, 8.75%, 12/15/01.......................... 2,500,000 2,506,250
PREFERRED STOCKS
Foxmeyer Health Corp. Pfd. $4.20 Series A.................................. 75,558(5) 2,823,980
Pantry Pride Inc. Pfd. $14.875 Series B.................................... 10,000 1,025,000
-------------
25,135,605
-------------
FINANCIAL SERVICES/INSURANCE (6.27%)
CORPORATE BONDS
American Annuity Group Inc. Sr Sub Notes, 11.125%, 02/01/03................ 3,000,000 3,240,000
Americo Life Inc. Sr Notes, 9.25% 06/01/05................................. 2,500,000 2,375,000
First City Financial Sr Sub Notes, 9.00%, 09/30/97......................... 5,079,400 5,066,702
Keystone Group Inc. Sr Secured Notes, 9.75%, 09/01/03...................... 1,000,000 965,000
Navistar Financial Corp. Sr Sub Notes, 8.875%, 11/15/98.................... 2,500,000 2,525,000
Penn Central Corp. Sr Notes 10.625%, 04/15/00.............................. 3,500,000 3,783,381
Phoenix Re Corp. Sr Notes, 9.75%, 08/15/03................................. 1,000,000 1,067,500
Presidential Life Corp. Sr Notes, 9.50%, 12/15/00.......................... 2,500,000 2,600,000
Reliance Group Holdings, Inc. Sr Notes, 9.75%, 11/15/03.................... 5,000,000 5,150,000
Terra Nova Holdings Sr Notes, 10.75%, 07/01/05............................. 3,000,000 3,270,000
-------------
30,042,583
-------------
FOREST & PAPER PRODUCTS (9.15%)
CORPORATE BONDS
Crown Paper Co. Sr Sub Notes, 11.00%, 09/01/05............................. 3,000,000 2,625,000
Doman Industries Ltd. Sr Notes, 8.75%, 03/15/04............................ 2,000,000 1,920,000
Fort Howard Corp. Pass Thru Cert., 11.00%, 01/02/02........................ 2,341,543 2,438,132
Fort Howard Corp. Sr Sub Notes, 9.00%, 02/01/06............................ 3,000,000 2,947,500
Fort Howard Corp. Variable Term Loan, 8.82%, 12/31/02...................... 2,500,000(4)(6) 2,506,250
Fort Howard Corp. Variable Term Loan, 8.88%, 12/31/02...................... 2,500,000(4)(6) 2,506,250
Maxxam Group Inc. Sr Secured Notes, 11.25%, 08/01/03....................... 2,350,000 2,291,250
Rainy River Forest Products Sr Notes, 10.75%, 10/15/01..................... 2,000,000 2,195,000
Repap New Brunswick Sr Notes Floating Rate Bonds, 9.25%, 07/15/00.......... 2,000,000(6) 2,000,000
Repap Wisconsin Inc. 1st Priority Sr Secured Notes, 9.25%, 02/01/02........ 5,000,000 4,750,000
Stone-Consolidated Corp. Sr Secured Notes, 10.25%, 12/15/00................ 2,500,000 2,675,000
Stone Container Corp. Sr Notes, 9.875%, 02/01/01........................... 4,000,000 3,880,000
Stone Container Corp. Sr Secured Notes, 10.75%, 10/01/02................... 2,000,000 2,080,000
Stone Container Corp. Sr Sub Notes, 11.00%, 08/15/99....................... 3,500,000 3,447,500
Tembec Finance Corp. Sr Notes, 9.875%, 09/30/05............................ 2,000,000 1,970,000
CONV. CORPORATE BONDS
Repap Enterprise Conv. Debs., 9.00%, 06/30/98.............................. 5,000,000(A) 3,609,381
-------------
43,841,263
-------------
</TABLE>
F-2
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GENERAL INDUSTRIES/MANUFACTURING (12.54%)
CORPORATE BONDS
American Standard Sr Sub Notes, 0/10.50%, 06/01/05......................... $ 6,000,000(3) $ 5,130,000
Calmar Inc. Sr Notes, 11.50%, 08/15/05 (144A).............................. 2,500,000(2) 2,537,500
CMI Industries Inc. Sr Sub Notes, 9.50%, 10/01/03.......................... 2,000,000 1,600,000
Communication and Power Industries Sr Sub Notes, 12.00%, 08/01/05.......... 2,500,000 2,568,750
Computervision Industries Sr Notes, 11.375%, 08/15/99...................... 975,000 1,028,625
Dal-Tile Sr Secured Notes, 0.00%, 07/15/98................................. 3,465,000 2,633,400
Dominion Textile (USA) Inc. Guaranteed Sr Notes, 8.875%, 11/01/03.......... 2,500,000 2,468,750
Envirosource Inc. Sr Notes, 9.75%, 06/15/03................................ 2,000,000 1,770,000
Envirotest System Corp. Sr Notes, 9.125%, 03/15/01......................... 1,500,000 1,245,000
Essex Group Sr Notes, 10.00%, 05/01/03..................................... 4,000,000 3,920,000
Harvard Industries Sr Notes, 11.125%, 08/01/05............................. 2,000,000 2,035,000
Howmet Corp. Sr Sub Notes, 10.00%, 12/01/03 (144A)......................... 1,000,000(2) 1,047,500
Lone Star Industries, Inc. Sr Notes, 10.00%, 07/31/03...................... 3,000,000 3,030,000
Norcal Waste Systems Sr Notes, 12.50%, 11/15/05............................ 3,000,000 3,030,000
Nortek Inc. Sr Sub Notes, 9.875%, 03/01/04................................. 1,500,000 1,395,000
NVR Inc. Sr Notes, 11.00%, 04/15/03........................................ 1,000,000 1,005,000
Schuller International Group Inc. Sr Notes, 10.875%, 12/15/04.............. 1,500,000 1,687,500
Scotsman Group Sr Notes, 9.50%, 12/15/00................................... 3,000,000 3,000,000
Talley Manufacturing & Technology Inc. Sr Notes, 10.75%, 10/15/03.......... 2,000,000 2,005,000
Unisys Corp. Sr Notes, 10.625%, 10/01/99................................... 3,000,000 2,655,000
U.S. Leather Inc. Sr Notes, 10.25%, 07/31/03............................... 1,000,000 740,000
Walbro Corp. Sr Notes, 9.875%, 07/15/05.................................... 2,000,000 1,980,000
Walter Industries Sr Notes, 12.19%, 03/15/00............................... 8,000,000 8,100,000
World Color Press, Inc. Sr Sub Notes, 9.125%, 03/15/03..................... 3,380,000 3,481,400
-------------
60,093,425
-------------
HOTELS & GAMING (4.55%)
CORPORATE BONDS
Bally Park Place Funding 1st Mtg. Notes, 9.25%, 03/15/04................... 5,000,000 5,050,000
Four Seasons Hotel Sr Notes, 9.125%, 07/01/00 (144A)....................... 3,000,000(2) 2,985,000
Grand Casino's 1st Mtg. Notes, 10.125%, 12/01/03........................... 1,000,000 1,042,500
Hollywood Casino Sr Notes, 12.75%, 11/01/03................................ 1,500,000 1,355,625
John Q Hammons Hotel 1st Mtg. Notes, 9.75%, 10/01/05 (144A)................ 5,000,000(2) 5,018,750
Mohegan Tribal Gaming Authority Sr Notes, 13.50%, 11/15/02 (144A).......... 2,000,000(2) 2,170,000
Prime Hospitality Corp. Sr Secured Notes, 10.00%, 07/31/99................. 4,211,333 4,190,276
-------------
21,812,151
-------------
METALS/MINING/IRON/STEEL (4.18%)
CORPORATE BONDS
AK Steel Corp. Sr Notes, 10.75%, 04/01/04.................................. 1,500,000 1,661,250
ARMCO Inc. Sr Notes, 7.875% 12/15/96....................................... 200,000 196,000
ARMCO Inc. Sr Notes, 9.375%, 11/01/00...................................... 5,000,000 4,950,000
Bethlehem Steel Corp. Sr Notes, 10.375%, 09/01/03.......................... 2,000,000 2,125,000
GS Technologies Corp. Sr Notes, 12.25%, 10/01/05........................... 2,000,000 1,992,500
Jorgensen Earle M. Co. Sr Notes, 10.75%, 03/01/00.......................... 1,600,000 1,472,000
Northwestern Steel & Wire Co. Sr Notes, 9.50%, 06/15/01.................... 3,000,000 2,947,500
Republic Engineered Steel 1st Mtg. Notes, 9.875%, 12/15/01................. 1,500,000 1,346,250
Wheeling-Pittsburgh Corp. Sr Notes, 9.375%, 11/15/03....................... 3,500,000 3,333,750
-------------
20,024,250
-------------
</TABLE>
F-3
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL/GAS (6.87%)
CORPORATE BONDS
Clark R & M Holdings Sr Notes, 0.00%, 02/15/00............................. $ 7,000,000 $ 4,655,000
Columbia Gas Systems Inc. 6.39%, Series A 11/28/00......................... 267,000 271,457
Columbia Gas Systems Inc. 6.61%, Series B 11/28/02......................... 264,000 269,832
Columbia Gas Systems Inc. 6.80%, Series C 11/28/05......................... 264,000 271,439
Columbia Gas Systems Inc. 7.05%, Series D 11/28/07......................... 264,000 272,346
Columbia Gas Systems Inc. 7.32%, Series E 11/28/10......................... 264,000 272,454
Crown Central Petroleum Sr Notes, 10.875%, 02/01/05........................ 2,400,000 2,520,000
Giant Industries Inc. Guaranteed Sr Sub Notes, 9.75%, 11/15/03............. 1,800,000 1,818,000
Gulf Canada Resources, Ltd. Sr Sub Debs., 9.25%, 01/15/04.................. 1,500,000 1,553,484
Maxus Energy Medium Term Notes, 11.02%, 05/15/01........................... 1,000,000 1,010,000
Maxus Energy Sr Notes, 9.875%, 10/15/02.................................... 1,000,000 1,006,250
Presidio Oil Co. Sr Notes, 11.50%, 09/15/00................................ 1,000,000(1) 1,045,000
Presidio Oil Co. Gas Index Notes, 13.25%, 07/15/02......................... 1,000,000(1) 680,000
Rowan Sr Sub Notes, 11.875%, 12/01/01...................................... 2,500,000 2,693,750
TransTexas Gas Corp. Sr Notes, 11.50%, 06/15/02............................ 4,000,000 4,130,000
Triton Energy Corp. Sr Sub Disc. Notes, 0/9.75%, 12/15/00.................. 2,500,000(3) 2,331,250
Triton Energy Corp. Sr Sub Disc. Notes, 0.00%, 11/01/97.................... 1,500,000 1,293,750
Tuboscope Vetco Sr Sub Notes, 10.75%, 04/15/03............................. 1,000,000 992,500
Wainoco Oil Corp. Sr Notes, 12.00%, 08/01/07............................... 2,000,000 1,955,000
Wilrig As Sr Secured Notes, 11.25%, 03/15/04............................... 1,200,000 1,311,000
PREFERRED STOCKS
Columbia Gas Systems Inc. 5.22% Dividend Enhanced Conv. Stock.............. 4,535 179,133
CONV. PREFERRED STOCKS
Columbia Gas Systems Inc. 7.89% Pfd........................................ 7,405 177,720
CONV. EURODOLLAR BONDS
Reading & Bates Energy Co. Conv. Eurobonds, 8.00%, 12/31/98................ 1,765,500 2,180,393
-------------
32,889,758
-------------
PACKAGING/CONTAINERS (3.01%)
CORPORATE BONDS
Gaylord Container Sr Notes, 11.50%, 05/15/01............................... 5,000,000 5,150,000
Owens-Illinois Corp. Sr Sub Notes, 10.00%, 08/01/02........................ 2,000,000 2,092,500
Owens-Illinois Corp. Sr Sub Notes, 10.50%, 06/15/02........................ 4,500,000 4,815,000
Riverwood International Corp. Sr Notes Series II, 10.75%, 06/15/00......... 2,200,000 2,365,000
-------------
14,422,500
-------------
REAL ESTATE (5.18%)
CORPORATE BONDS
Granite Development Partners L.P. Sr Notes, 10.83%, 11/15/03............... 1,000,000 800,000
Host Marriott Properties Sr Notes, 9.50%, 05/15/05......................... 2,000,000 2,042,500
Mortgage & Realty Trust Sr Notes, 11.125%, 09/29/02........................ 500,000 505,000
Rockefeller Center Properties Sr Notes, 0.00%, 12/31/00.................... 9,500,000 5,355,625
Trizec Finance Sr Notes, 10.875%, 10/15/05................................. 4,000,000 4,125,000
MORTGAGE BACKED SECURITIES
RTC Mtg. Tr. Series 1993-N3 CL 4 Mtg. Ln. Bkd. Bonds, 10.50%, 10/15/03
(144A).................................................................... 5,000,000(2) 5,000,000
RTC Mtg. Tr. Series 1994-N1 CL 4 Mtg. Ln. Bkd. Bonds, 10.50%, 01/15/04
(144A).................................................................... 1,250,000(2) 1,253,125
RTC Mtg. Tr. Series 1994-N2 CL 4 Mtg. Ln. Bkd. Bonds, 10.00%, 12/15/04
(144A).................................................................... 2,000,000(2) 2,005,000
RTC Mtg. Tr. Series 1994-C1 CL F Mtg. Ln. Bkd. Bonds, 8.00%, 06/25/26...... 2,683,329 2,227,163
RTC Mtg. Tr. Series 1994-C2 CL G Mtg. Ln. Bkd. Bonds, 8.00%, 04/25/25...... 1,827,824 1,507,955
-------------
24,821,368
-------------
</TABLE>
F-4
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL (3.93%)
CORPORATE BONDS
Grand Union Co. Sr Notes, 12.00%, 09/01/04................................. $ 1,500,000 $ 1,297,500
National Convenience Realty Co. Secured Notes, 9.50%, 04/30/03............. 2,398,698 2,494,646
Pathmark Stores Inc. Sr Sub Notes, 9.625%, 05/01/03........................ 5,000,000 4,812,500
Payless Cashways Inc. Sr Sub Notes, 9.125%, 04/15/03....................... 1,200,000 939,000
Penn Traffic Co. Sr Notes, 10.25%, 02/15/02................................ 4,000,000 3,810,000
Ralph's Grocery Sr Notes, 10.45%, 06/15/04................................. 2,500,000 2,531,250
TLC Beatrice Int'l Holdings Sr Notes, 11.50%, 10/01/05..................... 3,000,000 2,962,500
-------------
18,847,396
-------------
TRANSPORTATION (4.39%)
CORPORATE BONDS
Eletson Holdings Inc. 1st Pfd. Mtg. Notes, 9.25%, 11/15/03................. 2,000,000 1,967,500
GPA Delaware Inc. Guaranteed Notes, 8.75%, 12/15/98........................ 2,500,000 2,343,750
Moran Transportation Co. 1st Pfd. Mtg. Notes, 11.75%, 07/15/04............. 1,500,000 1,417,500
Sea Containers Ltd. Sr Notes, 9.50%, 07/01/03.............................. 2,600,000 2,600,000
Stena AB Sr Notes, 10.50%, 12/15/05........................................ 3,000,000 3,060,000
Viking Star Shipping 1st Pfd. Mtg. Notes, 9.625%, 07/15/03................. 2,000,000 2,070,000
TRUST CERTIFICATES
Piedmont Aviation Inc. Equipment Trust Certificates 1988 Series A, 9.80%,
01/15/00.................................................................. 942,000 884,303
Piedmont Aviation Inc. Equipment Trust Certificates 1988 Series F, 10.15%,
03/28/03.................................................................. 1,000,000 930,000
U.S. Air Inc. Equipment Trust Certificates 1990 Series A, 11.20%,
03/19/05.................................................................. 3,690,463 3,598,202
U.S. Air Inc. Equipment Trust Certificates 1990 Series B, 10.33%,
06/27/02.................................................................. 803,000 752,813
U.S. Air Inc. Equipment Trust Certificates 1990 Series D, 10.28%,
06/27/01.................................................................. 837,000 788,873
U.S. Air Inc. Equipment Trust Certificates 1988 Series B, 9.80%,
01/15/00.................................................................. 654,000 613,125
-------------
21,026,066
-------------
UTILITIES -- ELECTRIC (5.47%)
CORPORATE BONDS
Beaver Valley Funding Corp. Debs., 8.625%, 06/01/07........................ 1,797,000 1,612,865
California Energy Inc. Sr Notes, 9.875%, 06/30/03.......................... 1,800,000 1,872,000
Cleveland Electric Illum. Medium Term Notes, 9.25%, 07/29/99............... 1,000,000 1,033,750
Cleveland Electric Illum. Medium Term Notes, 8.16% 11/30/98................ 3,500,000 3,508,750
Cleveland Electric Illum. 1st Mortgage Bonds, 9.50% 05/15/05............... 1,600,000 1,666,170
CTC Mansfield Funding Corp. Secured Lease Obligation Bonds, 10.25%,
03/30/03.................................................................. 3,500,000 3,579,013
Long Island Lighting Co. Debs., 7.125%, 06/01/05........................... 4,000,000 3,849,252
Tucson Electric Power Company, Springerville Unit 1 Series B-1, 10.21%,
01/01/09.................................................................. 246,185 241,261
Tucson Electric Power Company, Springerville Unit 1 Series B-2, 10.21%,
01/01/09.................................................................. 370,554 363,143
Tucson Electric Power Company, Springerville Unit 1 Series B-4, 10.21%,
01/01/09.................................................................. 533,836 523,159
Tucson Electric Power Company, Springerville Unit 1 Series B-5, 10.21%,
01/01/09.................................................................. 1,128,441 1,105,872
Tucson Electric Power Company, Springerville Unit 1 Series B-6, 10.21%,
01/01/09.................................................................. 2,548,534 2,497,563
Tucson Electric Power Company, Springerville Unit 1 Series B-7, 10.21%,
01/01/09.................................................................. 698,465 684,496
PREFERRED STOCKS
Long Island Lighting Co. Pfd., 7.95%, 06/01/00 Series AA................... 90,000 2,193,750
Long Island Lighting Co. Pfd., 8.50%, Series R............................. 3,125 312,500
Public Service Co. of New Hampshire Pfd., 10.60%, 06/30/97 Series A........ 45,000 1,153,125
-------------
26,196,669
-------------
</TABLE>
F-5
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS (3.44%)
Banco Bozano Simonsen Ltd. CP 12.50%, 02/07/96............................. $ 2,500,000 $ 2,500,000
Ford Motor Credit Co. Commercial Paper, 01/11/96........................... 7,000,000 6,988,664
General Electric Corp. Commercial Paper, 01/11/96.......................... 7,000,000 6,988,664
-------------
16,477,328
-------------
TOTAL INVESTMENTS (COST $437,732,266) (94.66%)............................. 453,521,503
-------------
OTHER ASSETS IN EXCESS OF LIABILITIES (5.34%).............................. 25,568,878
-------------
TOTAL NET ASSETS (100.00%)................................................. $ 479,090,381
-------------
-------------
</TABLE>
- ---------------
(A) Canadian Dollars
(1) Issuer in default.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(3) Step up bond.
(4) Illiquid security.
(5) Payment in kind security.
(6) Interest rate reflected is the rate in effect at December 31, 1995.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
OFFITBANK
EMERGING MARKETS FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
SOVEREIGN DEBT
ARGENTINA (13.00%)
Argentina Bote X (10) Floating Rate Bonds, 5.6875%, 04/01/00............... $ 3,022,451(4) $ 2,696,691
Argentina Brady Floating Rate Bonds, 6.8125%, 03/31/05..................... 2,350,000(4) 1,668,500
Argentina Brady Par Step-up Bonds, 4.00%/6.00%, 03/31/23................... 1,750,000(3) 995,312
Argentina Global Bonds, 8.375%, 12/20/03................................... 1,250,000 1,043,750
-------------
6,404,253
-------------
BRAZIL (19.01%)
Brazil Brady Capitalization Step-up Bonds, 4.00%/8.00%, 04/15/14........... 2,387,720(3) 1,361,000
Brazil Brady DCB Floating Rate Bonds, 6.875%, 04/15/12..................... 2,250,000(4) 1,279,687
Brazil Brady EI Floating Rate Notes, 6.8125%, 04/15/06..................... 2,250,000(4) 1,544,062
Brazil Brady Par Z Step-Up Bonds, 4.00%/6.00%, 04/15/24.................... 2,850,000(3) 1,499,812
Brazil IDU Floating Rate Notes, 6.6875%, 01/01/01.......................... 475,000(4) 408,500
Brazilian LFT's, 06/01/96.................................................. 879,700(a) 1,138,121
Brazilian NTN-D 6.00%, Dollar Linked 03/15/96.............................. 1,517,886(a) 1,612,447
Brazilian NTN-D 6.00%, Dollar Linked 06/13/96.............................. 477,955(a) 519,625
-------------
9,363,254
-------------
CZECH REPUBLIC (2.88%)
Czechoslovakian Trade Obchodni Bank Sr Notes, 11.125%, 08/26/97............ 37,620,000(c) 1,417,417
-------------
ECUADOR (3.67%)
Ecuador Brady Discount Floating Rate Bonds, 6.8125%, 02/28/25.............. 250,000(4) 126,250
Ecuador Brady Par Step-Up Bonds, 3.00%/5.00%, 02/28/25..................... 3,000,000(3) 1,083,750
Ecuador Brady PDI Capitalization Bonds, 3.00%, 02/27/15.................... 1,787,438 598,791
-------------
1,808,791
-------------
MEXICO (2.99%)
UMS Cetes Linked Notes, 11/27/96........................................... 1,450,000 1,473,563
-------------
PANAMA (3.78%)
Panama Loan, 6.6875%, 1989................................................. 2,250,000(2) 1,859,625
-------------
PERU (1.45%)
Peru Citi-Loan............................................................. 1,000,000(2) 715,000
-------------
AUTOMOBILE PARTS
MEXICO (3.36%)
Corporacion Industrial Sanluis 9.125%, 11/16/98............................ 1,750,000 1,653,838
-------------
BANKS (8.29%)
ARGENTINA
Banco de Galicia 9.00%, 11/01/03........................................... 500,000 437,500
-------------
BRITISH VIRGIN ISLAND
Banco Fibra Participation 14.00%, 01/22/96................................. 250,000 250,000
-------------
CHILE
Citibank Chilean Peso-Linked Time Deposit, 12.00%, 01/18/96................ 201,656,721(b) 495,573
Citibank Chilean Peso-Linked Time Deposit, 12.00%, 01/18/96................ 99,748,716(b) 245,133
-------------
740,706
-------------
MOROCCO
Morocco Tranche A Loan, 6.594%, 01/01/09................................... 4,000,000(2) 2,655,000
-------------
INDUSTRIAL (10.87%)
ARGENTINA
Sociedad Comercial del Plata 8.75%, 12/14/98............................... 1,030,000 973,350
-------------
</TABLE>
F-7
<PAGE>
OFFITBANK
EMERGING MARKETS FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL (CONTINUED)
MEXICO
Alfa Convertible Notes, 8.00%, 09/15/00 (144A)............................. $ 1,300,000(1) $ 1,274,000
DESC Sociedad de Fomento Bonds, 11.00%, 12/15/97 (144A).................... 1,000,000(1) 993,900
Grupo IRSA 8.375%, 07/15/98 (144A)......................................... 1,750,000(1) 1,610,000
Tubos De Acero De Mexico 13.75%, 12/08/99.................................. 500,000 502,355
-------------
4,380,255
-------------
LEASING (1.97%)
BRAZIL
Dibens Leasing TR (Referential Rate) + 19.30%, 07/01/97.................... 9,300(a) 969,798
-------------
MANUFACTURING (1.67%)
MEXICO
AXA 8.50%, 10/01/98........................................................ 1,000,000 825,000
-------------
MUNICIPAL (3.82%)
BRAZIL
State of Minas Gerais 7.875%, 02/10/99 (X-Warrants), (144A)................ 2,000,000(1) 1,676,200
State of Minas Gerais 8.25%, 02/10/00...................................... 250,000 205,125
-------------
1,881,325
-------------
PAPER/PULP (4.06%)
BRAZIL
Klabin Fabricadora de Papel 10.00%, 12/20/01 (144A)........................ 750,000(1) 728,168
-------------
MEXICO
Grupo Industrial Durango 12.00%, 07/15/01.................................. 1,450,000 1,270,577
-------------
RETAIL (1.79%)
MEXICO
Controladora Commercial Mexicana 8.75%, 04/21/98........................... 1,000,000 880,000
-------------
SECURITIES INDUSTRY (0.51%)
BRAZIL
Banco Bozano Simonsen 13.00%, 04/02/96..................................... 250,000 250,000
-------------
STEEL (5.78%)
MEXICO
Grupo IMSA 8.75%, 07/07/98 (144A).......................................... 1,000,000(1) 912,500
Grupo IMSA 10.00%, 10/13/99................................................ 500,000 456,250
Hylsa 11.00%, 02/23/98 (144A).............................................. 1,500,000(1) 1,478,460
-------------
2,847,210
-------------
TELECOMMUNICATIONS (4.76%)
ARGENTINA
Telecom Argentina 12.00%, 11/15/02......................................... 1,000,000 1,064,580
Telecom Argentina 8.375%, 10/18/00......................................... 250,000 237,363
Telefonica Argentina 11.875%, 11/01/04..................................... 1,000,000 1,043,250
-------------
2,345,193
-------------
TOBACCO (1.50%)
MEXICO
Empresas La Moderna 10.25%, 11/12/97 (144A)................................ 750,000(1) 736,943
-------------
TRANSPORTATION (0.45%)
MEXICO
Transport Maritima Mexico 8.50%, 10/15/00.................................. 250,000 221,138
-------------
UTILITY (ELECTRIC) (2.53%)
ARGENTINA
Central Termica Guemes 12.00%, 11/29/96.................................... 500,000 492,500
-------------
</TABLE>
F-8
<PAGE>
OFFITBANK
EMERGING MARKETS FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITY (ELECTRIC) (CONTINUED)
BRAZIL
Eletrobras 10.00%, 10/30/98................................................ $ 750,000 $ 753,750
-------------
TOTAL INVESTMENTS (COST $45,641,341) (98.14%).......................... 48,334,154
-------------
OTHER ASSETS IN EXCESS OF LIABILITIES (1.86%).......................... 916,291
-------------
TOTAL NET ASSETS (100.00%)............................................. $ 49,250,445
-------------
-------------
</TABLE>
- ---------------
Principal denominated in the following currencies.
(a) Brazilian Real (b) Chilean Peso (c) Czech Koruna
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(2) Illiquid security.
(3) Step up bond.
(4) Interest rate reflected is the rate in effect at December 31, 1995.
F-9
<PAGE>
OFFITBANK
NEW YORK MUNICIPAL FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS (95.70%)
EDUCATION REVENUE (2.50%)
New York State Dormitory Authority Revenue Bonds Columbia University Series
A, 4.60%, 07/01/06........................................................ $100,000 $ 97,500
New York State Dormitory Authority Revenue Bonds New York University Series
A MBIA, 5.50%, 07/01/04 (4)............................................... 205,000 215,763
-------------
313,263
-------------
GENERAL OBLIGATIONS (24.14%)
Dutchess County General Obligation Bonds 4.90%, 08/01/04................... 215,000 221,988
Hempstead General Obligation Bonds Series B FGIC, 5.625%, 02/01/01 (2)..... 245,000 260,313
Hempstead General Obligation Bonds Series B FGIC, 5.625%, 02/01/04 (2)..... 140,000 150,150
Islip General Obligation Bonds FGIC, 6.00%, 11/01/05 (2)................... 100,000 109,000
Monroe County General Obligation Bonds MBIA, 6.00%, 03/01/98 (4)........... 405,000 422,212
New Castle General Obligation Bonds, 4.60%, 06/01/07....................... 215,000 205,863
New Castle General Obligation Bonds, 4.75%, 06/01/08....................... 210,000 203,700
New York State General Obligation Bonds Series C, 5.00%, 10/01/05.......... 200,000 201,750
New York State General Obligation Bonds, 5.50%, 11/15/01................... 200,000 210,500
Ontario County General Obligation Bonds FGIC, 5.00%, 08/15/02 (2).......... 250,000 260,000
Saratoga Springs CSD General Obligation Bonds, 6.10%, 06/15/97............. 315,000 324,056
Syracuse General Obligation Bonds MBIA, 6.00%, 12/01/04.................... 250,000 274,687
Syracuse General Obligation Bonds Series A, 5.00%, 02/15/06................ 175,000 177,187
-------------
3,021,406
-------------
HEALTH CARE (1.25%)
New York Medical Care Facility Finance Authority FHA 6.20%, 08/15/14 (3)... 150,000 156,563
-------------
HOUSING (5.45%)
New York State Mortgage Agency Revenue Bonds Series 37-A, 5.85%,
10/01/06.................................................................. 125,000 130,781
New York State Mortgage Agency Revenue Bonds Series 37-A, 5.95%,
04/01/07.................................................................. 100,000 104,625
New York State Mortgage Agency Revenue Bonds Series 37-A, 5.80%,
10/01/06.................................................................. 200,000 206,000
New York State Mortgage Agency Revenue Bonds Series 37-A, 5.35%,
04/01/07.................................................................. 240,000 240,900
-------------
682,306
-------------
PREREFUNDED/ESCROWED TO MATURITY (9.84%)
Erie County Water Authority Improvement & Extension Revenue Bonds, 5.75%,
12/01/08.................................................................. 350,000 377,563
Grand Central District Management Association Inc. Special Assessment
Bonds, 6.50%, 01/01/22.................................................... 150,000 169,125
New York City Municipal Water Financing Authority Water & Sewer System
Revenue Bonds Series B, 6.375%, 06/15/22.................................. 100,000 111,750
New York City Municipal Water and Sewer System Prerefunded Bonds, 7.00%,
06/15/07.................................................................. 95,000 108,300
Niagara Falls Bridge Commission New York Revenue Bonds, 6.125%, 10/01/19... 415,000 463,763
-------------
1,230,501
-------------
PUBLIC POWER (5.44%)
New York State Power Authority Revenue Bonds Series Y, 6.25%, 01/01/05..... 100,000 108,500
New York State Power Authority Revenue Bonds Series BB, 6.30%, 01/01/07.... 175,000 190,750
New York State Power Authority Revenue Bonds Series CC, 4.80%, 01/01/05.... 180,000 180,900
New York State Power Authority Revenue Bonds Series CC-MBIA, 4.90%,
01/01/06.................................................................. 200,000 200,750
-------------
680,900
-------------
RESOURCE RECOVERY (0.90%)
Dutchess County Resource Recovery Agency Solid Waste Management Revenue
Bonds Series A FGIC, 7.20%,
01/01/02 (2)............................................................. 100,000 112,250
-------------
SALES TAX REVENUE (11.15%)
Municipal Assistance Corp. for City of New York Revenue Bonds Series 61,
5.75%, 07/01/08........................................................... 300,000 307,125
Municipal Assistance Corp. for City of New York Revenue Bonds Series D,
5.20%, 07/01/07........................................................... 250,000 253,750
New York State Local Government Assistance Corp. Revenue Bonds Series E,
5.00%, 04/01/06........................................................... 100,000 100,000
New York State Local Government Assistance Corp. Revenue Bonds Series D,
6.375%, 04/01/00.......................................................... 100,000 107,750
</TABLE>
F-10
<PAGE>
OFFITBANK
NEW YORK MUNICIPAL FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL OBLIGATIONS (CONTINUED)
SALES TAX REVENUE (CONTINUED)
New York State Local Government Assistance Corp. Revenue Bonds Series D,
4.75%, 04/01/04........................................................... $100,000 $ 99,625
New York State Local Government Assistance Corp. Revenue Bonds Series E,
4.80%, 04/01/05........................................................... 180,000 178,650
New York State Local Government Assistance Corp. Revenue Bonds Series A,
5.00%, 04/01/06........................................................... 100,000 100,000
New York State Local Government Assistance Corp. Revenue Bonds Series D,
4.50%, 04/01/02........................................................... 250,000 248,438
-------------
1,395,338
-------------
SPECIAL ASSESSMENT (2.60%)
Grand Central District Management Association Inc. Special Assessment
Bonds, 5.10%, 01/01/08.................................................... 200,000 196,500
Grand Central District Management Association Inc. Special Assessment
Bonds, 6.20%, 01/01/00.................................................... 120,000 128,700
-------------
325,200
-------------
TELECOMMUNICATIONS (1.24%)
Puerto Rico Telephone Authority Revenue Bonds Series M AMBAC, 5.05%,
01/01/04 (1).............................................................. 150,000 155,812
-------------
TRANSPORTATION REVENUE (20.55%)
New York State Bridge Authority Bonds 7.00%, 01/01/00...................... 250,000 261,675
New York State Thruway, Highway & Bridge Trust Fund Bonds Series B FGIC,
6.40%, 04/01/04 (2)....................................................... 200,000 224,000
New York State Thruway, Highway & Bridge Trust Fund Bonds Series B, 5.80%,
04/01/07.................................................................. 300,000 319,125
New York State Thruway, Highway & Bridge Trust Fund Bonds Series B, 5.75%
MBIA, 04/01/06 (4)........................................................ 200,000 213,750
Port Authority of New York & New Jersey Bonds Series 86, 5.80%, 07/15/03... 200,000 218,000
Port Authority of New York & New Jersey Bonds Series 86, 5.00%, 07/01/06... 250,000 257,187
Port Authority of New York & New Jersey Bonds Series 86, 5.125%,
07/01/08.................................................................. 200,000 205,000
Triborough Bridge & Tunnel Authority General Purpose Bonds Series A, 4.50%,
01/01/03.................................................................. 250,000 249,688
Triborough Bridge & Tunnel Authority General Purpose Bonds, 5.90%,
01/01/07.................................................................. 425,000 461,656
Triborough Bridge & Tunnel Authority General Purpose Bonds, 5.75%,
01/01/05.................................................................. 150,000 162,375
-------------
2,572,456
-------------
WATER/SEWER (10.64%)
New York City Municipal Water Financing Authority Water & Sewer System
Revenue Bonds, 7.00%, 06/15/07............................................ 105,000 118,256
New York City Municipal Water Financing Authority Water & Sewer System
Revenue Bonds, 5.20%, 06/15/05............................................ 350,000 359,187
New York State Environmental Facilities Corporation Pollution Control
Revenue Bonds, Series E, 6.60%, 06/15/05.................................. 100,000 111,250
New York State Environmental Facilities Corporation Pollution Control
Revenue Bonds, 5.40%, 05/15/06............................................ 250,000 266,250
New York State Environmental Facilities Corporation Pollution Control
Revenue Bonds, 6.40%, 06/15/03............................................ 200,000 221,000
Suffolk County Water Revenue Bonds MBIA 5.10%, 06/01/05 (4)................ 250,000 256,250
-------------
1,332,193
-------------
TOTAL MUNICIPAL OBLIGATIONS (COST $11,678,269)......................... 11,978,188
-------------
</TABLE>
F-11
<PAGE>
OFFITBANK
NEW YORK MUNICIPAL FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM OBLIGATIONS (0.58%)
Vista New York Tax Free Money Market Fund.................................. $73,105 $ 73,105
-------------
TOTAL SHORT-TERM OBLIGATIONS (COST $73,105)............................ 73,105
-------------
GOVERNMENT AGENCIES (2.80%)
Federal Home Loan Bank Discount Notes, 01/02/96............................ 350,000 349,944
-------------
TOTAL GOVERNMENT AGENCIES ($349,944)................................... 349,944
-------------
TOTAL INVESTMENTS (COST $12,101,318) (99.08%).......................... 12,401,237
-------------
CASH AND OTHER ASSETS, NET OF LIABILITIES (0.92%)...................... 114,670
-------------
NET ASSETS (100.00%)................................................... $ 12,515,907
-------------
-------------
</TABLE>
- ---------------
(1) Insured as to principal and interest by the American Municipal Bond
Assurance Corporation.
(2) Insured as to principal and interest by the Financial Guarantee Insurance
Corporation.
(3) Insured by the Federal Housing Administration.
(4) Insured as to principal and interest by the Municipal Bond Insurance
Association.
F-12
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES--DECEMBER 31, 1995
HIGH YIELD FUND
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at market value (Cost -- $437,732,266) (Note 1a)................. $453,521,503
Cash.......................................................................... 18,611,594
Unrealized appreciation on forward currency contracts (Note 5)................ 37,240
Receivable for fund shares sold............................................... 1,122,500
Interest receivable........................................................... 9,813,954
Dividends receivable.......................................................... 125,750
Prepaid expenses.............................................................. 21,143
-------------
Total Assets................................................................ $483,253,684
LIABILITIES:
Payable for investments purchased............................................. 1,967,365
Payable for fund shares repurchased........................................... 178,000
Income distribution payable................................................... 1,521,120
Investment advisory fee payable (Note 2)...................................... 318,229
Other payables and accrued expenses........................................... 178,589
-------------
Total Liabilities........................................................... 4,163,303
-------------
NET ASSETS...................................................................... $479,090,381
-------------
-------------
Net assets consist of:
Shares of capital stock, $.001 par value per share; 48,310,714
issued and outstanding (Note 4).............................................. $ 48,311
Additional paid-in-capital.................................................... 463,285,307
Accumulated dividends in excess of net investment income...................... (62,489)
Accumulated net realized loss on investments and foreign currency
transactions................................................................. (5,272)
Net unrealized appreciation on investments and foreign currency
transactions................................................................. 15,824,524
-------------
NET ASSETS...................................................................... $479,090,381
-------------
-------------
NET ASSET VALUE PER SHARE....................................................... $9.92
-------------
-------------
</TABLE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at market value (Cost -- $45,641,341) (Note 1a).................. $ 48,334,154
Cash (including foreign currency of $13,790).................................. 1,087,239
Interest receivable........................................................... 954,326
Prepaid expenses.............................................................. 2,965
Unrealized appreciation on forward currency contracts (Note 5)................ 40,019
------------
Total Assets................................................................ $ 50,418,703
LIABILITIES:
Payable for investments purchased............................................. 706,250
Income distribution payable................................................... 343,930
Investment advisory fee payable (Note 2)...................................... 35,872
Other payables and accrued expenses........................................... 82,206
------------
Total Liabilities........................................................... 1,168,258
------------
NET ASSETS $ 49,250,445
------------
------------
Net assets consist of:
Shares of capital stock, $.001 par value per share; 4,968,891
issued and outstanding (Note 4).............................................. $ 4,969
Additional paid-in-capital.................................................... 47,125,815
Accumulated dividends in excess of net investment income...................... (385,680)
Accumulated net realized loss on investments and foreign currency
transactions................................................................. (227,168)
Net unrealized appreciation on investments and foreign currency
transactions................................................................. 2,732,509
------------
NET ASSETS...................................................................... $ 49,250,445
------------
------------
NET ASSET VALUE PER SHARE....................................................... $9.91
------------
------------
</TABLE>
F-13
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES--DECEMBER 31, 1995
(CONTINUED)
NEW YORK MUNICIPAL FUND
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $12,101,318) (Note 1a)......................... $ 12,401,237
Receivable for investments sold............................................... 102,884
Interest receivable........................................................... 195,490
Receivable from advisor....................................................... 58,913
Receivable for fund shares sold............................................... 8,101
Deferred organization expense................................................. 23,419
----------------
Total Assets................................................................ $ 12,790,044
LIABILITIES:
Payable for investments purchased............................................. 242,247
Income distribution payable................................................... 7,293
Accrued expenses.............................................................. 24,597
----------------
Total Liabilities........................................................... 274,137
----------------
NET ASSETS...................................................................... $ 12,515,907
----------------
----------------
Net assets consist of:
Shares of capital stock, $.001 par value per share; 1,195,830
issued and outstanding (Note 4).............................................. $ 1,195
Additional paid-in-capital.................................................... 12,209,082
Accumulated net realized gain on investments.................................. 5,711
Net unrealized appreciation on investments.................................... 299,919
----------------
NET ASSETS...................................................................... $ 12,515,907
----------------
----------------
NET ASSET VALUE PER SHARE....................................................... $10.47
----------------
----------------
</TABLE>
F-14
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF OPERATIONS
HIGH YIELD FUND
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest...................................................................... $ 36,647,565
Dividend...................................................................... 704,304
----------------
Total income................................................................ $ 37,351,869
EXPENSES:
Advisory fee (Note 2)......................................................... 2,884,016
Administrative services (Note 2).............................................. 536,814
Custodian fees and expenses................................................... 233,846
Registration fees............................................................. 123,260
Professional.................................................................. 77,847
Printing...................................................................... 45,851
Transfer and shareholder servicing agent fees (Note 2)........................ 21,360
Fund accounting fee and expenses (Note 2)..................................... 38,165
Insurance..................................................................... 25,076
Trustees' fees................................................................ 3,916
Miscellaneous................................................................. 45,710
----------------
Total expenses/fees before waivers.......................................... 4,035,861
Less: expenses/fees waived (Note 2)......................................... (268,407)
----------------
Net expenses................................................................ 3,767,454
----------------
NET INVESTMENT INCOME........................................................... 33,584,415
----------------
Net realized and unrealized gain (loss): (Note 5)
Net realized gain on investments.............................................. 285,277
Net realized gain on foreign currency transactions............................ 243,545
Net change in unrealized appreciation on investments.......................... 22,052,489
Net change in unrealized depreciation on foreign currency transactions........ 39,469
----------------
Net realized and unrealized gain on investments and foreign currency
transactions.................................................................. 22,620,780
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 56,205,195
----------------
----------------
</TABLE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (net of foreign tax withholding of $61,856) (Note 3)................. $ 3,977,593
----------------
Total income................................................................ $ 3,977,593
EXPENSES:
Advisory fee (Note 2)......................................................... 312,096
Professional.................................................................. 45,517
Administrative services (Note 2).............................................. 52,016
Custodian fees and expenses................................................... 43,367
Registration fees............................................................. 47,212
Fund accounting fee and expenses (Note 2)..................................... 30,000
Printing...................................................................... 8,992
Trustees' fees................................................................ 3,917
Insurance..................................................................... 3,966
Transfer and shareholder servicing agent fees (Note 2)........................ 4,418
Miscellaneous................................................................. 46,889
----------------
Total expenses/fees before waivers.......................................... 598,390
Less: expenses/fees waived (Note 2)......................................... (78,163)
----------------
Net expenses................................................................ 520,227
----------------
NET INVESTMENT INCOME........................................................... 3,457,366
----------------
Net realized and unrealized gain (loss): (Note 5)
Net realized gain on investments.............................................. 347,716
Net realized loss on foreign currency transactions............................ (120,599)
Net change in unrealized appreciation on investments.......................... 4,032,637
Net change in unrealized gain on foreign currency transactions................ 40,462
----------------
Net realized and unrealized gain on investments and foreign currency
transactions.................................................................. 4,300,216
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 7,757,582
----------------
----------------
</TABLE>
F-15
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF OPERATIONS (CONTINUED)
NEW YORK MUNICIPAL FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 3, 1995*
THROUGH DECEMBER 31, 1995
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest income............................................................... $ 279,456
---------
Total income................................................................ $ 279,456
EXPENSES:
Fund accounting fee and expenses (Note 2)..................................... 27,192
Professional.................................................................. 31,869
Advisory fee (Note 2)......................................................... 23,448
Custodian fees and expenses................................................... 6,150
Administrative services (Note 2).............................................. 8,793
Registration.................................................................. 2,760
Trustees' fees................................................................ 2,667
Printing...................................................................... 7,930
Transfer and shareholder servicing agent fees (Note 2)........................ 1,662
Amortization of organization expenses......................................... 4,119
Miscellaneous................................................................. 6,481
---------
Total expenses/fees before waivers.......................................... 123,071
Less: expenses/fees waived (Note 2)......................................... (90,986)
---------
Net expenses................................................................ 32,085
---------
NET INVESTMENT INCOME........................................................... 247,371
---------
Net realized and unrealized gain (loss):
Net realized gain on investments.............................................. 11,983
Net unrealized appreciation on investments.................................... 299,919
---------
Net realized and unrealized gain on investments................................. 311,902
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 559,273
---------
---------
</TABLE>
* Commencement of operations
F-16
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
HIGH YIELD FUND
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FROM
ENDED MARCH 2, 1994*
DECEMBER 31, 1995 THROUGH DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income........................................ $33,584,415 $12,499,514
Net realized gain (loss) on investments and foreign currency
transactions................................................ 528,822 (118,093)
Net change in unrealized appreciation/(depreciation) on
investments and foreign currency transactions............... 22,091,958 (6,267,434)
----------------- -------------------------
Net increase in net assets resulting from operations......... 56,205,195 6,113,987
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:..............
Net investment income........................................ (33,572,903) (12,673,292)
Realized gains............................................... (316,224) 0
----------------- -------------------------
Total dividends and distributions to shareholders............ (33,889,127) (12,673,292)
CAPITAL STOCK TRANSACTIONS (NOTE 4):
Net increase in net assets from capital share transactions... 234,457,225 228,843,060
----------------- -------------------------
Total increase in net assets................................. 256,773,293 222,283,755
NET ASSETS:
Beginning of period.......................................... 222,317,088 33,333
----------------- -------------------------
End of period................................................ $479,090,381 $222,317,088
----------------- -------------------------
----------------- -------------------------
</TABLE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FROM
ENDED MARCH 8, 1994*
DECEMBER 31, 1995 THROUGH DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income........................................ $3,457,366 $2,164,046
Net realized gain/(loss) on investments and foreign currency
transactions................................................ 227,117 (1,991,878)
Net change in unrealized appreciation/(depreciation) on
investments and foreign currency transactions............... 4,073,099 (1,340,590)
----------------- -------------------------
Net increase (decrease) in net assets resulting from
operations.................................................. 7,757,582 (1,168,422)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................................ (2,305,453) (2,164,046)
Return of capital............................................ (1,151,913) 0
----------------- -------------------------
Total dividends and distribution to shareholders............. (3,457,366) (2,164,046)
----------------- -------------------------
CAPITAL STOCK TRANSACTIONS (NOTE 4):
Net increase in net assets from capital share transactions... 16,833,223 31,416,141
----------------- -------------------------
Total increase in net assets................................. 21,133,439 28,083,673
NET ASSETS:
Beginning of period.......................................... 28,117,006 33,333
----------------- -------------------------
End of period................................................ $49,250,445 $28,117,006
----------------- -------------------------
----------------- -------------------------
</TABLE>
NEW YORK MUNICIPAL FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 3, 1995*
THROUGH DECEMBER
31, 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------
OPERATIONS:
Net investment income....................................... $247,371
Net realized gain on investments............................ 11,983
Net unrealized appreciation on investments.................. 299,919
-------------------
Net increase in net assets resulting from operations........ 559,273
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:.............
Net investment income....................................... (250,088)
Realized gains.............................................. (3,555)
-------------------
Total dividends and distributions to shareholders........... (253,643)
CAPITAL STOCK TRANSACTIONS (NOTE 4):
Net increase in net assets from capital share
transactions............................................... 12,210,237
-------------------
Total increase in net assets................................ 12,515,867
NET ASSETS:
Beginning of period......................................... 40
-------------------
End of period............................................... $12,515,907
-------------------
-------------------
</TABLE>
* Commencement of operations
F-17
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
FINANCIAL HIGHLIGHTS
HIGH YIELD FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM MARCH
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK FOR THE YEAR 2, 1994*
OUTSTANDING THROUGH THE PERIOD: ENDED DECEMBER 31, 1995 THROUGH DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $ 9.25 $ 10.00
-------- --------
Net investment income....................................................... 0.90 0.72
Net realized and unrealized gain/(loss)..................................... 0.67 (0.75)
-------- --------
Total from investment operations............................................ 1.57 (0.03)
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................................... (0.89) (0.72)
Realized gains.............................................................. (0.01) 0
-------- --------
Total dividends and distributions............................................. (0.90) (0.72)
-------- --------
NET ASSET VALUE, END OF PERIOD................................................ $ 9.92 $ 9.25
-------- --------
-------- --------
TOTAL INVESTMENT RETURN+:..................................................... 17.72% -.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................... $479,090 $222,317
Ratios to average net assets:
Expenses.................................................................... 1.05%(2) 1.14%(1)(2)
Net investment income....................................................... 9.38% 8.97%(1)
PORTFOLIO TURNOVER RATE....................................................... 34% 42%
</TABLE>
- ---------------
* Commencement of operations
(1) Annualized
(2) If the Fund had borne all expenses that were assumed or waived by the
Administrator, the above annualized expense ratio would have been 1.13% and
1.22% for the period ended December 31, 1995, and December 31, 1994,
respectively.
+Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK FOR THE YEAR MARCH 8, 1994*
OUTSTANDING THROUGH THE PERIOD: ENDED DECEMBER 31, 1995 THROUGH DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $ 8.84 $ 10.00
-------- --------
Net investment income....................................................... 0.90 0.81
Net realized and unrealized (loss).......................................... 1.07 (1.16)
-------- --------
Total from investment operations............................................ 1.97 (0.35)
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................................... (0.60) (0.81)
Return of Capital........................................................... (0.30) 0
-------- --------
Total dividends and distributions............................................. (0.90) (0.81)
-------- --------
NET ASSET VALUE, END OF PERIOD................................................ $ 9.91 $ 8.84
-------- --------
-------- --------
TOTAL INVESTMENT RETURN+:..................................................... 23.38% -3.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................... $ 49,250 $ 28,117
Ratios to average net assets:
Expenses.................................................................... 1.50%(2) 1.50%(1)(2)
Net investment income....................................................... 9.97% 10.39%(1)
PORTFOLIO TURNOVER RATE....................................................... 60% 47%
</TABLE>
- ---------------
* Commencement of operations
(1) Annualized.
(2) If the Fund had borne all expenses that were assumed or waived by the
Advisor and Administrator, the above annualized expense ratio would have
been 1.73% and 1.80% for the period ended December 31, 1995 and December 31,
1994, respectively.
+Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
F-18
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
NEW YORK MUNICIPAL FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGH THE APRIL 3, 1995*
PERIOD: THROUGH DECEMBER 31, 1995
<S> <C>
- ---------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $ 10.00
-------
Net investment income....................................................... 0.33
Net realized and unrealized gains on investments............................ 0.47
-------
Total from investment operations............................................ 0.80
-------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................................... (0.32)
Capital gains............................................................... (0.01)
-------
Total dividends and distributions............................................. (0.33)
-------
NET ASSET VALUE, END OF PERIOD................................................ $ 10.47
-------
-------
TOTAL INVESTMENT RETURN+:..................................................... 8.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................... $ 12,516
Ratios to average net assets:
Expenses.................................................................... 0.54%(1)(2)
Net investment income....................................................... 4.20%(1)
PORTFOLIO TURNOVER RATE....................................................... 35%
</TABLE>
- ---------------
* Commencement of operations
(1) Annualized
(2) If the Fund had borne all expenses that were assumed or waived by the
Advisor and Administrator, the above annualized expense ratio would have
been 2.09%.
+Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
F-19
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES. The OFFITBANK Investment Fund, Inc. (the
"Company") was incorporated in Maryland on September 8, 1993. The Company is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). Each Fund operates as a non-diversified, open-end management investment
company. The Company consists of seven separately managed funds. OFFITBANK High
Yield Fund, OFFITBANK Investment Grade Global Debt Fund, OFFITBANK Emerging
Markets Fund, OFFITBANK National Municipal Fund, OFFITBANK California Municipal
Fund, OFFITBANK New York Municipal Fund and OFFITBANK Global Convertible Fund.
Of these, only the High Yield, Emerging Markets and New York Municipal Funds
have commenced operations on March 2, 1994, March 8, 1994 and April 3, 1995,
respectively. Prior to March 2, 1994, the Company had no operations other than
those relating to organizational matters and the issuance to Furman Selz
Incorporated at $10.00 per share of 3,333, 3,333 and 3,334 shares, respectively,
of OFFITBANK High Yield, OFFITBANK Investment Grade Global Debt and OFFITBANK
Emerging Markets Funds (collectively referred to as the "Funds"). On March 2,
1994 8,653,427 shares of OFFITBANK High Yield Fund were exchanged for portfolio
securities with an aggregate value of $86,534,272. This exchange represented a
transfer of assets from The Senior Securities Fund, L.P. (the "Partnership");
the Partnership's investment adviser was OFFITBANK (the "Adviser") and the
general partner was an affiliate of the Adviser.
The preparation of financial statements prepared in accordance with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates. The following are significant accounting
policies followed by the Company in the preparation of its financial statements:
a. VALUATION OF SECURITIES. Equity securities held by a Fund are valued at the
last sale price on the exchange or in the principal over-the-counter market in
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price. Other securities held by a Fund generally are valued based on quoted bid
prices. Short-term debt investments having maturities of 60 days or less are
amortized to maturity based on their cost, and if applicable, adjusted for
foreign exchange translation. Securities for which market quotations are not
readily available are valued at fair value determined in good faith by or under
the direction of the Company's Board of Directors. Securities quoted in foreign
currencies initially are valued in the currency in which they are denominated
and then are translated into U.S. dollars at the prevailing foreign exchange
rate. Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics.
b. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Fund are
maintained in U.S. dollars as follows:
i. market value of investment securities and other assets and liabilities at the
exchange rate on the valuation date.
ii. purchases and sales of investment securities, income and expenses at the
exchange rate prevailing on the respective date of such transactions.
The resultant exchange gains and losses are included in the Statement of
Operations.
c. ORGANIZATIONAL EXPENSES. Costs incurred in connection with the organization
and initial registration of the New York Municipal Fund have been deferred and
are being amortized on a straight-line basis over sixty months beginning with
the Fund's commencement of operations. OFFITBANK assumed the organizational
expenses for the High Yield and Emerging Markets Funds.
d. ALLOCATION OF EXPENSES. Expenses directly attributable to a Fund are charged
to that Fund. Other expenses are allocated proportionately among each Fund in
relation to the net assets of each Fund or on another reasonable basis.
e. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of premium and accretion of discount on investments, is
accrued daily.
f. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net investment
income are declared daily and paid quarterly in the case of the Emerging Markets
Fund and monthly for the High Yield and New York Municipal Funds. Distributions
of net realized gains are normally declared and paid at least annually by each
Fund.
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require a reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
F-20
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
g. FEDERAL INCOME TAXES. Each Fund intends to continue to qualify as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
and distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
2. INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION AGREEMENTS. The Company
has entered into an investment advisory agreement (the "Investment Advisory
Agreement") with the Adviser. The Investment Advisory Agreement provides that
each Fund pays the Adviser an investment advisory fee that is calculated and
paid monthly at the annual rates of .40% of net assets for the New York
Municipal Fund, .85% on the first $200,000,000 of net assets and .75% on amounts
in excess thereof in the case of the High Yield Fund, and .90% on the first
$200,000,000 and .80% on amounts in excess thereof in the case of the Emerging
Markets Fund, of each Fund's average daily net assets. The Adviser provides
portfolio management and certain administrative, clerical and bookkeeping
services for the Company. For the year ended December 31, 1995, the Adviser was
entitled to fees of $2,884,016 for the High Yield Fund, $312,096 for the
Emerging Markets Fund, and $23,448 for the New York Municipal Fund. The Adviser
waived fees of $52,155 for the Emerging Markets Fund and $23,280 for the New
York Municipal Fund.
Furman Selz LLC ("Furman Selz") provides the Company with administrative, fund
accounting, dividend disbursing and transfer agency services pursuant to an
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include day-to-day administration of matters
related to the corporate existence of the Company, maintenance of its records,
preparation of reports, supervision of the Company's arrangements with its
custodian and assistance in the preparation of the Company's registration
statements under federal and state laws. Pursuant to the Administration
Agreement, the Company pays Furman Selz a monthly fee for its services which on
an annualized basis will not exceed .15% of the average daily net assets of the
Company. The fees are allocated among the Funds on the basis of their relative
net assets. For the year ended December 31, 1995, Furman Selz was entitled to
fees of $536,814 for the High Yield Fund, $52,016 for the Emerging Markets Fund
and $8,793 for the New York Municipal Fund. Furman Selz waived fees of $268,407
for the High Yield Fund, $26,008 for the Emerging Markets Fund and $8,793 for
the New York Municipal Fund.
As Administrator, Furman Selz provides the Funds with fund accounting related
services. For these services Furman Selz is paid a fee of $2,500 per month per
Fund. For the year ended December 31, 1995, Furman Selz earned fees, including
reimbursement of out of pocket expenses, of $38,165, $30,000 and $27,192 for the
High Yield, Emerging Markets Fund and New York Municipal Fund, respectively.
Furman Selz acts as Transfer Agent for the Fund and receives reimbursement of
certain expenses plus a per account fee of $15.00 per year. For the year ended
December 31, 1995, Furman Selz was entitled to fees of $21,360 for the High
Yield Fund, $4,418 for the Emerging Markets Fund and $1,662 for the New York
Municipal Fund.
OFFITBANK has voluntarily agreed to cap the expense ratio for the New York
Municipal Fund at 0.55%. In order to maintain this ratio, the Adviser has agreed
to reimburse the Fund $58,913.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. an affiliate of Furman Selz.
Under the Distribution Agreement, the Distributor, as agent of the Company,
agrees to use its best efforts as sole distributor of the Company's shares.
Under the Plan of Distribution, each Fund is authorized to spend up to 0.25% of
its average daily net assets to compensate the Distributor for its services. The
Distribution Agreement provides that the Company will bear the costs of the
registration of its shares with the Commission and various states and the
printing of its prospectuses, statements of additional information and reports
to shareholders. For the year ended December 31, 1995, no distribution costs
were incurred.
3. INVESTMENTS. Purchases and sales of securities for the year ended December
31, 1995, other than short-term securities, aggregated $320,118,978 and
$112,261,736 for the High Yield Fund, $44,274,204 and $15,499,351 for the
Emerging Markets Fund and $23,235,759 and $11,541,800 for New York Municipal
Fund. The cost of securities is substantially the same for Federal income tax
purposes as it is for financial reporting purposes.
<TABLE>
<CAPTION>
EMERGING NEW YORK
HIGH YIELD MARKETS MUNICIPAL
----------- ---------- ----------
<S> <C> <C> <C>
Aggregate cost............ $437,732,266 $45,641,341 $12,101,318
----------- ---------- ----------
----------- ---------- ----------
Gross unrealized
appreciation............. $19,342,329 $2,766,290 $ 299,919
Gross unrealized
depreciation............. (3,553,092) (73,477) 0
----------- ---------- ----------
Net unrealized
appreciation............. $15,789,237 $2,692,813 $ 299,919
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The Funds may purchase instruments from financial institutions, such as banks
and broker-dealers, subject to the seller's agreement to repurchase them at an
agreed upon time and price ("repurchase agreements"). The seller under a
repurchase agreement is required to maintain the value of the securities subject
to the agreement at not less than the repurchase price. Default by the seller
would, however, expose the relevant Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
A Fund's net investment income from foreign issuers may be subject to non-U.S.
withholding taxes, thereby reducing the Fund's net investment income.
F-21
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
4. CAPITAL STOCK TRANSACTIONS. The Company's Articles of Incorporation, permit
the Company to issue ten billion shares (par value $0.001). Transactions in
shares of common stock for the years ended December 31, 1995 and December 31,
1994, were as follows:
<TABLE>
<CAPTION>
HIGH YIELD FUND
--------------------------------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Beginning balance...... 24,029,315 $233,612,861 3,334 $ 33,333
---------- ------------ ---------- ------------
Shares sold............ 26,556,487 256,321,969 25,384,239 246,382,259
Shares issued in
reinvestment of
dividends and
distributions......... 2,237,907 21,843,278 942,483 8,874,728
Shares redeemed........ (4,512,995) (43,708,022) (2,300,741) (21,677,459)
---------- ------------ ---------- ------------
Net increase........... 24,281,399 234,457,225 24,025,981 233,579,528
---------- ------------ ---------- ------------
Ending balance......... 48,310,714 $468,070,086 24,029,315 $233,612,861
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
-----------------------------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Beginning balance.......... 3,180,297 $31,449,474 3,334 $ 33,333
---------- ----------- --------- -----------
Shares sold................ 2,699,458 25,099,840 3,093,896 30,656,902
Shares issued in
reinvestment of dividends
and distributions......... 231,369 2,172,548 155,505 1,471,277
Shares redeemed............ (1,142,233) (10,439,165) (72,438) (712,038)
---------- ----------- --------- -----------
Net increase............... 1,788,594 16,833,223 3,176,963 31,416,141
---------- ----------- --------- -----------
Ending balance............. 4,968,891 $48,282,697 3,180,297 $31,449,474
---------- ----------- --------- -----------
---------- ----------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
NEW YORK MUNICIPAL FUND
-----------------------
PERIOD ENDED
DECEMBER 31, 1995
-----------------------
SHARES AMOUNT
---------- -----------
<S> <C> <C> <C> <C>
Beginning balance........ 4 $ 40
---------- -----------
Shares sold.............. 1,507,243 15,433,921
Shares issued in
reinvestment of
dividends and
distributions........... 19,264 198,979
Shares redeemed.......... (330,681) (3,422,663)
---------- -----------
Net increase............. 1,195,826 12,210,237
---------- -----------
Ending balance........... 1,195,830 $12,210,277
---------- -----------
---------- -----------
</TABLE>
In connection with the transfer of assets of the High Yield Fund described in
Note 1, $4,736,468 was credited to unrealized appreciation, representing
unrealized appreciation on the portfolio securities received from the
partnership on the transfer date.
5. DERIVATIVE INSTRUMENTS. The Funds may invest in various financial instruments
including positions in forward currency contracts, currency swaps and purchased
foreign currency options. The Funds enter into such contracts for the purpose of
hedging exposure to changes in foreign currency exchange rates on their
portfolio holdings.
Each of the Funds is also permitted to enter into swap agreements to manage
interest rate or currency exposure. Swap agreements involve the commitment to
exchange with another party cash flows which are based upon the application of
interest rates, currency movements or other financial indices to a notional
principal amount. Gains and losses associated with currency swap transactions
entered into by the Emerging Markets Fund are included in realized gains and
losses on foreign currency transactions.
A forward foreign exchange contract is a commitment to sell or buy a foreign
currency at a future date at a negotiated exchange rate. The Fund bears the
market risk which arises from possible changes in foreign exchange values. Risks
may arise from the potential inability of counterparties to meet the terms of
their contracts and from unanticipated movements in the value of the foreign
currency relative to the U.S. dollar. Forward foreign exchange contracts may
involve market or credit risk in excess of the amounts reflected on the Fund's
statement of assets and liabilities.
The gain or loss from the difference between the cost of original contracts and
the amount realized upon the closing of such contracts is included in net
realized gain on foreign exchange. Fluctuations in the value of forward
contracts held at December 31, 1995 are recorded for financial reporting
purposes as unrealized gains and losses by the Funds.
The tables below indicate the High Yield Fund's and Emerging Markets Fund's
outstanding forward currency contract positions at December 31, 1995.
HIGH YIELD FUND
<TABLE>
<CAPTION>
VALUE ON UNREALIZED
ORIGI- VALUE AT APPRECIATION
CONTRACT MATURITY NATION DECEMBER 31, (DEPREC-
CURRENCY AMOUNTS DATE DATE 1995 IATION)
----------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Buy CHF $ 527,500 1-8-96 $ 377,865 $ 457,712 $ 79,847
Sell CHF (527,500) 1-8-96 (366,065) (457,712) (91,647)
Buy CHF 1,582,500 1-8-96 1,133,596 1,373,135 239,539
Sell CHF (1,582,500) 1-8-96 (1,141,775) (1,373,135) (231,360)
Sell CAD (5,000,000) 2-14-96 (3,695,901) (3,662,000) 33,901
Buy CHF 434,600 3-11-96 294,444 379,580 85,136
Sell CHF (434,600) 3-11-96 (303,492) (379,580) (76,088)
Buy CHF 1,575,000 3-18-96 1,092,233 1,376,708 284,475
Sell CHF (1,575,000) 3-18-96 (1,112,288) (1,376,708) (264,420)
Buy CHF 308,750 5-30-96 270,833 271,885 1,052
Sell CHF (308,750) 5-30-96 (248,690) (271,885) (23,195)
------------
Net unrealized depreciation on forward positions............................ $ 37,240
------------
------------
</TABLE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
VALUE ON UNREALIZED
ORIGI- VALUE AT APPRECIATION
CONTRACT MATURITY NATION DECEMBER 31, (DEPREC-
CURRENCY AMOUNTS DATE DATE 1995 IATION)
----------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sell DEM $(1,390,000) 2-21-96 $(1,000,648) $ (960,629) $ 40,019
</TABLE>
A purchased option contract gives the Fund the right to sell (puts) or purchase
(calls) a specified amount of foreign currency at a fixed price. The maximum
exposure to loss for any purchased option is limited to the premium initially
paid for the option. Such options are reflected at value in the Fund's portfolio
of investments.
The Emerging Markets Fund also is invested in indexed securities whose value is
linked directly to changes in foreign currencies, interest rates and other
financial indices. Indexed securities may be more volatile than the underlying
instrument but the risk of loss is limited to the amount of the original
investment.
6. OTHER MATTERS. The Emerging Markets Fund and the High Yield Fund invest in
obligations of foreign entities
F-22
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
and securities denominated in foreign currencies that involve risk not typically
involved in domestic investments. Such risks include fluctuations in foreign
exchange rates, ability to convert proceeds into U.S. dollars, less publicly
available information about foreign financial instruments, less liquidity
resulting from substantially less trading volume, more volatile prices and
generally less government supervision of foreign securities markets and issuers.
7. FEDERAL INCOME TAX STATUS. During the year ended December 31, 1995, the
Emerging Markets Fund and High Yield Fund utilized their capital loss carryovers
of $81,854 and $133,424 respectively. At December 31, 1995, the Emerging Markets
Fund had available net capital loss carryovers of $170,976, which will be
available through December 31, 2002 to offset future capital gains, to the
extent provided by regulations.
The Emerging Markets Fund has incurred $29,039 and $1,731 of post-October net
capital and foreign currency losses during the year ended December 31, 1995.
These losses are deemed to arise on the first business day of the next taxable
year.
As of December 31, 1995, the Emerging Markets and High Yield Funds had permanent
book/tax differences primarily attributable to foreign currency gains and
losses. To reflect reclassifications arising from permanent book/tax differences
as of December 31, 1995, the Emerging Markets Fund charged paid in capital
$1,151,913, accumulated dividends in excess of net investment income was charged
$385,680 and accumulated net realized loss was credited $1,537,593. The High
Yield Fund reclassified $99,777 between net investment income and realized
capital gains; paid in capital was not affected.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------------------------------------
To the Board of Directors
and Shareholders of The
OFFITBANK Investment Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of OFFITBANK High Yield Fund,
OFFITBANK Emerging Markets Fund and OFFITBANK New York Municipal Fund (the
"Funds," each constituting a portfolio of The OFFITBANK Investment Fund,
Inc.) at December 31, 1995, the results of each of their operations for the
year then ended, and the changes in each of their net assets and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1995
by correspondence with the custodian and brokers, provide a reasonable basis
for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
February 15, 1996
F-24
<PAGE>
PART A
<PAGE>
-------------------------------------------
OFFITBANK National Municipal Fund
OFFITBANK California Municipal Fund
OFFITBANK New York Municipal Fund
---------------------------
PROSPECTUS
APRIL 29, 1996
THE
[LOGO]
INVESTMENT FUND, INC.
<PAGE>
[This page intentionally left blank]
<PAGE>
-------------------------------------------
The [LOGO] Investment Fund, Inc. consists of eight no-load mutual funds
designed to meet a variety of investment objectives.
INVESTORS LOOKING TO BROADEN THE INVESTMENT
EXPOSURE IN THEIR PORTFOLIOS SHOULD CONSIDER:
High Yield Fund
Investment Grade Global Debt Fund
Emerging Markets Fund
Global Convertible Fund
Latin America Total Return Fund
INVESTORS SEEKING TO MAXIMIZE AFTER-TAX TOTAL RETURNS SHOULD CONSIDER:
National Municipal Fund
California Municipal Fund
New York Municipal Fund
For more complete information on any of the [LOGO] Funds listed above,
refer to the Fund's prospectus.
-------------------------------------------
The text above is not part of the Prospectus.
<PAGE>
PROSPECTUS
THE [LOGO] INVESTMENT FUND, INC.
- ------------------------------------------------
INVESTMENT PORTFOLIOS:
[LOGO]NATIONAL MUNICIPAL FUND
[LOGO]CALIFORNIA MUNICIPAL FUND
[LOGO]NEW YORK MUNICIPAL FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end,
management investment company consisting of eight separate, no-load,
non-diversified investment portfolios which each have a different investment
objective. This Prospectus relates to the following three portfolios (each a
"Fund"), each of which offers two classes of shares, Select Shares and Advisor
Shares:
The OFFITBANK NATIONAL MUNICIPAL FUND'S investment objective is to maximize
total after-tax return, consistent with a prudent level of credit risk.
The OFFITBANK CALIFORNIA MUNICIPAL FUND'S investment objective is to
maximize total after-tax return for California residents, consistent with a
prudent level of credit risk.
The OFFITBANK NEW YORK MUNICIPAL FUND'S investment objective is to maximize
total after-tax return for New York residents, consistent with a prudent level
of credit risk.
Select Shares may be purchased from and redeemed through the Company's
distributor. Advisor Shares must be purchased or redeemed through a Shareholder
Servicing Agent, which is a financial institution that has entered into an
agreement with the Company to provide various shareholder services to the
beneficial owners of shares. Shares of each class of any Fund may be exchanged
for shares of the same class of any other Fund or for shares of the same class
of any of the Company's five other portfolios not covered by this Prospectus.
The investment objectives of each of these other portfolios are described below.
Information about these portfolios is contained in a separate Prospectus and
Statement of Additional Information, each dated April 29, 1996 and each of which
is available from OFFITBANK without charge by calling 1-800-618-9510.
The OFFITBANK HIGH YIELD FUND'S primary investment objective is high current
income. Capital appreciation is a secondary objective.
The OFFITBANK INVESTMENT GRADE GLOBAL DEBT FUND'S investment objective is to
achieve a competitive fixed income total return.
The OFFITBANK GLOBAL CONVERTIBLE FUND'S investment objective is to maximize
total return from a combination of capital appreciation and investment income.
The OFFITBANK EMERGING MARKETS FUND'S investment objective is to provide
investors with a competitive total return by focusing on current yield and
opportunities for capital appreciation.
The OFFITBANK LATIN AMERICA TOTAL RETURN FUND'S investment objective is to
maximize total investment return from a combination of capital appreciation and
current income.
THE FUNDS MAY INVEST A PORTION OF THEIR TOTAL ASSETS IN HIGH YIELD, HIGH
RISK DEBT SECURITIES WHICH ARE CONSIDERED SPECULATIVE AND SUBJECT TO CERTAIN
RISKS. SEE "INVESTMENT OBJECTIVES AND POLICIES" AND "SPECIAL RISK
CONSIDERATIONS". There can be no assurance that the Funds' investment objectives
will be achieved.
OFFITBANK serves as the Funds' investment adviser (the "Adviser"). The
Adviser is a New York State chartered trust company which currently manages
approximately in excess of $6.5 billion in assets principally invested in global
fixed income securities.
The address of the Company is 237 Park Avenue, Suite 910, New York, New York
10017. Yield and other information regarding the Funds may be obtained by
calling the Company at 1-800-618-9510.
This Prospectus briefly sets forth certain information about the Funds that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Funds, contained in a Statement of Additional Information dated April 29, 1996,
as it may be amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission (the "Commission") and is available to
investors without charge by calling 1-800-618-9510. The Statement of Additional
Information is incorporated in its entirety by reference into this Prospectus.
INVESTORS ARE ADVISED THAT SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATES OF OFFITBANK, NOR
ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THE COMPANY IS NOT AUTHORIZED TO
ENGAGE IN THE BUSINESS OF BANKING.
--------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------
April 29, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary......................................................................................... 3
Expense Information........................................................................................ 6
Financial Highlights....................................................................................... 8
Investment Objectives and Policies......................................................................... 9
Other Investment Policies.................................................................................. 14
Special Risk Considerations................................................................................ 18
Limiting Investment Risks.................................................................................. 21
Management................................................................................................. 22
Dividends and Distributions................................................................................ 24
Purchase of Shares......................................................................................... 25
Redemption of Shares....................................................................................... 26
Shareholder Services....................................................................................... 28
Net Asset Value............................................................................................ 28
Taxes...................................................................................................... 28
Performance Information.................................................................................... 31
Additional Information..................................................................................... 31
Reports to Shareholders.................................................................................... 32
Appendix A................................................................................................. A-1
Appendix B................................................................................................. B-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
PROSPECTUS SUMMARY
WHAT ARE THE FUNDS?
OFFITBANK National Municipal Fund (the "National Municipal Fund"), OFFITBANK
California Municipal Fund (the "California Municipal Fund") and OFFITBANK New
York Municipal Fund (the "New York Municipal Fund") (each a "Fund" and
collectively, the "Funds") are no-load, separate, non-diversified investment
portfolios of The OFFITBANK Investment Fund, Inc. (the "Company"), an open-end
management investment company incorporated in Maryland on September 8, 1993.
Each Fund offers two classes of shares, Select Shares and Advisor Shares. See
"What Classes of Shares does each Fund Offer?", below. As of the date of this
Prospectus, only the New York Municipal Fund has commenced investment
operations. The Company is not authorized to engage in the business of banking.
WHAT ARE THE FUNDS' OBJECTIVES AND POLICIES?
The NATIONAL MUNICIPAL FUND'S investment objective is to maximize total
after-tax return, consistent with a prudent level of credit risk. The Fund seeks
to achieve its investment objective by investing, under normal market
conditions, at least 80% of its total assets in a portfolio of municipal
obligations, the interest from which is exempt from regular federal income
taxes. In addition, at least 80% of the Fund's total assets will be invested in
investment grade securities and at least 50% of the Fund's total assets will be
invested in "high quality" securities (as defined in this Prospectus). The Fund
may invest up to 20% of its total assets in taxable obligations and all or a
portion of the Fund's dividends may be subject to the federal alternative
minimum tax.
The CALIFORNIA MUNICIPAL FUND'S investment objective is to maximize total
after-tax return for California residents, consistent with a prudent level of
credit risk. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 65% of its total assets in a portfolio
of municipal obligations, the interest from which is exempt from California
State and local personal income taxes and at least 80% of its total assets in
obligations the interest on which is exempt from regular federal income taxes.
In addition, at least 80% of the Fund's total assets will be invested in
investment grade securities and at least 50% of the Fund's total assets will be
invested in "high quality" securities. The Fund may invest up to 20% of its
total assets in non-municipal obligations and all or a portion of the Fund's
dividends may be subject to the federal alternative minimum tax.
The NEW YORK MUNICIPAL FUND'S investment objective is to maximize total
after-tax return for New York residents, consistent with a prudent level of
credit risk. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 65% of its total assets in a portfolio
of municipal obligations, the interest on which is exempt from New York State,
New York City and City of Yonkers personal income taxes and at least 80% of its
total assets in obligations the interest on which is exempt from regular federal
income taxes. In addition, at least 80% of the Fund's total assets will be
invested in investment grade securities and at least 50% of the Fund's total
assets will be invested in "high quality" securities. The Fund may invest up to
20% of its total assets in non-municipal obligations and all or a portion of the
Fund's dividends may be subject to the federal alternative minimum tax.
WHO IS THE FUNDS' INVESTMENT ADVISER?
OFFITBANK (the "Adviser"), a New York State chartered trust company, provides
investment advisory services to the Funds. Under its charter, the Adviser may
neither accept deposits nor make loans except for deposits or loans arising
directly from its exercise of the fiduciary powers granted it under the New York
Banking Law. The Adviser's principal business is the rendering of discretionary
investment management services to high net worth individuals and family groups,
foundations, endowments and corporations. The Adviser specializes in fixed
income management and offers its clients a complete range of fixed income
investments in capital markets throughout the world. The Adviser currently
manages in excess of $6.5 billion in assets and serves as investment adviser to
sixteen registered investment companies (or portfolios thereof). For its
services as investment adviser, the Adviser is entitled to receive from each
Fund a monthly fee based upon the average daily net assets of the Fund at the
following annual rates: 0.40% for the National Municipal Fund; 0.40% for the
California Municipal Fund; and 0.40% for the New York Municipal Fund. See
"Management".
3
<PAGE>
WHAT CLASSES OF SHARES DOES EACH FUND OFFER?
As of April 29, 1996, outstanding shares of the New York Municipal Fund were
reclassified as "Select Shares" and the Fund began offering a new class of
shares, designated as "Advisor Shares", in addition to Select Shares. Select
Shares and Advisor Shares have different expense levels. See "Expense
Information."
HOW DO YOU PURCHASE AND REDEEM SHARES OF THE FUNDS?
Select Shares of the Funds may be purchased from the Company's distributor,
OFFIT Funds Distributor, Inc., at the next determined net asset value per share.
The minimum initial investment for Select Shares of each of the Funds is
$250,000. The minimum for subsequent investments for Select Shares of each Fund
is $10,000.
Advisor Shares must be purchased through a Shareholder Servicing Agent. Advisor
Shares are subject to such investment minimums and terms and conditions as may
be imposed by Shareholder Servicing Agents from time to time.
The Company's officers are authorized to waive the minimum initial and
subsequent investment requirements. See "Purchase of Shares". Each Fund has
adopted a Plan of Distribution which permits the reimbursement by such Fund of
distribution expenses with respect to each class of shares of the Fund on an
annual basis. See "Management--Distributor".
Each Fund redeems shares on any business day at the next determined net asset
value. There is no redemption fee charged by the Funds. The redemption price may
be more or less than the purchase price. Advisor Shares must be redeemed through
a Shareholder Servicing Agent. See "Redemption of Shares".
WHEN DO THE FUNDS PAY DIVIDENDS AND MAKE DISTRIBUTIONS?
Each Fund intends to declare dividends daily and pay dividends monthly.
Shareholders of each Fund will receive dividends in additional Fund shares of
the same class or may elect to receive cash. It is anticipated that the expenses
incurred by each class of shares of each Fund will differ and, accordingly, that
the dividends distributed with respect to each class will differ. See "Dividends
and Distributions".
WHAT ARE THE SPECIAL RISK CONSIDERATIONS FOR INVESTORS IN THE FUNDS?
SHARE PRICE FLUCTUATIONS. Each Fund's net asset value and its share price will
fluctuate, reflecting fluctuations in the market value of its portfolio
positions. The value of the securities held by each Fund will generally
fluctuate to varying degrees based on a variety of factors, including (1)
interest rate movements and (2) changes in the actual and perceived
creditworthiness of the issuers of such securities.
MUNICIPAL OBLIGATIONS. The Adviser believes that, in general, the secondary
market for municipal obligations is less liquid than that for many taxable fixed
income securities. Consequently, the ability of the Funds to buy and sell
municipal obligations may be limited at any particular time and with respect to
any particular securities. The amount of information about the financial
condition of an issuer of municipal obligations may not be as extensive as
information about corporations whose securities are publicly traded. Obligations
of issuers of municipal obligations may be subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the U.S. Bankruptcy Code and applicable state laws, which
could limit the ability of the Funds to recover payments of principal or
interest on such securities.
All or a portion of each Fund's dividends may be subject to alternative minimum
tax and the National Municipal Fund's dividends may be subject to state or local
taxation. In addition, each of these Funds may invest up to 20% of their
respective assets in non-municipal obligations. Certain provisions in the
Internal Revenue Code of 1986, as amended (the "Code"), relating to the issuance
of municipal obligations impose restrictions on the volume of municipal
obligations qualifying for federal tax exemption. One effect of these provisions
could be to increase the cost of the tax exempt securities available for
purchase by such Funds and thus reduce available yield. Legislative proposals
that may further restrict or eliminate the federal income tax exemption for
interest on municipal obligations may be introduced in the future. See "Taxes".
Because the California and New York Municipal Funds intend to invest primarily
in a portfolio of municipal obligations the interest on which is exempt from
regular federal income taxes and from personal income
4
<PAGE>
taxes of the State of California or New York State, New York City and the City
of Yonkers, as the case may be, they are more susceptible to factors adversely
affecting issuers of such obligations than a comparable municipal securities
fund that is not so concentrated. See "Special Risk Considerations--California
Municipal and New York Municipal Funds" in this Prospectus and "Special Factors
Affecting California Municipal Securities" and "Special Factors Affecting New
York Municipal Securities" in the Statement of Additional Information.
HIGH YIELD, HIGH RISK DEBT SECURITIES. Up to 20% of each Fund's total assets may
be high yield, high risk debt securities, at the time of investment. Investment
by the Funds in such securities involves a high degree of credit risk. Such
investments are regarded as speculative by the major rating agencies.
NON-DIVERSIFIED FUNDS. Each Fund normally invests in a substantial number of
issuers; however, each Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the value of
its shares may fluctuate more than the shares of a diversified fund.
OTHER INVESTMENT POLICIES. In addition, prospective investors in the Funds
should consider the following factors: (1) each Fund may invest in repurchase
agreements, which entail a risk of loss should the seller default in its
obligation to repurchase the security which is the subject of the transaction;
(2) each Fund may lend its investment securities which entails a risk of loss
should the borrower fail financially; (3) each Fund may purchase securities on a
when-issued basis, which may decline or appreciate in market value prior to
their actual delivery to the Fund; (4) each Fund may purchase and sell certain
types of futures contracts and options on interest rate futures contracts which
entail certain costs and risks including imperfect correlation between the value
of the security being hedged and the value of the futures or options contract,
and the risk that a Fund could not close out a position in such a futures or
options contract when it would be most advantageous to do so; (5) each Fund may
invest in mortgage-backed and/or asset-backed securities, the value of which may
be highly sensitive to interest rate changes; (6) each Fund may invest in
structured products, including among others, inverse floaters, spread trades and
notes linked by a formula to the price of an underlying instrument, all of which
generally are subject to greater volatility than an investment directly in the
underlying market or security; and (7) each Fund may borrow money from banks, a
speculative technique known as leveraging. See "Special Risk Considerations" for
additional information regarding certain risks associated with investment in the
Funds.
5
<PAGE>
EXPENSE INFORMATION
The following Expense Summary lists the costs and expenses that a shareholder
can expect to incur as an investor in Select Shares or Advisor Shares of each
Fund.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SELECT SHARES ADVISOR SHARES
------------- ---------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)......... None None
Sales Load Imposed on Reinvested Dividends.......................................... None None
Redemption Fee...................................................................... None None
Exchange Fee........................................................................ None None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
FUND
NATIONAL MUNICIPAL FUND
Advisory Fee (after waivers)*..................................................... 0.00% 0.00%
Rule 12b-1 Fees (after waiver)**.................................................. 0.00% 0.00%
Other Expenses (estimated, after waivers)***...................................... 0.55% 0.80%
------ ------
Total Fund Operating..............................................................
Expenses (after waivers)+....................................................... 0.55% 0.80%
------ ------
------ ------
CALIFORNIA MUNICIPAL FUND
Advisory Fee (after waivers)*..................................................... 0.00% 0.00%
Rule 12b-1 Fees (after waiver)**.................................................. 0.00% 0.00%
Other Expenses (estimated, after waivers)***...................................... 0.55% 0.80%
------ ------
Total Fund Operating..............................................................
Expenses (after waivers)+....................................................... 0.55% 0.80%
------ ------
------ ------
NEW YORK MUNICIPAL FUND
Advisory Fee (after waivers)*..................................................... 0.00% 0.00%
Rule 12b-1 Fees (after waiver)**.................................................. 0.00% 0.25%
Other Expenses (estimated, after waivers and reimbursements)***................... 0.55% 0.80%
------ ------
Total Fund Operating..............................................................
Expenses (after waivers and reimbursements)+.................................... 0.55% 0.80%
------ ------
------ ------
</TABLE>
- --------------
* Reflects current waivers of advisory fees for each Fund. The Advisor has
agreed to voluntarily waive all or a portion of its advisory fee to the
extent necessary to maintain the Total Fund Operating Expenses of the Funds
at the levels set forth in the table above. Absent such voluntary waivers,
the ratio of advisory fees to average net assets would be 0.40% for the
National Municipal Fund, 0.40% for the California Municipal Fund and 0.40%
for the New York Municipal Fund.
** Each Fund is authorized to spend, with respect to each class of its shares,
up to 0.25% of net assets annually in accordance with a Plan of Distribution
to reimburse its distributor for activities primarily intended to result in
the sale of shares. The amounts set forth in the table above reflect the
current waiver by the Distributor of its right to seek reimbursement under
the Plan of Distribution with respect to each class of shares. Such waiver
may be terminated at any time. See "Management--Distributor".
*** As of the date of this Prospectus, the National Municipal and California
Municipal Funds had not commenced investment operations. The amounts set
forth for "Other Expenses" for these Funds are therefore based on estimates
for the current fiscal year, after giving effect to current waivers of
administration fees. Such waivers may be terminated at any time. "Other
Expenses" include audit, administration, custody, shareholder servicing,
legal, registration, transfer agency and miscellaneous other charges. Absent
the aforementioned waivers, the ratio of "Other Expenses" to average net
assets
6
<PAGE>
would be (i) 0.70% and 0.95% for the Select Shares and Advisor Shares,
respectively, of the National Municipal Fund, (ii) 0.70% and 0.95% for the
Select Shares and Advisor Shares, respectively, of the California Municipal
Fund and (iii) 0.91% and 1.06% for the Select Shares and Advisor Shares,
respectively, of the New York Municipal Fund. In addition, the Adviser has
agreed to reimburse the New York Municipal Fund, with respect to both
classes of its shares, 0.21% for their "Other Expenses" for the upcoming
fiscal year ending December 31, 1996.
+ The ratio of "Total Fund Operating Expenses" to average net assets would be
(i) 1.35% and 1.60% for the Select Shares and Advisor Shares, respectively,
of the National Municipal Fund, (ii) 1.35% and 1.60% for the Select Shares
and Advisor Shares, respectively, of the California Municipal Fund and (iii)
1.56% and 1.81% for the Select Shares and Advisor Shares, respectively, of
the New York Municipal Fund, absent the voluntary waivers and reimbursements
referred to above.
For additional information with respect to the expenses identified in the table
above, see "Management" in this Prospectus and "Management" and "Distributor" in
the Statement of Additional Information.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) a 5%
annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
NATIONAL MUNICIPAL FUND CALIFORNIA MUNICIPAL FUND NEW YORK MUNICIPAL FUND
---------------------------------- ---------------------------------- ----------------------------------
SELECT SHARES ADVISOR SHARES SELECT SHARES ADVISOR SHARES SELECT SHARES ADVISOR SHARES
--------------- ----------------- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
1 year................ $ 6 $ 16 $ 6 $ 16 $ 6 $ 18
3 years............... $ 18 $ 33 $ 18 $ 33 $ 18 $ 57
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES AND
RATE OF RETURN, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Moreover, while the example assumes a 5% annual return, each Fund's actual
performance will vary and may result in actual returns that are greater or less
than 5%. The foregoing table has not been audited by the Funds' independent
accountants.
Long-term shareholders in mutual funds with Rule 12b-1 fees may pay more than
the economic equivalent of the maximum front-end sales charge permitted by rules
of the National Association of Securities Dealers, Inc.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth per-share data for a share of capital stock
outstanding of the New York Municipal Fund, and other selected information for
the fiscal period ended December 31, 1995. The information presented below, has
been audited by Price Waterhouse LLP, the Company's independent accountants,
whose unqualified opinion thereon is included in the Company's Annual Report and
in the Statement of Additional Information, which are both available upon
request and without charge. The information below should be read in conjunction
with the financial statements and the related notes thereto, which are also
contained in the Statement of Additional Information. Further information about
the Company's performance is contained in its Annual Report. Financial
highlights are not presented for Advisor Shares since no such shares were
outstanding during the period presented. As of the close of business on April
29, 1996, all existing shares of the New York Municipal Fund were reclassified
as "Select Shares".
<TABLE>
<CAPTION>
NEW YORK
MUNICIPAL FUND*
-----------------
FOR THE PERIOD
ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of period........................................................... $ 10.00
Income (loss) from investment operations
Net investment income........................................................................ 0.33
Net realized and unrealized gain (losses).................................................... 0.47
-------
Total from investment operations........................................................... 0.80
-------
Less dividends and distributions
Dividends (from net investment income)....................................................... (0.32)
Distributions (from realized gains).......................................................... (0.01)
-------
Total dividends and distributions.......................................................... (0.33)
-------
Net Asset Value, End of Period................................................................. $ 10.47
-------
-------
Total Return+ 8.13%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)..................................................... $12,516
Ratio of Expenses to Average Net Assets...................................................... 0.54%(1)(2)
Ratio of Net Income to Average Net Assets.................................................... 4.20%(1)
Portfolio Turnover Rate...................................................................... 35%
</TABLE>
- --------------
* The Fund commenced operations on April 3, 1995
(1)Annualized
(2)Reflects voluntary waivers of fees and reimbursement of expenses. Without
such waivers and reimbursements, the ratios of expenses to average net
assets would have been 2.09%.
+ Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
This table does not include information with respect to National Municipal
and California Municipal Funds. As of the date of this Prospectus, these Funds
had not yet commenced investment operations.
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the Funds are set forth below. The
investment objective of each Fund is fundamental and may not be changed without
the affirmative vote of a majority of its outstanding shares. Of course, there
can be no assurance that these objectives will be achieved.
The National Municipal Fund's investment objective is to maximize total
after-tax return, consistent with a prudent level of credit risk. The Fund seeks
to achieve its investment objective by investing, under normal market
conditions, at least 80% of its total assets in a portfolio of municipal
obligations, the interest from which is exempt from regular federal income taxes
("Municipal Securities"). Municipal Securities are securities issued by states
and their various political subdivisions along with agencies and
instrumentalities of states and their various political subdivisions and by
possessions and territories of the United States, such as Puerto Rico, the
Virgin Islands, and Guam and their various political subdivisions. All or a
portion of the Fund's dividends may be subject to federal alternative minimum
tax. See "Taxes". (Unless specifically referring to California Municipal
Securities or New York Municipal Securities (as these terms are defined below),
the term "Municipal Securities" shall be used as a general reference to
Municipal, California Municipal and New York Municipal Securities.)
The California Municipal Fund's investment objective is to maximize total
after-tax return for California residents, consistent with a prudent level of
credit risk. The California Municipal Fund intends to invest, under normal
market conditions, at least 65% of its total assets in a portfolio of municipal
obligations, the interest from which is exempt from California State and local
personal income taxes ("California Municipal Securities") and at least 80% of
its total assets in obligations the interest on which is exempt from regular
federal income taxes. California Municipal Securities are securities issued by
the State of California and its various political subdivisions along with its
agencies and instrumentalities and their various political subdivisions, and by
possessions and territories of the United States, such as Puerto Rico, the
Virgin Islands, and Guam and their various political subdivisions. All or a
portion of the Fund's dividends may be subject to the federal alternative
minimum tax.
The New York Municipal Fund's investment objective is to maximize total
after-tax return for New York residents, consistent with a prudent level of
credit risk. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 65% of its total assets in a portfolio
of municipal obligations, the interest on which is exempt from New York State,
New York City and City of Yonkers personal income taxes ("New York Municipal
Securities") and at least 80% of its total assets in obligations the interest on
which is exempt from regular federal income taxes. New York Municipal Securities
are securities issued by the State of New York and its various political
subdivisions along with its agencies and instrumentalities and their various
political subdivisions, and by possessions and territories of the United States,
such as Puerto Rico, the Virgin Islands, and Guam and their various political
subdivisions. All or a portion of the Fund's dividends may be subject to federal
alternative minimum tax.
Each Fund intends that, under normal market conditions, at least 50% of its
total assets will be invested in "high quality" securities. For purposes of this
Prospectus, high quality securities are those which are rated AA or better by
Standard & Poor's Ratings Group ("S&P") or by Fitch Investors Service, Inc.
("Fitch"), or Aa or better by Moody's Investor Services, Inc. ("Moody's") or, if
unrated, are determined by the Adviser to be of comparable quality, at the time
of investment. Furthermore, under normal market conditions, at least 80% of each
Fund's total assets will be invested in securities that are rated investment
grade or better, or, if unrated, are determined by the Adviser to be of
comparable quality, at the time of investment. Therefore, a Fund may invest up
to 20% of its total assets in securities that are rated below investment grade,
or which are unrated and determined by the Adviser to be of quality comparable
to non-investment grade, at the time of investment. A Fund may retain in its
portfolio any security whose rating (or quality as determined by the Adviser if
such security is unrated) is downgraded after its acquisition by the Fund if the
Adviser considers the retention of such security advisable. At no time, however,
will more than
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35% of a Fund's net assets consist of securities rated below investment grade or
unrated securities determined by the Adviser to be of comparable quality.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of principal and interest, than higher rated securities. See "Special
Risk Considerations--High Yield, High Risk Debt Securities".
Investment grade ratings in the case of municipal bonds are the four highest
rating categories assigned by Moody's, S&P or Fitch, or determined by the
Adviser to be of comparable quality. The four highest rating categories
currently assigned by Moody's to municipal bonds are "Aaa", "Aa", "A" and "Baa";
the four highest rating categories assigned by S&P and Fitch to municipal bonds
are "AAA", "AA", "A" and "BBB". A more complete description of the debt security
ratings categories assigned by Moody's, S&P and Fitch is included in Appendix A
to this Prospectus.
Although municipal obligations rated in the fourth highest rating category
by Moody's (I.E., "Baa") or S&P or Fitch (I.E., "BBB") are considered investment
grade, they may be subject to greater risks than other higher rated investment
grade securities. Municipal obligations rated "Baa" by Moody's, for example, are
considered medium grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well. Municipal
obligations rated "BBB" by S&P and Fitch are regarded as having an adequate
capacity to pay principal and interest. Obligations rated BBB by Fitch are
deemed to be subject to an increased likelihood that their rating will fall
below investment grade than higher rated bonds.
Each Fund's dollar-weighted average maturity is not expected to exceed ten
years. Each Fund seeks to increase income and preserve or enhance total return
by actively managing the average Fund maturity in light of market conditions and
trends. Length of maturity influences sensitivity to interest rate changes, with
the value of longer-maturity securities being generally more volatile than that
of shorter-term securities. A Fund also may seek to hedge all or part of its
assets against changes in securities prices by buying or selling interest rate
futures contracts and options. The average portfolio maturity and duration,
however, may be shortened from time to time depending on market conditions.
MUNICIPAL SECURITIES
Municipal Securities are debt obligations issued by or on behalf of states,
cities, municipalities and other public authorities. The two principal
classifications of Municipal Securities that may be held by each of the Funds
are "general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of a facility being financed. Revenue
securities may include private activity bonds. Such bonds may be issued by or on
behalf of public authorities to finance various privately operated facilities
and are not payable from the unrestricted revenues of the issuer. As a result,
the credit quality of private activity bonds is frequently related directly to
the credit standing of private corporations or other entities. In addition, the
interest on private activity bonds issued after August 7, 1986 is subject to the
federal alternative minimum tax. The Funds will not be restricted with respect
to the proportion of their assets that may be invested in private activity
obligations. Accordingly, the Funds may not be a suitable investment vehicle for
individuals or corporations that are subject to the federal alternative minimum
tax.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from regular federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance. Neither the
Funds nor the Adviser will review the proceedings relating to the issuance of
municipal obligations or the basis for such opinions.
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The types of Municipal Securities in which each Fund may invest include the
following:
MUNICIPAL BONDS. Municipal bonds are debt obligations that are
typically issued to obtain funds for various public purposes, such as
construction of public facilities (E.G., airports, highways, bridges and
schools). Municipal bonds at the time of issuance are generally long-term
securities with maturities of as much as twenty years or more, but may have
remaining maturities of shorter duration at the time of purchase by the
Funds. Municipal bonds that may be purchased by the Funds include, but are
not limited to:
MORAL OBLIGATION SECURITIES. Moral obligation securities are
normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of
the state or municipality that created that issuer.
PRE-REFUNDED MUNICIPAL SECURITIES. The principal of and interest on
pre-refunded Municipal Securities are no longer paid from the original
revenue source for such securities. Instead, the source of such payments
is typically an escrow fund consisting of U.S. Government securities. The
assets in the escrow fund are derived from the proceeds of refunding
bonds issued by the same issuer as the pre-refunded Municipal Securities.
INSURED BONDS. Insured Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private
(non-governmental) insurance company. The insurance entitles a Fund to
receive only the face or par value of the securities held by such Fund.
The insurance does not guarantee the market value of the Municipal
Securities or the value of the shares of a Fund.
RESOURCE RECOVERY BONDS. Resource recovery bonds may be general
obligations of the issuing municipality or supported by project revenues
or corporate or bank guarantees. The viability of the resource recovery
project, environmental protection regulations and project operator tax
incentives may affect the value and credit quality of resource recovery
bonds.
MUNICIPAL NOTES. Municipal notes are issued to meet the short-term
funding requirements of local, regional and state governments. Municipal
notes generally have maturities at the time of issuance of three years or
less. Municipal notes are generally secured by the anticipated revenues from
taxes, grants or bond financing. Municipal notes that may be purchased by
the Funds include, but are not limited to:
TAX ANTICIPATION NOTES. Tax anticipation notes ("TANs") are sold as
interim financing in anticipation of collection of taxes. An uncertainty
in a municipal issuer's capacity to raise taxes as a result of such
factors as a decline in its tax base or a rise in delinquencies could
adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
BOND ANTICIPATION NOTES. Bond anticipation notes ("BANs") are sold
as interim financing in anticipation of a bond sale. The ability of a
municipal issuer to retire its BANs is primarily dependent on the
issuer's adequate access to the longer term municipal bond market and the
likelihood that the proceeds of such bond sales will be used to pay the
principal of, and interest on, BANs.
REVENUE ANTICIPATION NOTES. Revenue anticipation notes ("RANs") are
sold as interim financing in anticipation of receipt of other revenues. A
decline in the receipt of certain revenues, such as anticipated revenues
from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs.
TANs, BANs and RANs may be general obligations of the issuer.
FLOATING OR VARIABLE RATE OBLIGATIONS. Floating or variable rate
obligations bear interest at rates that are not fixed, but vary with changes
in specified market rates or indices, such as the prime rate, and at
specified intervals. Certain of the floating or variable rate obligations
that may be purchased by the
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Funds may carry a demand feature that would permit the holder to tender them
back to the issuer at par value prior to maturity. Such obligations include
variable rate master demand notes, which are unsecured instruments issued
pursuant to an agreement between the issuer and the holder that permit the
interest rate thereunder to vary and provide for periodic adjustments in the
interest rate. The Adviser will monitor on an ongoing basis the ability of
an issuer of a demand instrument to pay principal and interest on demand.
CUSTODIAL RECEIPTS OR CERTIFICATES. Custodial receipts or certificates
are undivided interests in underlying securities issued by a bank, insurance
company or other financial institution which possesses such underlying
securities. The issuer of the custodial receipts or certificates typically
deposits the underlying securities in an irrevocable trust or custodial
account with a custodian bank. The Funds may purchase participation
certificates that represent interests in obligations that may otherwise be
purchased by the Funds. A Fund's undivided interest in the underlying
obligations is the proportion that the Fund's interest bears to the total
principal amount of such obligations. Certain of such participation
certificates, sometimes called tender option bonds, may carry a demand
feature that would permit the holder to tender them back to the issuer or to
a third party prior to maturity.
MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations are entered
into by a State or a political subdivision to finance the acquisition or
construction of equipment, land or facilities. Municipal lease obligations
do not constitute general obligations of the issuer and the interest on a
municipal lease obligation may become taxable if the lease is assigned. If
the governmental user does not appropriate sufficient funds for the
following year's lease payments, the lease will terminate, with the
possibility of default on the lease obligations and loss to the Funds.
Disposition of the property in the event of foreclosure may prove difficult.
The Funds may purchase unrated municipal lease obligations. In such case,
the Company's Board of Directors will be responsible for determining the
credit quality of such leases on an ongoing basis, including the assessment
of the likelihood that the lease will not be cancelled. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities.
VARIABLE RATE AUCTION SECURITIES AND INVERSE FLOATERS. Variable rate
auction securities and inverse floaters are instruments created when an
issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable rate instruments. The interest
rate on the variable rate auction portion reflects short-term interest
rates, while the interest rate on the inverse floater portion is typically
higher than the rate available on the original fixed-rate bond. Changes in
the interest rate paid on the portion of the issue relative to short-term
interest rates inversely affect the interest rate paid on the latter portion
of the issue. The latter portion therefore is subject to greater price
volatility than the original fixed-rate bond. Since the market for these
instruments is new, the holder of one portion may have difficulty finding a
ready purchaser. Depending on market availability, the two portions may be
recombined to form a fixed-rate municipal bond.
MUNICIPAL COMMERCIAL PAPER. Municipal commercial paper that may be
purchased by the Funds includes short-term obligations of a state, regional
or local governmental entity. Such paper is likely to be issued to meet
seasonal working capital needs of a municipality or as interim construction
financing. Municipal commercial paper, which may be unsecured, may be backed
by a letter of credit lending agreement, note repurchase agreement or other
credit facility agreement offered by banks or other institutions.
From time to time, each Fund may invest 25% or more of its assets in any
obligations whose debt service is paid from revenues of similar projects (such
as utilities or hospitals) or whose issuers share the same geographic location.
As a result, a Fund may be more susceptible to a single economic, political or
regulatory development than would a portfolio of securities with a greater
variety of issuers. These developments include proposed legislation or pending
court decisions affecting the financing of such projects and market factors
affecting the demand for their services or products.
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In California, municipal bonds may also be secured by property taxes in
specially created districts (Mello-Roos bonds or Special Assessment bonds), tax
allocations based on increased property tax assessments over a specified period,
frequently for redevelopment projects, or specified redevelopment area sales tax
allocations.
Because the California Municipal and New York Municipal Funds will invest
primarily in obligations issued by a single state (I.E., California and New
York, respectively) and such state's counties, municipalities and other public
authorities and their agencies and instrumentalities and their various political
subdivisions, they are more susceptible to factors adversely affecting issuers
of such obligations than a comparable municipal securities fund that is not so
concentrated. See "Special Risk Considerations--Municipal Securities" in this
Prospectus, and "Special Factors Affecting California Municipal Securities" and
"Special Factors Affecting New York Municipal Securities" in the Statement of
Additional Information for further information.
OTHER PERMITTED INVESTMENTS
Each Fund may invest up to 35% of its assets in taxable obligations,
including taxable high-quality short-term money market instruments in the
following circumstances: (a) when, in the opinion of the Adviser, the inclusion
of taxable securities will enhance the expected after-tax return of a Fund; (b)
pending investment of the proceeds of sales of shares of a Fund or sales of
portfolio securities; (c) pending settlement of purchases of portfolio
securities; or (d) to maintain liquidity for the purpose of meeting anticipated
redemptions or exchanges.
Each Fund may invest in the following taxable high-quality short-term money
market instruments: (i) obligations of the U.S. Government and its agencies and
instrumentalities ("U.S. Government Securities"); (ii) commercial paper of
issuers rated, at the time of purchase, "A-1" by S&P, "P-1" by Moody's, or "F-1"
or better by Fitch or which if unrated, in the opinion of the Adviser, are of
comparable quality; (iii) certificates of deposit, bankers' acceptances or time
deposits of any bank whose long-term debt obligations have been rated "AAA" by
S&P or "Aaa" by Moody's; and (iv) repurchase agreements with respect to such
obligations.
In addition, the California Municipal and New York Municipal Funds may,
during seasonal variations or other shortages in the supply of suitable
California Municipal Securities or New York Municipal Securities, as the case
may be, invest more than 35% of its total assets in Municipal Securities issued
by other states, their agencies or instrumentalities the interest on which is
exempt from federal income tax, but not California or New York State and local
personal income taxes, as the case may be, if, in the opinion of the Adviser,
adverse conditions prevail in the market for California Municipal Securities or
New York Municipal Securities (including conditions under which such obligations
are unavailable for investment).
To the extent that a Fund deviates from its investment policies as a result
of the unavailability of suitable obligations or for other defensive purposes,
its investment objective may not be achieved.
HEDGING AND DERIVATIVES
Each Fund is currently authorized to use the various investment strategies
referred to under "Special Risk Considerations--Hedging and Derivatives".
Specifically, a Fund may, in order to further its investment objective purchase
or sell futures contracts on (a) U.S. Government Securities and (b) municipal
bond indices. Currently, at least one exchange trades futures contracts on an
index of long-term municipal bonds, and the Funds reserve the right to conduct
futures transactions based on an index which may be developed in the future to
correlate with price movements in municipal obligations. In addition, each Fund
may buy and sell interest rate futures contracts and options on interest rate
futures contracts. The Funds will not engage in futures and options transactions
for leveraging purposes. For a discussion of these transactions, including
certain risks associated therewith, see "Special Risk Considerations--Hedging
and Derivatives" and Appendix B to this Prospectus.
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OTHER INVESTMENT POLICIES
GENERAL
Each Fund may use many of the same investment techniques and may invest in
similar securities. Investors should note, however, that each Fund will invest
its assets in accordance with its respective investment objective and policies
described above. Accordingly, the Adviser expects that each Fund's investment
portfolio will be distinct.
STRUCTURED PRODUCTS
Each Fund may invest in interests in entities organized and operated solely
for the purpose of restructuring the investment characteristics of certain debt
obligations. This type of restructuring involves the deposit with or purchase by
an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans) and the issuance by that entity of one or more classes of
securities ("structured products") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured products to create securities with
different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to structured products is dependent on the extent of the cash flow
on the underlying instruments. Each Fund may invest in structured products which
represent derived investment positions based on relationships among different
markets or asset classes. Each Fund may also invest in other types of structured
products, including among others, inverse floaters, spread trades and notes
linked by a formula to the price of an underlying instrument.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security
because they are linked to their underlying markets or securities. Total return
on the structured product is derived by linking return to one or more
characteristics of the underlying instrument. Because certain structured
products of the type in which each Fund anticipates it will invest may involve
no credit enhancement, the credit risk of those structured products generally
would be equivalent to that of the underlying instruments. Although a Fund's
purchase of structured products would have a similar economic effect to that of
borrowing against the underlying securities, the purchase will not be deemed to
be leverage for purposes of the limitations placed on the extent of each Fund's
assets that may be used for borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, each Fund's investment in
these structured products may be limited by the restrictions contained in the
1940 Act. See "Other Investment Companies" below. Structured products are
typically sold in private placement transactions, and there currently is no
active trading market for structured products. As a result, certain structured
products in which a Fund invests may be deemed illiquid and subject to the 15%
limitation described below under "Illiquid Securities". See "Additional
Information on Portfolio Instruments" in the Statement of Additional
Information.
MORTGAGE-RELATED SECURITIES
Each Fund may invest in mortgage-related securities, consistent with their
respective investment objective and policies, that provide funds for mortgage
loans made to residential home owners. These include securities, such as
Collateralized Mortgage Obligations and Stripped Mortgage-Backed Securities
which represent interests in pools of mortgage loans made by lenders such as
savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled for sale to investors (such as a Fund) by
various governmental, government-related and private organizations.
The Adviser expects that governmental, governmental-related or private
entities may create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these securities may
be second mortgages or alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from
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customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Adviser will, consistent
with each Fund's investment objective and policies, consider making investments
in such new types of securities.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities consistent with its investment
policies. Each Fund may lend portfolio securities in an amount up to 30% of its
total assets to broker-dealers, major banks or other recognized domestic
institutional borrowers of securities. Such loans will be against collateral,
consisting of cash or securities which is equal at all times to at least 100% of
the value of the securities loaned. Such loans would involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the Adviser
to be of good standing and only when, in the Adviser's judgment, the income to
be earned from the loans justifies the attendant risks. The voting rights, if
any, associated with the loaned portfolio securities may pass to the borrower
with the lending of the securities. The Fund's Directors will be obligated to
call loans to vote proxies or otherwise obtain rights to vote or consent if a
material event affecting such investment is to occur.
REPURCHASE AGREEMENTS
Each Fund may purchase instruments from financial institutions, such as
banks and U.S. broker-dealers, subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). The seller
under a repurchase agreement will be required to maintain the value of the
securities subject to the agreement at not less than the repurchase price.
Default by the seller would, however, expose the relevant Fund to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying obligations.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow by entering into reverse repurchase agreements.
Pursuant to such agreements, a Fund would sell portfolio securities to financial
institutions, such as banks and broker-dealers, and agree to repurchase them at
an agreed upon date, price and interest payment. When effecting reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. A reverse repurchase agreement involves the risk that
the market value of the portfolio securities sold by a Fund may decline below
the price of the securities the Fund is obligated to repurchase, which price is
fixed at the time the Fund enters into such agreement.
SHORT SALES
Each Fund may make short sales of securities "against the box." A short sale
is a transaction in which a Fund sells a security it does not own in
anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, a Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.
BORROWING
Each Fund is authorized to borrow money from banks in U.S. dollars, in an
amount up to 25% of their respective total assets (including the amount
borrowed), less all liabilities and indebtedness other than the borrowings and
may use the proceeds of such borrowings for investment purposes. The Funds will
borrow for investment purposes only when the Adviser believes that such
borrowings will benefit the applicable Fund, after taking into account
considerations such as the costs of the borrowing and the likely investment
returns on the securities purchased with the borrowed monies.
Borrowing for investment purposes is known as leveraging, which is a
speculative practice. Such borrowing creates the opportunity for increased net
income and appreciation but, at the same time, involves special risk
considerations. For example, leveraging will exaggerate changes in the net asset
value of the applicable Fund's shares and in the yield on the Fund's portfolio.
Although the principal of such borrowings
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will be fixed, the Fund's assets may change in value during the time the
borrowing is outstanding. By leveraging, changes in a Fund's net asset value may
be greater in degree than if leverage was not employed. If the income from the
assets obtained with borrowed funds is not sufficient to cover the cost of
borrowing, the net income of the Fund will be less than if borrowing were not
used, and therefore the amount available for distribution to shareholders as
dividends will be reduced.
Each Fund may, in addition to engaging in the transactions described above,
borrow money for temporary or emergency purposes (including, for example,
clearance of transactions, share repurchases or payments of dividends to
shareholders) in an amount not exceeding 5% of the value of the applicable
Fund's total assets (including the amount borrowed).
WHEN-ISSUED AND FORWARD COMMITMENT TRANSACTIONS
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a forward commitment basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities at a
set price with payment and delivery taking place beyond the normal settlement
date, allow such Fund to lock in what the Adviser believes to be an attractive
price or yield on a security it owns or intends to purchase or sell, regardless
of future changes in interest rates or securities prices. No income accrues to
the purchaser of a security on a when-issued or forward commitment basis prior
to delivery. When a Fund purchases securities on a when-issued basis or engages
in forward commitment transactions, it sets aside securities or cash with its
custodian equal to the payment that will be due. Engaging in when-issued and
forward commitment transactions can cause greater fluctuation in a Fund's net
asset value and involves a risk that yields or prices available in the market on
the delivery date may be more advantageous to such Fund than those received in
each transaction.
ZERO COUPON SECURITIES AND DISCOUNT OBLIGATIONS
Each Fund may invest in zero coupon securities and debt securities acquired
at a discount, to the extent consistent with its investment objective. These
investments involve special risk considerations. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. Zero coupon securities may be issued by a
wide variety of corporate and governmental issuers.
Zero coupon securities and debt securities acquired at a discount are
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying debt securities with similar maturities. The
value of zero coupon securities and debt securities acquired at a discount
appreciates more during periods of declining interest rates and depreciates more
during periods of rising interest rates than does the value of ordinary
interest-bearing debt securities with similar maturities. Under current federal
income tax law, the Funds are required to accrue as income each year a portion
of the original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Funds will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Funds may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements. See "Taxes".
ILLIQUID SECURITIES
No Fund will knowingly invest more than 15% of the value of its net assets
in illiquid securities, including securities which are not readily marketable,
time deposits and repurchase agreements not terminable within seven days.
Illiquid assets are assets which may not be sold or disposed of in the ordinary
course of business within seven days at approximately the value at which a Fund
has valued the investment. Securities
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that have readily available market quotations are not deemed illiquid for
purposes of this limitation (irrespective of any legal or contractual
restrictions on resale). The Funds may purchase securities that are not
registered under the Securities Act of 1933, as amended, but which can be sold
to qualified institutional buyers in accordance with Rule 144A under that Act
("Rule 144A securities"). Rule 144A securities generally must be sold to other
qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% limitation on investment in illiquid securities. The ability to
sell Rule 144A securities to qualified institutional buyers is a recent
development and it is not possible to predict how this market will mature. Each
Fund may also invest in commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended ("Section 4(2) paper"). Section
4(2) paper is restricted as to disposition under the federal securities laws,
and generally is sold to institutional investors such as the Funds who agree
that they are purchasing the paper for investment and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) paper normally is resold to other institutional investors like the
Funds through or with the assistance of the issuer or investment dealers who
make a market in the Section 4(2) paper, thus providing liquidity. The Adviser
will monitor the liquidity of such restricted securities under the supervision
of the Board of Directors. See "Additional Risk Considerations--Illiquid
Securities" in the Statement of Additional Information.
OTHER INVESTMENT COMPANIES
Each Fund may invest up to 10% of its total assets in the securities of
other investment companies. No Fund may invest more than 5% of its total assets
in the securities of any one investment company or acquire more than 3% of the
voting securities of any other investment company. No Fund intends to invest in
such investment companies unless, in the judgment of the Adviser, the potential
benefits of such investment justify the payment of any premium to net asset
value of the investment company or of any sales charge. Each Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by investment companies in which it invests in addition to the
advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
Each Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by a Fund or
which currently are not available but which may be developed, to the extent such
investment practices are both consistent with a Fund's investment objective and
legally permissible for such Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described above.
TEMPORARY STRATEGIES
Each of the Funds retains the flexibility to respond promptly to changes in
market and economic conditions. Accordingly, consistent with each Fund's
investment objective, the Adviser may employ a temporary defensive investment
strategy if it determines such a strategy is warranted. Thus, each Fund may, for
temporary defensive purposes, invest without limitation in taxable high-quality
short-term money market instruments described above if, in the opinion of the
Adviser, adverse conditions prevail in the market for Municipal Securities,
California Municipal Securities or New York Municipal Securities (including
conditions under which such obligations are unavailable for investment). Any net
interest income derived from taxable securities and distributed by a Fund will
be taxable as ordinary income when distributed.
In addition, pending investment of proceeds from new sales of Fund shares or
to meet ordinary daily cash needs, each Fund temporarily may hold cash and may
invest any portion of its assets in high-quality money market instruments.
PORTFOLIO TURNOVER
The Funds will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. It is anticipated that, under normal
conditions, the portfolio turnover will not exceed 60% for each Fund in any one
year after
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each Fund is fully invested. For the fiscal period ended December 31, 1995, the
New York Municipal Fund's portfolio turnover rate was 35%. See "Taxes" and
"Portfolio Transactions" in the Statement of Additional Information.
SPECIAL RISK CONSIDERATIONS
GENERAL
Each Fund's net asset value will fluctuate, reflecting fluctuations in the
market value of its portfolio positions. The value of each Fund's fixed income
securities generally fluctuates inversely with interest rate movements and fixed
income securities with longer maturities tend to be subject to increased
volatility. There is no assurance that any Fund will achieve its investment
objective.
MUNICIPAL SECURITIES
CONCENTRATION. Because the California Municipal and New York Municipal
Funds will invest primarily in obligations issued by the States of California
and New York, respectively, and their agencies, instrumentalities and various
political subdivisions, these Funds are more susceptible to factors adversely
affecting issuers of such obligations than comparable municipal securities funds
that are not so concentrated.
CALIFORNIA ISSUERS. California is experiencing significant financial
difficulties, which have reduced its credit standing. The ratings of certain
related debt of other issuers for which California has an outstanding lease
purchase, guarantee or other contractual obligation (such as state-insured
hospital bonds) are generally linked directly to California's rating. Should the
financial condition of California deteriorate further, its credit ratings could
be further reduced, the market value and marketability of all outstanding notes
and bonds issued by California, its public authorities or local governments
could be adversely affected, and the income derived by the California Municipal
Fund and its ability to preserve capital and liquidity could be adversely
affected. See "Special Factors Affecting the California Municipal Fund" in the
Statement of Additional Information for further information.
NEW YORK ISSUERS. New York State, New York City and other issuers of New
York Municipal Securities have, at various times in the past, encountered
financial difficulties. A continuation or recurrence of the financial
difficulties previously experienced by the issuers of New York Municipal
Securities could result in defaults or declines in the market values of those
issuers' existing obligations and, possibly, in the obligations of other issuers
of New York Municipal Securities and the income derived by the Fund and its
ability to preserve capital and liquidity could be adversely affected. See
"Special Factors Affecting the New York Municipal Fund" in the Statement of
Additional Information for further information.
LIQUIDITY. The Adviser believes that, in general, the secondary market for
municipal obligations is less liquid than that for most taxable fixed income
securities. Consequently, the ability of each Fund to buy and sell municipal
obligations may, at any particular time and with respect to any particular
securities, be limited. The amount of information about the financial condition
of an issuer of municipal obligations may not be as extensive as information
about corporations whose securities are publicly traded. Obligations of issuers
of municipal obligations may be subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the U.S. Bankruptcy Code and applicable state laws, which could limit the
ability of the Funds to recover payments of principal or interest on such
securities.
CALLABLE SECURITIES. Certain tax exempt securities which may be held by
each Fund may permit the issuer at its option to "call," or redeem, its
securities. If an issuer were to redeem tax exempt securities held by a Fund
during a time of declining interest rates, the Fund may realize a capital loss
on its investment if the security was purchased at a premium and may not be able
to reinvest the proceeds in tax exempt securities providing as high a level of
investment return as the securities redeemed. For additional considerations
relating to the Funds' investments in tax-exempt securities, including investing
in municipal leases, see "Investment Objectives and Policies" and "Additional
Information on Portfolio Instruments" in the Statement of Additional
Information.
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TAXES. All or a portion of each Fund's dividends may be subject to
alternative minimum tax and the National Municipal Fund's dividends may be
subject to state or local taxation. In addition, each of these Funds may invest
up to 20% of their respective assets in non-municipal obligations. Certain
provisions in the Internal Revenue Code of 1986, as amended (the "Code"),
relating to the issuance of municipal obligations impose restrictions on the
volume of municipal obligations qualifying for federal tax exemption. One effect
of these provisions could be to increase the cost of the tax exempt securities
available for purchase by the Funds and thus reduce available yield. Legislative
proposals that may further restrict or eliminate the federal income tax
exemption for interest on municipal obligations may be introduced in the future.
See "Taxes".
HIGH YIELD, HIGH RISK DEBT SECURITIES
Each Fund may invest up to 20% of its total assets in high yield, high risk
debt securities, at the time of investment. Securities rated below investment
grade and comparable unrated securities offer yields that fluctuate over time,
but generally are superior to the yields offered by higher rated securities.
However, securities rated below investment grade also involve greater risks than
higher rated securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Certain of the debt securities in which
the Funds may invest may have, or be considered comparable to securities having,
the lowest ratings for debt instruments assigned by Moody's, S&P or Fitch (I.E.,
rated C by Moody's or D by S&P or Fitch). Under rating agency guidelines, these
securities are considered to have extremely poor prospects of ever attaining any
real investment standing and a current identifiable vulnerability to default, to
be unlikely to have the capacity to pay interest and repay principal when due in
the event of adverse business, financial or economic conditions, and/or to be in
default or not current in the payment of interest or principal. Such securities
are considered speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. Unrated
securities deemed comparable to these lower- and lowest-rated securities will
have similar characteristics. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by the
Funds with a commensurate effect on the value of their respective shares.
Therefore, an investment in the Funds should not be considered as a complete
investment program for all investors.
The secondary markets for high yield, high risk debt securities generally
are not as liquid as the secondary markets for higher rated securities. The
secondary markets for high yield, high risk debt securities are characterized by
relatively few market makers and participants in the market are mostly
institutional investors, including insurance companies, banks, other financial
institutions and mutual funds. In addition, the trading volume for high yield,
high risk debt securities is generally lower than that for higher-rated
securities and the secondary markets could contract under adverse market or
economic conditions independent of any specific adverse changes in the condition
of a particular issuer. These factors may have an adverse effect on a Fund's
ability to dispose of particular portfolio investments and may limit its ability
to obtain accurate market quotations for purposes of valuing securities and
calculating net asset value. If a Fund is not able to obtain precise or accurate
market quotations for a particular security, it will become more difficult for
the Company's Board of Directors to value such Fund's portfolio securities and
the Company's Directors may have to use a greater degree of judgment in making
such valuations. Furthermore, adverse publicity and investor perceptions about
lower-rated securities, whether or not based on fundamental analysis, may tend
to decrease the market value and liquidity of such lower-rated securities. Less
liquid secondary markets may also affect each Fund's ability to sell securities
at their fair value. In addition, each of the Funds may invest up to 15% of its
net assets, measured at the time of investment, in illiquid securities, which
may be more difficult to value and to sell at fair value. If the secondary
markets for high yield, high risk debt securities contract due to adverse
economic conditions or for other reasons, certain previously liquid securities
in a Fund's portfolio may become illiquid and the proportion of the Fund's
assets invested in illiquid securities may increase.
The ratings of fixed income securities by Moody's, S&P and Fitch are a
generally accepted barometer of credit risk. They are, however, subject to
certain limitations from an investor's standpoint. The rating of an issuer is
heavily weighted by past developments and does not necessarily reflect probable
future conditions.
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There is frequently a lag between the time a rating is assigned and the time it
is updated. In addition, there may be varying degrees of difference in credit
risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
NON-DIVERSIFIED FUNDS
Each Fund is classified as a "non-diversified" fund under the 1940 Act,
which means that each Fund is not limited by the 1940 Act in the proportion of
its assets that may be invested in the obligations of a single issuer. Each
Fund, however, intends to comply with the diversification requirements imposed
by the Code for qualification as a regulated investment company. Thus, a Fund
may invest a greater proportion of its assets in the securities of a smaller
number of issuers and, as a result, will be subject to greater risk of loss with
respect to its portfolio securities.
SHORT SALES
Each Fund may engage in short sales "against the box," which involve certain
risks and special considerations. Possible losses from short sales differ from
losses that could be incurred from a purchase of a security, because losses from
short sales may be unlimited, whereas losses from purchases can equal only the
total amount invested. The Funds are permitted to engage in short sales only
with respect securities related to those in its portfolio. The Adviser therefore
expects that if the price of the securities a Fund is required to replace in
connection with a short sale increase, the value of the related securities in
the Fund's portfolio will also increase, although not necessarily in the same
proportion. A Fund's ability to make short sales will be limited by the
requirement that not more than 30% of its Fund's gross income be derived from
the sale or disposition of securities held for less than three months to
maintain such Fund's status as a regulated investment company under the Code.
See "Taxes".
HEDGING AND DERIVATIVES
The Funds may be authorized to use a variety of investment strategies
described below to hedge various market risks (such as interest rates and broad
or specific market movements), to manage the effective maturity or duration of
debt instruments held by a Fund, or to seek to increase a Fund's income or gain.
Each Fund may (if and to the extent so authorized) purchase and sell (or write)
exchange-listed and over-the-counter put and call options on securities, index
futures contracts, financial futures contracts and fixed income indices and
other financial instruments, enter into financial futures contracts and interest
rate transactions (collectively, these transactions are referred to in this
Prospectus as "Hedging and Derivatives"). A Fund's interest rate transactions
may take the form of swaps, caps, floors and collars.
Hedging and Derivatives may generally be used to attempt to protect against
possible changes in the market value of securities held or to be purchased by a
Fund resulting from securities markets or interest rate fluctuations, to protect
a Fund's unrealized gains in the value of its securities, to facilitate the sale
of those securities for investment purposes, to manage the effective maturity or
duration of a Fund's securities or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. A Fund may use any or all types of Hedging and Derivatives which it
is authorized to use at any time; no particular strategy will dictate the use of
one type of transaction rather than another, as use of any authorized Hedging
and Derivatives will be a function of numerous variables, including market
conditions. The ability of a Fund to utilize Hedging and Derivatives
successfully will depend on, in addition to the factors described above, the
Adviser's ability to predict pertinent market movements, which cannot be
assured. These skills are different from those needed to select a Fund's
securities. None of the Funds is a "commodity pool" (I.E., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Derivatives involving futures contracts and
options on futures contracts will be purchased, sold or entered into only for
BONA FIDE hedging, and non-hedging purposes to the extent permitted by CFTC
regulations; PROVIDED that a Fund may enter into futures contracts or options
thereon for purposes other than BONA FIDE hedging if immediately thereafter, the
sum of the amount of its initial margin and premiums on open contracts would not
exceed 5% of the liquidation value of such Fund's portfolio; PROVIDED FURTHER,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be
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excluded in calculating the 5% limitation. The use of certain Hedging and
Derivatives will require that a Fund segregate cash, U.S. Government Securities
or other liquid high grade debt obligations to the extent such Fund's
obligations are not otherwise "covered" through ownership of the underlying
security or financial instrument. Risks associated with Hedging and Derivatives
are described in Appendix B to this Prospectus. A detailed discussion of various
Hedging and Derivatives, including applicable regulations of the CFTC and the
requirement to segregate assets with respect to these transactions, also appears
in Appendix B.
LIMITING INVESTMENT RISKS
To further protect investors, the Funds have adopted the following
investment limitations:
1.
No Fund may invest 25% or more of the value of its total assets in
securities of issuers in any one industry; PROVIDED, that there is no
limitation with respect to investment in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; PROVIDED FURTHER,
that there is no limitation with respect to obligations issued or guaranteed
by any state, territory or possession of the United States, the District of
Columbia, or any of their authorities, agencies, instrumentalities or
political subdivisions.
2.
No Fund may borrow money, except (a) from banks or by entering into
reverse repurchase agreements, in aggregate amounts not exceeding 25%
of the value of its total assets at the time of such borrowing and (b) in
amounts not exceeding 5% of the value of its total assets at the time of
such borrowing for temporary or emergency purposes (including for clearance
of securities transactions or payment of redemptions or dividends). For
purposes of the foregoing investment limitation, the term "total assets"
shall be calculated after giving effect to the net proceeds of any
borrowings and reduced by any liabilities and indebtedness other than such
borrowings.
3.
No Fund may invest an amount equal to 15% or more of the current
value of its net assets in investments that are illiquid.
The foregoing investment limitations and certain of those described in the
Statement of Additional Information under "Investment Limitations" are
fundamental policies of each of the Funds that may be changed only when
permitted by law and approved by the holders of a "majority" of such Fund's
outstanding shares. If a percentage restriction on investment or use of assets
contained in these investment limitations or elsewhere in this Prospectus or
Statement of Additional Information is adhered to at the time a transaction is
effected, later changes in percentage resulting from any cause other than
actions by the relevant Fund will not be considered a violation; PROVIDED, that
the restrictions on borrowing described in (2) above shall apply at all times.
As used in this Prospectus and in the Statement of Additional Information, the
term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting any particular Fund (E.G.,
approval of investment advisory contracts), means the vote of the lesser of (i)
67% of the shares of that Fund represented at a meeting if the holders of more
than 50% of the outstanding shares of such Fund are present in person or by
proxy, or (ii) more than 50% of the outstanding shares of such Fund.
Shareholders are entitled to one vote for each full share held and to fractional
votes for fractional shares held.
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MANAGEMENT
The business and affairs of the Funds are managed under the general
direction and supervision of the Company's Board of Directors. The Funds'
day-to-day operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK (the "Adviser") provides investment advisory services to the Funds
pursuant to an Investment Advisory Agreement with the Company (the "Advisory
Agreement"). Subject to such policies as the Company's Board of Directors may
determine, the Adviser makes investment decisions for each Fund. The Advisory
Agreement provides that, as compensation for services, the Adviser is entitled
to receive from each Fund a monthly fee at the following annual rates based upon
the average daily net assets of the Fund: 0.40% for the National Municipal Fund;
0.40% for the California Municipal Fund; and 0.40% for New York Municipal Fund.
The Adviser is a New York State chartered trust company. Under its charter,
the Adviser may neither accept deposits nor make loans except for deposits or
loans arising directly from its exercise of the fiduciary powers granted it
under the New York Banking Law. The Adviser's principal business is the
rendering of discretionary investment management services to high net worth
individuals and family groups, foundations, endowments and corporations. The
Adviser specializes in fixed income management and offers its clients a complete
range of fixed income investments in capital markets throughout the world. The
Adviser currently manages in excess of $6.5 billion in assets and serves as
investment adviser to sixteen registered investment companies (or portfolios
thereof). The principal business address of the Adviser is 520 Madison Avenue,
New York, New York 10022.
PORTFOLIO MANAGERS. Carolyn N. Dolan, Joan Dougherty and John H. Haldeman,
Jr. will serve as portfolio managers for the Funds. Ms. Dolan has been with the
Adviser since 1983 with responsibilities for the Adviser's tax sensitive and
cross market portfolios. Ms. Dougherty joined the Adviser in 1994 as its
Director of Municipal Research. From 1986 through 1993, Ms. Dougherty served as
Vice President and Manager with Moody's Investors Service, Inc. in the Public
Finance Department. Mr. Haldeman has been with the Adviser since 1988 with
responsibilities in fixed income portfolio management, specializing in municipal
securities.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
Furman Selz LLC ("Furman Selz") serves as the Company's administrator and
generally assists the Company in all aspects of its administration and
operation. As compensation for its administrative services, Furman Selz receives
a monthly fee, based upon an annual rate of 0.15% of the aggregate average daily
net assets of the Funds.
The Chase Manhattan Bank, N.A. serves as custodian of the assets of the
Funds. The principal address of the custodian is 4 MetroTech Center, Brooklyn,
New York 11245. Furman Selz has entered into an agreement with the Company for
the provision of transfer agency and dividend disbursing services for the Funds.
The principal business address of the transfer agent is 230 Park Avenue, New
York, New York 10169.
A further discussion of the terms of the Company's administrative, custody
and transfer agency arrangements is contained in the Statement of Additional
Information.
DISTRIBUTOR
Shares in each Fund are sold on a continuous basis by the Company's
distributor, OFFIT Funds Distributor, Inc. (the "Distributor"), a wholly-owned
subsidiary of Furman Selz. The Distributor's principal offices are located at
230 Park Avenue, New York, New York 10169.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of its shares, each Fund is authorized
to spend up to 0.25% of its net assets annually with respect to each class of
shares of the Fund in accordance with a Plan of Distribution (the "Plan")
pursuant to Rule 12b-1 promulgated under the 1940 Act. Activities for which the
Distributor may be reimbursed include (but are not
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limited to) the development and implementation of direct mail promotions and
advertising for the Funds and the preparation, printing and distribution of
prospectuses for the Funds to recipients other than existing shareholders. The
Distributor has agreed to waive its fee during the first year of the Funds'
operation.
Although it is anticipated that some promotional activities will be
conducted on a Company-wide basis, payments made by the Funds under the Plan
will generally be used to finance the distribution of shares of the Funds.
Expenses incurred in connection with Company-wide activities may be allocated
pro rata among all portfolios and classes of the Company on the basis of their
relative net assets. Allocation of expenses on the basis of relative net assets
may result in the subsidization by larger portfolios or classes of the
distribution of shares of smaller portfolios or classes.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents") with respect to Advisor
Shares. Shareholder administrative support services will be performed by
Shareholder Servicing Agents for their customers who beneficially own Advisor
Shares. Such services may include, among other things: assisting in aggregating
and processing purchase, exchange and redemption transactions; placing net
purchase and redemption orders with the Company's distributor; arranging for the
wiring of funds; transmitting and receiving funds in connection with customer
orders to purchase or redeem shares; processing dividend payments; verifying and
guaranteeing shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts, as necessary;
providing periodic statements showing a customer's positions in the Funds;
furnishing (either separately or on an integrated basis with other reports sent
to a shareholder by a Shareholder Servicing Agent) monthly and year-end
statements and confirmations of purchases, exchanges and redemptions;
transmitting, on behalf of the Company, proxy statements, annual reports,
updating prospectuses and other communications from the Company to the
shareholders of the Funds; and receiving, tabulating and transmitting to the
Company proxies executed by shareholders with respect to meetings of
shareholders of the Fund. Customers may have or be given the right to vote
shares held of record by Shareholder Servicing Agents.
For the services provided, the Company's Shareholder Servicing Plan permits
each Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.10% of the average daily net asset value of Advisor Shares of the Fund for
which such Shareholder Servicing Agents provide services for the benefit of
customers. Shareholder Servicing Agents will provide their customers with a
schedule of any credits, fees or of the terms or conditions that may be
applicable to the investment of customer assets in each Fund's Advisor Shares.
REGULATORY MATTERS
OFFITBANK is a trust company chartered under the New York Banking Law and is
supervised and examined thereunder by the New York Banking Department. OFFITBANK
is prohibited by its charter from accepting deposits other than deposits arising
directly from its exercise of the fiduciary powers granted under the New York
Banking Law and, accordingly, is not an insured depository institution for
purposes of the Federal Deposit Insurance Act or any other banking law or
regulation.
Banking laws and regulations, as currently interpreted by the New York
Banking Department, prohibit New York State chartered trust companies from
controlling, or distributing the shares of, a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit such
trust companies generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such trust companies from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. OFFITBANK believes that it may perform the services
described in this Prospectus with respect to the
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Company without violation of such laws or regulations. OFFITBANK is not a member
of the Federal Reserve System and is not subject to the Glass-Steagall Act, the
Bank Holding Company Act of 1956 or any other federal banking law or regulation
that might affect its ability to perform such services.
If the Adviser were prohibited from performing the services described in
this Prospectus with respect to the Funds, it is expected that the Company's
Board of Directors would recommend to each Fund's shareholders that they approve
new agreements with another entity or entities qualified to perform such
services and selected by the Board of Directors. The Company does not anticipate
that investors would suffer any adverse financial consequences as a result of
these occurrences.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by any or all of the Funds to the
organizations retained to provide services for the Funds may be waived from time
to time in order to increase such Funds' net investment income available for
distribution to shareholders.
Except as noted below, OFFITBANK and Furman Selz bear all expenses in
connection with the performance of their advisory and administrative services.
The Company bears the expenses incurred in its operations, including:
organization expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Company); fees payable to the
Commission; state securities qualification fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges of its custodian and
transfer agent; certain insurance costs; auditing and legal expenses; fees of
independent pricing services; costs of shareholders' reports and shareholder
meetings; and any extraordinary expenses. The Company also pays for brokerage
fees and commissions, if any, in connection with the purchase of portfolio
securities, and reimburses the Company's distributor for certain expenses
incurred by it in connection with activities primarily intended to result in the
sale of shares of any of the Funds. Each Fund bears its own organizational
expenses and other expenses directly attributable to that Fund. Other expenses
of the Company are allocated among the Company's portfolios and classes thereof
based on their relative net assets. Expenses are allocated to a particular class
of a portfolio based on either expenses identifiable to the class or relative
net assets of the class and other classes of the portfolios.
DIVIDENDS AND DISTRIBUTIONS
The Funds will declare dividends of substantially all of their net income
daily and pay those dividends monthly. Each Fund will distribute, at least
annually, substantially all net capital gains, if any, earned by such Fund. Each
Fund will inform shareholders of the amount and nature of all such income or
gains.
Dividends are paid in the form of additional shares of the same class of the
same Fund, unless the shareholder of record has elected prior to the date of
distribution to receive payment in cash. Such election, or any revocation
thereof, must be made in writing to the Fund's transfer agent and will become
effective with respect to dividends paid after its receipt. Dividends that are
otherwise taxable are taxable to investors whether received in cash or in
additional shares of a Fund. It is anticipated that expenses incurred by each
class of shares of each Fund will differ and, accordingly, that the dividends
distributed with respect to each class will differ.
Shares purchased will begin earning dividends on the business day following
the date on which federal funds are available in payment for such shares. Shares
redeemed will earn dividends through the date of redemption. Net investment
income of the Funds for a Saturday, Sunday or a holiday will be declared as a
dividend on the prior business day. Investors who redeem all or a portion of
Fund shares prior to a dividend payment date will be paid for all dividends
declared but unpaid on those shares at the time of their redemption.
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PURCHASE OF SHARES
SELECT SHARES
Select Shares of each Fund may be purchased at the net asset value per share
next determined after receipt of the purchase order. See "Net Asset Value".
INITIAL INVESTMENTS BY WIRE
Subject to acceptance by the Company, Select Shares of each Fund may be
purchased by wiring federal funds ($250,000 minimum) to Investors Fiduciary
Trust Co. (see instructions below). A completed Account Application should be
forwarded to the Company at the address noted below under "Initial Investments
by Mail" in advance of the wire. For each Fund, notification must be given to
the Company at 1-800-618-9510 prior to 4:15 p.m., New York time, of the wire
date. (Prior notification must also be received from investors with existing
accounts.) Funds should be wired through the Federal Reserve Bank of New York
to:
Investors Fiduciary Trust Co.
127 West 10th Street
Kansas City, Missouri 64105
ABA # 1010-0362-1
Account #7512996
F/B/O The OFFITBANK Investment Fund, Inc.
Ref. (Fund name)
Federal funds purchases will be accepted only on a day on which the Company
and the custodian bank are open for business.
INITIAL INVESTMENTS BY MAIL
Subject to acceptance by the Company, an account may be opened by completing
and signing an Account Application and mailing it to the Company at the address
noted below, together with a check ($250,000 minimum) payable to The OFFITBANK
Investment Fund, Inc.:
The OFFITBANK Investment Fund, Inc.
237 Park Avenue, Suite 910
New York, New York 10017
The Fund(s) to be purchased should be designated on the Account Application.
Subject to acceptance by the Company, payment for the purchase of Select Shares
received by mail will be credited to a shareholder's account at the net asset
value per share of the Fund next determined after receipt. Such payment need not
be converted into federal funds (monies credited to the Company's custodian bank
by a Federal Reserve Bank) before acceptance by the Company.
ADDITIONAL INVESTMENTS
Additional investments may be made at any time (minimum investment $10,000)
by purchasing Select Shares of any Fund at net asset value by mailing a check to
the Company at the address noted under "Initial Investments by Mail" (payable to
The OFFITBANK Investment Fund, Inc.) or by wiring monies to the custodian bank
as outlined above. For each Fund, notification must be given to the Company at
1-800-618-9510 prior to 4:15 p.m., New York time, of the wire date.
SHAREHOLDER ORGANIZATIONS
Select Shares of the Company's Funds may also be sold to corporations or
other institutions such as trusts, foundations or broker-dealers purchasing for
the accounts of others ("Shareholder Organizations"). Investors purchasing and
redeeming shares of the Funds through a Shareholder Organization may be charged
a transaction-based fee or other fee for the services of such organization. Each
Shareholder Organization is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Customers of Shareholder
Organizations should read this Prospectus in light of the terms governing
accounts with their
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organization. The Company does not pay to or receive compensation from
Shareholder Organizations for the sale of Select Shares. The Company's officers
are authorized to waive the minimum initial and subsequent investment
requirements.
ADVISOR SHARES
All purchase orders for Advisor Shares must be placed through a Shareholder
Servicing Agent. Orders for purchases of Advisor Shares will be executed at the
net asset value per share next determined after an order has been transmitted to
and accepted by the Company's distributor. Advisor Shares are subject to such
investment minimums and other terms and conditions as may be imposed by
Shareholder Servicing Agents from time to time. Shareholder Servicing Agents may
offer additional services to their customers. For further information as to how
to direct a Shareholder Servicing Agent to purchase Advisor Shares of any Fund
on his/her behalf, a customer should contact his/her Shareholder Servicing Agent
or the Company's distributor.
OTHER PURCHASE INFORMATION
The Company reserves the right, in its sole discretion, to suspend the
offering of shares of the Funds or to reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interests of
the Company.
Purchases of a Fund's shares will be made in full and fractional shares of
the Fund calculated to three decimal places. In the interest of economy and
convenience, certificates for shares will not be issued except at the written
request of the shareholder. Certificates for fractional shares, however, will
not be issued.
REDEMPTION OF SHARES
SELECT SHARES
Select Shares of each Fund of the Company may be redeemed by mail, or, if
authorized, by telephone. No charge is made for redemptions. The value of Select
Shares redeemed may be more or less than the purchase price, depending on the
market value of the investment securities held by the Fund.
BY MAIL
Each Fund will redeem its Select Shares at the net asset value next
determined after the request is received in "good order". The net asset values
per share of the Company's Funds are determined as of 4:15 p.m., New York time,
on each day that the New York Stock Exchange, Inc. (the "NYSE"), the Company and
the Distributor are open for business. Requests should be addressed to The
OFFITBANK Investment Fund, Inc., 237 Park Avenue, Suite 910, New York, New York
10017.
Requests in "good order" must include the following documentation:
(a) the share certificates, if issued;
(b) a letter of instruction, if required, or a stock assignment
specifying the number of shares or dollar amount to be redeemed,
signed by all registered owners of the shares in the exact names in which
they are registered;
(c) any required signature guarantees (see "Signature Guarantees" below);
and
(d) other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit sharing plans and other organizations.
SIGNATURE GUARANTEES
To protect shareholder accounts, the Company and its transfer agent from
fraud, signature guarantees are required to enable the Distributor to verify the
identity of the person who has authorized a redemption from an account.
Signature guarantees are required for (1) redemptions where the proceeds are to
be sent to someone other than the registered shareholder(s) and the registered
address, and (2) share transfer requests. Shareholders may contact the Company
at 1-800-618-9510 for further details.
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BY TELEPHONE
Provided the Telephone Redemption Option has been authorized, a redemption
of Select Shares may be requested by calling the Company at 1-800-618-9510 and
requesting that the redemption proceeds be mailed to the primary registration
address or wired per the authorized instructions. Select Shares cannot be
redeemed by telephone if share certificates are held for those shares. If the
Telephone Redemption Option or the Telephone Exchange Option (as described
below) is authorized, the Company and its transfer agent may act on telephone
instructions from any person representing himself or herself to be a shareholder
and believed by the Company or its transfer agent to be genuine. The transfer
agent's records of such instructions are binding and shareholders, not the
Company or its transfer agent, bear the risk of loss in the event of
unauthorized instructions reasonably believed by the Company or its transfer
agent to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated are genuine and, if it does not, it may be liable
for any losses due to unauthorized or fraudulent instructions. The procedures
employed by the Company in connection with transactions initiated by telephone
include tape recording of telephone instructions and requiring some form of
personal identification prior to acting upon instructions received by telephone.
SYSTEMATIC WITHDRAWAL PLAN
An owner of Select Shares with a net asset value of $10,000 or more shares
of a Fund may elect to have periodic redemptions made from his/her account to be
paid on a monthly, quarterly, semiannual or annual basis (the "Systematic
Withdrawal Plan", or the "Plan"). The maximum withdrawal per year under the
Systematic Withdrawal Plan is 12% of the account value at the time of the
election. A number of Select Shares sufficient to make the scheduled redemption
will normally be redeemed on the date selected by the shareholder. Depending on
the size of the payment requested and fluctuations in the net asset value of the
shares redeemed, redemptions for the purpose of making payments under the
Systematic Withdrawal Plan may reduce or even exhaust the account. A shareholder
may request that the payments under the Plan be sent to a predesignated bank or
other designated party.
ADVISOR SHARES
All redemption orders for Advisor Shares must be placed through a
Shareholder Servicing Agent in accordance with instructions or limitations
pertaining to an investor's account with his/her Shareholder Servicing Agent.
Redemption orders for Advisor Shares are effected at the net asset value next
determined after the order is received by the Company's distributor. While no
redemption fee is imposed by the Funds, Shareholder Servicing Agents may charge
their customers' accounts for redemption services. A customer should contact
his/her Shareholder Servicing Agent or the Company's distributor for further
information regarding redemption of Advisor Shares, including the availability
of wire or telephone redemption privileges, or whether the customer may elect to
participate in a systematic withdrawal plan.
FURTHER REDEMPTION INFORMATION
Redemption proceeds for shares of the Company recently purchased by check
may not be distributed until payment for the purchase has been collected, which
may take up to fifteen business days from the purchase date. Shareholders can
avoid this delay by utilizing the wire purchase option.
Other than as described above, payment of the redemption proceeds will be
made within seven days after receipt of an order for a redemption. The Company
may suspend the right of redemption or postpone the date at times when the NYSE
or the bond market is closed or under any emergency circumstances as determined
by the Commission.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Company to make payment
wholly or partly in cash, the Company may pay the redemption proceeds in whole
or in part by a distribution in-kind of readily marketable securities held by a
Fund in lieu of cash in conformity with applicable rules of the Commission.
Investors generally will incur brokerage charges on the sale of portfolio
securities so received in payment of redemptions.
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SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Shares of each class of any Fund may be exchanged for shares of the same
class of any other Fund or for shares of the same class of the Company's other
portfolios that are listed on the cover page of this Prospectus based on the
respective net asset values of the shares involved. The exchange privilege is
only available, however, with respect to the Funds that are registered for sale
in a shareholder's state of residence. In addition, with respect to Select
Shares, shareholders must transfer a minimum of $50,000 of assets between Funds
for each transfer. The Funds impose no exchange fees. Exchange requests with
respect to Select Shares should be sent to The OFFITBANK Investment Fund, Inc.,
237 Park Avenue, Suite 910, New York, New York 10017 or, if the Telephone
Exchange Option has been authorized, by calling the Company at 1-800-618-9510.
See "Redemption of Shares--By Telephone" above. Shareholders should note that an
exchange between Funds is considered a sale and purchase of shares for tax
purposes. A shareholder who holds Advisor Shares should consult his/her
Shareholder Servicing Agent to determine the availability of and terms and
conditions imposed on exchanges with the other Funds and portfolios of the
Company.
TRANSFER OF REGISTRATION
The registration of Company shares may be transferred by writing to The
OFFITBANK Investment Fund, Inc., 237 Park Avenue, Suite 910, New York, New York
10017. As in the case of redemptions, the written request must be received in
good order as defined above.
NET ASSET VALUE
The net asset value per share for each class of shares of each Fund is
calculated once daily at 4:15 p.m., New York time, Monday through Friday, except
on days on which the NYSE is closed. The NYSE currently is scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas or on the preceding
Friday or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. The net asset value per share for each class of shares of
each Fund is determined as of the close of regular trading on the NYSE and is
computed by dividing the value of the net assets attributable to each class of
such Fund by the total number of shares of the class of the Fund outstanding.
Debt securities held by a Fund generally are valued based on quoted bid prices.
Short-term debt investments having maturities of 60 days or less are amortized
to maturity based on their cost.
Securities for which market quotations are not readily available are valued
at fair value determined in good faith by or under the direction of the
Company's Board of Directors. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics.
TAXES
Each Fund intends to qualify for taxation as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code") and to
satisfy conditions under the Code that will enable interest from municipal
obligations, which is exempt from regular federal income taxes in the hands of
each Fund, to qualify as "exempt-interest dividends" when distributed to such
Fund's shareholders. Under the Code, such dividends are exempt from regular
federal income taxes. If so qualified, each Fund will not be subject to federal
income taxes with respect to net investment income and net realized long-term
capital gains, if any, that are distributed to its shareholders, PROVIDED that
the Fund distributes each taxable year (i) at least 90% of its investment
company taxable income (as that term is defined in the Code, without regard to
the deduction for dividends paid), and (ii) at least 90% of the excess of its
tax-exempt interest income net of certain deductions allocable to such income.
Each Fund will be treated as a separate entity for federal income tax purposes,
and thus the provisions of the Code applicable to regulated investment companies
generally will be applied to each Fund separately, rather than to the Company as
a whole. In
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addition, net realized long-term capital gains, investment company taxable
income and operating expenses will be determined separately for each Fund.
Dividends, either in cash or reinvested in shares, paid by a Fund from ordinary
and net short-term capital gains will be taxable to shareholders as ordinary
income.
Whether paid in cash or additional shares of a Fund, and regardless of the
length of time the shares in such Fund have been owned by the shareholder,
distributions from long-term capital gains are taxable to shareholders as such.
Shareholders are notified annually by the Company as to federal tax status of
dividends and distributions paid by a Fund. Such dividends and distributions may
also be subject to state and local taxes.
Exchanges and redemptions of shares in a Fund are generally taxable events
for federal income tax purposes. Individual shareholders may also be subject to
state and municipal taxes on such exchanges and redemptions.
Each Fund intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of a non-deductible 4% federal excise
tax. To do so, each Fund intends to distribute an amount at least equal to (i)
98% of its calendar year ordinary income, (ii) 98% of its capital gains net
income (the excess of short and long-term capital gain over short and long-term
capital loss) for the one-year period ending October 31st, and (iii) 100% of any
undistributed ordinary or capital gain net income from the prior calendar year.
Although dividends generally will be treated as distributed when paid, dividends
declared in October, November or December, payable to shareholders of record on
a specified date in one of those months and paid during the following January
will be treated as having been distributed by a Fund (and received by the
shareholders) on December 31 of the year declared.
A Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number, (ii) the Internal Revenue Service ("IRS") notifies the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (iii)
when required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding.
Although exempt-interest dividends paid by each Fund may be excluded by
shareholders of such Fund from their gross income for regular federal income tax
purposes, under the Code all or a portion of such dividends may be (i) a
preference item for purposes of the alternative minimum tax, (ii) a component of
the "ACE" adjustment for purposes of determining the amount of corporate
alternative minimum tax or (iii) a factor in determining the extent to which a
shareholder's Social Security benefits are taxable. Moreover, the receipt of
exempt-interest dividends from each Fund may increase a corporate shareholder's
liability for environmental taxes under Section 59A of the Code and may also
affect the federal tax liability of certain foreign corporations, S Corporations
and insurance companies. Furthermore, under the Code, interest on indebtedness
incurred or continued to purchase or carry portfolio shares, which interest is
deemed to relate to exempt-interest dividends, will not be deductible by
shareholders of the Fund for federal income tax purposes.
Each Fund may each hold without limit certain private activity bonds issued
after August 7, 1986. Shareholders must include, as an item of tax preference,
the portion of dividends paid by the Fund that is attributable to interest on
such bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the 26% or 28% alternative minimum tax
applicable to individuals and the 20% alternative minimum tax and the
environmental tax applicable to corporations. Corporate shareholders must also
take all exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum tax and environmental tax applicable
to corporations is imposed at the rate of .12% on
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<PAGE>
the excess of the corporation's modified federal alternative minimum taxable
income over $2,000,000. Shareholders receiving Social Security benefits should
note that all exempt-interest dividends will be taken into account in
determining the taxability of such benefits.
Each Fund intends that substantially all dividends and distributions it pays
to its shareholders will be designated as exempt-interest dividends and as such
will be exempt from regular federal income taxes. However, to the extent each
Fund earns ordinary income from taxable investments or gains attributable to
accrued market discount or realizes capital gains, some portion of its dividends
and distributions may not qualify as exempt-interest dividends and may be
subject to regular federal income taxes.
The exemption of exempt-interest dividend income from regular federal income
taxation does not necessarily result in similar exemptions for such income under
the income or other tax laws of state or local taxing authorities. In general,
states exempt from state income tax only that portion of any exempt-interest
dividend that is derived from interest received by a regulated investment
company on its holdings of obligations issued by that state or its political
subdivisions and instrumentalities and other obligations exempt from state
taxation by federal law.
A notice detailing the tax status of dividends and distributions paid by
each of the Funds will be mailed annually to each Fund's shareholders. As part
of this notice, the Fund will report to its shareholders the percentage of
interest income earned by the Fund during the preceding year on tax-exempt
obligations indicating, on a state-by-state basis, the source of such income.
CALIFORNIA STATE TAXATION. If at the close of each quarter of the
California Municipal Fund's taxable year at least 50% of the value of the Fund's
total assets consists of obligations of California issuers, shareholders of the
Fund who are subject to California personal income tax will not be subject to
such tax to the extent that distributions from the Fund are attributable to
tax-exempt interest from such California issuer obligations and other
obligations exempt from state taxation by federal law. If such distributions are
received by a corporation subject to California franchise tax, however, the
distributions will be includable in its gross income for purposes of determining
its California franchise tax. Corporations subject to California corporate
income tax may, in certain circumstances, be subject to such tax with respect to
distributions from the California Municipal Fund. Shares of the Fund will be
exempt from local property taxes in California.
To the extent shareholders are obligated to pay state or local taxes other
than to California, dividends received from the Fund may be subject to such
taxation.
NEW YORK STATE AND LOCAL TAXATION. Exempt-interest dividends paid to
shareholders of the New York Municipal Fund will not be subject to New York
State and New York City personal income taxes to the extent they represent
interest income directly attributable to federally tax-exempt obligations of the
State of New York and its political subdivisions and instrumentalities and other
obligations exempt from state taxation by federal law. The Fund intends that
substantially all of the dividends it designates as exempt-interest dividends
will also be exempt from New York State and New York City personal income taxes.
To the extent shareholders are obligated to pay state or local taxes other than
to New York, dividends received from the Fund may be subject to such taxation.
Similarly, exempt-interest dividends paid to shareholders who are residents of
Yonkers will not be subject to the City of Yonkers personal income tax
surcharge, except and to the extent they are subject to the New York State
personal income tax on such income.
Corporate shareholders subject to New York State franchise tax or New York
City general corporation tax will be required to include all dividends received
from the Fund (including exempt-interest dividends) as net income subject to
such taxes. Furthermore, for purposes of calculating a corporate shareholder's
liability for such taxes under the alternative tax base measured by business and
investment capital, such shareholder's shares of the Fund will be included in
computing such shareholder's investment capital.
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Shareholders will not be subject to the New York City unincorporated
business tax solely by reason of their ownership of shares in the Fund. If a
shareholder is subject to the New York City unincorporated business tax, income
and gains derived from the Fund will be subject to such tax, except for
exempt-interest dividend income that is directly attributable to interest on New
York Municipal Securities. Shares of the Fund will be exempt from local property
taxes in New York State and New York City.
----------------------------
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide.
Investors should consult their tax advisers concerning a prospective investment
in the Funds.
PERFORMANCE INFORMATION
From time to time the Funds may advertise certain information about their
performance. The Funds may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Funds may make available information as to
their respective "yield" and "effective yield" over a thirty-day period, as
calculated in accordance with the Commission's prescribed formula. The
"effective yield" assumes that the income earned by an investment in a Fund is
reinvested, and will therefore be slightly higher than the yield because of the
compounding effect of this assumed reinvestment. Total return and yield
quotations are computed separately for each class of shares of a Fund. Each Fund
presents performance information for each class of shares commencing with the
Fund's inception. Performance information for each class of shares may also
reflect performance for time periods prior to the introduction of such class,
and the performance for such prior time periods will not reflect any fees and
expenses payable by such class that were not borne by the Fund prior to the
introduction of such class. The Funds may also present from time to time their
respective tax-equivalent yields. The tax-equivalent yield is calculated by
determining the portion of yield which is tax-exempt and calculating the
equivalent taxable yield and adding to such amount any fully taxable yield.
The performance of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices. The performance information may also include
evaluations of the Funds published by nationally recognized ranking services and
by various national or local financial publications, such as BUSINESS WEEK,
FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY, THE WALL STREET JOURNAL,
BARRON'S, CHANGING TIMES, MORNINGSTAR, MUTUAL FUND VALUES, U.S.A. TODAY or THE
NEW YORK TIMES or other industry or financial publications.
A FUND'S PERFORMANCE INFORMATION IS HISTORICAL, WILL FLUCTUATE AND SHOULD
NOT BE CONSIDERED AS REPRESENTATIVE OF FUTURE RESULTS. The Commission's
formulas for calculating performance are described under "Performance
Information" in the Statement of Additional Information.
ADDITIONAL INFORMATION
ORGANIZATION AND CAPITAL STOCK
The Company was incorporated under the laws of the State of Maryland on
September 8, 1993. The Company operates as an open-end investment company and is
not authorized to engage in the business of banking. The authorized capital
stock of the Company consists of 10,000,000,000 shares having a par value of
$.001 per share. The Company's Articles of Incorporation, together with Articles
Supplementary, currently authorize the issuance of eight classes of shares,
corresponding to shares of the OFFITBANK High Yield Fund, the OFFITBANK
Investment Grade Global Debt Fund, the OFFITBANK Global Convertible Fund,
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the OFFITBANK Emerging Markets Fund, the OFFITBANK Latin America Total Return
Fund, the OFFITBANK National Municipal Fund, the OFFITBANK California Municipal
Fund and the OFFITBANK New York Municipal Fund. Effective April 29, 1996, all of
the outstanding shares of each of the Funds were reclassified as "Select Shares"
and each Fund began offering a new class of shares, designated as "Advisor
Shares." The per-share net asset value of each class of shares in a Fund is
calculated separately and may differ as between classes as a result of different
fees or expenses payable by the classes and the allocation of certain
class-specific expenses to the appropriate class to which such expenses apply.
The Company's Board of Directors may, in the future, authorize the issuance of
additional classes of capital stock representing shares of additional investment
portfolios or additional classes of shares of the Funds.
Holders of a Fund's shares will vote in the aggregate, and not by series or
class, on all matters and will vote in the aggregate with shareholders of the
Company's other current and future portfolios except where voting by portfolio
or class is required by law or where the matter involved affects only one
portfolio or class. Under the corporate law of Maryland, the Company's state of
incorporation, and the Company's By-Laws (except as required under the 1940
Act), the Company is not required and does not currently intend to hold annual
meetings of shareholders for the election of directors. Shareholders, however,
do have the right to call for a meeting to consider the removal of one or more
of the Company's directors if such a request is made, in writing, by the holders
of at least 10% of the Company's outstanding voting securities. A more complete
statement of the voting rights of shareholders is contained in the Statement of
Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
Prior to the commencement of the Funds' operations, Furman Selz was the sole
and controlling shareholder of the Funds.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York, serves as counsel to the Company.
REPORTS TO SHAREHOLDERS
Each Fund sends shareholders a semi-annual and audited annual report, which
includes listings of investment securities held by the Fund at the end of the
period covered. In an effort to reduce the Funds' printing and mailing costs,
the Funds may consolidate the mailing of their semi-annual and annual reports by
household. This consolidation means that a household having multiple accounts
with the identical address of record would receive a single copy of each report.
When a Fund's annual report is combined with the Prospectus into a single
document, the Fund will mail the combined document to each shareholder to comply
with legal requirements. Any shareholder who does not want this consolidation to
apply to his or her account should contact the Distributor or the Funds'
transfer agent.
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APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") and Fitch
Investors Service, Inc. ("Fitch") that are applicable to certain obligations in
which certain of the Company's Funds may invest.
MOODY'S MUNICIPAL BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. 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.
A--Bonds which are rated A possess many favorable investment qualities 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
characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
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
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.
Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
MOODY'S MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable demand obligations
are designated Variable Moody's Investment
A-1
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Grade (VMIG). This distinction recognizes the differences between short-term
credit risk and long-term risk. Loans bearing the designation MIG 1/VMIG 1 are
of the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the designation MIG 2/VMIG 2 are
of high quality, with margins of protection ample, although not as large as the
preceding group. Loans bearing the designation MIG 3/VMIG 3 are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Market access for refinancing, in particular,
is likely to be less well established.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates or return on funds employed,
conservative capitalization structures 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 a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory 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, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short- term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
S&P MUNICIPAL BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired. The D rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
A-2
<PAGE>
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
S&P MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
Notes rated SP-3 have a speculative capacity to pay principal and interest.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime
rating categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3--Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B--Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
C--This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period.
FITCH MUNICIPAL BOND RATINGS
AAA--Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA by Fitch are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated "AAA".
Because bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated "F-1+".
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A--Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB--Bonds rated BB by Fitch are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B--Bonds rated B by Fitch are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC--Bonds rated CCC by Fitch have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC--Bonds rated CC by Fitch are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C--Bonds rated C by Fitch are in imminent default in payment of interest or
principal.
DDD-DD-and D--Bonds rated DDD, DD or D by Fitch are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential for recovery.
Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the "AAA" category.
FITCH'S COMMERCIAL PAPER RATINGS
F-1+--Exceptionally strong quality. Issues assigned this rating are regarded
as having the strongest degree of assurance for timely payment.
F-1--Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2--Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
"F-1+" or "F-1".
----------------------------
After purchase by a Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by such Fund. Neither event
will require a sale of such security by such Fund. However, the Adviser will
consider such event in its determination of whether such Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or Fitch
may change as a result of changes in such organizations or their rating systems,
the Funds will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
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APPENDIX B
HEDGING AND DERIVATIVES
Each Fund may be authorized to use a variety of investment strategies to
hedge various market risks (such as interest rates and broad or specific market
movements), to manage the effective maturity or duration of debt instruments
held by the Fund, or, with respect to certain strategies, to seek to increase
the Fund's income or gain (such investment strategies and transactions are
referred to herein as "Hedging and Derivatives").
A detailed discussion of Hedging and Derivatives follows below. No Fund
which is authorized to use any of these investment strategies will be obligated,
however, to pursue any of such strategies and no Fund makes any representation
as to the availability of these techniques at this time or at any time in the
future. In addition, a Fund's ability to pursue certain of these strategies may
be limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools. To the extent not otherwise
restricted by the Commission, the CFTC, the Code or its investment objectives
and policies, a Fund may utilize, without limitation, Hedging and Derivatives.
See "Additional Information Concerning Taxes" in the Statement of Additional
Information.
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 Hedging and Derivatives involving
options require segregation of Fund 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, index or other instrument at the exercise price. A Fund's purchase of
a put option on a security, for example, 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 of such instrument by giving
the Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
futures contract, index or other instrument might be intended to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
the instrument. An "American" style put or call option may be exercised at any
time during the option period, whereas a "European" style put or call option may
be exercised only upon expiration or during a fixed period prior to expiration.
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 the options. The discussion below uses the OCC as
an example, but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security, although in the future,
cash settlement may become available. Index options are cash settled for the net
amount, if any, by which the option is "in-the-money" (that is, the amount by
which 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.
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A Fund's inability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would 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 would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are determined by
negotiation of the parties. It is anticipated that any Fund authorized to use
OTC options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security or other instrument underlying an OTC option it
has entered into with a Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction. Thus, the
Adviser must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC option will be met. A Fund will enter into
OTC option transactions only with U.S. 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 that are deemed
creditworthy by the Adviser. In the absence of a change in the current position
of the staff of the Commission, OTC options purchased by a Fund and the amount
of the Fund's obligation pursuant to an OTC option sold by the Fund (the cost of
the sell-back plus the in-the-money amount, if any) or the value of the assets
held to cover such options will be deemed illiquid.
If a 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 held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
If and to the extent authorized to do so, a Fund may purchase and sell call
options on securities that are traded on U.S. securities exchanges and in the
OTC markets, and on securities indices and futures contracts. All calls sold by
a Fund must be "covered", that is, the Fund must own the securities subject to
the call, must own an offsetting option on a futures position, or must otherwise
meet the asset segregation requirements described below for so long as the call
is outstanding. Even though a Fund will receive the option premium to help
protect it against loss, a call sold by the Fund will expose 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 that it might otherwise have sold.
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<PAGE>
Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices and futures contracts. In selling put options, a Fund
faces the risk that it may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate or market changes, for duration management and
for permissible non-hedging purposes. Futures contracts are generally bought and
sold on the commodities exchanges on which they are listed with payment of
initial and variation margin as described below. The sale of a futures contract
creates a firm obligation by a Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to certain 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 that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC and generally will be entered into only
for bona fide hedging, risk management (including duration management) or other
permissible non-hedging purposes. Maintaining a futures contract or selling an
option on a futures contract will typically require a Fund to deposit with a
financial intermediary, as security for its obligations, an amount of cash or
other specified assets ("initial margin") that initially is from 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 daily as the mark-to-market value of the futures contract fluctuates.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
No Fund will enter into a futures contract or option thereon for purposes
other than bona fide hedging if, immediately thereafter, the sum of the amount
of its initial margin and premiums required to maintain permissible non-hedging
positions in futures contracts and options thereon would exceed 5% of the
liquidation value of the Fund's net assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below under "Use
of Segregated and Other Special Accounts".
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, a Fund may purchase and sell call
and put options on securities indices and other financial indices. In so doing,
the Fund 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, options on indices settle by cash
settlement; that is, 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,
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<PAGE>
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
comprising 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.
COMBINED TRANSACTIONS
If and to the extent authorized to do so, a Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple interest rate transactions and any combination of
futures, options and interest rate transactions, instead of a single Hedging and
Derivatives transaction, as part of a single or combined strategy when, in the
judgment of the Adviser, it is in the best interests of the 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 will normally
be entered into by a Fund based on the Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase the risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may be authorized to enter into interest rate swaps and the purchase
or sale of related caps, floors and collars. A Fund will enter into these
transactions primarily to seek to preserve a return or spread on a particular
investment or portion of its portfolio, as a duration management technique or to
protect against any increase in the price of securities a Fund anticipates
purchasing at a later date. A Fund will use these transactions for
non-speculative purposes and will not sell interest rate caps or floors if it
does not own securities or other instruments providing the income the Fund may
be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). An index swap is an agreement to
exchange cash flows on a national principal amount based on changes in the
values of the reference index. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate. The
purchase of an interest rate floor entitles the purchaser to receive payments of
interest on a notional principal amount from the party selling the interest rate
floor to the extent that a specified index falls below 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 the floor to the
extent that a specific 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 with a predetermined range of interest rates or values.
Provided the contract so permits, a Fund will usually enter into interest
rate swaps on a net basis, that is, the two payments streams are netted out in a
cash settlement on the payment date or dates specified in the instrument, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. A
Fund will not enter into any swap, cap, floor, collar or other similar
transaction unless the Counterparty is deemed creditworthy by the Adviser. If a
Counterparty defaults, a Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the Adviser based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the
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<PAGE>
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features) and (5) the nature of the
marketplace for trades (including the ability to assign or offset a Fund's
rights and obligations relating to the investment). Such determination will
govern whether a swap will be deemed within the 15% restriction on investments
in securities that are not readily marketable.
Each Fund will maintain cash and appropriate liquid assets (I.E., high grade
debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If a Fund enters into a swap agreement on a
net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If a
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts".
RISK FACTORS
Hedging and Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of the Hedging and Derivatives could result in losses greater than
if they had not been used. Use of put and call options could result in losses to
a 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, or cause a Fund to hold a security
it might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's 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 it will tend to limit any
potential gain to a Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium.
Losses resulting from the use of Hedging and Derivatives will reduce a
Fund's net asset value, and possibly income, and the losses can be greater than
if Hedging and Derivatives had not been used.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Derivatives by a Fund will require, among other
things, that the Fund segregate cash, liquid high grade debt obligations or
other assets with its custodian, or a designated sub-custodian, to the extent
the Fund's obligations are not otherwise "covered" through ownership of the
underlying security or financial instrument. 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 or instruments required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade debt obligations at least equal to the current amount of the obligation
must be segregated with the custodian or sub-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. A call option on
securities written by a Fund, for example, 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
debt obligations 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 that correlate with the index or to segregate liquid
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<PAGE>
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by a Fund
will require the Fund to segregate liquid high grade debt obligations equal to
the exercise price.
OTC options entered into by a Fund, including those on securities, financial
instruments or indices, and OCC-issued and exchange-listed index options will
generally provide for cash settlement, although a Fund will not be required to
do so. As a result, when a Fund sells these instruments it will segregate an
amount of assets equal to its obligations under the options. OCC-issued and
exchange-listed options sold by a Fund other than those described above
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 on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or to pay the amount owed at the expiration of an index-based
futures contract. These assets may consist of cash, cash equivalents, liquid
high grade debt securities or other acceptable assets. A Fund will accrue the
net amount of the excess, if any, of its obligations relating to swaps over its
entitlements with respect to each swap on a daily basis and will segregate with
its custodian, or designated sub-custodian, an amount of cash or liquid high
grade debt obligations having an aggregate value equal to at least the accrued
excess. Caps, floors and collars require segregation of assets with a value
equal to a Fund's net obligation, if any.
Hedging and Derivatives may be covered by means other than those described
above when consistent with applicable regulatory policies. A Fund may also enter
into offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Hedging and Derivatives. A Fund could purchase a put option, for example, 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 it holds a
futures contracts or forward contract, a Fund could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Hedging and Derivatives may also be
offset in combinations. If the offsetting transaction terminates at the time of
or after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
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<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
- -----------------------------------------------------------------------------
OFFICERS AND DIRECTORS
Morris W. Offit
CHAIRMAN OF THE BOARD, PRESIDENT AND
DIRECTOR
Edward J. Landau
DIRECTOR
The Very Reverend
James Parks Morton
DIRECTOR
Wallace Mathai-Davis
SECRETARY AND TREASURER
John J. Pileggi
ASSISTANT TREASURER
Joan V. Fiore
ASSISTANT SECRETARY
Sheryl Hirschfeld
ASSISTANT SECRETARY
Gordon Forrester
ASSISTANT TREASURER
INVESTMENT ADVISOR
OFFITBANK
520 Madison Avenue
New York, NY 10022-4213
DISTRIBUTOR
OFFIT Funds Distributor, Inc.
230 Park Avenue
New York, NY 10169
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3909
ADMINISTRATOR, TRANSFER AND DIVIDEND DISBURSING
AGENT
Furman Selz LLC
230 Park Avenue
New York, NY 10169
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
<PAGE>
The OFFITBANK Investment Fund, Inc.
237 Park Avenue Suite 910 New York NY 10017
212 758 9600
OF0295
<PAGE>
PART B
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
237 Park Avenue, Suite 910
New York, New York 10017
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
April 29, 1996
The OFFITBANK Investment Fund, Inc. (the "Company") is a no-load mutual
fund consisting of eight portfolios offering a variety of investment
alternatives. This Statement of Additional Information relates to the following
three portfolios:
OFFITBANK National Municipal Fund
OFFITBANK California Municipal Fund
OFFITBANK New York Municipal Fund
(individually, a "Fund", and collectively, the "Funds"). This Statement of
Additional Information sets forth information about the Company applicable to
each of the three Funds.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Company's
Prospectus dated April 29, 1996 (the "Prospectus"). This Statement of Additional
Information contains additional information to that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or calling the Company at the
address and telephone number set forth above.
Information about the Company's five other portfolios, OFFITBANK High Yield
Fund, OFFITBANK Investment Grade Global Debt Fund, OFFITBANK Global Convertible
Fund, OFFITBANK Emerging Markets Fund and OFFITBANK Latin America Total Return
Fund, is contained in a Prospectus and related Statement of Additional
Information each dated April 29, 1996. The Prospectus and Statement of
Additional Information relating to these portfolios may be obtained without
charge by writing or calling the Company at the address and the telephone number
set forth above.
<PAGE>
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TABLE OF CONTENTS
Page
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS . . . . . . . . . . . . . . 2
ADDITIONAL RISK CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . 11
SPECIAL FACTORS AFFECTING THE CALIFORNIA MUNICIPAL FUND . . . . . . . . . . 12
SPECIAL FACTORS AFFECTING THE NEW YORK MUNICIPAL FUND . . . . . . . . . . . 23
INVESTMENT LIMITATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 55
MANAGEMENT OF THE FUND. . . . . . . . . . . . . . . . . . . . . . . . . . . 57
DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES. . . . . . . . . . . . 60
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 62
PURCHASE OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
PERFORMANCE CALCULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 64
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . 66
SHAREHOLDER SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
The following information relates to or supplements the description of the
Funds' investment policies contained in the Prospectus.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. A repurchase agreement is a
transaction in which the seller of a security commits itself at the time of the
sale to repurchase that security from the buyer at a mutually agreed upon time
and price. A Fund will enter into repurchase agreements only with dealers,
domestic banks or recognized financial institutions which, in the opinion of the
Adviser based on guidelines established by the Company's Board of Directors,
present minimal credit risks. The Adviser will monitor the value of the
securities underlying the repurchase agreement at the time the transaction is
entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always exceeds the
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repurchase price. In the event of default by the seller under the repurchase
agreement, the Fund may incur costs and experience time delays in connection
with the disposition of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. A reverse
repurchase agreement is a borrowing transaction in which the Fund transfers
possession of a security to another party, such as a bank or broker/dealer, in
return for cash, and agrees to repurchase, the security in the future at an
agreed upon price, which includes an interest component. Whenever a Fund enters
into reverse repurchase agreements as described in the Prospectus, they will
place in a segregated custodian account liquid assets having a value equal to
the repurchase price (including accrued interest) and will subsequently monitor
the account to ensure such equivalent value is maintained. Reverse repurchase
agreements are considered to be borrowings by the Funds under the 1940 Act.
BORROWING
Each Fund's borrowings will not exceed 25% of such Fund's total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowings and may use the proceeds of such borrowings for investment
purposes. Each Fund may borrow for leveraging purposes. Any borrowing by a Fund
may cause greater fluctuation in the value of its shares than would be the case
if the Funds did not borrow. In the event that a Fund employs leverage, it would
be subject to certain additional risks. Use of leverage creates an opportunity
for greater growth of capital but would exaggerate any increases or decreases in
a Fund's net asset values. When the income and gains on securities purchased
with the proceeds of borrowings exceed the costs of such borrowings, the Fund's
earnings or net asset values will increase faster than otherwise would be the
case; conversely, if such income and gains fail to exceed such costs, the Fund's
earnings or net asset values would decline faster than would otherwise be the
case.
LOANS OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. Securities loans are made to broker/dealers or institutional investors
pursuant to agreements requiring that the loans continuously be secured by
collateral at least equal at all times to the value of the securities lent plus
any accrued interest, "marked to market" on a daily basis. The collateral
received will consist of cash, U.S. short-term government securities, bank
letters of credit or such other
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collateral as may be permitted under the Fund's investment program and by
regulatory agencies and approved by the Company's Board of Directors. While the
securities loan is outstanding, the Fund will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Fund has a right to call each loan and obtain the securities on five business
days' notice. To the extent applicable, the Fund will not have the right to vote
equity securities while they are being lent, but it will call in a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
only will be made to firms deemed by the Adviser to be of good standing and will
not be made unless, in the judgment of the Adviser, the consideration to be
earned from such loans would justify the risk.
UNITED STATES GOVERNMENT OBLIGATIONS
Except for temporary defensive purposes, no Fund will invest more than 35%
of its net assets in securities issued or guaranteed by the U.S. government or
by its agencies or instrumentalities. Such securities in general include a wide
variety of U.S. Treasury obligations consisting of bills, notes and bonds, which
principally differ only in their interest rates, maturities and times of
issuance. Securities issued or guaranteed by U.S. government agencies and
instrumentalities are debt securities issued by agencies or instrumentalities
established or sponsored by the U.S. government.
In addition to the U.S. Treasury obligations described above, each Fund may
invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith
and credit of the U.S. Treasury (E.G., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (E.G., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(E.G., obligations of the Federal Home Loan
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Mortgage Corporation). In the case of obligations not backed by the full faith
and credit of the U.S. Treasury, the agency issuing or guaranteeing the
obligation is principally responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and
that have been established or sponsored by the U.S. government include, in
addition to those identified above, the Bank for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
Bank obligations that may be purchased by each Fund includes certificates
of deposit, bankers' acceptances and fixed time deposits. A certificate of
deposit is a short-term negotiable certificate issued by a commercial bank
against funds deposited in the bank and is either interest-bearing or purchased
on a discount basis. A banker's acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of U.S. banks or foreign
banks which are payable at a stated maturity date and bear a fixed rate of
interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. The Funds do not consider fixed time deposits illiquid
for purposes of the restriction on investment in illiquid securities.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be made
and the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation.
VARIABLE AND FLOATING RATE INSTRUMENTS
Securities purchased by each Fund may include variable and floating rate
instruments, which provide for adjustments in the
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interest rate on certain reset dates or whenever a specified interest rate index
changes, respectively. Variable and floating rate instruments are subject to the
credit quality standards described in the Prospectus. In some cases the Fund may
require that the obligation to pay the principal of the instrument be backed by
a letter or line of credit or guarantee. Although a particular variable or
floating rate demand instrument might not be actively traded in a secondary
market, in some cases, the Fund may be entitled to principal on demand and may
be able to resell such notes in the dealer market. With respect to the floating
and variable rate notes and demand notes described in the Prospectus, the
Adviser will consider the earning power, cash flows and other liquidity ratios
of the issuers or guarantors of such notes and will continuously monitor their
financial ability to meet payment obligations when due.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
INTERESTS
Each Fund may invest in municipal leases, certificates of participation and
other participation interests. A municipal lease is an obligation in the form
of a lease or installment purchase which is issued by a state or local
government to acquire equipment and facilities. Income from such obligations is
generally exempt from state and local taxes in the state of issuance. Municipal
leases frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover a Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to
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be made by the state or political subdivision under such leases or installment
purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' 15% limitation on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such limitation. In determining the
liquidity of municipal lease obligations and certificates of participation, the
Adviser will consider a variety of factors including: (1) the willingness of
dealers to bid for the security; (2) the number of dealers willing to purchase
or sell the obligation and the number of other potential buyers; (3) the
frequency of trades or quotes for the obligation; and (4) the nature of the
marketplace trades. In addition, the Adviser will consider factors unique to
particular lease obligations and certificates of participation affecting the
marketability thereof. These include the general creditworthiness of the
issuer, the importance to the issuer of the property covered by the lease and
the likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by a Fund.
Each Fund may purchase participations in Municipal Securities held by a
commercial bank or other financial institution. Such participations provide a
Fund with the right to a pro rata undivided interest in the underlying Municipal
Securities. In addition, such participations generally provide a Fund with the
right to demand payment, on not more than seven days' notice, of all or any part
of such Fund's participation interest in the underlying Municipal Security, plus
accrued interest. Each Fund will only invest in such participations if, in the
opinion of bond counsel, counsel for the issuers of such participations or
counsel selected by the Adviser, the interest from such participations is exempt
from regular federal income tax and California income tax, in the case of the
California Municipal Fund, or New York State, New York City and City of Yonkers
personal income tax, in the case of the New York Municipal Fund.
PRE-REFUNDED MUNICIPAL SECURITIES
Each Fund may invest in pre-refunded Municipal Securities. The principal
of and interest on pre-refunded Municipal Securities are no longer paid from the
original revenue source for the securities. Instead, the source of such
payments is typically an escrow fund consisting of obligations issued or
guaranteed by the U.S. Government. The assets in the escrow fund are derived
from the proceeds of refunding bonds issued by the same issuer as the pre-
refunded Municipal Securities. Issuers of
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Municipal Securities use this advance refunding technique to obtain more
favorable terms with respect to securities that are not yet subject to call or
redemption by the issuer. For example, advance refunding enables an issuer to
refinance debt at lower market interest rates, restructure debt to improve cash
flow or eliminate restrictive covenants in the indenture or other governing
instrument for the pre-refunded Municipal Securities. However, except for a
change in revenue source from which principal and interest payments are made,
the pre-refunded Municipal Securities remain outstanding on their original terms
until they mature or are redeemed by the Issuer. Pre-refunded Municipal
Securities are usually purchased at a price which represents a premium over
their face value.
TENDER OPTION BONDS
Each Fund may invest in tender option bonds. A tender option bond is a
Municipal Security (generally held pursuant to a custodial arrangement) having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term-tax-exempt rates. The bond is typically
issued in conjunction with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term, tax-exempt rate. However, an
institution will not be obligated to accept tendered bonds in the event of
certain defaults or a significant downgrade in the credit rating assigned to the
issuer of the bond. The liquidity of a tender option bond is a function of the
credit quality of both the bond issuer and the financial institution providing
liquidity. Tender option bonds are deemed to be liquid unless, in the opinion
of the Adviser, the credit quality of the bond issuer and the financial
institution is deemed, in light of the Fund's credit quality requirements, to be
inadequate.
No Fund will purchase tender option bonds unless at the time of such
purchase the Adviser reasonably expects that (i) based upon its assessment of
current and historical interest rate trends, prevailing short-term tax-exempt
rates will not exceed the stated interest rate on the underlying municipal
obligations at the time of the next tender fee adjustment, and (ii) the
circumstances which might entitle the grantor of a tender option
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to terminate the tender option would not occur prior to the time of the next
tender opportunity. At the time of each tender opportunity, a Fund will exercise
the tender option with respect to any tender option bonds unless the Adviser
reasonably expects that, (a) based upon its assessment of current and historical
interest rate trends, prevailing short-term tax-exempt rates will not exceed the
stated interest rate on the underlying municipal obligations at the time of the
next tender fee adjustment, and (b) the circumstances which might entitle the
grantor of a tender option to terminate the tender option would not occur prior
to the time of the next tender opportunity. Each Fund will exercise the tender
feature with respect to tender option bonds, or otherwise dispose of their
tender option bonds, prior to the time the tender option is scheduled to expire
pursuant to the terms of the agreement under which the tender option is granted.
Each Fund will purchase tender option bonds only when it is satisfied that (a)
the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax-exempt status of the underlying
municipal obligations and (b) payment of any tender fees will not have the
effect of creating taxable income for the Funds.
Each Fund intends to invest in tender option bonds the interest on which
will, in the opinion of bond counsel, counsel for the issuer of interests
therein or counsel selected by the Investment Adviser, be exempt from regular
federal income tax and, in the case of the California Municipal Fund, California
state income tax, or in the case of the New York Municipal Fund, New York State,
New York City and City of Yonkers personal income tax. However, because there
can be no assurance that the Internal Revenue Service (the "Service") will agree
with such counsel's opinion in any particular case, there is a risk that a Fund
will not be considered the owner of such tender option bonds and thus will not
be entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees, in relation to various regulated investment company tax provisions is
unclear. Each Fund intends to manage its portfolio in a manner designed to
eliminate or minimize any adverse impact from the tax rules applicable to these
investments.
AUCTION RATE SECURITIES
Each Fund may invest in auction rate securities. Auction rate securities
consist of auction rate Municipal Securities and auction rate preferred
securities issued by closed-end investment companies that invest primarily in
Municipal Securities. Provided that the auction mechanism is successful,
auction rate securities usually permit the holder to sell the securities in an
auction at par value at specified intervals. The dividend is reset by "Dutch"
auction in which bids are made by broker-dealers
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and other institutions for a certain amount of securities at a specified minimum
yield. The dividend rate set by the auction is the lowest interest or dividend
rate that covers all securities offered for sale. While this process is
designed to permit auction rate securities to be traded at par value, there is
the risk that an auction will fail due to insufficient demand for the
securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Internal
Revenue Code. For purposes of complying with the 35% limitation on each Fund's
investments in securities other than Municipal Securities, auction rate
preferred securities will not be treated as Municipal Securities unless
substantially all of the dividends on such securities are expected to be exempt
from regular federal income taxes and, in the case of the California Fund,
California state income tax, or, in the case of the New York Fund, New York
State, New York City and City of Yonkers personal income tax.
Each Fund's investments in auction rate preferred securities of closed-end
funds are subject to the limitations prescribed by the Investment Company Act of
1940 (the "Act") and certain state securities regulations. These limitations
include a prohibition against acquiring more than 3% of the voting securities of
any other investment company and investing more than 5% of such Fund's assets in
securities of any one investment company or more than 10% of its assets in
securities of all investment companies. Each Fund will indirectly bear its
proportionate share of any management fees paid by such closed-end funds in
addition to the advisory and administration fees payable directly by such Fund.
INSURANCE
Each Fund may invest in "insured" tax-exempt Municipal Securities. Insured
Municipal Securities are those for which scheduled payments of interest and
principal are guaranteed by a private (non-governmental) insurance company. The
insurance only entitles a Fund to receive the face or par value of the
securities held by such Fund. The insurance does not guarantee the market value
of the Municipal Securities or the value of the shares of a Fund.
Each Fund may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security.
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By paying a premium and meeting the insurer's underwriting standards, the bond
issuer is able to obtain a high credit rating (usually, Aaa from Moody's
Investors Service, Inc. ("Moody's") or AAA from Standard & Poor's Ratings Group
("Standard & Poor's") for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are noncancellable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. Each Fund may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or a Fund may itself purchase such a policy from insurers for
bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by the Funds will be obtained only from insurance companies rated, at the time
of purchase, Aaa by Moody's or AAA by Standard & Poor's.
ADDITIONAL RISK CONSIDERATIONS
ILLIQUID SECURITIES
A Fund may invest up to 15% of its net assets in illiquid securities. See
"Limiting Investment Risks" in the Prospectus. The sale of restricted or
illiquid securities require more time and result in higher brokerage charges or
dealer discounts and other selling expenses than the sale of securities eligible
for trading on securities exchanges or in the over-the-counter markets.
Restricted securities often sell at a price lower than similar securities that
are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933 and commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, are liquid or illiquid. The Board has
delegated the function of making day to day determinations of liquidity to the
Adviser, pursuant to guidelines reviewed by the Board. The Adviser takes into
account a number of factors in reaching liquidity decisions, including, but not
limited to: (i) the frequency of trading in the security; (ii) the number of
dealers who make quotes for the security; (iii) the number of dealers who have
undertaken to make
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a market in the security; (iv) the number of other potential purchasers; and (v)
the nature of the security and how trading is effected (E.G., the time needed to
sell the security, how offers are solicited and the mechanics of transfer). The
Adviser will monitor the liquidity of securities in each Fund's portfolio and
report periodically on such decisions to the Board of Directors.
SPECIAL FACTORS AFFECTING THE CALIFORNIA MUNICIPAL FUND
The California Municipal Fund will invest at least 65% of its assets in
California Municipal Securities. The Fund is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Securities. These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters that are described below. The following information provides
only a brief summary of the complex factors affecting the financial situation in
California and is derived from sources that are generally available to investors
and is believed to be accurate. No independent verification has been made of
the accuracy or completeness of any of the following information. It is based
in part on information obtained from various State and local agencies in
California or contained in official statements for various California municipal
obligations.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on California or local
governmental finances generally, will not adversely affect the market value of
California Municipal Securities held in the California Municipal Fund's
portfolio or the ability of particular obligors to make timely payments of debt
service on (or relating to) those securities.
ECONOMIC OVERVIEW
California's economy is the largest among the 50 states and one of the
largest in the world. California's population of about 32 million represented
over 12% of the total United States population and grew by 26% in the 1980s.
Total personal income in California, at an estimated $683 billion in 1993,
accounts for about 13% of all personal income in the nation. Total employment
is almost 14 million, the majority of which is in the service, trade and
manufacturing sectors.
Reports issued by the State Department of Finance and the Commission on
State Finance (the "COSF") indicate that California's economy is suffering its
worst recession since the 1930s, with prospects for recovery slower than for the
nation as a whole. California's tax revenue experience clearly reflects
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sharp declines in employment, income and sales on a scale not seen in over 50
years. After the worst job losses of any post-war recession, non-farm employment
levels are believed to have stabilized by late 1994 and show modest growth in
1995, and pre-recession job levels are not expected to be reached until 1997.
Unemployment is expected to remain well above the national average through 1994.
The largest job losses have been in Southern California, led by declines in the
aerospace and construction industries. The Governor's May 1994 Revision to the
1994-95 Budget (the "May 1994 Revision") reflects signs that California will
start to recover from the recessionary conditions in 1994, with a modest upturn
beginning in 1994 and continuing in 1995. Sectors which are contributing to
California's recovery include construction and related manufacturing, wholesale
and retail trade, transportation and several service industries. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. These trends are expected to continue, and in this year,
much of the restructuring in finance and utilities industries should be nearly
completed. Thus, California believes that its recovery should gain momentum
through 1996.
As a result of these factors, average 1994 nonfarm employment is now
forecast to maintain 1993 levels compared to a projected 0.6% decline forecasted
earlier. Employment in 1995 is expected to rise 1.6%, compared to a previous
estimate of a 0.7% gain.
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8 on
the Richter Scale struck Los Angeles causing significant damage to the public
and private structures and facilities. Although some individuals and businesses
suffered losses totaling in the billions of dollars, the overall effect of the
earthquake is not expected to be serious. The earthquake may have dampened
economic activity briefly during late January and February 1994, but the
rebuilding effects are now adding a small measure of stimulus to the economy.
The full impact of the earthquake on Los Angeles and surrounding areas and
on California's finances has yet to be determined. Preliminarily, however,
total property damage (public and private) is estimated to be in the range of
$20 billion. Federal and state aid and insurance was estimated to provide
reimbursement in excess of one-half that amount, and the Governor has proposed
additional relief to be provided in 1995-96 or beyond. California believes this
effect will not impact its ability to pay the principal of and interest on its
obligations.
CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS
LIMITATION ON TAXES. Certain California Municipal Securities may be
obligations of issuers which rely in whole or
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in part, directly or indirectly, on AD VALOREM property taxes as a source of
revenue. The taxing powers of California local governments and districts are
limited by Article XIIIA of the California Constitution, enacted by the voters
in 1978 and commonly known as "Proposition 13." Briefly, Article XIIIA limits
to 1% of full cash value the rate of AD VALOREM property taxes on real property
and generally restricts the reassessment of property to 2% per year, except upon
new construction or change of ownership (subject to a number of exemptions).
Taxing entities may, however, raise AD VALOREM taxes above the 1% limit to pay
debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% AD VALOREM tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992, the U.S. Supreme
Court announced a decision upholding Proposition 13. Article XIIIA prohibits
local governments from raising revenues through AD VALOREM property taxes above
the 1% limit; it also requires voters of any governmental unit to give two-
thirds approval to levy any "special tax." A court decision, however, allowed
non-voter approved levy of "general taxes" which were not dedicated to a
specific use.
APPROPRIATIONS LIMITS. California and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
California or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" excludes most state subventions to local governments, tax refunds and
some benefit payments such as unemployment insurance. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for
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certain capital outlay projects, (4) appropriations by California of post-1989
increases in gasoline taxes and vehicle weight fees, and (5) appropriations made
in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in California's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. California must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments, including California, are
currently operating near their spending limits, but this condition may change
over time. Local governments may by voter approval exceed their spending limits
for up to four years.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or Article
XIIIB on California Municipal Securities or on the ability of California or
local governments to pay debt service on such California Municipal Securities.
It is not presently possible to predict the outcome of any pending litigation
with respect to the ultimate scope, impact or constitutionality of either
Article XIIIA or Article XIIIB, or the impact of any such determinations upon
state agencies or local governments, or upon their ability to pay debt service
on their obligations. Future initiatives or legislative changes in laws or the
California Constitution may also affect the ability of California or local
issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
As of November 30, 1994, California had approximately $18.4 billion of
general obligation bonds outstanding. In addition, at June 30, 1994, California
had lease-purchase obligations, payable from California's General Fund, of
approximately $5.1 billion. In fiscal year 1993-94, debt service on general
obligation bonds and lease-purchase debt was approximately 5.2% of General Fund
revenues. California has paid the principal of and interest on its general
obligation bonds, lease-purchase debt and short-term obligations when due.
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RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1993-94 were the
California personal income tax (45% of total revenues), the sales tax (36%),
bank and corporation taxes (12%), and the gross premium tax on insurance (2%).
California maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund.
GENERAL. Throughout the 1980s, state spending increased rapidly as
California's population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California's General Fund
revenues (currently about 34%).
Since the start of 1990-91 Fiscal Year, California has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected state tax revenues. It also caused increased expenditures for health
and welfare programs. California also entered the period with a structural
imbalance in its budget with the largest programs supported by the General Fund
(education, health, welfare and corrections) growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. As a
result, California's expenditures exceeded revenues for four of the five fiscal
years ending in 1991-92; revenues and expenditures were about equal in 1992-93.
By June 30, 1993, California's General Fund had an accumulated deficit, on a
budget basis, of approximately $2.8 billion. The Deficit Reduction Plan
incorporated in the 1993-94 Budget Act was to repay this deficit over two years.
As a result of the continuing recession, deficit-reduction goals were not met,
but the General Fund's accumulated deficit was reduced to $2.0 billion at June
30, 1994.
1992-93 FISCAL YEAR. At the outset of the 1992-93 Fiscal Year, California
estimated that approximately $7.9 billion of budget actions would be required to
end the fiscal year without a budget deficit. The difficulty of taking these
actions delayed enactment of a budget for more than two months past the start of
the 1992-93 Fiscal Year. With the failure to enact a budget by July 1, 1992,
California had no legal authority to pay many of its vendors until the budget
was passed; nevertheless, certain obligations (such as debt service, school
apportionments, welfare payments and employee salaries) were payable because of
continuing or special appropriations, or court orders. However, the state
Controller did not have enough cash to pay as they came
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due all of these ongoing obligations, as well as valid obligations incurred in
the prior fiscal year.
Because of the delay in enacting the budget, California could not carry
out its normal cash flow borrowing and, starting on July 1, 1992, the Controller
was required to issue "registered warrants" in lieu of normal warrants backed by
cash to pay many state obligations. Available cash was used to pay
constitutionally mandated and priority obligations. Between July 1 and
September 3, 1992, the Controller issued an aggregate of approximately $3.8
billion of registered warrants all of which were called for redemption by
September 4, 1992 following enactment of the 1992-93 Budget Act and issuance by
California of $3.3 billion of Interim Notes.
The 1992-93 Budget Act, adopted on September 2, 1992, provided for
expenditures of $57.4 billion and consisted of General Fund expenditures of
$40.8 billion and Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimated there would be a balance in the Special Fund for
Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion budget gap was closed through a combination of increased
revenues and transfers and expenditure cuts. The principal reductions were in
health and welfare, K-12 schools and community colleges, state aid to local
governments, higher education (partially offset by increased student fees), and
various other programs. In addition, funds were transferred from special funds,
collections of state revenues were accelerated and other adjustments were made.
As had occurred in the prior two fiscal years, the continuing recession
caused actual revenues and expenditures for the 1992-93 Fiscal Year to vary
greatly from the original projections in the 1992-93 Budget Act. This was
exacerbated by enactment of an initiative measure in November 1992 which
repealed a sales tax for certain candy, snack foods and bottled water, reducing
revenues by $300 million a year ($200 million in 1992-93). While the original
1992-93 Budget Act had projected that revenues would exceed expenditures by
about $2.6 billion, to repay the accumulated budget deficit, by the end of the
Fiscal Year at June 30, 1993, the accumulated budget deficit was essentially
unchanged at $2.8 billion.
1993-94 FISCAL YEAR. The 1993-94 Budget Act, signed on June 30, 1993,
provided for General Fund expenditures of $38.5 billion, a 6.3% decline from the
prior year. Revenues were projected at $40.6 billion, about $400 million below
the prior year. To bring the budget into balance, the 1993-94 Budget Act and
related legislation provided for transfer of $2.6 billion of local property
taxes to school districts, thus reducing General Fund support by an equal
amount; reductions in health and welfare
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expenditures; reductions in support for higher education institutions; a two-
year suspension of the renters' tax credit; and miscellaneous cuts in general
government spending and certain one-time and accounting adjustments. There were
no general state tax increases, but a 0.5% state sales tax scheduled to expire
on June 30, 1994, but which was extended permanently, and dedicated to support
local government public safety costs.
1994-95 FISCAL YEAR. The 1994-95 Budget Act was passed on July 8, 1994,
and provides for an estimated $41.9 billion of General Fund revenues, and $40.9
billion of expenditures. The budget assumes receipt of about $750 million of
new federal assistance for the costs of incarceration, and health and welfare
costs for undocumented immigrants. In late 1994, however, California's
Controller estimated that approximately $407 million of such assistance will not
be received. Other major components of the budget include further reductions in
health and welfare costs, some additional transfers of funds from local
government for the benefit of school districts, and a plan to defer retirement
of $1 billion of the accumulated budget deficit to the 1995-96 fiscal year. The
1994-95 Budget Act contains no tax increases, but a further one-year suspension
of the renter's tax credit, for 1995, was approved.
Because of the accumulated budget deficit over the past several years, the
payment of certain unbudgeted expenditures to schools to maintain constant
per-pupil aid levels, and a reduction of the level of available internal
borrowing, California's cash resources have been significantly depleted. This
has required California to rely on a series of external borrowings for the past
several years to pay its normal expenses, including borrowings which have gone
past the end of the fiscal year. In July, 1994, California borrowed a total of
$7 billion to meet its cash flow requirements for the 1994-95 fiscal year, and
to fund a part of its deficit into the 1995-96 fiscal year. A total of $3
billion of this borrowing matures in June, 1995 and $4 million matures in April,
1996. In order to assure repayment of this borrowing, California enacted
legislation which can lead to automatic, across-the-board cuts in General Fund
expenditures in either the 1994-95 or 1995-96 fiscal years if cash flow
projections made at certain times during those years show deterioration from the
projections of July 1994, when the borrowings were made.
California's severe financial difficulties for the current budget year will
result in continued pressure upon almost all local governments, particularly
school districts and counties which depend on state aid. Despite efforts in
recent years to increase taxes and reduce governmental expenditures, there can
be no assurance that California will not face budget gaps in the future.
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BOND RATING
The ratings on California's general obligation bonds were lowered on July
15, 1994 and they are currently rated "A1" by Moody's and "A" by S&P and Fitch.
Ratings on California's general obligation bonds have fallen gradually since
late 1991, when Moody's and S&P both rated such obligations "AAA". There can be
no assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and that there is no obligation on the part of California
to make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS
California is involved in certain legal proceedings (described in
California's recent financial statements) that, if decided against California,
may require it to make significant future expenditures or may substantially
impair revenues.
ORANGE COUNTY BANKRUPTCY
On December 6, 1994, Orange County, California, and the "Orange County
Investment Pools, an Instrumentality of the County of Orange" filed for
bankruptcy under Chapter 9 of the federal Bankruptcy Code. These filings began
the largest municipal bankruptcy case in United States history. Orange County
and approximately 187 local government entities invested public monies using a
strategy that has resulted in an estimated loss exceeding $2 billion.
The Orange County Treasury managed money for 187 different and separate
governmental agencies (the "Participants"). By early December 1994, the
Participants had deposited approximately $7.5 billion in the Orange County
Treasury. The Participants included cities, school districts, community
colleges, special district accounts, other county governmental accounts and
monies held in trust for the use of the Orange County municipal and superior
court systems. Approximately ten of these entities exist outside of Orange
County. Some local agencies, including Orange County and several school
districts, issued one-year notes solely to invest the borrowed funds in the
Pools. Orange County borrowed $600 million in July 1994 to invest in the Pools,
and five school districts each borrowed in excess of $50 million to invest in
the Pools.
Until the bankruptcy filings, the Orange County Treasurer's strategy was to
use reverse repurchase agreements, combined with investments in structured or
floating interest rate securities, such as "inverse floaters", which effectively
leveraged the Pools
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by a ratio of 2 to 1. This strategy was predicated upon stable, low interest
earning rates. Orange County entered into reverse repurchase agreements, at
short-term rates, to take relatively long-term rate positions which combined
with the structured notes to produce a portfolio highly sensitive to interest
rate movements. By December 1994, an estimated $7.5 billion in deposits with the
Treasurer had been leveraged to over $20 billion. As rates increased, the
returns on long-term obligations no longer exceeded the cost of funds used to
acquire them and their market value declined, as did the market value of the
inverse floaters. Requests for withdrawal of deposited funds, combined with the
negative interest return under the reverse repurchase agreements, generated a
cashflow squeeze which precipitated the Orange County bankruptcy filing.
Both Standard & Poor's and Moody's rated debt that was issued by Orange
County and other municipalities that participated in the Pools. Prior to Orange
County's disclosure that the Pools had large unrealized losses, Orange County's
short-term debt was rated in the highest category, and its long-term debt was
rated very highly, by both Standard & Poor's and Moody's. Following Orange
County's bankruptcy filing on December 6, 1994, Standard & Poor's downgraded its
short-term debt rating of most Orange County debt obligations to "speculative"
and most of its long-term debt to "CCC". Moody's also reacted by initially
suspending its ratings of all Orange County debt, and then on January 6, 1995,
by reinstating and lowering its long-term ratings on certain of orange County's
obligations to Caa and its ratings on various short-term obligations to
"speculative grade" and "not prime".
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number of
California agencies, instrumentalities and political subdivisions of California
that issue municipal obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of California.
STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by California to assist municipal issuers to raise revenues. Through
1990-91, local assistance (including public schools) accounted for approximately
75% of
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General Fund spending. To reduce General Fund support for school districts, the
1992-93 and 1993-94 Budget Acts caused local governments to transfer a total of
$3.9 billion of property tax revenues to school districts, representing all of
the post-Proposition 13 "bailout" aid. The largest share of these transfers
came from counties, and the balance from cities, special districts and
redevelopment agencies. In order to make up part of this shortfall, the
Legislature proposed, and voters approved, extending permanently the 0.5% of the
sales tax, dedicating it to counties and cities for public safety purposes. In
addition, the Legislature has changed laws to relieve local governments of
certain mandates, allowing them to reduce costs.
To the extent California should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. At least one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in August
1990, although such plans were put off after the Governor approved legislation
to provide additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. The Richmond Unified School
District (Contra Costa County) entered bankruptcy proceedings in May 1991 but
the proceedings have been dismissed.
ASSESSMENT BONDS. California Municipal Securities which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Certain California long-term lease
obligations, though typically payable from the general fund of the municipality,
are subject to "abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to
the holders of the certificates
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evidencing the lease obligation in the event abatement occurs. The most common
cases of abatement are failure to complete construction of the facility before
the end of the period during which lease payments have been capitalized and
uninsured casualty losses to the facility (E.G., due to earthquake). In the
event abatement occurs with respect to a lease obligation, lease payments may be
interrupted (if all available insurance proceeds and reserves are exhausted) and
the certificates may not be paid when due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a California receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which California was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the original lease transaction. The trial
court has upheld the validity of the District's lease. The case is likely to be
settled, but if it is not, further appeals may occur. Any ultimate judgment
against the Trustee may have adverse implications for lease transactions of a
similar nature by other California entities.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in state regulations governing cost reimbursements to health care
providers under Medi-Cal (California's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on AD VALOREM property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (E.G., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
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Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay the entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not presently possible to predict the extent to which any such legislation
will be enacted. Nor is it presently possible to determine the impact of any
such legislation on California Municipal Securities in which the California
Municipal Fund may invest, future allocations of state revenues to local
governments or the abilities of state or local governments to pay the interest
on, or repay the principal of, such California Municipal Securities.
Substantially all of California is within an active geologic region subject
to major seismic activity. Any California Municipal Securities in the
California Municipal Fund could be affected by an interruption of revenues
because of damaged facilities, or, consequently, income tax deductions for
casualty losses or property tax assessment reductions. Compensatory financial
assistance could be constrained by the inability of (i) an issuer to have
obtained earthquake insurance coverage at reasonable rates; (ii) an insurer to
perform on its contracts of insurance in the event of widespread losses; or
(iii) the Federal or state government to appropriate sufficient funds within
their respective budget limitations.
SPECIAL FACTORS AFFECTING THE NEW YORK MUNICIPAL FUND
Some of the significant financial considerations relating to the
investments of the New York Municipal Bond Fund in New York municipal securities
are summarized below. The following information constitutes only a brief
summary, does not purport to be a complete description and is largely based on
information drawn from official statements relating to securities offerings of
New York municipal obligations available as of
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the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in such offering statements has not
been independently verified.
NEW YORK STATE
NEW YORK STATE FINANCING ACTIVITIES. There are a number of methods by
which New York State (the "State") may incur debt. Under the State
Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term general obligation borrowing (I.E., borrowing for more than
one year) unless the borrowing is authorized in a specific amount for a single
work or purpose by the New York State Legislature (the "Legislature") and
approved by the voters. There is no limitation on the amount of long-term
general obligation debt that may be so authorized and subsequently incurred by
the State. With the exception of general obligation housing bonds (which must
be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
In April 1993, legislation was also enacted providing for significant
constitutional changes to the long-term financing practices of the State and the
Authorities.
In June 1994, the Legislature passed a proposed constitutional amendment
that would permit the State, within a formula-based cap, to issue revenue bonds,
which would be debt of the State secured solely by a pledge of certain State tax
receipts (including those allocated to State funds dedicated for transportation
purposes), and not by the full faith and credit of the State. In addition, the
proposed amendment would permit multiple purpose general obligation bond
proposals to be proposed on the same ballot, require that State debt be incurred
only for capital projects included in a multi-year capital financing plan and
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Public hearings were held on the proposed constitutional amendment during
1993. Following these hearings, in February 1994, Governor Cuomo and the State
Comptroller recommended a revised constitutional amendment which would further
tighten the ban on lease-purchase and contractual-obligation financing,
incorporate existing lease-purchase and contractual-obligation debt under the
proposed revenue bond cap while simultaneously reducing the size of the cap.
After considering these recommendations, the Legislature passed a revised
constitutional
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amendment which tightens the ban, and provides for a phase-in to a lower cap
(4.4 percent of personal income).
Although the State Senate and Assembly passed the amendment, the voters
defeated it in November 1995.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes ("TRANs"), and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes ("BANs"). TRANs must mature within one year from their dates
of issuance and may not be refunded or refinanced beyond such period. BANS may
only be issued for the purposes and within the amounts for which bonds may be
issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job Development
Authority and the Port Authority of New York and New Jersey. The State has
never been called upon to make any direct payments pursuant to such guarantees.
The constitutional provisions allowing a State-guarantee of certain Port
Authority of New York and New Jersey debt stipulates that no such guaranteed
debt may be outstanding after December 31, 1996.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms, lease-purchase
and contractual-obligation financing, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual
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availability of money to the State for making the payments. The State has also
entered into a contractual-obligation financing arrangement with the New York
Local Government Assistance Corporation ("LGAC") to restructure the way the
States makes certain local aid payments. The State also participates in the
issuance of certificates of participation ("COPs") in a pool of leases entered
into by the State's Office of General Services on behalf of several State
departments and agencies interest in acquiring operational equipment, or in
certain cases, real property.
The State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.
The State also employs moral obligations financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and includes statutory provisions requiring the State, subject
to appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. There has never been a default on
any moral obligation debt of any public authority.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1995-96 fiscal
year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and
$186 million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in COPs during the State's 1995-96
fiscal year for equipment purchases and $14 million for capital purposes. The
projection of the State regarding its borrowings for the 1995-96 fiscal year may
change if circumstances require.
LGAC is authorized to provide net proceeds of up to $529 million during the
State's 1995-96 fiscal year, to redeem notes sold in June 1995.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.7 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1994-95
capital projects. Included therein are borrowings by (i) the Dormitory
Authority of the State of New York ("DA") for State University of New York
("SUNY"), The City University of New York ("CUNY"), and health facilities,
(ii) the New York State
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Medical Care Facilities Finance Agency ("MCFFA") for mental health facilities;
(iii) Thruway Authority for the Dedicated Highway and Bridge Trust Fund and
Consolidated Highway Improvement Program; (iv) UDC for prison and youth
facilities and economic development programs; (v) the Housing Finance Agency
("HFA") for housing programs; and (vi) other borrowings by the Environmental
Facilities Corporation ("EFC") and the Energy Research and Development Authority
("ERDA").
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to aid
financially troubled localities. The Municipal Assistance Corporation for The
City of New York ("MAC"), created to provide financing assistance to New York
City (the "City"), is the only municipal assistance corporation created to date.
To enable MAC to pay debt service on its obligations, MAC receives, subject to
annual appropriation by the Legislature, receipts from the 4% New York State
Sales Tax for the Benefit of New York City, the State-imposed Stock Transfer Tax
and, subject to certain prior liens, certain local assistance payments otherwise
payable to the City. The legislation creating MAC also includes a moral
obligation provision. Under its enabling legislation, MAC's authority to issue
bonds and notes (other than refunding bonds and notes) expired on December 31,
1984.
STATE FINANCIAL OPERATIONS. The State has historically been one of the
wealthiest states in the nation. For decades, however, the State economy has
grown more slowly than that of the nation as a whole, gradually eroding the
State's relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the suburbs and
an influx of generally less affluent residents. Regionally, the older Northeast
cities have suffered because of the relative success that the South and the West
have had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although the State ranks 22nd in the nation for its State tax burden, the
State has the second highest combined state and local tax burden in the United
States. In 1991, total State and local taxes in New York were $3,349 per
capita, compared with $1,475 per capita in 1980. Between 1980 and 1991, State
and local taxes per capita increased at approximately the same rate in the State
as in the nation as a whole with per capita taxes in the State increasing by
127% while such taxes increased 111% in the nation. The State Division of the
Budget ("DOB") believes, however, that it is more informative to describe the
state and local tax burden in terms of its
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relationship to personal income. In 1992, total State and local taxes in New
York were $154.70 per $1,000 of personal income, compared with $152.70 in 1980.
Between 1980 and 1992, State and local taxes per $1,000 of personal income
increased at a slower rate in the State than in the nation as a whole with such
taxes in the State increasing by 1.3 percent while such taxes increased 4
percent in the nation. The burden of State and local taxation, in combination
with the many other causes of regional economic dislocation, may have
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within the State. The State and its localities have used
these taxes to develop and maintain their respective transportation networks,
public schools and colleges, public health systems, other social services, and
recreational facilities. Despite these benefits, the burden of State and local
taxation, in combination with the many other causes of regional economic
dislocation, may have contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within, the State.
The national economy began expanding in 1991 and has added over 7 million
jobs since early 1992. However, the recession lasted longer in the State and
the State's economic recovery has lagged behind the nation's. Although the
State has added approximately 185,000 jobs since November 1992, employment
growth in the State has been hindered during recent years by significant
cutbacks in the computer and instrument manufacturing, utility, defense, and
banking industries. DOB forecasted that national economic growth would weaken,
but not turn negative, during the course of 1995 before beginning to rebound.
This dynamic is often described as a "soft landing."
The national economy achieved the desired "soft landing" in 1995, as growth
slowed from 6.2 percent in 1994 to a rate sufficiently slow to inhibit the
buildup of inflationary pressures. This was achieved without any material pause
in the economic expansion, although recession worries flared in the late spring
and early summer. Growth in the national economy is expected to moderate during
1996. Real GDP grew only 0.9 percent in the fourth quarter of 1995, and there
were declines in the leading economic indicators in four of the past five
months. It is anticipated that slow economic growth will continue through the
first half of 1996 and inflationary pressures will be modest in 1996. Economic
growth will gradually accelerate in the second half of 1996 as the lower level
of interest rates over the last year is expected to stimulate economic activity.
Economic growth, as measured by the nation's nominal GDP, is projected to expand
by 4.3 percent in 1996 versus 4.6 in 1995. In 1992 dollars, real GDP is
expected to grow 1.8 percent as compared with the 2.1 percent growth in 1995.
By either measure, economic growth is projected to be noticeably slower for 1996
than 1995.
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To stimulate economic growth, the State has developed programs, including
the provision of direct financial assistance, designed to assist businesses to
expand existing operations located within the State and to attract new
businesses to the State. In addition, the State has provided various tax
incentives to encourage business relocation and expansion. These programs
include direct tax abatements from local property taxes for new facilities
(subject to locality approval) and investment tax credits that are applied
against the State corporation franchise tax. Furthermore, the State has created
40 "economic development zones" in economically distressed regions of the
States. Businesses in these zones are provided a variety of tax and other
incentives to create jobs and make investments in the zones. There can be no
assurance that these programs will be successful.
From 1994 to 1995 the annual growth rates of most economic indicators for
the State improved. The pace of private sector employment expansion and
personal income and wage growth all accelerated. Government employment fell as
workforce reductions were implemented at federal, State and local levels.
Similar to the nation, some moderation of growth is expected in the year ahead.
Private sector employment is expected to continue to rise, although somewhat
more slowly than in 1995, while public employment should continue to fall,
reflecting government budget cutbacks. Anticipated continued restraint in wage
settlements, a lower rate of employment growth and falling interest rates are
expected to slow personal income growth significantly.
The State's current fiscal year commenced on April 1, 1995, and ends on
March 31, 1996, and is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year (the "1995-96 State Financial Plan")
was formulated on June 20, 1995 and is based on the State's budget as enacted by
the Legislature and signed into law by the Governor. The State Financial Plan
is updated quarterly pursuant to law in July, October and January.
The 1995-96 budget is the first to be enacted in the administration of
Governor George Pataki, who assumed office on January 1, 1995. It is the first
budget in over half a century which proposed and, as enacted, projects an
absolute year-over-year decline in General Fund disbursements. Spending for
State operations is projected to drop even more sharply, by
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4.6 percent. Nominal spending from all State funding sources (I.E., excluding
Federal aid) is proposed to increase by only 2.5 percent from the prior fiscal
year, in contrast to the prior decade when such spending growth averaged more
than 6.0 percent annually.
In his Executive Budget, the Governor indicated that in the 1995-96 fiscal
year, the 1995-96 State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts to
spur economic growth and provide relief for low and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
The 1995-96 State Financial Plan contemplates closing this gap based on the
enacted budget, through a series of actions, mainly spending reductions and cost
containment measures and certain reestimates that are expected to be recurring,
but also through the use of one-time solutions. The 1995-96 State Financial
Plan projects (i) nearly $1.6 billion in savings from cost containment,
disbursement reestimates, and other savings in social welfare programs,
including Medicaid, income maintenance and various child and family care
programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs, capital
projects, the prison system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting school aid and
revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
The following discussion summarizes updates to the 1995-96 State Financial
Plan and recent fiscal years with particular emphasis on the State's General
Fund. Pursuant to statute, the State updates the financial plan at least on a
quarterly basis. Due to changing economic conditions and information, public
statements or reports may be released by the Governor, members of the
Legislature, and their respective staffs, as well as others involved in the
budget process from time to time. Those statements or reports may contain
predictions, projections or other items of information relating to the State's
financial
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condition, including potential operating results for the current fiscal year and
projected baseline gaps for future fiscal years, that may vary materially and
adversely from the information provided herein.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1995-96 fiscal year, the General Fund is expected by the State to
account for approximately 49 percent of total governmental-fund receipts and 71
percent of total governmental-fund disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the 1995-
96 fiscal year. Total receipts are projected to be $33.110 billion, an increase
of $48 million over total receipts in the prior fiscal year. Total General Fund
disbursements are projected to be $33.055 billion, an increase of $344 million
over the total amount disbursed and transferred in the prior fiscal year.
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise more than 40 percent
of total government funds receipts and disbursements in the 1995-96 fiscal year,
about three-quarters of that activity relates to Federally-funded programs.
Projected receipts in this fund type total $25.547 billion, an increase of
$1.316 billion over the prior year. Projected disbursements in this fund type
total $26.002 billion, an increase of $1.641 billion over 1994-95 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $19.209 billion in the
1995-96 fiscal year. Remaining projected spending of $6.793 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority (the "MTA") funded from the proceeds of dedicated
transportation taxes, and costs of a variety of self-supporting programs which
deliver services financed by user fees.
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Capital Projects Funds are used to account for the financial resources used
for the acquisition, construction, or rehabilitation of major State capital
facilities and for capital assistance grants to certain local governments or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1995-96 fiscal year, activity in these
funds is expected to comprise 7 percent of total governmental receipts and
disbursements.
Disbursements from this fund type are projected to increase by $541 million
over prior-year levels, primarily reflecting higher spending for transportation
and mental hygiene projects. The Dedicated Highway and Bridge Trust Fund is
projected to comprise 23 percent of the activity in this fund type--$936 million
in 1995-96--and is the single largest dedicated fund. Projected disbursements
from this dedicated fund reflect an increase of $80 million over 1994-95 levels.
Spending for capital projects will be financed through a combination of sources:
Federal grants (25 percent), public authority bond proceeds (38 percent),
general obligation bond proceeds (9 percent), and current revenues (28 percent).
Total receipts in this fund type are projected at $4.170 billion, not including
$364 million expected to be available from the proceeds of general obligation
bonds.
Debt Service Funds are used to account for the payment of principal of, and
interest on, long-term debt of the State and to meet commitments under lease-
purchase and other contractual-obligation financing arrangements. This fund is
expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1995-96 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund, which
is supported primarily by tax dollars transferred from the General Fund, and
seven other funds. In the 1995-96 fiscal year, total disbursements in this fund
type are projected at $2.506 billion, an increase of $303 million or 13.8
percent. The transfer from the General Fund of $1.583 billion is expected to
finance 63 percent of these payments.
The State contemplates financing the remaining payments by pledged
revenues, including $1.794 billion in taxes, $228 million in dedicated fees, and
$2.200 billion in patient revenues, including transfers of Federal
reimbursements. After impoundment for debt service, as required, $3.481 billion
is expected to be transferred to the General Fund and other funds in support of
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State operations. The largest transfer--$1.761 billion--is made to the Special
Revenue Fund type, in support of operations of the mental hygiene agencies.
Another $1.341 billion in excess sales taxes is expected to be transferred to
the General Fund, following payment of projected debt service on bonds of LGAC.
| The State issued the first of the three required quarterly updates to the
1995-96 cash-basis State Financial Plan on July 28, 1995 (the "First Quarter
Update"). The First Quarter Update projected continued balance in the State's
1995-96 Financial Plan, and incorporated few revisions to the initial State
Financial Plan of June 20, 1995. The economic forecast was unchanged. A number
of small, offsetting changes were made to the annual receipts and disbursements
estimates. The First Quarter Update also incorporated the restatement of three
transactions within the budget so that these transactions conformed with
accounting treatments utilized by the Office of the State Comptroller. These
restatements had the net effect of reducing both General Fund receipts and
disbursements by $251 million; therefore, they had no impact on the closing
balance of the General Fund.
The State issued its second quarterly update to the cash-basis 1995-96
State Financial Plan (the "Mid-Year Update") on October 26, 1995. The Mid-Year
Update projected continued balance in the State's 1995-96 Financial Plan, with
estimated receipts reduced by a net $71 million and estimated disbursements
reduced by a net $30 million as compared to the First Quarter Update. The
resulting General Fund balance decreased from $213 million in the First Quarter
Update to $172 million in the Mid-Year Update, reflecting the expected use of
$41 million from the Contingency Reserve Fund for payments of litigation and
disallowance expenses. The Mid-Year Update also incorporated changes resulting
from implementation of the Governor's Management Review Plan which was released
on October 12, 1995. The Management Review Plan is expected to produce savings
of $148 million in State fiscal year 1995-96, primarily through Medicaid
Utilization controls, consolidation of State agency staffing and office space,
controls on staffing, overtime and contractual expenses, and increased
productivity. Of the $148 million in savings attributable to the Management
Review Plan, $146 million was reflected in low spending from the General Fund
and $2 million was reflected in increased General Fund receipts.
The State revised the cash-basis 1995-96 Financial Plan on December 15,
1995 (the "December 15 Update"), in conjunction with the release of the
Executive Budget for the 1996-97 fiscal year.
The December 15 Update projected continued balance in the 1995-96 General
Fund Financial Plan, with reductions on projected receipts offset by an
equivalent reduction in projected disbursements. Modest changes were made to
the Mid-Year Update,
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reflecting two more months of actual results, deficiency requests by State
agencies (the largest of which is for school aid resulting from revisions to
data submitted by school districts), and administrative efficiencies achieved by
State agencies. Total General Fund receipts are expected to be approximately
$73 million lower than estimated at the time of the Mid-Year Update. Tax
receipts are now projected to be $29.57 billion, $8 million less than in the
earlier plan. Miscellaneous receipts and transfers from other funds are
estimated at $3.15 billion, $65 million lower than in the Mid-Year Update. The
largest single change in these estimates is attributable to the lag in achieving
$50 million in proceeds from sales of State assets, which are unlikely to be
completed prior to the end of the fiscal year.
Projected General Fund disbursements are reduced by a total of $73 million,
with changes made in most major categories of the 1995-96 State Financial Plan.
The reduction in overall spending masks the impact of deficiency requests
totaling more than $140 million, primarily for school aid and tuition assistance
to college students. Offsetting reductions in spending are attributable to the
continued maintenance of strict controls on spending through the fiscal year by
State agencies, yielding savings of $50 million. Reductions of $49 million in
support for capital projects reflect a stringent review of all capital spending.
Reductions of $30 million in debt service costs reflect savings from refundings
undertaken in the current fiscal year, as well as savings from lower interest
rates in the financial market. Finally, the 1995-96 Financial Plan reflects
reestimates based on actual results through November, the largest of which is a
reduction of $70 million in projected costs for income maintenance. This
reduction is consistent with declining caseload projections.
The balance in the General Fund at the close of the 1995-96 fiscal year is
expected to be $172 million, entirely attributable to monies in the Tax
Stabilization Reserve Fund following the required $15 million payment into that
Fund. A $40 million deposit in the Contingency Reserve Fund included as part of
the enacted 1995-96 budget will not be made, and the minor balance of $1 million
currently in the Fund will be transferred to the General Fund. These
Contingency Reserve Fund monies are expected to support payments from the
General Fund for litigation related to the State's Medicaid program, and for
federal disallowances.
Changes in federal aid programs currently pending in Congress are not
expected to have a material impact on the State's 1995-96 Financial Plan,
although prolonged interruptions in the receipt of federal grants could create
adverse developments, the scope of which can not be estimated at this time. The
major remaining uncertainties in the 1995-96 State Financial Plan continue to be
those related to the economy and
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tax collections, which could produce either favorable or unfavorable variances
during the balances of the year.
The State issued its third required quarterly update to the 1995-96 cash-
basis State Financial Plan on January 30, 1996 (the "Third Quarterly Update").
The Third Quarterly Update was published two weeks after the closure of the
Governor's 30-day amendment period, during the Governor revised the 1996-97
State Financial Plan.
The Third Quarterly Update reflected actual results through the third
quarter of the State's fiscal year, quarterly and year-end tax payments received
in December and January, and modest changes in spending to reflect the current
year impact of certain 30-day amendments. The 1995-96 General Fund State
Financial Plan was projected to remain in balance on a cash basis, with both
receipts and disbursements projected to be $47 million higher than in the
December 15 Update. Total taxes were projected to be $29.66 billion, $88
million higher than in the December 15 Update. Miscellaneous receipts and
transfers were expected to total $3.1 billion, down $41 million from the
December 15 Update. Total disbursements were projected to be $32.75 billion.
Spending in Governmental Funds were projected at $63.31 billion, an increase of
$15 million from the December 15 Update.
The Governor presented his 1996-97 Executive Budget to the Legislature on
December 15, 1995, and subsequently amended it. The Executive Budget also
contains financial projections for the State's 1997-98 and 1998-99 fiscal years
and an updated Capital Plan. As provided by the State Constitution, the
Governor submitted amendments to his 1996-97 Executive Budget within 30 days
following submission and after the 30-day amendment period. Those amendments
are reflected in the discussion of the 1996-97 Executive Budget contained in
this Statement of Additional Information. The 1996-1997 Executive Budget was
not adopted by the State Legislature by the statutory deadline of April 1, 1996.
There can be no assurance that the Legislature will enact the Executive Budget
as proposed by the Governor into law, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth in this Statement of Additional Information.
The 1996-97 Financial Plan projects balance on a cash basis in the General
Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $31.32 billion, a
decrease of $1.4 billion from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to other funds are
projected to be $31.22 billion, a decrease of $1.5 billion from spending totals
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projected for the current fiscal year. After adjustments and transfers for
comparability between the 1995-96 and 1996-97 State Financial Plans, the
Executive Budget proposes an absolute year-to-year decline in General Fund
spending of 5.8 percent. Spending from all funding sources (including federal
aid) is proposed to increase by 0.4 percent from the prior fiscal year after
adjustments and transfers for comparability. On April 3, 1996, the State
announced that the General Fund for the State's 1996 fiscal year is expected to
be balanced on a cash basis, with an operating surplus of $445 million. There
can be no assurance that the General Fund will yield such a surplus.
The Executive Budget proposes $3.9 billion in actions to balance the 1996-
97 Financial Plan. Before reflecting any actions proposed by the Governor to
restrain spending, General Fund disbursements for 1996-97 were projected at $35
billion, an increase of $2.3 billion or 7 percent from 1995-96. This increase
would have resulted from growth in Medicaid, inflationary increases in school
aid, higher fixed costs such as pensions and debt service, collective bargaining
agreements, inflation, and the loss of non-recurring resources that offset
spending in 1995-96. Receipts would have been expected to fall by $1.6 billion.
This reduction would have been attributable to modest growth in the State's
economy and underlying tax base, the loss of non-recurring revenues available in
1995-96 and implementation of previously enacted tax reduction programs.
The Executive Budget proposes to close this gap primarily through a series
of spending reductions and cost containment measures. The Executive Budget
projects (i) over $1.8 billion in savings from cost containment and other
actions in social welfare programs, including Medicaid, welfare and various
health and mental programs; (ii) $1.3 billion in savings from a reduced State
General Fund share of Medicaid made available from anticipated changes in the
federal Medicaid program, including an increase in the federal share of
Medicaid; (iii) over $450 million in savings from reforms and cost avoidance in
educational services (including school aid and higher education), while
providing fiscal relief from certain State mandates that increase local
spending; and (iv) $350 million in savings from efficiencies and reductions in
other State programs. The assumption regarding an increased share of federal
Medicaid funding has received bipartisan Congressional support and would benefit
32 states, including New York.
The 1996-97 Financial Plan projects receipts of $31.32 billion and spending
of $31.22 billion, allowing for a deposit of $85 million to the Contingency
Reserve Fund and a required repayment of $15 million to the Tax Stabilization
Reserve Fund.
The Governor has submitted several amendments to the Executive Budget.
These amendments have a nominal impact on the
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State's Financial Plan for 1996-97 and the subsequent years. The net impact of
the amendments leaves unchanged the total estimated amount of General Fund
spending in 1996-97, which continues to be projected at $31.22 billion. All
funds spending in 1996-97 is increased by $68 million, primarily reflecting
adjustments to projections of federal funds, and now totals $63.87 billion.
The budget amendments advanced by the Governor are largely technical
revisions, with General Fund spending increases fully offset by spending
decreases. Reductions in estimated 1996-97 disbursements are recommended
primarily for welfare (associated with updated projections showing a declining
caseload) and debt service (reflecting lower interest rates and recent bond
sales). Disbursement increases are projected for snow and ice control, the AIDS
Institute, Health Department utilization review programs and other items.
Estimated disbursements for other funds are increased to accommodate updated
projections of federal funding in certain categorical grant programs and reduced
for welfare as noted for the General Fund.
On March 15, 1996, two weeks before the start of the 1996-97 fiscal year,
the Governor presented additional amendments to the 1996-97 Executive Budget
which address two potential outcomes of the federal debate on entitlement
reform:
- Contingency Plan -- If the federal government fails to adopt
entitlement changes assumed to produce savings in the Executive Budget
for the State's 1996-97 fiscal year, the Governor has identified $2.01
billion in new or redirected resources to replace these savings in
order to preserve budget balance in the 1996-97 State Financial Plan.
- Balanced Budget Bonus Plan -- If the federal government acts, through
legislation or through waivers of existing federal provisions, and any
necessary conforming changes are adopted by the State Legislature, the
State could receive all or a portion of the $2.01 billion benefit
anticipated in the original 1996-97 Executive Budget. As a result, a
portion of the new resources identified in the Contingency Plan would
then be available to make restorations or add new spending to the
1996-97 State budget. The Balanced Budget Bonus Plan sets priorities
for up to $1.42 billion in potential recurring and non-recurring
spending increases.
There can be no assurance that the Legislature will enact the Executive
Budget or any of the amendments proposed by the Governor, that the State's
adopted budget projections will not differ materially and adversely from the
projections set forth in this Statement of Additional Information, or that the
State's
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actions will be sufficient to maintain budgetary balance in 1996-97 or future
fiscal years. Further, since the amendments implementing the Contingency Plan
and the Balanced Budget Bonus Plan have been submitted after the 30-day
amendment period, the Legislature must consent to their introduction.
DOB believes that its economic assumptions and its projections of receipts
and disbursements for the 1996-97 Executive Budget as amended by the Contingency
Plan and the Balanced Budget Bonus Plan are reasonable. However, various
financial, social, economic, and political factors can affect these projections,
of which certain factors, such as action by the federal government, are outside
the State's control. Because of the uncertainty and unpredictability of these
factors, their impact cannot be fully anticipated in the assumptions underlying
the State's projections.
The 1996-97 Executive Budget includes actions that will have an impact on
receipts and disbursements in future fiscal years. The Governor has proposed
closing the 1996-97 budget gap primarily through expenditures reductions and
without increases in taxes or deferrals of scheduled tax reductions. After
accounting for proposed changes to the Executive Budget submitted during the 30-
day amendment period, the net impact of these actions is expected to produce a
potential imbalance in the 1997-98 fiscal year of $1.44 billion and in the 1998-
99 fiscal year of $2.46 billion, assuming implementation of the 1996-97
Executive Budget recommendations. For 1997-98, receipts are estimated at $30.62
billion and disbursements at $32.05 billion. For 1998-99, receipts are
estimated at $31.85 billion and disbursements at $34.32 billion.
For 1996-97 the closing fund balance in the General Fund is projected to be
$272 million. The required deposit to the Tax Stabilization Reserve Fund adds
$15 million to the 1995-96 balance of $172 million in that fund, bringing the
total to $187 million at the close of 1996-97. The remaining General Fund
balance reflects the deposit of $85 million to the Contingency Reserve Fund, to
provide resources to finance potential costs associated with litigation against
the State. This deposit is expected to be made pursuant to legislation
submitted with the Executive Budget which will require the State share of
certain non-recurring federal recoveries to be deposited to the Contingency
Reserve Fund.
For 1996-97, the Financial Plan projects disbursements of $28.93 billion
from this Fund. This includes $7.65 billion from Special Revenue Funds
containing State revenues, and $21.28 billion from funds containing federal
grants, primarily for social welfare programs.
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The 1996-97 Executive Budget recommends that all of the SUNY's revenues be
consolidated in a single fund, permitting SUNY more flexibility and control in
the use of its revenues. As a result of this proposal, General Fund support
would be transferred to this fund, rather than spent directly from the General
Fund. SUNY's spending from this fund is projected to total $2.55 billion in
1996-97. The Mass Transportation Operating Assistance Fund and the Dedicated
Mass Transportation Trust Fund, which receive taxes earmarked for mass
transportation programs throughout the State, are projected to have total
disbursements of $1.23 billion in 1996-97. Disbursements also include $1.63
billion in lottery proceeds which, after payment of administrative expenses,
permit the distribution of $1.43 billion for education purposes. One hundred
million dollars of lottery proceeds will be reserved in a separate account for a
local school tax reduction program to be agreed upon by the Governor and the
Legislature for disbursement in State fiscal year 1997-98. Disbursements of
$650 million in 1996-97 from the Disproportionate Share Medicaid Assistance Fund
constitutes most of the remaining estimated State Special Revenue Funds
disbursements.
Federal Special Revenue Fund projections for 1996-97 were developed in the
midst of considerable uncertainty as to the ultimate composition of the federal
budget, including uncertainties regarding major federal entitlement reforms.
Disbursements are estimated at $21.27 billion in 1996-97, an increase of $2.02
billion, or 10.5 percent from 1995-96. The projections included in the 1996-97
State Financial Plan assume that the federal Medicaid program will be reformed
generally along the lines of the congressional MediGrant program. This would
include an increase from 50 percent to 60 percent in the federal share of New
York's Medicaid expenses. A repeal of the federal Boren amendment regarding
provider rates is also anticipated. As a result of these changes, the Executive
Budget projects the receipt of $13.1 billion in total federal Medicaid
reimbursements in 1996-97, an increase of approximately $915 million from the
1995-96 level.
The second largest projected increase in federal reimbursement is for the
State's welfare program. The State is projected to receive $2.5 billion, up
$421 million from 1995-96 levels, primarily because of increased funding
anticipated from the proposed federal welfare block grant. All other federal
spending is projected at $5.7 billion for 1996-97, an increase of $626 million.
Disbursements from the Capital Projects Funds in 1996-97 are estimated at
$3.76 billion. This estimate is $332 million less than the 1995-96 projections.
The spending reductions are the result of program restructuring, achieved in
1995-96 and
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continued in the 1996-97 Financial Plan. The spending plan includes:
- $2.5 billion in disbursements for the second year of the five-year
$12.6 billion State and local highway and bridge program;
- Environmental Protection Fund spending of $106.5 million;
- Correctional services spending of $153 million; and
- SUNY and CUNY capital spending of $196 million and $87 million,
respectively.
The share of capital projects to be financed by "pay-as-you-go" resources
is projected to hold steady in 1996-97 at approximately 27 percent. State-
supported bond issuances finance 44 percent of capital projects, with federal
grants financing the remaining 29 percent.
Disbursements from the Debt Service Fund are estimated at $2.64 billion in
1996-97, an increase of $206 million or 9 percent from 1995-96. Of this
increase, $85 million is attributable to transportation bonding for the State
and local highway and bridge programs which are financed by the Dedicated
Highway and Bridge Trust Fund, $35 million is for corrections including new debt
service on prisons recently purchased from New York City, and $27 million is for
the mental hygiene programs financed through the Mental Health Services Fund.
Debt service for LGAC bonds increases only slightly after years of significant
increases, as the new-money bond issuance portion of the LGAC program was
completed in State fiscal year 1995-96. Increased debt service costs primarily
reflect prior capital commitments financed by bonds issued by the State and its
public authorities, the reduced use of capitalized interest, and the use of
shorter term bonds, such as the 10 year average maturity for the Dedicated
Highway and Bridge Trust Fund bonds.
The 1995-96 State Financial Plans and the 1996-97 Executive Budget are
based upon forecasts of national and State economic and financial conditions.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, can vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State but also by entities, such as the federal
government, that are outside the State's control. Because of the uncertainty
and unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be no
assurance that the State economy will not experience results in the 1995-96 and
the 1996-97 fiscal
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years that are worse than predicted, with corresponding material and adverse
effects on the State's financial projections.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
TRANs. First, the national recession, and then the lingering economic slowdown
in the New York and regional economy, resulted in repeated shortfalls in
receipts and three budget deficits. For its 1992-93, 1993-94 and 1994-95 fiscal
years, the State recorded balanced budgets on a cash basis, with substantial
fund balances in 1992-93 and 1993-94, and a smaller fund balance in 1994-95 as
described below.
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund
reserve account, $250 million of which was deposited at the end of the State's
1994-95 fiscal year to continue the process of restructuring the State's cash
flow as part of the LGAC program.
Compared to the State Financial Plan for 1994-95 as formulated on June 16,
1994, reported receipts fell short of original projections by $1.163 billion,
primarily in the categories of personal income and business taxes. Of this
amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in the 1994-95 fiscal year. These
shortfalls were offset by better performance in the remaining taxes,
particularly the user taxes and fees, which exceeded projections by $210
million. Of this amount, $227 million was attributable to certain restatements
for accounting treatment purposes pertaining to the CRF and LGAC; these
restatements had no impact on balance in the General Fund.
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Disbursements were also reduced from original projections by $848 million.
After adjusting for the net impact of restatements relating to the CRF and LGAC
which raised disbursements by $38 million, the variance is $886 million. Well
over two-thirds of this variance is in the category of grants to local
governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated in
January 1995 by the Governor to reduce spending to avert a potential gap in the
1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of non-
essential capital projects. These actions, together with $71 million in other
measures comprised the Governor's $259 million gap-closing plan, submitted to
the Legislature in connection with the 1995-96 Executive Budget.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion in
its tax refund reserve account, $265 million in its CRF and $134 million in its
Tax Stabilization Reserve Fund. These fund balances were primarily the result
of an improving national economy, State employment growth, tax collections that
exceeded earlier projections and disbursements that were below expectations.
Deposits to the personal income tax refund reserve have the effect of reducing
reported personal income tax receipts in the fiscal year when made and
withdrawals from such reserve increase receipts in the fiscal year when made.
The balance in the tax refund reserve account will be used to pay taxpayer
refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million was redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process of
restructuring the State's cash flow as part of the LGAC program. The balance in
the CRF will be used to meet the cost of litigation facing the State. The Tax
Stabilization Reserve Fund may be used only in the event of an unanticipated
General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in the 1993-94 fiscal year exceeded those originally
projected when the State Financial Plan for that year was formulated on April
16, 1993 by $1.002 billion. Greater-than-expected receipts in the personal
income tax, the bank tax, the corporation franchise tax and the estate tax
accounted for most of this variance, and more than offset
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weaker-than-projected collections from the sales and use tax and miscellaneous
receipts. Collections from individual taxes were affected by various factors
including changes in Federal business laws, sustained profitability of banks,
strong performance of securities firms, and higher-than-expected consumption of
tobacco products following price cuts.
The higher receipts resulted, in part, because the State economy performed
better than forecasted. Employment growth started in the first quarter of the
State's 1993-94 fiscal year, and, although this lagged behind the national
economic recovery, the growth in New York began earlier than forecasted. The
State economy exhibited signs of strength in the service sector, in
construction, and in trade. Long Island and the Mid-Hudson Valley continued to
lag behind the rest of the State in economic growth. The DOB believes that
approximately 100,000 jobs were added during the 1993-94 fiscal year.
Disbursements and transfers from the General Fund were $303 million below
the level that was projected in April 1993, an amount that would have been $423
million had the State not accelerated the payment of Medicaid billings, which in
the April 1993 State Financial Plan were planned to be deferred into the 1994-95
fiscal year. Compared to the estimates included in the State Financial Plan
formulated in April 1993, lower disbursements resulted from lower spending for
Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC program.
Disbursements were higher-than-expected for general support for public schools,
the State share of income maintenance, overtime for prison guards, and highway
snow and ice removal. The State also made the first of six required payments to
the State of Delaware related to the settlement of Delaware's litigation against
the State regarding the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded the
CRF as a way to assist the State in financing the cost of litigation affecting
the State. The CRF was initially funded with a transfer of $100 million
attributable to the positive margin recorded in the 1992-93 fiscal year. In
addition, the State augmented this initial deposit with $132 million in debt
service savings attributable to the refinancing of State and public authority
bonds during 1993-94. A year-end transfer of $36 million was also made to the
CRF, which, after a disbursement for authorized fund purposes, brought the CRF
balance at the end of 1993-94 to $265 million. This amount was $165 million
higher than the amount originally targeted for this reserve fund.
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The State ended its 1992-93 fiscal year with a balance of $671 million in
the tax refund reserve account and $67 million in the Tax Stabilization Reserve
Fund.
The State's 1992-93 fiscal year was characterized by performance that was
better than projected for the national and regional economies. National gross
domestic product, State personal income, and State employment and unemployment
performed better than originally projected in April 1992. This favorable
economic performance, particularly at year end, combined with a tax-induced
acceleration of income into 1992, was the primary cause of the General Fund
surplus. Personal income tax collections were more than $700 million higher
than originally projected (before reflecting the tax refund reserve account
transaction), primarily in the withholding and estimated payment components of
the tax.
There were large, but mainly offsetting, variances in other categories of
receipts. Significantly higher-than-projected business tax collections and the
receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200-million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable court
decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above
projections made in April 1992, although this includes a $150 million payment to
health insurers (financed with a receipt from the MMIA made pursuant to
legislation passed in January 1993). All other disbursements were $105 million
lower than projected. This reduction primarily reflected lower costs in
virtually all categories of spending, including Medicaid, local health programs,
agency operations, fringe benefits, capital projects and debt service as
partially offset by higher-than-anticipated costs for education programs.
The financial condition of the State is affected by several factors,
including the strength of the State and regional economy and actions of the
Federal government, as well as State actions affecting the level of receipts and
disbursements. Owing to these and other factors, the State may, in future
years, face substantial potential budget gaps resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the future costs of maintaining State programs at current levels. Any such
recurring imbalance would be exacerbated if the State were to use a significant
amount of nonrecurring resources to balance the budget in a particular fiscal
year. To address a potential imbalance for a given fiscal year, the State would
be required to take actions to increase receipts and/or reduce
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disbursements as it enacts the budget for that year, and under the State
Constitution the Governor is required to propose a balanced budget each year.
To correct recurring budgetary imbalances, the State would need to take
significant actions to align recurring receipts and disbursements in future
fiscal years. There can be no assurance, however, that the State's actions will
be sufficient to preserve budgetary balance in a given fiscal year or to align
recurring receipts and disbursements in future fiscal years.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation authorized LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC and bonds issued to provide for capitalized interest, except in
cases where the Governor and the legislative leaders have certified the need for
additional borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it is required by
law to be reduced to the cap by the fourth fiscal year after the limit was first
exceeded. This provision capping the seasonal borrowing was included as a
covenant with LGAC's bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of
$4.7 billion completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs in the first quarter of the fiscal
year without relying on short-term seasonal borrowings. The 1995-96 State
Financial Plan includes no spring borrowing nor did the 1994-95 State Financial
Plan, which was the first time in 35 years there was no short-term seasonal
borrowing.
On January 13, 1992, Standard & Poor's ("S&P") lowered its rating on the
State's general obligation bonds from A to A- and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. S&P also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993 S&P revised the
rating outlook assessment to stable. On
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February 14, 1994, S&P revised its outlook to positive and, on October 3, 1995,
confirmed its A- rating. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1. On October 2, 1995, Moody's reconfirmed its A rating on the
State's general obligation long-term indebtedness.
On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from A1 to A, the rating having been A1
since May 27, 1986. On November 12, 1990, Moody's confirmed the A rating. In
1992, S&P lowered the State's general obligation bond rating to A-, where it
currently remains and was affirmed on July 13, 1995. Prior to this, on
March 26, 1990, S&P lowered its rating of all of the State's outstanding general
obligation bonds from AA- to A. Previous S&P ratings were AA- from August, 1987
to March, 1990 and A+ from November, 1982 to August, 1987.
AUTHORITIES. The fiscal stability of the State is related, in part, to the
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially
adversely affected, if any of its public authorities were to default on their
respective obligations. As of September 30, 1994, the date of the latest data
available, there were 18 Authorities that had outstanding debt of $100 million
or more, and the aggregate outstanding debt, including refunding bonds, of these
18 Authorities was $70.3 billion. As of March 31, 1995, aggregate Authority
debt outstanding as State-supported debt was $27.9 billion and as State-related
debt was $36.1 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units, and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose
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local assistance payments have been paid to public authorities under these
arrangements if local assistance payments are so diverted, the affected
localities could seek additional State assistance.
Some authorities also receive monies from State appropriations to pay for
the operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and commuter
services.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State Housing Finance Agency, the New York State Urban Development Corporation
and certain other Authorities have in the past required and continue to require
substantial amounts of assistance from the State to meet debt service costs or
to pay operating expenses. Further assistance, possibly in increasing amounts,
may be required for these, or other, Authorities in the future. In addition,
certain other statutory arrangements provide for State local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.
METROPOLITAN TRANSPORTATION AUTHORITY . The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line on
Staten Island. Through its affiliated agency, the Triborough Bridge and Tunnel
Authority (the "TBTA"), the MTA operates certain intrastate toll bridges and
tunnels. Because fare revenues are not sufficient to finance the mass transit
portion of these operations, the MTA has depended, and will continue to depend
for operating support upon a system of State, local government and TBTA support,
and, to the extent available, Federal operating assistance, including loans,
grants and operating subsidies. If current revenue projections are not realized
and/or operating expenses exceed current projections, the TA or commuter
railroads may be required
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to seek additional State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes -- including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax -- that
provide revenues for mass transit purposes, including assistance to the MTA. In
addition, since 1987, State law has required that the proceeds of a one quarter
of 1% mortgage recording tax paid on certain mortgages in the Metropolitan
transportation Region be deposited in a special MTA fund for operating or
capital expenses. Further, in 1993 the State dedicated a portion of the State
petroleum business tax to fund operating or capital assistance to the MTA. For
the 1995-96 fiscal year, total State assistance to the MTA is estimated by the
State to be approximately $1.1 billion.
In 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the "1992-
96 Capital Program"). The MTA has received approval of the 1992-96 Capital
Program based on this legislation from the 1992-96 Capital Program Review Board,
as State law requires. This is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and amendment of a five-year
plan in 1981 for a capital program designed to upgrade the performance of the
MTA's transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the TBTA and the TA are collectively
authorized to issue an aggregate of $3.1 billion of bonds (net certain statutory
exclusions) to finance a portion of the 1992-96 Capital Program. The 1992-96
Capital Program may be financed in significant part through dedication of State
petroleum business taxes referred to above. However, in December 1994 the
proposed bond resolution based on such tax receipts was not approved by the MTA
Capital Program Review Board. Further consideration of the resolution was
deferred until 1995.
There can be no assurance that all the necessary governmental actions for
the 1992-96 Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1992-96 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1992-96
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional State assistance.
LOCALITIES. Certain localities in addition to the City could have financial
problems leading to requests for additional State
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assistance during the 1995-96 fiscal years and thereafter. The potential impact
on the State of such actions by localities is not included in the projections of
the State receipts and disbursements for the 1995-96 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the re-establishment of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the Legislature to assist Yonkers could result in allocation of
State resources in amounts that cannot yet be determined.
MUNICIPAL INDEBTEDNESS. Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1993, the total
indebtedness of all localities in the State was approximately $17.7 billion. A
small portion (approximately $105 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to enabling
State legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Fifteen localities had
outstanding indebtedness for deficit financing at the close of their fiscal year
ending in 1993.
From time to time, proposed Federal expenditure reductions could reduce, or
in some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect certain localities and require increasing State
assistance in the future.
LITIGATION. Certain litigation pending against the State or its officers or
employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve: (i)
a challenge to certain enhanced supplemental pension allowances for members of
the state and local retirement systems; (ii) several
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challenges to provisions of Chapter 81 of the Laws of 1995 which after the
nursing home Medicaid reimbursement methodology; (iii) the validity of
agreements and treaties by which various Indian tribes transferred title to the
State of certain land in central and upstate New York; (iv) a challenge to State
regulations which reduce base prices for the direct and indirect component of
Medicaid reimbursement for rate years commencing 1989; (v) an action against
State and City officials alleging that the present level of shelter allowance
for public assistance recipients is inadequate under statutory standards to
maintain proper housing; (vi) challenges to the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's Social Security
benefits; (vii) alleged responsibility of State officials to assist in remedying
racial segregation in the City of Yonkers; (viii) alleged responsibility of the
State Department of Environmental Conservation for a plaintiff's inability to
complete construction of a cogeneration facility in a timely fashion and the
damages suffered thereby; (ix) challenges to the promulgation of the State's
proposed procedure to determine the eligibility for and nature of home care
services for Medicaid recipients; (x) a challenge to State implementation of a
program which reduces Medicaid benefits to certain home-relief recipients; (xi)
a challenge to the constitutionality of petroleum business tax assessments
authorized by Tax Law Section 301; and (xii) two cases by commercial insurers,
employee welfare benefit plans, and health maintenance organizations to
provisions of Section 2807-c of the Public Health Law which impose 13%, 11%, and
9% surcharges on inpatient hospital bills and a bad debt and charity care
allowance on all hospital bills paid by such entities were resolved by order
dated October 2, 1995, the United States District Court for the Southern
District of New York held that the 11 percent and 13 percent surcharges are
preempted by FEBHA and unenforceable against commercial insurers which provide
stop-loss coverage to self-funded ERISA plans.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1995-96 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1994, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $675
million. There can be no assurance that an adverse decision in any of the above
cited proceedings would not exceed the amount of the 1995-96 State Financial
Plan reserves for the payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced 1995-96 State Financial Plan.
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NEW YORK CITY
The fiscal health of the State may also be impacted by the fiscal health of
its localities, particularly the City, which has required and continues to
require significant financial assistance from the State. The City's
independently audited operating results for each of its fiscal years from 1981
through 1995, which end on June 30, show a General Fund surplus reported in
accordance with generally accepted accounting principles ("GAAP"). The City was
required to close substantial budget gaps in recent years in order to maintain
balanced operating results. For fiscal year 1995, the City adopted a budget
which halted the trend in recent years of substantial increases in City-funded
spending from one year to the next. There can be no assurance that the City
will continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or additional economic reductions in
City services or entitlement programs, which could adversely affect the City's
economic base.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the
State established the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ("OSDC") to assist the Control Board in exercising its
powers and responsibilities; and a "Control Period" from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal-monitoring
arrangements. Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending certain Control
Board powers, the Control Board, MAC and OSDC continue to exercise various
fiscal-monitoring functions over the City, and upon the occurrence or
"substantial likelihood and immi nence" of the occurrence of certain events,
including, but not limited to a City operating budget deficit of more than $100
million, the Control Board is required by law to reimpose a Control Period.
Currently, the City and its Covered Organizations (i.e., those which receive or
may receive money from the City directly, indirectly or contingently) operate
under a four-year financial plan, which is reviewed and revised on a quarterly
basis and which includes the City's capital revenue and expense projections and
outline proposed gap-closing programs for years with projected budget gaps. The
City's current four-year financial plan projects substantial budget gaps for
each of the 1997 through 1999 fiscal years, before implementation of the
proposed gap-closing program contained in the current
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financial plan. The City is required to submit its financial plans to review
bodies, including the New York State Financial Control Board.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected Federal or State
aid is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases in
taxes and reductions in essential City services. The City might also seek
additional assistance from the State.
On January 31, 1996, the City published the Financial Plan for the 1996-
1999 fiscal years, which is a modification to a financial plan submitted to the
Control Board on July 11, 1995 (the "July Financial Plan") and which relates to
the City, the Board of Education ("BOE") and the City University of New York
("CUNY"). The Financial Plan sets forth proposed actions by the City for the
1996 fiscal year to close substantial projected budget gaps resulting from lower
than projected tax receipts and other revenues and greater than projected
expenditures. In addition to substantial proposed agency expenditure
reductions, the Financial Plan reflects a strategy to substantially reduce
spending for entitlements for the 1996 and subsequent fiscal years, and to
decrease the City's costs for Medicaid in the 1997 fiscal year and thereafter by
increasing the Federal share of Medicaid costs otherwise paid by the City. This
strategy is the subject of substantial debate, and implementation of this
strategy will be significantly affected by State and Federal budget proposals
currently being considered. It is likely that the Financial Plan will be
changed significantly in connection with the preparation of the Executive Budget
for the 1997 fiscal year as a result of the status of State and Federal budget
proposals and other factors. The City expects to submit the Executive Budget to
the City Council in early May 1996.
The July Financial Plan set forth proposed actions to close a previously
projected gap of approximately $3.1 billion for the 1996 fiscal year. The
proposed actions in the July Financial Plan for the 1996 fiscal year included
(i) a reduction in spending of $400 million, primarily affecting public
assistance and Medicaid payments by the City; (ii) agency reduction programs,
totaling $1.2 billion; (iii) transitional
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labor savings totaling $600 million; and (iv) the phase-in of the increased
annual pension funding cost due to revisions resulting from an actuarial audit
of the City pension systems, which would reduce such costs in the 1996 fiscal
year. A modification to the July Financial Plan published on November 29, 1995
(the "November Financial Plan") included savings from a proposed refunding of
outstanding debt and other expenditure reductions to offset a $129 million
increase in projected expenditures.
The 1996-1999 Financial Plan published on January 31, 1996 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the November Financial Plan, and projects revenues and expenditures for
the 1996 fiscal year balanced in accordance with GAAP. For the 1996 fiscal year,
the Financial Plan includes actions to offset an additional $759 million budget
gap resulting primarily from (i) the failure of the Port Authority of New York
and New Jersey (the "Port Authority") to pay disputed back rent for the City's
airports in the amount included in the November Financial Plan, (ii) shortfalls
in Federal and State aid included in the November Financial Plan, (iii)
shortfalls in revenues and in amounts to be saved through gap-closing actions at
BOE, (iv) shortfalls in projected savings from cost containment initiatives
proposed in the July Financial Plan affecting public assistance and Medicaid,
and (v) the failure of the City and its labor unions to identify assumed savings
in the City's health benefits system. The gap-closing measures for the 1996
fiscal year set forth in the Financial Plan include (i) additional proposed
agency actions aggregating $207 million, (ii) the receipt of $150 million from
MAC, and (iii) the receipt of $120 million from the proposed sale of mortgages,
$75 million from increased revenues from the proposed sale of City tax liens on
real property and $207 million from the proposed sale of the City's television
station.
The City and MAC have reached an agreement in principle under which MAC
will develop and implement a debt restructuring program which will provide the
City with $125 million in budget relief in fiscal year 1996, in addition to the
$20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in cash of the four fiscal years starting in fiscal
year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions. The proposed sale of the City's
television station is subject to Federal regulatory approval, and the Federal
budget negotiation process for the 1996 Federal fiscal year could result in a
reduction in, or a delay in the receipt of, Federal grants in the City's 1996
fiscal year.
The Financial Plan also sets forth projections for the 1997 through 1999
fiscal years and outlines a proposed gap-closing program to eliminate a
projected gap of $2.0
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billion for the 1997 fiscal year, and to reduce projected gaps of $3.3 billion
and $4.1 billion for the 1998 and 1999 fiscal years, respectively, assuming
successful implementation of the gap-closing program for the 1996 fiscal year.
The projected gaps for the 1997 through 1999 fiscal years have increased from
the gaps projected in the November Financial Plan to reflect (i) reductions in
projected property taxes of $177 million, $294 million and $421 million in the
1997, 1998 and 1999 fiscal years, respectively, due to a lower than forecast
increase in the tentative assessment roll published by the New York City
Department of Finance, (ii) reductions in other forecast tax revenues of $114
millon, $216 million and $261 million in the 1997, 1998 and 1999 fiscal years,
respectively, (iii) reductions in tax revenues of $79 million, $224 million and
$341 million in the 1997, 1998 and 1999 fiscal years, respectively, as a result
of new tax reduction initiatives, including a proposed sales tax exemption on
clothing items under $500, and (iv) increased agency expenditures.
The proposed gap-closing actions for the 1997 through 1999 fiscal years
include (i) additional agency actions, totaling between $643 million and $691
million in each of the 1997 through 1999 fiscal years; (ii) additional savings
resulting from State and Federal aid and cost containment in entitlement
programs to reduce City expenditures and increase revenues by $650 million in
the 1997 fiscal year and by $727 million in each of the 1998 and 1999 fiscal
years; (iii) additional proposed Federal aid of $50 million in the 1997 fiscal
year and State aid of $100 million in each of the 1997 through 1999 fiscal
years; (iv) the receipt of $300 million in the 1997 fiscal year from
privatization or other initiatives, including the sale of the City's parking
meters and associated revenues, which may require legislative action by the City
Council, or the sale of other assets; and (v) the assumed receipt of revenues
relating to rent payments for the City's airports, totaling $244 million, $226
million and $70 million in the 1997 through 1999 fiscal years, respectively,
which are currently the subject of a dispute with the Port Authority and the
collection of which is expected to depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's remedies
under the leases through pending legal actions. The City is also preparing an
additional contingency gap-closing program for the 1997 fiscal year to be
comprised of $200 million in additional agency actions.
The Governor released the 1996-1997 Executive Budget on December 15, 1995.
The 1996-1997 Executive Budget was not adopted by the State Legislature by the
statutory deadline of April 1, 1996. The City estimates that the 1996-1997
Executive Budget provides the City with $173 million of savings from Medicaid
cost containment proposals and $127 million of savings from proposed reductions
in welfare spending in the 1997 fiscal year. The Financial Plan assumes that
the remaining $350 million
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of the $650 million of entitlement reform benefits included in the Financial
Plan for the 1997 fiscal year will be generated by the State providing the City
with a portion of the additional funds received by the State as a result of the
increased Federal share of Medicaid costs proposed in the State Executive
Budget. However, the State Executive Budget does not currently contemplate
sharing such funds with the City. In addition, the President and Congress are
currently considering budget proposals for the 1996 Federal fiscal year. The
Federal budget or other factors may cause substantial amendments to the State
Executive Budget.
The Federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The Federal and State aid projected in the Financial Plan, and the
substantial savings assumed from cost containment in entitlement programs
included in the Financial Plan gap-closing program for the 1997 through 1999
fiscal years, will be significantly affected both by the outcome of the current
Federal budget negotiations and by the State budget proposals made by the
Governor and to be considered by the State Legislature. The nature and extent
of the impact on the City of the Federal and State budgets, when adopted, is
uncertain, and no assurance can be given that Federal or State actions included
in the Federal and State adopted budgets may not have a significant adverse
impact on the City's budget and its Financial Plan.
The projections for the 1996 through 1999 fiscal years reflect the costs of
the proposed settlement with the United Federation of Teachers ("UFT") and the
recent settlement with a coalition of unions headed by District Council 37 of
the American Federation of State, County and Municipal Employees ("District
Council 37"), and assume that the City will reach agreement with its remaining
municipal unions under terms which are generally consistent with such
settlements which are discussed below. The projections for the 1996 through
1999 fiscal years also assume the BOE will be able to identify actions to offset
possible substantial shortfalls in Federal, State and City revenues.
The City's fiancial plans have been the subject of extensive public comment
and criticism. The City Comptroller has issued reports identifying risks
ranging between $440 million and $560 million in the 1996 fiscal year before
taking into account the availability of $160 million in the General Reserve, and
between $2.05 billion and $2.15 billion in the 1997 fiscal year after
implementation of the City's proposed gap-closing actions. With respect to the
1997 fiscal year, the report noted that the Financial Plan assumes the
implementation fo highly uncertain State and Federal actions, most of which are
unlikely to be implemented, that would provide between $1.2 billion and $1.4
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billion in relief to the City, and identified additional risks, including risks
attributable to BOE which total $415 million, without taking into account
potential reductions that will likely take place upon adoption of the Federal
and State budgets. The report concluded that the magnitude of the budget risk
for the 1997 fiscal year, after two years of lagrge agency cutbacks and
workforce reductions, indicates the seriousness of the City's continuing budget
difficulties, and that the Financial Plan will require substantial revision in
order to provide a credible program for dealing with the large projected budget
gap for the 1997 fiscal year. In addition, the staff of the OSDC and the staff
of the Control Board have issued reports on the Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. In November 1995 the City announced a tentative settlement
with the UFT and a coalition of unions headed by District Council 37 which
represent approximately two-thirds of the City's workforce. The settlement
provides for a wage freeze in the first two years, followed by a cumulative
effective wage increase of 11% by the end of the five year period covered by the
proposed agreements, ending in fiscal years 2000 and 2001. Additional benefit
increases would raise the total cumulative effective increase to 13% above
present costs. The United Probation Officers' Association which represents
approximately 1,000 probation officers recently ratified a contract with the
City which conforms to the pattern established by the civilian coalition. The
Financial Plan reflects the costs associated with the settlements, and assumes
similar increases for all other City-funded employees, which total $49 million,
$459 million and $1.2 billion in the 1997, 1998 and 1999 fiscal years,
respectively. Such increases exceed $2 billion in each fiscal year after the
1999 fiscal year. District Council 37 and Local 237, representing approximately
90,000 full-time employees, have ratified the proposed settlement. On
December 7, 1995, the members of the UFT voted on the proposed settlement with
the UFT. Six chapters of the UFT, representing approximately 18,000 full-time
employees, including teaching paraprofessionals, voted to ratify the proposed
settlement, which will apply to those chapters if approved by BOE. Five
chapters, representing approximately 76,000 full-time employees, including
teachers, voted not to ratify the proposed settlement. A portion of the
transitional labor savings contained in the Financial Plan is dependent upon
conclusion of collective bargaining agreements with the City's workforce. There
can be no assurance that the City will reach an agreement with the chapters of
the UFT which rejected the proposed settlement on the terms contained in the
Financial Plan.
In the event of a collective bargaining impasse, the terms of wage
settlements could be determined through statutory impasse procedures, which can
impose a binding settlement except
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in the case of collective bargaining with the UFT, which may be subject to non-
binding arbitration. On January 23, 1996, the City requested the Office of
Collective Bargaining to declare an impasse against the Patrolmen's Benevolent
Association ("PBA") and the United Firefighters Association ("UFA").
From time to time, the Control Board staff, MAC, OSDC, the City Comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services. It is
reasonable to expect that reports and statements will continue to be issued and
to engender public comment.
On February 29, 1996 the staff of the City Comptroller issued a report on
the Financial Plan. The report projects that there remains $408 million to $528
million in budget risks for the 1996 fiscal year, before taking into account the
availability of $160 million in the General Reserve. The principal risks for
the 1996 fiscal year identified in the report include $140 million to $190
million of uncertain revenues and projected savings at BOE and the receipt by
the City of $100 million to $130 million from a proposed MAC refunding. The
report also expressed concern as to whether the required regulatory approval for
the sale of the City's television station would be received before the end of
the 1996 fiscal year. In a subsequent report, the City Comptroller increased
the risks for the 1996 fiscal year by $32 million. The report also noted that
the city may be required to implement additional cash management actions and
delay payments to vendors if the Federal budget impasse continues and the state
budget process is delayed. In addition, the report noted that tax revenues
between July 1995 and February 1996 were $82.1 million below the Financial Plan
projections and that tax revenues were $10.8 million below the Financial Plan
projections for the month of February 1996, due principally to lower than
forecast general property tax receipts, which were partially offset by greater
than forecast personal income tax revenues.
With respect to the 1997 fiscal year, the report states that the Financial
Plan includes total risks of between $2.05 billion and $2.15 billion. The
report notes that the gap-closing program for the 1997 fiscal year assumes the
implementation of highly
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uncertain State and Federal actions that would provide between $1.2 billion and
$1.4 billion in relief to the City resulting from proposed public assistance and
medical assistance entitlement reductions, a proposed increase in Federal
Medicaid reimbursements, additional State aid and various privatization
proposals. The report concludes that it is unlikely that the City will be able
to implement most of these initiatives due to Federal and State budget
difficulties. Additional risks for the 1997 fiscal year identified in the
report include (i) risks attributable to BOE relating to unspecified additional
State aid, unspecified expenditure reductions and proposals to reduce special
education spending, which total $415 million, without taking into account
potential reductions that will likely take place upon adoption of the Federal
and State budgets; (ii) proposals for the sale of parking meters and other
assets; and (iii) the receipt of $244 million to $294 million of lease payments
from the Port Authority for the City's airports.
The report concluded that the magnitude of the budget risk for the 1997
fiscal year, after two years of large agency cutbacks and work force reductions,
indicates the seriousness of the City's continuing budget difficulties, and that
the Financial Plan will require substantial revision in order to provide a
credible program for dealing with the large projected budget gap for the 1997
fiscal year. The report further notes that the relative weakness of the
national and City economies makes it unlikely that new jobs and business
expansion will generate significant additional tax revenues and that proposed
Federal and State reductions in funding will reduce the levels of
intergovernmental assistance for the City.
On March 6, 1996, the staff of the OSDC issued a report on the Financial
Plan. The report concluded that there remained a budget gap for the 1996 fiscal
year of $44 million, which can be closed with the $200 million General Reserve,
and additional significant risks totaling $507 million involving actions which
require the approval of the State and Federal governments or other third
parties. These risks include (i) potential delays in the sale of the City's
television station; (ii) shortfalls in projected resources from MAC; and (iii)
shortfalls of $100 million in projected State education aid and $50 million in
projected Federal assistance. In addition, the report expressed concern that
(i) the City may have to write off a portion of approximately $300 million in
State education aid that was included as revenue in prior years' budgets, since
the State has not made payment and neither the current nor the proposed State
budget include an appropriation sufficient to cover most of this liability, and
(ii) the City must complete two transactions before the end of the fiscal year,
the sale of property tax liens and housing mortgages, that together are expected
to produce resources of $267 million.
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The report also concluded that the gap for the 1997 fiscal year could be
$544 million greater than the City's projected budget gap of $2 billion,
primarily due to the failure of BOE to specify $304 million of expenditure
reductions or additional resources necessary to bring its spending in line with
the resources allocated to it in the Financial Plan. In addition, the report
noted that gap-closing proposals set forth in the Financial Plan totalling $1.6
billion are at high risk of falling short of target. The proposals identified
in the report as high risk include (i) $800 million in expected State and
Federal assistance, primarily from savings in social service entitlement
programs, which are dependent on the ultimate resolution of the Federal and
State budgets; (ii) $300 million from initiatives to privatize parking meters
and other City assets; (iii) $244 million to be received from the Port Authority
as retroactive lease payments for the City's two airports; and (iv) $181 million
in spending cuts for BOE. Moreover, the report expressed concern that the
potential for budget cuts at BOE could exceed $1 billion after taking into
account the possible loss of $453 million in proposed reductions in State and
Federal funding. The report also stated that non-recurring resources for the
1996 fiscal year have increased to over $1.7 billion, approaching the
unprecedented $2 billion used in the 1995 fiscal year, and that one-third of the
1997 fiscal year gap-closing program already relies on one-time resources.
With respect to the economy, the report noted that, in a time of slow
economic growth, revenues continue to stagnate, and that the City's economic
forecast, which is premised on sluggish national growth, does not reflect the
potential for a national recession during the four years of the Financial Plan.
In addition, the report expressed concern that the City's economy, and City and
State tax revenues, are closely tied to swings in the financial markets, such as
rising interest rates, which sharply reduced the profits of securities firms in
1994, and rising equity markets, which raised personal income and business tax
collections in 1995, as well as economic conditions in Europe and Japan, which
are currently weak.
The report noted that Federal and State assistance is likely to be
significantly reduced and that there is little potential for significant new
revenues beyond those already reflected in the Financial Plan. The report
concluded that, despite the City's success in work force reduction and
entitlement savings, the Financial Plan shows an increasing imbalance between
the City's recurring revenues and expenditures.
On March 15, 1996, the staff of the Control Board issued a report on the
Financial Plan. The report identified risks totaling $384 millon for the 1996
fiscal year, including $109 million in uncertain State aid to be received by BOE
and $130 million of the projected $150 million in budget relief from MAC
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which had not yet been agreed to by MAC. In addition to these risks, the report
noted that the City must successfully implement major initiatives, including the
sale of the City's television station, which requires regulatory approval, and
the proposed property tax lien sale and the sale of a pool of mortgages. With
respect to the 1997 fiscal year, the report projects that the City must resolve
budget problems of $1.7 billion in the 1997 fiscal year and over $2.8 billion in
the 1998 fiscal year, $3.5 billion in the 1999 fiscal year and $4.6 billion in
fiscal year 2000. The projected gaps for the 1997 and subsequent fiscal years
result primarily from uncertainties concerning the ability of BOE to implement
actions necessary to achieve a balanced budget; proposed sales of assets in the
1997 fiscal year, including the City's parking meters; projected Medicaid
entitlement reductions from the State's assumption of certain Medicaid costs, to
be funded by a change in the Federal Medicaid matching rate formula; the
projected receipt of retroactive and increased lease payments for the City's two
airports; and the possibility of larger than forecast overtime costs. In
addition, the report noted that BOE has estimated that it could lose additional
funding of up to $453 million in the 1997 fiscal year due to reductions in
Federal and State aid.
With respect to the economy, the report noted that only 80,000 of the
310,000 private sector jobs lost during 1990 and 1992 have been regained, and
that the growth in private sector employment has been substantially offset by
the continuing contraction of Federal, State and local government jobs in the
City. The report further noted that most of the growth in local output is the
result of a substantial increase in financial sector salaries and bonus
payments, rather than growth in jobs, and that such rapid compensation growth
could evaporate when stock market growth slows. The report state that it is
unlikely that the growth in nonproperty taxes projected in the Financial Plan
can be sustained if either the securities industry or the national economy were
to experience a substantial setback at any time over the next four years.
The report concluded that, in spite of the large gap-closing efforts of the
past several years, the City's finances have continued to deteriorate, that
revenue growth is insufficient to support planned expenditures over the term of
the Financial Plan, and that the City continues to rely heavily on non-recurring
actions to balance its budget. The report identified several factors underlying
the City's fiscal problems, including sluggish revenue growth, which is
projected to be below the rate of inflation, a decline in the real value of
Federal and State aid relative to the size of the City's budget, and the
projected growth rate of expenditures, which exceeds the rate of inflation after
the 1997 fiscal year due to the impact of recent labor settlements, the cost of
fringe benefits and growth in Medicaid and debt service costs. The report
stated that the
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City is at a significant crossroads, facing a growing gap between revenues and
expenditures and approaching its constitutional borrowing limit, with prospects
of receiving additional State and Federal assistance uncertain.
On December 12, 1995, the City Comptroller issued a report noting that the
capacity of the City to issue general obligation debt could be reduced in future
years. The report noted that, under the State constitution, the City is
permitted to issue debt in an amount not greater than 10% of the average full
value of taxable real estate for the current year and preceding four years. The
report concluded that, if the value of taxable real property in each of 1998 and
1999 fiscal years continues to decline, reflecting the continuing trend of lower
values of taxable property, the City would have to continue to curtail its
capital program from the levels projected in the Financial Plan to remain within
the legal debt-incurring limit in those years. The City Comptroller recommended
that the City prioritize and improve the efficiency and administration of its
current capital plan to determine which capital projects can be delayed or
cancelled to further reduce capital expenditures and thus debt service over the
course of the Financial Plan.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat" tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state and
local income taxes, could have a severe impact on funding methods under which
municipalities operate. With respect to property taxes, the report noted that
the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest deduction
would result in a significant reduction in affordability and, thus, in the
demand for, and the valuation of, real estate. The report noted that rapid
losses in property valuations would be felt by many municipalities, hurting
their revenue raising abilities. In addition, the report noted that the loss of
the current deduction for real property and state and local income taxes from
Federal income tax liability would make rate increases more difficult and
increase pressures to lower existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of municipal bond
interest is worth less to investors. Finally, the report noted that tax
anticipation notes issued in anticipation of property taxes could be hurt by the
imposition of a flat tax, if uncertainty is introduced with regard to their
repayment revenues, until property values fully reflect the loss of mortgage and
property tax deductions.
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The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short-term obligations within their fiscal
year of issuance. The City's current monthly cash flow forecast for the 1996
fiscal year shows a need of $2.4 billion of seasonal financing for the 1996
fiscal year, a portion of which will be met with the proceeds of notes.
Seasonal financing requirements for the 1995 fiscal year increased to $2.2
billion from $1.75 billion and $1.4 billion in the 1994 and 1993 fiscal years,
respectively. The delay in the adoption of the State's budget for its 1992
fiscal year required the City to issue $1.25 billion in short-term notes on May
7, 1991, and the delay in the adoption of the State's budget for its 1991 fiscal
year required the City to issue $900 million in short-term notes on May 15,
1990. Seasonal financing requirements were $2.25 billion and $3.65 billion in
the 1992 and 1991 fiscal years, respectively.
The 1996-1999 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1996-1999 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent, if
any, to which wage increases for City employees exceed the annual wage costs
assumed for the 1996 through 1999 fiscal years; continuation of interest
earnings assumptions for pension fund assets and current assumptions with
respect to wages for City employees affecting the City's required pension fund
contributions; the willingness and ability of the State, in the context of the
State's current financial condition, to provide the aid contemplated by the
Financial Plan and to take various other actions to assist the City, including
the proposed entitlement spending reductions; the ability of HHC, BOE and other
such agencies to maintain balanced budgets; the willingness of the Federal
government to provide the amount of Federal aid contemplated in the Financial
Plan; adoption of the City's budgets by the City Council in substantially the
forms submitted by the Mayor; the ability of the City to implement proposed
reductions in City personnel and other cost reduction initiatives, and the
success with which the City controls expenditures; the impact of conditions in
the real estate market on real estate tax revenues; approval by MAC of the
projected receipt of funds from MAC; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.
On June 7, 1995, the State adopted its Budget for the State's 1996 fiscal
year, commencing April 1, 1995. Prior to
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adoption of the budget the State had projected a potential budget gap of
approximately $5 billion for its 1996 fiscal year. This gap is projected to be
closed in the 1995-1996 State Financial Plan based on the enacted budget,
through a series of actions, mainly spending reductions and cost containment
measures and certain reestimates that are expected to be recurring, but also
through the use of one-time solutions. The State Financial Plan projects
(i) nearly $1.6 billion in savings from cost containment, disbursement
reestimates, and other savings in social welfare programs, including Medicaid,
income maintenance and various child and family care programs; (ii) $2.2 billion
in savings from State agency actions to reduce spending on the State workforce,
SUNY and CUNY, mental hygiene programs, capital projects, the prison system and
fringe benefits; (iii) $300 million in savings from local assistance reforms,
including actions affecting school aid and revenue sharing while proposing
program legislation to provide relief from certain mandates that increase local
spending; (iv) over $400 million in revenue measures, primarily a new Quick Draw
Lottery game, changes to tax payment schedules, and the sale of assets; and
(v) $300 million from reestimates in receipts.
On April 3, 1996, the State announced that the General Fund for the State's
1996 fiscal year is expected to be balanced on a cash basis, with an operating
surplus of $445 million. There can be no assurance that the General Fund will
yield such a surplus.
The Governor presented his 1996-1997 Executive Budget to the Legislature on
December 15, 1995, and subsequently amended it. The Legislature and the
Comptroller will review the Governor's Executive Budget and are expected to
comment on it. There can be no assurance that the Legislature will enact the
Executive Budget into law, or that the State's adopted budget projections will
not differ materially and adversely from the projections set forth in the
Executive Budget.
The Governor's Executive Budget projects balance on a cash basis in the
General Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $31.3 billion, a
decrease of $1.4 billion from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to other funds are
projected to be $31.2 billion, a decrease of $1.5 billion from spending totals
projected for the current fiscal year.
The 1996-1997 Executive Budget proposes $3.9 billion in actions to balance
the 1996-97 State Financial Plan. The Executive Budget proposes to close this
gap primarily through a series of spending reductions and cost containment
measures. The
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Executive Budget projects (i) over $1.8 billion in savings from cost containment
and other actions in social welfare programs, including Medicaid, welfare and
various health and mental health programs; (ii) $1.3 billion in savings from a
reduced State General Fund share of Medicaid made available from anticipated
changes in the Medicaid program, including an increase in the Federal share of
Medicaid; (iii) over $450 million in savings from reforms and cost avoidance in
educational services (including school aid and higher education), while
providing fiscal relief from certain State mandates that increase local
spending; and (iv) $350 million in savings from efficiencies and reductions in
other State programs. The State has noted that there is considerable
uncertainty as to the ultimate composition of the Federal budget, including
uncertainties regarding major Federal entitlement reforms. The 1996-1997
Executive Budget seeks to lessen the effect of the proposed cuts on localities
by granting certain mandate relief to permit them to exercise greater
flexibility in allocating their resources. However, no assurance can be given
as to the amount of savings which the City might realize from any of the
Medicaid cost containment or welfare reform measures proposed in the Executive
Budget or the size of any reductions in State aid to the City. Depending upon
the amount of such savings or the size of any such reduction in State aid, the
City might be required to make substantial additional changes in the Financial
Plan.
The State Division of the Budget has noted that the economic and financial
condition of the State may be affected by various financial, social, economic
and political factors. Those factors can be very complex, can vary from fiscal
year to fiscal year, and are frequently the result of actions taken not only by
the State but also by entities, such as the Federal government, that are outside
the State's control. Because of the uncertainty and unpredictability of these
changes, their impact cannot be included in the assumptions underlying the
State's projections at this time. There can be no assurance that the State
economy will not experience results that are worse than predicted, with
corresponding material and adverse effects on the State's financial projections.
To make progress toward addressing recurring budgetary imbalances, the
1996-97 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be no
assurance that the Legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in future fiscal years. The 1996-1997
Executive Budget includes actions that will have an impact on receipts and
disbursements in future fiscal years. The net impact of these actions is
expected to produce a potential imbalance in State fiscal year 1997-98 of $1.4
billion and in the 1998-99 fiscal year of $2.5 billion, assuming
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implementation of the 1996-97 Executive Budget recommendations. It is expected
that the Governor will propose to close these budget gaps with future spending
reductions.
Uncertainties with regard to both the economy and potential decisions at
the Federal level add further pressure on future budget balance in New York
State. For example, various proposals relating to Federal tax and spending
policies could, if enacted, have a significant impact on the State's financial
condition in the current and future fiscal years. Specifically, the assumption
of $1.3 billion in savings in the State fiscal year 1996-97 from a reduced State
General Fund share of Medicaid is contingent upon anticipated changes to Federal
provisions, including an increase in the Federal share of Medicaid from 50 to 60
percent. Other budget and tax proposals under consideration at the Federal level
but not included in the State's 1996-1997 Executive Budget forecast could also
have a disproportionately negative impact on the longer-term outlook for the
State's economy as compared to other states. A significant risk to the State's
projections arises from tax legislation under consideration by Congress and the
President. Congressionally-adopted retroactive changes to Federal tax treatment
of capital gains would flow through automatically to the State personal income
tax. Such changes, if ultimately enacted, could produce revenue losses in the
1996-1997 fiscal year. In addition, changes in Federal aid programs, currently
pending in Congress, could result in prolonged interruptions in the receipt of
Federal grants.
On March 15, 1996, the Governor announced that additional projected
resources had been identified for the State fiscal year 1996-97, which could be
used for additional program needs if the Federal government enacts welfare and
Medicaid reform in the near future, or which could be used as part of a
contingency plan, if such reform is not enacted in the State fiscal year 1996-
97, to offset the loss of welfare and Medicaid reform benefits to the State
assumed in the 1996-97 Executive Budget. In the State's 1996 fiscal year and in
certain recent fiscal years, the State has failed to enact a budget prior to the
beginning of the State's fiscal year. The State budget for the State's 1997
fiscal year was not adopted by the statutory deadline of April 1, 1996.
However, temporary spending measures are being considered by the State, which
would maintain State spending until April 30, 1996. A prolonged delay in the
adoption of the State's budget beyond the statutory April 1 deadline could delay
the projected receipt by the City of State aid. In addition, there can be no
assurance that State budgets in future fiscal years will be adopted by the April
1 statutory deadline.
The projections and assumptions contained in the 1996-1999 Financial Plan
are subject to revision which may involve substantial change, and no assurance
can be given that
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these estimates and projections, which include actions which the City expects
will be taken but which are not within the City's control, will be realized.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. The City's projections are subject to the City's
ability to implement the necessary service and personnel reduction programs
successfully.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the 1996-99 Financial Plan. The City is a party to
numerous lawsuits and is the subject of numerous claims and investigations. The
City has estimated that its potential future liability on account of outstanding
claims against it as of June 30, 1995 amounted to approximately $2.5 billion.
This estimate was made by categorizing the various claims and applying a
statistical model, based primarily on actual settlements by type of claim during
the preceding ten fiscal years, and by supplementing the estimated liability
with information supplied by the City's Corporation Counsel.
On July 10, 1995, S&P revised downward its rating on City general
obligation bonds from A- to BBB+ and removed City bonds from CreditWatch. S&P
stated that "structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector". Other
factors identified by S&P's in lowering its rating on City bonds included a
trend of using one-time measures, including debt refinancings, to close
projected budget gaps, dependence on unratified labor savings to help balance
the Financial Plan, optimistic projections of additional federal and State aid
or mandate relief, a history of cash flow difficulties caused by State budget
delays and continued high debt levels.
Fitch Investors Service, Inc. ("Fitch") rates City general obligation bonds
A-. Moody's rating for City general obligation bonds is Baa1. On March 1,
1996, Moody's stated that the rating for the City's Baa1 general obligation
bonds remains under review for a possible downgrade pending the outcome of the
adoption of the City's budget for the 1997 fiscal year and in light of the
status of the debate on public assistance and Medicaid reform; the enactment of
a State budget, upon which major assumptions regarding State aid are dependent,
which may be extensively
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delayed; and the seasoning of the City's economy with regard to its strength and
direction in the face of a potential national economic slowdown. Since July 15,
1993, Fitch has rated City bonds A-. On February 28, 1996, Fitch placed the
City's general obligation bonds on FitchAlert with negative implications. There
is no assurance that such ratings will continue for any given period of time or
that they will not be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an adverse effect on the market prices of the
City's general obligation bonds.
In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. On July
10, 1995, S&P revised its rating of City bonds downward to BBB+, as discussed
above. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. Since July 15, 1993, Fitch
has rated City bonds A-. On July 12, 1995, Fitch stated that the City's credit
trend remains "declining."
INVESTING IN PUERTO RICO, THE UNITED STATES VIRGIN ISLANDS AND GUAM
Although the economy of Puerto Rico expanded significantly from fiscal 1984
through fiscal 1990, the rate of this expansion slowed during and after fiscal
1991. Growth in fiscal 1994 will depend on several factors, including the state
of the U.S. economy, the exchange rate of the U.S. dollar, the cost of borrowing
and the relative stability in the price of oil. Puerto Rico is required to
import all of its oil.
Puerto Rico has a diversified economy dominated by the manufacturing and
service sectors. Manufacturing is the largest sector in terms of gross domestic
product and is more diversified than during earlier phases of Puerto Rico's
industrial development. The service sector, particularly finance, insurance and
real estate, grew significantly in response to the expansion of the
manufacturing sector. However, government layoffs and a recession driven
slowdown in tourism have lead to weakness in these areas and have had a negative
ripple effect on services as well. In addition, legislation was adopted in
August 1993 which will phase out over a number of years certain tax benefits to
U.S. corporations with manufacturing operations in Puerto Rico. Puerto Rico's
unemployment rate tends to be significantly higher than the average rate for the
United States.
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Puerto Rico exercises virtually the same control over its internal affairs
as do the fifty states; however, it differs from the states in its relationship
with the federal government. Most federal taxes, except those such as social
security taxes that are imposed by mutual consent, are not levied in Puerto
Rico.
Puerto Rico's financial reporting was first conformed to generally accepted
accounting principles in fiscal 1990. Non-recurring revenues have been used
frequently to balance recent years' budgets. This reliance on non-recurring
revenues and economic weakness led Standard & Poor's to change its outlook from
stable to negative. Standard & Poor's rates Puerto Rico general obligation debt
A, while Moody's rates it Baa1.
The United States Virgin islands ("USVI") are located approximately 1,100
miles east-southeast of Miami and are made up of St. Croix, St. Thomas and St.
John. The economy is heavily reliant on the tourism industry, with roughly 43%
of non-agricultural employment in tourist-related trade and services. However,
a recession-driven decline in visitors to the Virgin Islands has caused
unemployment to increase.
An important component of the USVI revenue base is the federal excise tax
on rum exports. The preferential tariff treatment the USVI rum industry
currently enjoys could be reduced under the North American Free Trade Agreement.
Increased competition from Mexican rum producers could reduce USVI rum imported
to the U.S., decreasing excise tax revenues generated. There is currently no
rated, unenhanced Virgin Islands debt outstanding.
Guam, an unincorporated U.S. territory, is located 1,500 miles southeast of
Tokyo. Population has grown consistently since 1970. The U.S. military is a
key component of Guam's economy. The federal government directly comprises more
than 10% of the employment base, with a substantial component of the service
sector to support these personnel. Guam is expected to benefit from the closure
of the Subic Bay Naval Base and the Clark Air Force Base in the Philippines.
Guam is also heavily reliant on tourists, particularly the Japanese. There is
currently no rated, unenhanced Guam debt outstanding.
INVESTMENT LIMITATIONS
In addition to the restrictions described under "Limiting Investment Risks"
in the Prospectus, each Fund may not:
1. purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase and sell currency forward
contracts, options
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on foreign currencies and may otherwise engage in transactions in
foreign currencies;
2. make loans, except that a Fund may (a) (i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in
loans and participations in accordance with its investment objectives
and policies, (b) make loans of portfolio securities and (c) enter
into repurchase agreements with respect to portfolio securities;
3. underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with a Fund's investment
program may be deemed to be an underwriting;
4. purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein);
5. purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5% of
a Fund's net assets in the case of any one other investment company
and 10% of such net assets in the case of all other investment
companies in the aggregate. This restriction shall not apply to
investment company securities received or acquired by a Fund pursuant
to a merger or plan of reorganization;
6. sell securities short (except for short positions in a futures
contract or forward contract or short sales against the box and except
in connection with Hedging and Derivatives);
7. invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;
8. pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered
put and call options and the purchase of securities on a forward
commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to futures contracts and
options on futures contracts, securities or indicies;
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9. investment in stock or bond futures and/or options on futures unless
(i) not more than 5% of a Fund's total assets are required as deposit
to secure obligations under such futures and/or options on futures
contracts, provided, however, 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 such 5%;
10. purchase or retain securities of an issuer if those officers or
Directors of the Fund or its investment adviser who own more than 1/2
of 1% of such issuer's securities together own more than 5% of the
securities of such issuer; and
11. invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous operation.
If a percentage restriction on investment or use of assets set forth above
is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
Investment restrictions (1) through (6) described above and those set forth
in the Prospectus under "Limiting Investment Risks" are fundamental policies of
the Funds which may be changed only when permitted by law and approved by the
holders of a majority of a Fund's outstanding voting securities, as described
under "General Information -- Capital Stock". Restrictions (7) through (15) are
nonfundamental policies of the Funds, and may be changed by a vote of the
Company's Board of Directors.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of
the Company for the past five years are listed below.
Position Principal
Held With Occupation(s)
Name, Address and Age the Company Past 5 Years
- --------------------- ----------- --------------
Morris W. Offit* Chairman of the Board, President and Director,
OFFITBANK President and Director OFFITBANK (1983-
520 Madison Avenue present).
New York, NY 10022
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Age: 59 Years
Edward J. Landau Director Member, Lowenthal,
Lowenthal, Landau, Landau, Fischer &
Fischer & Bring, P.C. Bring, P.C. (1960 -
250 Park Avenue present); Director,
New York, NY 10177 Revlon Group Inc.
Age: 66 Years (cosmetics), Revlon
Consumer Products Inc.
(cosmetics), Pittsburgh
Annealing Box (metal
fabricating) and Clad
Metals Inc. (cookware).
The Very Reverend James Director Dean of Cathedral of
Parks Morton St. John the Divine
Cathedral of St. John (1972 - present).
the Divine
1047 Amsterdam Avenue
New York, NY 10025
Age: 66 Years
Wallace Mathai-Davis Secretary and Treasurer Managing Director,
OFFITBANK OFFITBANK (1986-
520 Madison Avenue present).
New York, NY 10022
Age: 51 Years
John J. Pileggi Assistant Treasurer Senior Managing
Furman Selz LLC Director, Furman Selz
230 Park Avenue LLC (1984 - present).
New York, NY 10169
Age: 37 Years
- ---------------
* "Interested person" as defined in the 1940 Act.
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Joan V. Fiore Assistant Secretary Managing Director and
Furman Selz LLC Counsel, Furman Selz
230 Park Avenue LLC (1991 - present);
New York, NY 10169 Attorney, Securities
Age: 39 Years and Exchange Commission
(1986 - 1991).
Gordon M. Forrester Assistant Treasurer Managing Director,
Furman Selz LLC Furman Selz LLC (1987 -
230 Park Avenue present).
New York, NY 10169
Age: 35 Years
The Company pays each Director who is not also an officer or affiliated
person an annual fee of $3,000 and a fee of $500 for each Board of Directors and
Board committee meeting attended and are reimbursed for all out-of-pocket
expenses relating to attendance at meetings. Directors who are affiliated with
the Adviser do not receive compensation from the Company but are reimbursed for
all out-of-pocket expenses relating to attendance at meetings.
DIRECTOR COMPENSATION
(for fiscal period ended December 31, 1995)
<TABLE>
<CAPTION>
Pension or Total
Aggregate Retirement Compensation
Name of Compensa- Benefits Accrued Estimated Annual From Registrant
Person, tion As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Directors
- -------- ---------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Morris W. Offit $-0- -0- -0- $-0-
Edward J. Landau $5,500 -0- -0- $5,500
The Very Reverend
James Parks Morton $5,000 -0- -0- $5,000
</TABLE>
As of February 16, 1996, the Directors and officers, as a group, did not
own 1% or more of the Company.
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INVESTMENT ADVISER
The Company has retained OFFITBANK, a New York State chartered trust
company, to act as its investment adviser (the "Adviser"). The advisory
agreements (the "Advisory Agreements") between the Adviser and the Company
provides that the Adviser shall manage the operations of the Company, subject to
policy established by the Board of Directors of the Company. Pursuant to the
Advisory Agreements, the Adviser manages the Company's investment portfolios,
directs purchases and sales of the portfolio securities and reports thereon to
the Company's officers and directors regularly. In addition, the Adviser pays
the compensation of the Company's officers, employees and directors affiliated
with the Adviser. The Company bears all other costs of its operations, including
the compensation of its directors not affiliated with the Adviser.
For its services under the Advisory Agreements, the Adviser receives from
each Fund an advisory fee. The fee is payable monthly at an annual rate of 0.40%
of OFFITBANK National Municipal Fund's average daily net assets, 0.40% of
OFFITBANK California Municipal Fund's average daily net assets and 0.40% of
OFFITBANK New York Municipal Fund's average daily net assets. The Adviser may
waive all or part of its fee from time to time in order to increase a Fund's net
investment income available for distribution to shareholders. The Funds will not
be required to reimburse the Adviser for any advisory fees waived. The Advisor
was entitled to $23,448 for the fiscal period ended December 31, 1995 from the
New York Municipal Fund but waived $23,280.
The Advisory Agreement with respect to the National Municipal, California
Municipal and New York Municipal Funds was approved by the Company's Board of
Directors on January 31, 1995 and by each Fund's sole shareholder, Furman Selz
LLC ("Furman Selz"). Unless sooner terminated, the Advisory Agreement will
continue in effect until February 7, 1997, and from year to year thereafter if
such continuance is approved at least annually by the Company's Board of
Directors or by a vote of a majority (as defined under "General Information --
Capital Stock") of the outstanding shares of each Fund, and, in either case, by
a majority of the directors who are not parties to the contract or "interested
persons" (as defined in the 1940 Act) of any party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement may be terminated by
the Company or the Adviser on 60 days' written notice, and will terminate
immediately in the event of its assignment.
DISTRIBUTOR
Offit Funds Distributor, Inc., a wholly-owned subsidiary of Furman Selz
(the "Distributor"), with its principal office at 230 Park Avenue, New York, New
York 10169, distributes the shares of the Company. Under a distribution
agreement with the Company (the "Distribution Agreement"), the Distributor, as
agent of the Company, agrees to use its best efforts as sole distributor of the
Company's shares. Solely for the purpose of reimbursing the Distributor for its
expenses incurred in certain activities primarily intended to result in the sale
of shares of the Funds, the Company has adopted a Plan of Distribution (the
"Plan") under Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. Under the
Plan and Distribution Agreement, each Fund is authorized to spend up to 0.25% of
its average daily net assets annually with respect to each class of shares of
the Fund to reimburse the Distributor for such activities, which are summarized
in the Prospectus. For the fiscal period ended December 31, 1995, no
distribution costs were incurred by the Funds.
The Plan, together with the Distribution Agreement, will continue in effect
with respect to a particular Fund from year to year if such continuance is
approved at least annually by the Company's Board of Directors and by a majority
of the Directors who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan ("Qualified
Directors") and who are not "interested persons" (as defined in the 1940 Act) of
any party by votes cast in person at a meeting called for such purpose. In
approving the continuance of the Plan and the Distribution Agreement, the
Directors must determine that the Plan is in the best interest of the
shareholders of each Fund.
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The Plan requires that, at least quarterly, the Board of Directors must
review a written report prepared by the Treasurer of the Company enumerating the
amounts expended and purposes therefor under the Plan. Rule 12b-1 also requires
that the selection and nomination of Directors who are not "interested persons"
of the Company be made by such Qualified Directors.
The Plan was approved unanimously by the Company's Board of Directors on
October 17, 1994 and by Furman Selz, as sole shareholder of each such Fund. The
Plan was unanimously re-approved by the Company's Board of Directors on December
21, 1995. The Pan, as amended to reflect each Fund's Advisor Shares, was re-
approved by the Company's Board of Directors on April 15, 1996.
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES
Furman Selz provides the Company with administrative, fund accounting,
dividend disbursing and transfer agency services pursuant to a Fund
Administration Agreement dated as of February 7, 1994 (the "Administration
Agreement"), as supplemented as of February 8, 1995. The services provided by
and the fees payable to Furman Selz for such services are described in the
Prospectus. The Administration Agreement was recently re-approved by the
Company's Board of Directors on December 21, 1995 and will continue in effect
until February 6, 1997 and from year to year thereafter if such continuance is
approved at least annually by the Company's Board of Directors and by a majority
of the Directors who are not parties to such Agreement or "interested persons"
(as defined in the 1940 Act).
Pursuant to the Administration Agreement, Furman Selz performs certain
administrative and clerical services, including certain accounting services,
facilitation of redemption requests, exchange privileges, and account
adjustments, development of new shareholder services and maintenance of certain
books and records; and certain services to the Company's shareholders, including
assuring that investments and redemptions are completed efficiently, responding
to shareholder inquiries and maintaining a flow of information to shareholders.
Furman Selz also furnishes office space and certain facilities reasonably
necessary for the performance of its services under the Administration
Agreement, and provides the office space, facilities, equipment and personnel
necessary to perform the following services for the Company: Commission
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Company operations, including custodian,
accountants and counsel and other parties performing services or operational
functions for the Company. Pursuant to the Administration Agreement, the
Company pays Furman Selz a monthly fee which on an annualized basis will not
exceed .15% of the average daily net assets of the Company. For the fiscal
period ended December 31, 1995, Furman Selz waived its entire fee of $8,793 from
the New York Municipal Fund.
Furman Selz serves as the Company's Transfer Agent and Dividend Disbursing
Agent pursuant to a Transfer Agency Agreement dated as of February 7, 1994 (the
"Transfer Agency Agreement"), as supplemented as of February 8, 1995. Under the
Transfer Agency Agreement, Furman Selz has agreed, among other things, to: (i)
issue and redeem shares of each Fund; (ii) transmit all communications by each
Fund to its shareholders of record, including reports to shareholders, dividend
and distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Directors concerning the Funds' operations. Under the Transfer Agency
Agreement, Furman Selz is entitled to a fee of $15.00 per account per year. The
Transfer Agency Agreement was recently re-approved at the December 21, 1995
Meeting and continues in effect until February 6, 1997 and from year to year
thereafter if such continuance is approved at least annually by the Company's
Board of Directors and by a majority of the Directors who are not "interested
persons" (as defined in the 1940 Act) of any party, and such Agreement may be
terminated by either party on 60 days' written notice. For the fiscal period
ended December 31, 1995, Furman Selz received $1,662 from the New York Municipal
Fund in transfer agency fees.
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The Chase Manhattan Bank, N.A. (the "Custodian") serves as the Funds'
custodian pursuant to custodian agreements with the Company dated February 8,
1995 (the "Custodian Agreements"). The Custodian is located at 4 MetroTech
Center, 18th Floor, Brooklyn, New York 11245. Under the Custodian Agreements,
the Custodian has agreed to (i) maintain a separate account or accounts in the
name of each Fund; (ii) hold and disburse portfolio securities on account of
each Fund; (iii) collect and receive all income and other payments and
distributions on account of each Fund's portfolio securities; (iv) respond to
correspondence by security brokers and others relating to its duties; and (v)
make periodic reports to the Company's Board of Directors concerning the Funds'
operations. The Custodian is authorized under the Custodian Agreements to
establish separate accounts for the Funds' foreign securities with
subcustodians, provided that the Custodian remains responsible for the
performance of all of its duties under the Custodian Agreements. The Custodian
is entitled to receive monthly fees under the Custodian Agreements based upon
the types of assets held by each Fund, at the annual rate of .0865% on the first
$10 million and .05% on amounts in excess thereof for assets held in the United
States and .20% on the first $10 million and .15% on amounts in excess thereof.
For the fiscal period ended December 31, 1995, the New York Municipal Fund paid
the Custodian $6,150 in fees.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Company's Board of Directors, the Adviser is primarily
responsible for the Company's portfolio decisions and the placing of the
Company's portfolio transactions. For the fiscal period ended December 31,
1995, the New York Municipal Fund did not pay any brokerage commissions.
Fixed-income and certain short-term securities normally will be purchased
or sold from or to dealers serving as market makers for the securities at a net
price, which may include dealer spreads and underwriting commissions. Purchases
and sales of securities on a stock exchange are effected through brokers who
charge a commission. In the over-the-counter market, securities are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer. In placing orders, it is the policy of the Company to
obtain the best results taking into account the dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities involved. While the Adviser
generally seeks a competitive price in placing its orders, the Company may not
necessarily be paying the lowest price available.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the
Commission. Affiliated persons of the Company, or affiliated persons of such
persons, may from time to time be selected to execute portfolio transactions for
the Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees or other remuneration received by other brokers in connection
with comparable transactions. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length agency
transaction.
Investment decisions for the Company are made independently from those for
other funds and accounts advised or managed by the Adviser. Such other funds and
accounts may also invest in the same securities as the Company. If those funds
or accounts are prepared to invest in, or desire to dispose of, the same
security at the same time as the Company, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Company or the price paid or received by the Company. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security. To the extent permitted by law, the
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Adviser may aggregate the securities to be sold or purchased for the Company
with those to be sold or purchased for other funds or accounts in order to
obtain best execution.
PURCHASE OF SHARES
For information pertaining to the manner in which shares of each class of
each Fund are offered to the public, see "Purchase of Shares" in the Prospectus.
The Company reserves the right, in its sole discretion, to (i) suspend the
offering of shares of its Funds, and (ii) reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interest of
the Company. The officers of the Company may, from time to time, waive the
minimum initial and subsequent investment requirements.
REDEMPTION OF SHARES
For information pertaining to the manner in which each of class of each
Fund may be redeemed, see "Redemption of Shares" in the Prospectus. The Company
may suspend redemption privileges or postpone the date of payment (i) during any
period that the New York Stock Exchange (the "NYSE") or the bond market is
closed, or trading on the NYSE is restricted as determined by the Commission,
(ii) during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for a Fund to
dispose of securities owned by it, or fairly to determine the value of its
assets, and (iii) for such other periods as the Commission may permit.
Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of a Fund, such Fund may pay the
redemption price, in whole or in part, by a distribution in kind.
The Company has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part in investment securities or in cash, as the Board of
Directors may deem advisable; however, payment will be made wholly in cash
unless the Board of Directors believes that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Company. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Company's Prospectus under "Net Asset Value" and
redeeming shareholders would normally incur brokerage expenses if they converted
these securities to cash.
No charge is made by a Fund for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by a Fund.
PERFORMANCE CALCULATIONS
The Company may from time to time quote various performance figures to
illustrate the past performance of each class of shares of its Funds.
Performance quotations by investment companies are subject to rules adopted by
the Commission, which require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
Fund be accompanied by certain standardized performance information computed as
required by the Commission. An explanation of the Commission methods for
computing performance follows.
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TOTAL RETURN
A Fund's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5 and 10 year periods (or, if shorter,
the period since inception of the Fund) that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes that all dividends and distributions are reinvested when paid. The
quotation assumes the amount was completely redeemed at the end of each 1, 5 and
10 year period (or, if shorter, the period since inception of the Fund) and the
deduction of all applicable Fund expenses on an annual basis. Average annual
total return is calculated according to the following formula:
P (1+T)to the nth power = 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 stated period
Each Fund presents performance information for each class of shares
commencing with the Fund's inception. Performance information for each class of
shares may also reflect performance for time periods prior to the introduction
of such class, and the performance for time periods prior to the introduction of
such class, and the performance for such prior time periods will not reflect any
fees and expenses, payable by such class that were not borne by the Fund prior
to the introduction of such class.
All of the outstanding shares of the Funds were reclassified as "Select
Shares" as of April 15, 1996, and Funds began to offer a new class of shares,
"Advisor Shares." The percentage shown in the table below are based on the fees
and expenses actually paid by each Fund for the periods presented, rather than
the fees and expenses currently payable by each class of shares, which in
certain cases are different (as indicated in the footnotes to the table.)
The following table sets forth the total returns for each class of shares
of each of the New York Municipal Fund for the period ended December 31, 1995.
New York Municipal Fund*
Select Advisor
Shares Shares
------ -------
Since inception
(April 3, 1995) 8.13% 8.13%
- ---------------
* The return figures do not reflect the distribution and service fees
currently paid with respect to the Advisor Shares of the Fund.
As described in the Prospectus under the caption "Expense Information," the
High Yield Fund and the Emerging Markets Funds have been and still are subject
to certain fee waivers. Absent such waivers, the returns shown above would be
lower.
The Funds may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating aggregate total return can be expressed as follows:
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Aggregate Total Return = [ ( ERV )- 1 ]
---
P
In addition to total return, each Fund may quote performance in terms of a
30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the Commission and can be expressed as follows:
a-b
Yield = 2 [ (-------- + 1)to the 6th power - 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.
The 30-day yield for the New York Municipal Fund for the period ended
December 31, 1995 was 4.47%.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by a Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Undeclared earned income, computed in accordance
with generally accepted accounting principles, may be subtracted from the
maximum offering price calculation required pursuant to "d" above.
Each Fund may also advertise tax-equivalent yields which are computed by
dividing that portion of yield that is tax-exempt by one, minus a stated income
tax rate and adding the quotient to that portion, if any, of the yield that is
not tax-exempt.
The performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc. or other independent services which monitor the
performance of investment companies, and may be quoted in advertising in terms
of their rankings in each applicable universe. In addition, the Company may use
performance data reported in financial and industry publications, including
BARRON'S, BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY,
MORNINGSTAR, MUTUAL FUND VALUES, THE WALL STREET JOURNAL, THE NEW YORK TIMES AND
U.S.A. TODAY.
ADDITIONAL INFORMATION CONCERNING TAXES
The following discussion is only a brief summary of certain additional tax
considerations affecting the Company, its Funds and its shareholders. No attempt
is made to present a detailed explanation of all federal, state and local tax
concerns, and the discussion set forth here and in the Prospectus is not
intended as a substitute
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for careful tax planning. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state or local taxes.
IN GENERAL
Each Fund intends to qualify as a regulated investment company (a "RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and to continue to so qualify. Qualification as a RIC requires, among other
things, that each Fund: (a) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stocks or
securities; (b) derive less than 30% of its gross income in each taxable year
from the sale or other disposition of any of the following held for less than
three months: (i) stock or securities, (ii) options, futures, or forward
contracts, or (iii) foreign currencies (or foreign currency options, futures or
forward contracts) that are not directly related to its principal business of
investing in stock or securities (or options and futures with respect to stocks
or securities) (the "30% limitation"); and (c) diversify its holdings so that,
at the end of each quarter of each taxable year, (i) at least 50% of the market
value of a Fund's assets is represented by cash, cash items, U.S. government
securities, securities of other regulated investment companies and other
securities with such other securities limited, in respect of any issuer, to an
amount not greater than 5% of the value of a Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than U.S. government
securities or the securities of other regulated investment companies) of any one
issuer.
Investors should consider the tax implications of buying shares just prior
to distribution. Although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those purchasing just prior to a
distribution will receive a distribution which will nevertheless be taxable to
them.
Gain or loss, if any, on the sale or other disposition of shares of each of
the Funds will generally result in capital gain or loss to shareholders.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. If a shareholder sells or
otherwise disposes of a share of a Fund before holding it for more than six
months, any loss on the sale or other disposition of such share shall be treated
as a long-term capital loss to the extent of any capital gain dividends received
by the shareholder with respect to such share, or shall be disallowed to the
extent of any exempt-interest dividend. Currently, the maximum federal income
tax rate imposed on individuals with respect to net realized long-term capital
gains is limited to 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to net realized short-term capital gains (which are
taxed at the same rates as ordinary income) is 39.6%.
Each Fund's investments in options, futures contracts and forward
contracts, options on futures contracts and stock indices and certain other
securities, including transactions involving actual or deemed short sales or
losses are subject to many complex and special tax rules. For example, over-the-
counter options on debt securities and equity options, including options on
stock and on narrow-based stock indexes, will be subject to tax under Section
1234 of the Code, generally producing a long-term or short-term capital gain or
loss upon exercise, lapse or closing out of the option or sale of the underlying
stock or security. By contrast, each Fund's treatment of certain other options,
futures and forward contracts entered into by a Fund is generally governed by
Section 1256 of the Code. These "Section 1256" positions generally include
listed options on debt securities, options on broad-based stock indexes, options
on securities indexes, options on futures contracts and regulated futures
contracts.
Absent a tax election to the contrary, each such Section 1256 position held
by the Funds will be marked-to-market (I.E., treated as if it were sold for fair
market value) on the last business day of the Portfolios' fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end will generally be treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss.
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The effect of Section 1256 mark-to-market rules may be to accelerate income or
to convert what otherwise would have been long-term capital gains into short-
term capital gains or short-term capital losses into long-term capital losses
within the Funds. The acceleration of income on Section 1256 positions may
require the Funds to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, the Funds may be required to dispose of portfolio securities that they
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income earned and in turn distributed
to shareholders by the Funds.
When the Funds hold options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
I.E., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.
As a regulated investment company, each Fund is also subject to the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months ("short-short income"). This requirement may limit the
Funds' ability to engage in options, spreads, straddles, hedging transactions,
forward or futures contracts or options on any of these positions because these
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in the case
of short sales of portfolio securities reduce the holding periods of certain
securities within the Funds, resulting in additional short-short income for the
Funds.
Each Fund will monitor its transactions in such options and contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
Each Fund is likely to make investments that produce income that is not
matched by a corresponding cash distribution to the Fund, such as investments in
obligations having original issue discount (I.E., an amount equal to the excess
of the stated redemption price of the security at maturity over its issue
price), or market discount (I.E., an amount equal to the excess of the stated
redemption price of the security over the basis of such bond immediately after
it was acquired) if the Fund elects to accrue market discount on a current
basis. Each Fund intends to elect to accrue market discount on a current basis.
In addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the 30% limitation discussed above. In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction for any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed.
The tax treatment of certain securities in which each Fund may invest is
not free from doubt and it is possible that an Internal Revenue Service ("IRS")
examination of the issuers of such securities or of the Fund could result in
adjustments to the income of a Fund. An upward adjustment by the IRS to the
income of a Fund may result in the failure of such Fund to satisfy the 90%
distribution requirement described in the Prospectus necessary for such Fund to
maintain its status as a regulated investment company under the Code. In such
event, a Fund may be able to make a "deficiency dividend" distribution to its
shareholders with respect to the year under examination to satisfy this
requirement. Such distribution will be taxable as a dividend to the shareholders
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<PAGE>
receiving the distribution (whether or not a Fund has sufficient current or
accumulated earnings and profits for the year in which such distribution is
made). A downward adjustment by the IRS to the income of a Fund may cause a
portion of the previously made distribution with respect to the year under
examination not to be treated as a dividend. In such event, the portion of
distributions to each shareholder not treated as a dividend would be
recharacterized as a return of capital and reduce the shareholder's basis in the
shares held at the time of the previously made distributions. Accordingly, this
reduction in basis could cause a shareholder to recognize additional gain upon
the sale of such shareholder's shares.
TAX-EXEMPT DIVIDENDS
The Funds intend to qualify to pay "exempt-interest dividends," as that
term is defined in the Code, by holding at the end of each quarter of its
taxable year at least 50% of the value of its total assets in the form of
obligations described in section 103(a) of the Code. These Funds' policy is to
pay in each taxable year exempt-interest dividends equal to at least 90% of each
such Fund's interest from tax-exempt obligations net of certain deductions.
Except as discussed below, exempt-interest dividends will be exempt from regular
federal income tax.
Although exempt-interest dividends may be excluded from a shareholder's
gross income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholder's liability (if any) under the federal individual and corporate
alternative minimum tax provisions of the Code. Exempt-interest dividends will
constitute a specific preference item for purposes of the federal alternative
minimum tax to the extent that such dividends are derived from certain types of
private activity bonds issued after August 7, 1986. In addition, all exempt-
interest dividends will be a component of the "adjusted current earnings"
adjustment item for purposes of the federal corporate alternative minimum tax.
Moreover, the receipt of dividends from the Fund may increase a corporate
shareholder's liability for environmental taxes under Section 59A of the Code
and a foreign corporate shareholder's liability under the branch profits tax,
and may also affect the federal tax liability of certain Subchapter S
corporations and insurance companies. Furthermore, the receipt of exempt-
interest dividends may be a factor in determining the extent to which a
shareholder's Social Security benefits are taxable.
The exemption of interest income for regular federal income tax purposes
may not result in similar exemptions under the tax law of state and local taxing
Authorities. In general, a state exempts from state income tax only interest
earned on obligations issued by that state or its political subdivisions and
instrumentalities.
Interest on indebtedness incurred by a shareholder to purchase or carry a
Fund's shares is not deductible for federal income tax purposes if such Fund
distributes exempt-interest dividends during the shareholder's taxable year.
Net long-term capital gains realized by the Funds, if any, will be
distributed at least annually. The Funds will generally have no tax liability
with respect to such gains to the extent distributed, and the distributions,
whether paid in cash or reinvested in additional shares, will be taxable to the
Funds' shareholders as long-term capital gains, regardless of how long a
shareholder has held the Funds' shares. Such distributions will be designated as
a capital gain dividend in a written notice mailed by the Funds to their
shareholders not later than 60 days after the close of the Funds' taxable year.
Similarly, while the Funds do not expect to earn significant investment
company taxable income, taxable income earned by the Funds will be distributed
to their shareholders. In general, the Funds' investment company taxable income
will be its taxable income (for example, any short-term capital gains) subject
to certain adjustments and excluding the excess of any net long-term capital
gain for the taxable year over the net short-term capital loss, if any, for such
year. The Funds will be taxed on any undistributed investment company
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taxable income of each Fund. To the extent such income is distributed by a Fund,
it will be taxable to such Fund's shareholders as ordinary income, whether paid
in cash or reinvested in additional shares.
BACKUP WITHHOLDING
The Funds may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to non-
corporate shareholders. This tax may be withheld from dividends if (i) the payee
fails to furnish a Fund with the payee's correct taxpayer identification number,
(ii) the Internal Revenue Service notifies a Fund that the payee has failed to
report properly certain interest and dividend income to the Internal Revenue
Service and to respond to notices to that effect, or (iii) when required to do
so, the payee fails to certify that he or she is not subject to backup
withholding.
Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.
SHAREHOLDER SERVICES
The following supplements the shareholder services set forth in the
Company's Prospectus:
EXCHANGE PRIVILEGE
Shares of each class of any Fund of the Company may be exchanged for shares
of the same class of the Company's other Funds or portfolios provided that, with
respect to Select Shares, a shareholder exchanges shares with a value of at
least $50,000. Exchange requests should be sent to The OFFITBANK Investment
Fund, Inc., 237 Park Avenue, Suite 910, New York, New York 10017. Any such
exchange will be based on the respective net asset values of the shares
involved. There is no sales commission or charge of any kind. Before making an
exchange, a shareholder should consider the investment objective of the Fund or
portfolio to be purchased. Exchange requests may be made either by mail or
telephone. Telephone exchanges (referred to as "expedited exchanges") will be
accepted only if the certificates for the shares to be exchanged are held by the
Company for the account of the shareholder and the registration of the two
accounts is identical. Requests for expedited exchanges received prior to 4:15
p.m. (New York time) will be processed as of the close of business on the same
day. Requests received after this time will be processed on the next business
day. Expedited exchanges may, upon 60 days' notice to shareholders, also be
subject to limitations as to amounts or frequency, and to other restrictions
established by the Board of Directors to assure that such exchanges do not
disadvantage the Company and its shareholders. A Shareholder who holds Advisor
Shares should consult his/her Shareholder Servicing Agent to determine the
availability of and terms and conditions imposed on exchanges with other Funds
and Portfolios of the Company.
For federal income tax purposes, an exchange between Funds or portfolios of
the Company is a taxable event, and, accordingly, a capital gain or loss may be
realized. In a revenue ruling relating to circumstances similar to the
Company's, an exchange between a series of a fund was deemed to be a taxable
event. It is likely, therefore, that a capital gain or loss would be realized on
an exchange between Funds or portfolios; shareholders may want to consult their
tax advisers for further information in this regard. The exchange privilege may
be modified or terminated at any time.
TRANSFER OF SHARES
Shareholders may transfer shares of the Company's Funds to another person
by written request to The OFFITBANK Investment Fund, Inc. at the address noted
above. The request should clearly identify the account and number of shares to
be transferred and include the signature of all registered owners and all share
certificates, if any, which are subject to the transfer. The signature on the
letter of request, the share certificate or
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any stock power must be guaranteed in the same manner as described under
"Redemption of Shares" in the Prospectus. As in the case of redemptions, the
written request must be received in good order before any transfer can be made.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law. As
used in this Statement of Additional Information, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Fund and all additional investment portfolios,
means the vote of the lesser of (i) 67% of the Company's shares represented at a
meeting if the holders of more than 50% of the outstanding shares are present in
person or by proxy or (ii) more than 50% of the Company's outstanding shares.
The term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting the Company, any other single
Fund (E.G., approval of Advisory Agreements) or any single class of a Fund,
means the vote of the lesser of (i) 67% of the shares of the Fund represented at
a meeting if the holders of more than 50% of the outstanding shares of the Fund,
or of the class of shares of the Fund, if a class vote is required, are present
in person or by proxy or (ii) more than 50% of the outstanding shares of the
Fund, or of the class of shares of the Fund, if a class vote is required.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held.
Each share of each class of a Fund of the Company is entitled to such
dividends and distributions out of the income earned on the assets belonging to
that Fund as are declared in the discretion of the Company's Board of Directors.
In the event of the liquidation or dissolution of the Company, shares of a Fund
are entitled to receive the assets allocable to that class of Shares of such
Fund which are available for distribution, and a proportionate distribution,
based upon the relative net assets of the Funds, of any general assets not
belonging to a Fund which are available for distribution. It is anticipated that
expenses incurred by each class of shares of each Fund will differ and,
accordingly, that the dividends distributed with respect to each class will
differ.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid, non-assessable, fully transferable and redeemable at
the option of the holder.
CERTAIN OWNERS OF SHARES OF THE COMPANY
As of February 16, 1996, the following persons owned of record or
beneficially 5% or more of the outstanding shares of a Fund of the Company:
NEW YORK MUNICIPAL FUND SHARES OWNED PERCENTAGE
- ----------------------- ------------ ----------
Kinco & Co. 96,140.078 6.31%
C/O RNB Securities Services
One Hanson Place
Brooklyn, NY 11243
Peter J. Solomon & Abigail 126,895.127 8.33%
R. Solomon TTEES FBO
Abigail R. Solomon 1995 Trust
350 Park Avenue
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<PAGE>
New York, NY 10022
Trust FBO Jonathan S. Canno 3,558.638 5.48%
U/W/O Maurice Rosenfeld
Irma R Canno TTEE
C/O Irma R Canno
870 Fifth Avenue
New York, NY 10021
OFFITBANK Capital 239,956.138 15.75%
Attn Vincent Rella
520 Madison Avenue, 27th Fl
New York, NY 10022
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Company.
Price Waterhouse LLP is located at 1177 Avenue of the Americas, New York, New
York 10036.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Commission under the Securities Act of 1933 with respect to the securities
offered by the Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Statement of Additional Information
pursuant to the rules and regulations of the Commission. The Registration
Statement including the exhibits filed therewith may be examined at the office
of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
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THE OFFITBANK INVESTMENT FUND, INC.
OFFITBANK INVESTMENT GRADE GLOBAL DEBT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
ASSETS:
Cash $33,333
-------
Total Assets $33,333
-------
LIABILITIES:
Commitments (Notes 1 and 2) -------
NET ASSETS:
(3,333 shares of OFFITBANK Investment Grade Global
Debt Fund, of $.001 par value of common stock issued and
outstanding) $33,333
-------
Net Asset Value per share $ 10.00
-------
NOTES TO FINANCIAL STATEMENT
NOTE 1
OFFITBANK Investment Grade Global Debt Fund (the "Fund") is a separate
non-diversified Portfolio of The OFFITBANK Investment Fund Inc. (the
"Company") which was incorporated in Maryland on September 8, 1993. The Fund
has had no operations other than those relating to organizational matters and
the issuance of 3,333 Common Shares to Furman Selz LLC ("Ferman Selz"). The
Company is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). OFFITBANK has agreed to pay the Fund's organizational
expenses. In the event that, at any time during the five year period
beginning with the date of commencement of operations, the initial shares
acquired by Furman Selz prior to such date are redeemed by any holder
thereof, the redemption proceeds payable in respect of such shares will be
reduced by the pro rata shares (based on the proportionate shares of the
initial shares redeemed to the total number of original shares outstanding at
the time of such redemption) of the then unamortized organizational expenses
as of the date of such redemption.
NOTE 2
The Company has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with OFFITBANK (the "Adviser"). The
Investment Advisory Agreement provides for the Fund to pay the Adviser an
investment advisory fee calculated and accrued daily and paid monthly at the
annual rate of .80% on the first $200,000,000 of net assets and .70% on
amounts in excess thereof of the Fund's average daily net assets. The Adviser
will provide portfolio management and certain administrative, clerical and
bookkeeping services for the Fund.
<PAGE>
Furman Selz provides the Company with administrative, fund accounting,
dividend disbursing and transfer agency services pursuant to an administration
agreement (the "Administration Agreement"). The services under the
Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include day-to-day administration of
matters related to the corporate existence of the Company, maintenance of its
records, preparation of reports, supervision of the Company's arrangement
with its custodian and assistance in the preparation of the Company's
Registration Statements under federal and state laws. Pursuant to the
Administration Agreement, the Fund will pay Furman Selz a monthly fee for its
services which on an annualized basis will not exceed .15% of the average
daily net assets of the Fund.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. (the "Distributor"), an
affiliate of Furman Selz. Under the Distribution Agreement, the
Distributor, as agent of the Company, agrees to use its best efforts as sole
distributor of the Company's shares. Under the Plan of Distribution, the Fund
is authorized to spend up to 0.25% of its average daily net assets to
compensate the Distributor for its services. The Distribution Agreement
provides that the Fund will bear the costs of the registration of its shares
with the Commission and various states and the printing of its prospectus,
statement of additional information and report to shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
The OFFITBANK Investment Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of OFFITBANK
Investment Grade Global Debt Fund (the "Fund"), a separate portfolio of The
OFFITBANK Investment Fund, Inc., at December 31, 1995, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our
audit of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
February 28, 1996
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
OFFITBANK NATIONAL MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
ASSETS:
Cash $ 50
--
Deferred Organization expenses (Note 1) 25,000
-------
Total Assets 25,050
-------
LIABILITIES:
Organization expenses payable (Note 1) 25,000
-------
Commitments (Notes 1 and 2) -------
NET ASSETS:
(5 shares of OFFITBANK National Municipal Fund,
of $.001 par value of common stock issued and
outstanding) $ 50
--
Net Asset Value per share $ 10.00
-------
NOTES TO FINANCIAL STATEMENT
NOTE 1
OFFITBANK National Municipal Fund (the "Fund") is a separate
non-diversified Portfolio of The OFFITBANK Investment Fund Inc. (the
"Company") which was incorporated in Maryland on September 8, 1993. The Fund
has had no operations other than those relating to organizational matters and
the issuance of 5 Common Shares to Furman Selz LLC ("Ferman Selz"). The
Company is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). In the event that, at any time during the five year period
beginning with the date of commencement of operations, the initial shares
acquired by Furman Selz prior to such date are redeemed by any holder
thereof, the redemption proceeds payable in respect of such shares will be
reduced by the pro rata shares (based on the proportionate shares of the
initial shares redeemed to the total number of original shares outstanding at
the time of such redemption) of the then unamortized organizational expenses
as of the date of such redemption. In the event that the Fund liquidates
before the deferred organizational expenses are full amortized, Furman Selz
shall bear such unamortized deferred organizational expenses.
<PAGE>
NOTE 2
The Company has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with OFFITBANK (the "Adviser"). The
Investment Advisory Agreement provides for the Fund to pay the Adviser an
investment advisory fee calculated and accrued daily and paid monthly at the
annual rate of .40% of the Fund's average daily net assets. The Adviser will
provide portfolio management and certain administrative, clerical and
bookkeeping services for the Fund.
Furman Selz provides the Company with administrative, fund accounting,
dividend disbursing and transfer agency services pursuant to an administration
agreement (the "Administration Agreement"). The services under the
Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include day-to-day administration of
matters related to the corporate existence of the Company, maintenance of its
records, preparation of reports, supervision of the Company's arrangement
with its custodian and assistance in the preparation of the Company's
Registration Statements under federal and state laws. Pursuant to the
Administration Agreement, the Fund will pay Furman Selz a monthly fee for its
services which on an annualized basis will not exceed .15% of the average
daily net assets of the Fund.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. (the "Distributor"), an
affiliate of Furman Selz. Under the Distribution Agreement, the Distributor,
as agent of the Company, agrees to use its best efforts as sole distributor
of the Company's shares. Under the Plan of Distribution, the Fund is
authorized to spend up to 0.25% of its average daily net assets to compensate
the Distributor for its services. The Distribution Agreement provides that
the Fund will bear the costs of the registration of its shares with the
Commission and various states and the printing of its prospectus, statement
of additional information and report to shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
The OFFITBANK Investment Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of OFFITBANK
National Municipal Fund (the "Fund"), a separate portfolio of The
OFFITBANK Investment Fund, Inc., at December 31, 1995, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our
audit of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
February 28, 1996
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
OFFITBANK CALIFORNIA MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
ASSETS:
Cash $ 50
--
Deferred Organization expenses (Note 1) 25,000
-------
Total Assets 25,050
-------
LIABILITIES:
Organization expenses payable (Note 1) 25,000
-------
Commitments (Notes 1 and 2) -------
NET ASSETS:
(5 shares of OFFITBANK National Municipal Fund,
of $.001 par value of common stock issued and
outstanding) $ 50
--
Net Asset Value per share $ 10.00
-------
NOTES TO FINANCIAL STATEMENT
NOTE 1
OFFITBANK California Municipal Fund (the "Fund") is a separate
non-diversified Portfolio of The OFFITBANK Investment Fund Inc. (the
"Company") which was incorporated in Maryland on September 8, 1993. The Fund
has had no operations other than those relating to organizational matters and
the issuance of 5 Common Shares to Furman Selz LLC ("Ferman Selz"). The
Company is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). In the event that, at any time during the five year period
beginning with the date of commencement of operations, the initial shares
acquired by Furman Selz prior to such date are redeemed by any holder
thereof, the redemption proceeds payable in respect of such shares will be
reduced by the pro rata shares (based on the proportionate shares of the
initial shares redeemed to the total number of original shares outstanding at
the time of such redemption) of the then unamortized organizational expenses
as of the date of such redemption. In the event that the Fund liquidates
before the deferred organizational expenses are full amortized, Furman Selz
shall bear such unamortized deferred organizational expenses.
<PAGE>
NOTE 2
The Company has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with OFFITBANK (the "Adviser"). The
Investment Advisory Agreement provides for the Fund to pay the Adviser an
investment advisory fee calculated and accrued daily and paid monthly at the
annual rate of .40% of the Fund's average daily net assets. The Adviser will
provide portfolio management and certain administrative, clerical and
bookkeeping services for the Fund.
Furman Selz provides the Company with administrative, fund accounting,
dividend disbursing and transfer agency services pursuant to an
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include day-to-day administration of
matters related to the corporate existence of the Company, maintenance of its
records, preparation of reports, supervision of the Company's arrangement
with its custodian and assistance in the preparation of the Company's
Registration Statements under federal and state laws. Pursuant to the
Administration Agreement, the Fund will pay Furman Selz a monthly fee for its
services which on an annualized basis will not exceed .15% of the average
daily net assets of the Fund.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. (the "Distributor"), an
affiliate of Furman Selz. Under the Distribution Agreement, the Distributor,
as agent of the Company, agrees to use its best efforts as sole distributor
of the Company's shares. Under the Plan of Distribution, the Fund is
authorized to spend up to 0.25% of its average daily net assets to compensate
the Distributor for its services. The Distribution Agreement provides that
the Fund will bear the costs of the registration of its shares with the
Commission and various states and the printing of its prospectus, statement
of additional information and report to shareholders.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
The OFFITBANK Investment Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of OFFITBANK
California Municipal Fund (the "Fund"), a separate portfolio of The
OFFITBANK Investment Fund, Inc., at December 31, 1995, in conformity with
generally accepted accounting principles, This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our
audit of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
February 28, 1996
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
AEROSPACE/DEFENSE (2.34%)
CORPORATE BONDS
Fairchild Industries Inc. Sr Notes, 12.25%, 02/01/99....................... $ 1,250,000 $ 1,300,000
Sequa Corp. Sr Notes, 8.75%, 12/15/01...................................... 4,800,000 4,536,000
Sequa Corp. Sr Sub Notes, 9.375%, 12/15/03................................. 1,000,000 932,500
Tracor, Inc. Sr Sub Notes, 10.875%, 08/15/01............................... 2,000,000 2,055,000
UNC, Inc. Sr Notes, 9.125%, 07/15/03....................................... 2,450,000 2,376,500
-------------
11,200,000
-------------
BROADCAST/TELECOMMUNICATIONS (13.33%)
CORPORATE BONDS
Adelphia Communications Sr Notes, 9.50%, 02/15/04.......................... 2,095,000(5) 1,738,850
Cablevision Industries Corp. Sr Notes, 10.75%, 01/30/02.................... 2,000,000 2,180,000
Cablevision Systems Corp. Sr Sub Notes, 10.75%, 04/01/04................... 1,000,000 1,057,500
Cablevision Systems Corp. Sr Sub Notes, 9.25%, 11/01/05.................... 3,000,000 3,116,250
Centennial Cellular Corp. Sr Notes, 8.875%, 11/01/01....................... 5,500,000 5,403,750
Century Communications Corp. Sr Notes, 9.75%, 02/15/02..................... 4,500,000 4,680,000
Continental Cablevision, Inc. Sr Sub Notes, 10.625%, 06/15/02.............. 2,250,000 2,430,000
Fundy Cable Ltd. Sr Notes, 11.00%, 11/15/05................................ 2,000,000 2,090,000
Granite Broadcasting Corp. Sr Sub Notes, 10.375%, 05/15/05................. 2,000,000 2,050,000
Le Groupe Videotron Ltee. Sr Notes, 10.625%, 02/15/05...................... 1,000,000 1,066,250
MobileMedia Communications Sr Sub Notes, 9.375%, 11/01/07.................. 2,000,000 2,060,000
Paging Network Sr Sub Notes, 10.125%, 08/01/07............................. 5,000,000 5,443,750
Pan Am Sat, L.P. Sr Notes, 9.75%, 08/01/00................................. 2,000,000 2,115,000
Rogers Cablesystems Ltd. Sr Secured 2nd Priority Notes, 9.625%, 08/01/02... 2,000,000 2,100,000
Rogers Cablesystems Ltd. Sr Secured 2nd Priority Notes, 9.65%, 01/15/14.... 2,000,000(A) 1,282,521
Rogers Cablesystems Ltd. Sr Secured 2nd Priority Notes, 10.00%, 03/15/05... 3,000,000 3,210,000
SCI Television Inc. 1st Secured Loan Fac., 7.50/9.50%, 06/30/98............ 3,087,800(3) 3,087,800
Sinclair Broadcast Group Sr Sub Notes, 10.00%, 09/30/05.................... 3,000,000 3,067,500
Storer Communications Inc. Sub Debs., 10.00%, 05/15/03..................... 3,000,000 3,003,750
Telemundo Group Sr Notes, 10.25%, 12/30/01................................. 2,000,000 1,980,000
TeleWest Plc Debs., 0/11.00%, 10/01/07..................................... 7,000,000(3) 4,208,750
Videotron Holdings Sr Discount Notes, 0/11.125%, 07/01/04.................. 2,500,000(3) 1,731,250
Videotron Ltee. Sr Sub Notes, 10.25%, 10/15/02............................. 2,500,000 2,637,500
PREFERRED STOCKS
Cablevision Systems Corp. Pfd., 11.75% Series G............................ 20,000 2,100,000
-------------
63,840,421
-------------
CHEMICALS (4.77%)
CORPORATE BONDS
Borden Chemicals & Plastics Sr Notes, 9.50%, 05/01/05...................... 1,500,000 1,546,875
Freeport-McMoran Resource Partners, L.P. Sr Sub Notes, 8.75%, 02/15/04..... 2,000,000 2,050,000
Harris Chemical North America, Inc. Sr Notes, 0/10.25%, 07/15/01........... 5,000,000(3) 4,800,000
Sherritt Gordon Ltd. Notes, 9.75%, 04/01/03................................ 2,500,000 2,643,750
Sherritt, Inc. Sr Notes, 11.00%, 03/31/04.................................. 3,000,000(A) 2,365,634
Sifto Canada Inc. Sr Notes, 8.50%, 07/15/00................................ 3,500,000 3,386,961
Terra Industries Inc. Sr Notes, 10.50%, 06/15/05........................... 3,000,000 3,307,500
Uniroyal Chemical Co., Inc. Sr Notes, 9.00%, 09/01/00...................... 2,750,000 2,750,000
-------------
22,850,720
-------------
</TABLE>
F-1
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER GROUPS (5.24%)
CORPORATE BONDS
Borg-Warner Security Corp. Sr Sub Notes, 9.125%, 05/01/03.................. $ 1,500,000 $ 1,365,000
Host Marriott Travel Plaza Sr Notes, 9.50%, 05/15/05....................... 6,500,000 6,426,875
Regency Health Services Sr Sub Notes, 9.875%, 10/15/02..................... 2,000,000 1,985,000
Revlon Inc. Sr Debs., 10.875%, 07/15/10.................................... 3,800,000 3,876,000
Samsonite Corp. Sr Notes, 11.125%, 07/15/05................................ 1,500,000 1,470,000
Sealy Corp Sr Sub Notes, 9.50%, 05/01/03................................... 2,200,000 2,233,000
Tultex Corp. Sr Notes, 10.625%, 03/15/05................................... 1,400,000 1,424,500
Westpoint Stevens, Inc. Sr Notes, 8.75%, 12/15/01.......................... 2,500,000 2,506,250
PREFERRED STOCKS
Foxmeyer Health Corp. Pfd. $4.20 Series A.................................. 75,558(5) 2,823,980
Pantry Pride Inc. Pfd. $14.875 Series B.................................... 10,000 1,025,000
-------------
25,135,605
-------------
FINANCIAL SERVICES/INSURANCE (6.27%)
CORPORATE BONDS
American Annuity Group Inc. Sr Sub Notes, 11.125%, 02/01/03................ 3,000,000 3,240,000
Americo Life Inc. Sr Notes, 9.25% 06/01/05................................. 2,500,000 2,375,000
First City Financial Sr Sub Notes, 9.00%, 09/30/97......................... 5,079,400 5,066,702
Keystone Group Inc. Sr Secured Notes, 9.75%, 09/01/03...................... 1,000,000 965,000
Navistar Financial Corp. Sr Sub Notes, 8.875%, 11/15/98.................... 2,500,000 2,525,000
Penn Central Corp. Sr Notes 10.625%, 04/15/00.............................. 3,500,000 3,783,381
Phoenix Re Corp. Sr Notes, 9.75%, 08/15/03................................. 1,000,000 1,067,500
Presidential Life Corp. Sr Notes, 9.50%, 12/15/00.......................... 2,500,000 2,600,000
Reliance Group Holdings, Inc. Sr Notes, 9.75%, 11/15/03.................... 5,000,000 5,150,000
Terra Nova Holdings Sr Notes, 10.75%, 07/01/05............................. 3,000,000 3,270,000
-------------
30,042,583
-------------
FOREST & PAPER PRODUCTS (9.15%)
CORPORATE BONDS
Crown Paper Co. Sr Sub Notes, 11.00%, 09/01/05............................. 3,000,000 2,625,000
Doman Industries Ltd. Sr Notes, 8.75%, 03/15/04............................ 2,000,000 1,920,000
Fort Howard Corp. Pass Thru Cert., 11.00%, 01/02/02........................ 2,341,543 2,438,132
Fort Howard Corp. Sr Sub Notes, 9.00%, 02/01/06............................ 3,000,000 2,947,500
Fort Howard Corp. Variable Term Loan, 8.82%, 12/31/02...................... 2,500,000(4)(6) 2,506,250
Fort Howard Corp. Variable Term Loan, 8.88%, 12/31/02...................... 2,500,000(4)(6) 2,506,250
Maxxam Group Inc. Sr Secured Notes, 11.25%, 08/01/03....................... 2,350,000 2,291,250
Rainy River Forest Products Sr Notes, 10.75%, 10/15/01..................... 2,000,000 2,195,000
Repap New Brunswick Sr Notes Floating Rate Bonds, 9.25%, 07/15/00.......... 2,000,000(6) 2,000,000
Repap Wisconsin Inc. 1st Priority Sr Secured Notes, 9.25%, 02/01/02........ 5,000,000 4,750,000
Stone-Consolidated Corp. Sr Secured Notes, 10.25%, 12/15/00................ 2,500,000 2,675,000
Stone Container Corp. Sr Notes, 9.875%, 02/01/01........................... 4,000,000 3,880,000
Stone Container Corp. Sr Secured Notes, 10.75%, 10/01/02................... 2,000,000 2,080,000
Stone Container Corp. Sr Sub Notes, 11.00%, 08/15/99....................... 3,500,000 3,447,500
Tembec Finance Corp. Sr Notes, 9.875%, 09/30/05............................ 2,000,000 1,970,000
CONV. CORPORATE BONDS
Repap Enterprise Conv. Debs., 9.00%, 06/30/98.............................. 5,000,000(A) 3,609,381
-------------
43,841,263
-------------
</TABLE>
F-2
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GENERAL INDUSTRIES/MANUFACTURING (12.54%)
CORPORATE BONDS
American Standard Sr Sub Notes, 0/10.50%, 06/01/05......................... $ 6,000,000(3) $ 5,130,000
Calmar Inc. Sr Notes, 11.50%, 08/15/05 (144A).............................. 2,500,000(2) 2,537,500
CMI Industries Inc. Sr Sub Notes, 9.50%, 10/01/03.......................... 2,000,000 1,600,000
Communication and Power Industries Sr Sub Notes, 12.00%, 08/01/05.......... 2,500,000 2,568,750
Computervision Industries Sr Notes, 11.375%, 08/15/99...................... 975,000 1,028,625
Dal-Tile Sr Secured Notes, 0.00%, 07/15/98................................. 3,465,000 2,633,400
Dominion Textile (USA) Inc. Guaranteed Sr Notes, 8.875%, 11/01/03.......... 2,500,000 2,468,750
Envirosource Inc. Sr Notes, 9.75%, 06/15/03................................ 2,000,000 1,770,000
Envirotest System Corp. Sr Notes, 9.125%, 03/15/01......................... 1,500,000 1,245,000
Essex Group Sr Notes, 10.00%, 05/01/03..................................... 4,000,000 3,920,000
Harvard Industries Sr Notes, 11.125%, 08/01/05............................. 2,000,000 2,035,000
Howmet Corp. Sr Sub Notes, 10.00%, 12/01/03 (144A)......................... 1,000,000(2) 1,047,500
Lone Star Industries, Inc. Sr Notes, 10.00%, 07/31/03...................... 3,000,000 3,030,000
Norcal Waste Systems Sr Notes, 12.50%, 11/15/05............................ 3,000,000 3,030,000
Nortek Inc. Sr Sub Notes, 9.875%, 03/01/04................................. 1,500,000 1,395,000
NVR Inc. Sr Notes, 11.00%, 04/15/03........................................ 1,000,000 1,005,000
Schuller International Group Inc. Sr Notes, 10.875%, 12/15/04.............. 1,500,000 1,687,500
Scotsman Group Sr Notes, 9.50%, 12/15/00................................... 3,000,000 3,000,000
Talley Manufacturing & Technology Inc. Sr Notes, 10.75%, 10/15/03.......... 2,000,000 2,005,000
Unisys Corp. Sr Notes, 10.625%, 10/01/99................................... 3,000,000 2,655,000
U.S. Leather Inc. Sr Notes, 10.25%, 07/31/03............................... 1,000,000 740,000
Walbro Corp. Sr Notes, 9.875%, 07/15/05.................................... 2,000,000 1,980,000
Walter Industries Sr Notes, 12.19%, 03/15/00............................... 8,000,000 8,100,000
World Color Press, Inc. Sr Sub Notes, 9.125%, 03/15/03..................... 3,380,000 3,481,400
-------------
60,093,425
-------------
HOTELS & GAMING (4.55%)
CORPORATE BONDS
Bally Park Place Funding 1st Mtg. Notes, 9.25%, 03/15/04................... 5,000,000 5,050,000
Four Seasons Hotel Sr Notes, 9.125%, 07/01/00 (144A)....................... 3,000,000(2) 2,985,000
Grand Casino's 1st Mtg. Notes, 10.125%, 12/01/03........................... 1,000,000 1,042,500
Hollywood Casino Sr Notes, 12.75%, 11/01/03................................ 1,500,000 1,355,625
John Q Hammons Hotel 1st Mtg. Notes, 9.75%, 10/01/05 (144A)................ 5,000,000(2) 5,018,750
Mohegan Tribal Gaming Authority Sr Notes, 13.50%, 11/15/02 (144A).......... 2,000,000(2) 2,170,000
Prime Hospitality Corp. Sr Secured Notes, 10.00%, 07/31/99................. 4,211,333 4,190,276
-------------
21,812,151
-------------
METALS/MINING/IRON/STEEL (4.18%)
CORPORATE BONDS
AK Steel Corp. Sr Notes, 10.75%, 04/01/04.................................. 1,500,000 1,661,250
ARMCO Inc. Sr Notes, 7.875% 12/15/96....................................... 200,000 196,000
ARMCO Inc. Sr Notes, 9.375%, 11/01/00...................................... 5,000,000 4,950,000
Bethlehem Steel Corp. Sr Notes, 10.375%, 09/01/03.......................... 2,000,000 2,125,000
GS Technologies Corp. Sr Notes, 12.25%, 10/01/05........................... 2,000,000 1,992,500
Jorgensen Earle M. Co. Sr Notes, 10.75%, 03/01/00.......................... 1,600,000 1,472,000
Northwestern Steel & Wire Co. Sr Notes, 9.50%, 06/15/01.................... 3,000,000 2,947,500
Republic Engineered Steel 1st Mtg. Notes, 9.875%, 12/15/01................. 1,500,000 1,346,250
Wheeling-Pittsburgh Corp. Sr Notes, 9.375%, 11/15/03....................... 3,500,000 3,333,750
-------------
20,024,250
-------------
</TABLE>
F-3
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL/GAS (6.87%)
CORPORATE BONDS
Clark R & M Holdings Sr Notes, 0.00%, 02/15/00............................. $ 7,000,000 $ 4,655,000
Columbia Gas Systems Inc. 6.39%, Series A 11/28/00......................... 267,000 271,457
Columbia Gas Systems Inc. 6.61%, Series B 11/28/02......................... 264,000 269,832
Columbia Gas Systems Inc. 6.80%, Series C 11/28/05......................... 264,000 271,439
Columbia Gas Systems Inc. 7.05%, Series D 11/28/07......................... 264,000 272,346
Columbia Gas Systems Inc. 7.32%, Series E 11/28/10......................... 264,000 272,454
Crown Central Petroleum Sr Notes, 10.875%, 02/01/05........................ 2,400,000 2,520,000
Giant Industries Inc. Guaranteed Sr Sub Notes, 9.75%, 11/15/03............. 1,800,000 1,818,000
Gulf Canada Resources, Ltd. Sr Sub Debs., 9.25%, 01/15/04.................. 1,500,000 1,553,484
Maxus Energy Medium Term Notes, 11.02%, 05/15/01........................... 1,000,000 1,010,000
Maxus Energy Sr Notes, 9.875%, 10/15/02.................................... 1,000,000 1,006,250
Presidio Oil Co. Sr Notes, 11.50%, 09/15/00................................ 1,000,000(1) 1,045,000
Presidio Oil Co. Gas Index Notes, 13.25%, 07/15/02......................... 1,000,000(1) 680,000
Rowan Sr Sub Notes, 11.875%, 12/01/01...................................... 2,500,000 2,693,750
TransTexas Gas Corp. Sr Notes, 11.50%, 06/15/02............................ 4,000,000 4,130,000
Triton Energy Corp. Sr Sub Disc. Notes, 0/9.75%, 12/15/00.................. 2,500,000(3) 2,331,250
Triton Energy Corp. Sr Sub Disc. Notes, 0.00%, 11/01/97.................... 1,500,000 1,293,750
Tuboscope Vetco Sr Sub Notes, 10.75%, 04/15/03............................. 1,000,000 992,500
Wainoco Oil Corp. Sr Notes, 12.00%, 08/01/07............................... 2,000,000 1,955,000
Wilrig As Sr Secured Notes, 11.25%, 03/15/04............................... 1,200,000 1,311,000
PREFERRED STOCKS
Columbia Gas Systems Inc. 5.22% Dividend Enhanced Conv. Stock.............. 4,535 179,133
CONV. PREFERRED STOCKS
Columbia Gas Systems Inc. 7.89% Pfd........................................ 7,405 177,720
CONV. EURODOLLAR BONDS
Reading & Bates Energy Co. Conv. Eurobonds, 8.00%, 12/31/98................ 1,765,500 2,180,393
-------------
32,889,758
-------------
PACKAGING/CONTAINERS (3.01%)
CORPORATE BONDS
Gaylord Container Sr Notes, 11.50%, 05/15/01............................... 5,000,000 5,150,000
Owens-Illinois Corp. Sr Sub Notes, 10.00%, 08/01/02........................ 2,000,000 2,092,500
Owens-Illinois Corp. Sr Sub Notes, 10.50%, 06/15/02........................ 4,500,000 4,815,000
Riverwood International Corp. Sr Notes Series II, 10.75%, 06/15/00......... 2,200,000 2,365,000
-------------
14,422,500
-------------
REAL ESTATE (5.18%)
CORPORATE BONDS
Granite Development Partners L.P. Sr Notes, 10.83%, 11/15/03............... 1,000,000 800,000
Host Marriott Properties Sr Notes, 9.50%, 05/15/05......................... 2,000,000 2,042,500
Mortgage & Realty Trust Sr Notes, 11.125%, 09/29/02........................ 500,000 505,000
Rockefeller Center Properties Sr Notes, 0.00%, 12/31/00.................... 9,500,000 5,355,625
Trizec Finance Sr Notes, 10.875%, 10/15/05................................. 4,000,000 4,125,000
MORTGAGE BACKED SECURITIES
RTC Mtg. Tr. Series 1993-N3 CL 4 Mtg. Ln. Bkd. Bonds, 10.50%, 10/15/03
(144A).................................................................... 5,000,000(2) 5,000,000
RTC Mtg. Tr. Series 1994-N1 CL 4 Mtg. Ln. Bkd. Bonds, 10.50%, 01/15/04
(144A).................................................................... 1,250,000(2) 1,253,125
RTC Mtg. Tr. Series 1994-N2 CL 4 Mtg. Ln. Bkd. Bonds, 10.00%, 12/15/04
(144A).................................................................... 2,000,000(2) 2,005,000
RTC Mtg. Tr. Series 1994-C1 CL F Mtg. Ln. Bkd. Bonds, 8.00%, 06/25/26...... 2,683,329 2,227,163
RTC Mtg. Tr. Series 1994-C2 CL G Mtg. Ln. Bkd. Bonds, 8.00%, 04/25/25...... 1,827,824 1,507,955
-------------
24,821,368
-------------
</TABLE>
F-4
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL (3.93%)
CORPORATE BONDS
Grand Union Co. Sr Notes, 12.00%, 09/01/04................................. $ 1,500,000 $ 1,297,500
National Convenience Realty Co. Secured Notes, 9.50%, 04/30/03............. 2,398,698 2,494,646
Pathmark Stores Inc. Sr Sub Notes, 9.625%, 05/01/03........................ 5,000,000 4,812,500
Payless Cashways Inc. Sr Sub Notes, 9.125%, 04/15/03....................... 1,200,000 939,000
Penn Traffic Co. Sr Notes, 10.25%, 02/15/02................................ 4,000,000 3,810,000
Ralph's Grocery Sr Notes, 10.45%, 06/15/04................................. 2,500,000 2,531,250
TLC Beatrice Int'l Holdings Sr Notes, 11.50%, 10/01/05..................... 3,000,000 2,962,500
-------------
18,847,396
-------------
TRANSPORTATION (4.39%)
CORPORATE BONDS
Eletson Holdings Inc. 1st Pfd. Mtg. Notes, 9.25%, 11/15/03................. 2,000,000 1,967,500
GPA Delaware Inc. Guaranteed Notes, 8.75%, 12/15/98........................ 2,500,000 2,343,750
Moran Transportation Co. 1st Pfd. Mtg. Notes, 11.75%, 07/15/04............. 1,500,000 1,417,500
Sea Containers Ltd. Sr Notes, 9.50%, 07/01/03.............................. 2,600,000 2,600,000
Stena AB Sr Notes, 10.50%, 12/15/05........................................ 3,000,000 3,060,000
Viking Star Shipping 1st Pfd. Mtg. Notes, 9.625%, 07/15/03................. 2,000,000 2,070,000
TRUST CERTIFICATES
Piedmont Aviation Inc. Equipment Trust Certificates 1988 Series A, 9.80%,
01/15/00.................................................................. 942,000 884,303
Piedmont Aviation Inc. Equipment Trust Certificates 1988 Series F, 10.15%,
03/28/03.................................................................. 1,000,000 930,000
U.S. Air Inc. Equipment Trust Certificates 1990 Series A, 11.20%,
03/19/05.................................................................. 3,690,463 3,598,202
U.S. Air Inc. Equipment Trust Certificates 1990 Series B, 10.33%,
06/27/02.................................................................. 803,000 752,813
U.S. Air Inc. Equipment Trust Certificates 1990 Series D, 10.28%,
06/27/01.................................................................. 837,000 788,873
U.S. Air Inc. Equipment Trust Certificates 1988 Series B, 9.80%,
01/15/00.................................................................. 654,000 613,125
-------------
21,026,066
-------------
UTILITIES -- ELECTRIC (5.47%)
CORPORATE BONDS
Beaver Valley Funding Corp. Debs., 8.625%, 06/01/07........................ 1,797,000 1,612,865
California Energy Inc. Sr Notes, 9.875%, 06/30/03.......................... 1,800,000 1,872,000
Cleveland Electric Illum. Medium Term Notes, 9.25%, 07/29/99............... 1,000,000 1,033,750
Cleveland Electric Illum. Medium Term Notes, 8.16% 11/30/98................ 3,500,000 3,508,750
Cleveland Electric Illum. 1st Mortgage Bonds, 9.50% 05/15/05............... 1,600,000 1,666,170
CTC Mansfield Funding Corp. Secured Lease Obligation Bonds, 10.25%,
03/30/03.................................................................. 3,500,000 3,579,013
Long Island Lighting Co. Debs., 7.125%, 06/01/05........................... 4,000,000 3,849,252
Tucson Electric Power Company, Springerville Unit 1 Series B-1, 10.21%,
01/01/09.................................................................. 246,185 241,261
Tucson Electric Power Company, Springerville Unit 1 Series B-2, 10.21%,
01/01/09.................................................................. 370,554 363,143
Tucson Electric Power Company, Springerville Unit 1 Series B-4, 10.21%,
01/01/09.................................................................. 533,836 523,159
Tucson Electric Power Company, Springerville Unit 1 Series B-5, 10.21%,
01/01/09.................................................................. 1,128,441 1,105,872
Tucson Electric Power Company, Springerville Unit 1 Series B-6, 10.21%,
01/01/09.................................................................. 2,548,534 2,497,563
Tucson Electric Power Company, Springerville Unit 1 Series B-7, 10.21%,
01/01/09.................................................................. 698,465 684,496
PREFERRED STOCKS
Long Island Lighting Co. Pfd., 7.95%, 06/01/00 Series AA................... 90,000 2,193,750
Long Island Lighting Co. Pfd., 8.50%, Series R............................. 3,125 312,500
Public Service Co. of New Hampshire Pfd., 10.60%, 06/30/97 Series A........ 45,000 1,153,125
-------------
26,196,669
-------------
</TABLE>
F-5
<PAGE>
OFFITBANK
HIGH YIELD FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL/SHARE MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS (3.44%)
Banco Bozano Simonsen Ltd. CP 12.50%, 02/07/96............................. $ 2,500,000 $ 2,500,000
Ford Motor Credit Co. Commercial Paper, 01/11/96........................... 7,000,000 6,988,664
General Electric Corp. Commercial Paper, 01/11/96.......................... 7,000,000 6,988,664
-------------
16,477,328
-------------
TOTAL INVESTMENTS (COST $437,732,266) (94.66%)............................. 453,521,503
-------------
OTHER ASSETS IN EXCESS OF LIABILITIES (5.34%).............................. 25,568,878
-------------
TOTAL NET ASSETS (100.00%)................................................. $ 479,090,381
-------------
-------------
</TABLE>
- ---------------
(A) Canadian Dollars
(1) Issuer in default.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(3) Step up bond.
(4) Illiquid security.
(5) Payment in kind security.
(6) Interest rate reflected is the rate in effect at December 31, 1995.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
OFFITBANK
EMERGING MARKETS FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
SOVEREIGN DEBT
ARGENTINA (13.00%)
Argentina Bote X (10) Floating Rate Bonds, 5.6875%, 04/01/00............... $ 3,022,451(4) $ 2,696,691
Argentina Brady Floating Rate Bonds, 6.8125%, 03/31/05..................... 2,350,000(4) 1,668,500
Argentina Brady Par Step-up Bonds, 4.00%/6.00%, 03/31/23................... 1,750,000(3) 995,312
Argentina Global Bonds, 8.375%, 12/20/03................................... 1,250,000 1,043,750
-------------
6,404,253
-------------
BRAZIL (19.01%)
Brazil Brady Capitalization Step-up Bonds, 4.00%/8.00%, 04/15/14........... 2,387,720(3) 1,361,000
Brazil Brady DCB Floating Rate Bonds, 6.875%, 04/15/12..................... 2,250,000(4) 1,279,687
Brazil Brady EI Floating Rate Notes, 6.8125%, 04/15/06..................... 2,250,000(4) 1,544,062
Brazil Brady Par Z Step-Up Bonds, 4.00%/6.00%, 04/15/24.................... 2,850,000(3) 1,499,812
Brazil IDU Floating Rate Notes, 6.6875%, 01/01/01.......................... 475,000(4) 408,500
Brazilian LFT's, 06/01/96.................................................. 879,700(a) 1,138,121
Brazilian NTN-D 6.00%, Dollar Linked 03/15/96.............................. 1,517,886(a) 1,612,447
Brazilian NTN-D 6.00%, Dollar Linked 06/13/96.............................. 477,955(a) 519,625
-------------
9,363,254
-------------
CZECH REPUBLIC (2.88%)
Czechoslovakian Trade Obchodni Bank Sr Notes, 11.125%, 08/26/97............ 37,620,000(c) 1,417,417
-------------
ECUADOR (3.67%)
Ecuador Brady Discount Floating Rate Bonds, 6.8125%, 02/28/25.............. 250,000(4) 126,250
Ecuador Brady Par Step-Up Bonds, 3.00%/5.00%, 02/28/25..................... 3,000,000(3) 1,083,750
Ecuador Brady PDI Capitalization Bonds, 3.00%, 02/27/15.................... 1,787,438 598,791
-------------
1,808,791
-------------
MEXICO (2.99%)
UMS Cetes Linked Notes, 11/27/96........................................... 1,450,000 1,473,563
-------------
PANAMA (3.78%)
Panama Loan, 6.6875%, 1989................................................. 2,250,000(2) 1,859,625
-------------
PERU (1.45%)
Peru Citi-Loan............................................................. 1,000,000(2) 715,000
-------------
AUTOMOBILE PARTS
MEXICO (3.36%)
Corporacion Industrial Sanluis 9.125%, 11/16/98............................ 1,750,000 1,653,838
-------------
BANKS (8.29%)
ARGENTINA
Banco de Galicia 9.00%, 11/01/03........................................... 500,000 437,500
-------------
BRITISH VIRGIN ISLAND
Banco Fibra Participation 14.00%, 01/22/96................................. 250,000 250,000
-------------
CHILE
Citibank Chilean Peso-Linked Time Deposit, 12.00%, 01/18/96................ 201,656,721(b) 495,573
Citibank Chilean Peso-Linked Time Deposit, 12.00%, 01/18/96................ 99,748,716(b) 245,133
-------------
740,706
-------------
MOROCCO
Morocco Tranche A Loan, 6.594%, 01/01/09................................... 4,000,000(2) 2,655,000
-------------
INDUSTRIAL (10.87%)
ARGENTINA
Sociedad Comercial del Plata 8.75%, 12/14/98............................... 1,030,000 973,350
-------------
</TABLE>
F-7
<PAGE>
OFFITBANK
EMERGING MARKETS FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL (CONTINUED)
MEXICO
Alfa Convertible Notes, 8.00%, 09/15/00 (144A)............................. $ 1,300,000(1) $ 1,274,000
DESC Sociedad de Fomento Bonds, 11.00%, 12/15/97 (144A).................... 1,000,000(1) 993,900
Grupo IRSA 8.375%, 07/15/98 (144A)......................................... 1,750,000(1) 1,610,000
Tubos De Acero De Mexico 13.75%, 12/08/99.................................. 500,000 502,355
-------------
4,380,255
-------------
LEASING (1.97%)
BRAZIL
Dibens Leasing TR (Referential Rate) + 19.30%, 07/01/97.................... 9,300(a) 969,798
-------------
MANUFACTURING (1.67%)
MEXICO
AXA 8.50%, 10/01/98........................................................ 1,000,000 825,000
-------------
MUNICIPAL (3.82%)
BRAZIL
State of Minas Gerais 7.875%, 02/10/99 (X-Warrants), (144A)................ 2,000,000(1) 1,676,200
State of Minas Gerais 8.25%, 02/10/00...................................... 250,000 205,125
-------------
1,881,325
-------------
PAPER/PULP (4.06%)
BRAZIL
Klabin Fabricadora de Papel 10.00%, 12/20/01 (144A)........................ 750,000(1) 728,168
-------------
MEXICO
Grupo Industrial Durango 12.00%, 07/15/01.................................. 1,450,000 1,270,577
-------------
RETAIL (1.79%)
MEXICO
Controladora Commercial Mexicana 8.75%, 04/21/98........................... 1,000,000 880,000
-------------
SECURITIES INDUSTRY (0.51%)
BRAZIL
Banco Bozano Simonsen 13.00%, 04/02/96..................................... 250,000 250,000
-------------
STEEL (5.78%)
MEXICO
Grupo IMSA 8.75%, 07/07/98 (144A).......................................... 1,000,000(1) 912,500
Grupo IMSA 10.00%, 10/13/99................................................ 500,000 456,250
Hylsa 11.00%, 02/23/98 (144A).............................................. 1,500,000(1) 1,478,460
-------------
2,847,210
-------------
TELECOMMUNICATIONS (4.76%)
ARGENTINA
Telecom Argentina 12.00%, 11/15/02......................................... 1,000,000 1,064,580
Telecom Argentina 8.375%, 10/18/00......................................... 250,000 237,363
Telefonica Argentina 11.875%, 11/01/04..................................... 1,000,000 1,043,250
-------------
2,345,193
-------------
TOBACCO (1.50%)
MEXICO
Empresas La Moderna 10.25%, 11/12/97 (144A)................................ 750,000(1) 736,943
-------------
TRANSPORTATION (0.45%)
MEXICO
Transport Maritima Mexico 8.50%, 10/15/00.................................. 250,000 221,138
-------------
UTILITY (ELECTRIC) (2.53%)
ARGENTINA
Central Termica Guemes 12.00%, 11/29/96.................................... 500,000 492,500
-------------
</TABLE>
F-8
<PAGE>
OFFITBANK
EMERGING MARKETS FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITY (ELECTRIC) (CONTINUED)
BRAZIL
Eletrobras 10.00%, 10/30/98................................................ $ 750,000 $ 753,750
-------------
TOTAL INVESTMENTS (COST $45,641,341) (98.14%).......................... 48,334,154
-------------
OTHER ASSETS IN EXCESS OF LIABILITIES (1.86%).......................... 916,291
-------------
TOTAL NET ASSETS (100.00%)............................................. $ 49,250,445
-------------
-------------
</TABLE>
- ---------------
Principal denominated in the following currencies.
(a) Brazilian Real (b) Chilean Peso (c) Czech Koruna
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(2) Illiquid security.
(3) Step up bond.
(4) Interest rate reflected is the rate in effect at December 31, 1995.
F-9
<PAGE>
OFFITBANK
NEW YORK MUNICIPAL FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS (95.70%)
EDUCATION REVENUE (2.50%)
New York State Dormitory Authority Revenue Bonds Columbia University Series
A, 4.60%, 07/01/06........................................................ $100,000 $ 97,500
New York State Dormitory Authority Revenue Bonds New York University Series
A MBIA, 5.50%, 07/01/04 (4)............................................... 205,000 215,763
-------------
313,263
-------------
GENERAL OBLIGATIONS (24.14%)
Dutchess County General Obligation Bonds 4.90%, 08/01/04................... 215,000 221,988
Hempstead General Obligation Bonds Series B FGIC, 5.625%, 02/01/01 (2)..... 245,000 260,313
Hempstead General Obligation Bonds Series B FGIC, 5.625%, 02/01/04 (2)..... 140,000 150,150
Islip General Obligation Bonds FGIC, 6.00%, 11/01/05 (2)................... 100,000 109,000
Monroe County General Obligation Bonds MBIA, 6.00%, 03/01/98 (4)........... 405,000 422,212
New Castle General Obligation Bonds, 4.60%, 06/01/07....................... 215,000 205,863
New Castle General Obligation Bonds, 4.75%, 06/01/08....................... 210,000 203,700
New York State General Obligation Bonds Series C, 5.00%, 10/01/05.......... 200,000 201,750
New York State General Obligation Bonds, 5.50%, 11/15/01................... 200,000 210,500
Ontario County General Obligation Bonds FGIC, 5.00%, 08/15/02 (2).......... 250,000 260,000
Saratoga Springs CSD General Obligation Bonds, 6.10%, 06/15/97............. 315,000 324,056
Syracuse General Obligation Bonds MBIA, 6.00%, 12/01/04.................... 250,000 274,687
Syracuse General Obligation Bonds Series A, 5.00%, 02/15/06................ 175,000 177,187
-------------
3,021,406
-------------
HEALTH CARE (1.25%)
New York Medical Care Facility Finance Authority FHA 6.20%, 08/15/14 (3)... 150,000 156,563
-------------
HOUSING (5.45%)
New York State Mortgage Agency Revenue Bonds Series 37-A, 5.85%,
10/01/06.................................................................. 125,000 130,781
New York State Mortgage Agency Revenue Bonds Series 37-A, 5.95%,
04/01/07.................................................................. 100,000 104,625
New York State Mortgage Agency Revenue Bonds Series 37-A, 5.80%,
10/01/06.................................................................. 200,000 206,000
New York State Mortgage Agency Revenue Bonds Series 37-A, 5.35%,
04/01/07.................................................................. 240,000 240,900
-------------
682,306
-------------
PREREFUNDED/ESCROWED TO MATURITY (9.84%)
Erie County Water Authority Improvement & Extension Revenue Bonds, 5.75%,
12/01/08.................................................................. 350,000 377,563
Grand Central District Management Association Inc. Special Assessment
Bonds, 6.50%, 01/01/22.................................................... 150,000 169,125
New York City Municipal Water Financing Authority Water & Sewer System
Revenue Bonds Series B, 6.375%, 06/15/22.................................. 100,000 111,750
New York City Municipal Water and Sewer System Prerefunded Bonds, 7.00%,
06/15/07.................................................................. 95,000 108,300
Niagara Falls Bridge Commission New York Revenue Bonds, 6.125%, 10/01/19... 415,000 463,763
-------------
1,230,501
-------------
PUBLIC POWER (5.44%)
New York State Power Authority Revenue Bonds Series Y, 6.25%, 01/01/05..... 100,000 108,500
New York State Power Authority Revenue Bonds Series BB, 6.30%, 01/01/07.... 175,000 190,750
New York State Power Authority Revenue Bonds Series CC, 4.80%, 01/01/05.... 180,000 180,900
New York State Power Authority Revenue Bonds Series CC-MBIA, 4.90%,
01/01/06.................................................................. 200,000 200,750
-------------
680,900
-------------
RESOURCE RECOVERY (0.90%)
Dutchess County Resource Recovery Agency Solid Waste Management Revenue
Bonds Series A FGIC, 7.20%,
01/01/02 (2)............................................................. 100,000 112,250
-------------
SALES TAX REVENUE (11.15%)
Municipal Assistance Corp. for City of New York Revenue Bonds Series 61,
5.75%, 07/01/08........................................................... 300,000 307,125
Municipal Assistance Corp. for City of New York Revenue Bonds Series D,
5.20%, 07/01/07........................................................... 250,000 253,750
New York State Local Government Assistance Corp. Revenue Bonds Series E,
5.00%, 04/01/06........................................................... 100,000 100,000
New York State Local Government Assistance Corp. Revenue Bonds Series D,
6.375%, 04/01/00.......................................................... 100,000 107,750
</TABLE>
F-10
<PAGE>
OFFITBANK
NEW YORK MUNICIPAL FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL OBLIGATIONS (CONTINUED)
SALES TAX REVENUE (CONTINUED)
New York State Local Government Assistance Corp. Revenue Bonds Series D,
4.75%, 04/01/04........................................................... $100,000 $ 99,625
New York State Local Government Assistance Corp. Revenue Bonds Series E,
4.80%, 04/01/05........................................................... 180,000 178,650
New York State Local Government Assistance Corp. Revenue Bonds Series A,
5.00%, 04/01/06........................................................... 100,000 100,000
New York State Local Government Assistance Corp. Revenue Bonds Series D,
4.50%, 04/01/02........................................................... 250,000 248,438
-------------
1,395,338
-------------
SPECIAL ASSESSMENT (2.60%)
Grand Central District Management Association Inc. Special Assessment
Bonds, 5.10%, 01/01/08.................................................... 200,000 196,500
Grand Central District Management Association Inc. Special Assessment
Bonds, 6.20%, 01/01/00.................................................... 120,000 128,700
-------------
325,200
-------------
TELECOMMUNICATIONS (1.24%)
Puerto Rico Telephone Authority Revenue Bonds Series M AMBAC, 5.05%,
01/01/04 (1).............................................................. 150,000 155,812
-------------
TRANSPORTATION REVENUE (20.55%)
New York State Bridge Authority Bonds 7.00%, 01/01/00...................... 250,000 261,675
New York State Thruway, Highway & Bridge Trust Fund Bonds Series B FGIC,
6.40%, 04/01/04 (2)....................................................... 200,000 224,000
New York State Thruway, Highway & Bridge Trust Fund Bonds Series B, 5.80%,
04/01/07.................................................................. 300,000 319,125
New York State Thruway, Highway & Bridge Trust Fund Bonds Series B, 5.75%
MBIA, 04/01/06 (4)........................................................ 200,000 213,750
Port Authority of New York & New Jersey Bonds Series 86, 5.80%, 07/15/03... 200,000 218,000
Port Authority of New York & New Jersey Bonds Series 86, 5.00%, 07/01/06... 250,000 257,187
Port Authority of New York & New Jersey Bonds Series 86, 5.125%,
07/01/08.................................................................. 200,000 205,000
Triborough Bridge & Tunnel Authority General Purpose Bonds Series A, 4.50%,
01/01/03.................................................................. 250,000 249,688
Triborough Bridge & Tunnel Authority General Purpose Bonds, 5.90%,
01/01/07.................................................................. 425,000 461,656
Triborough Bridge & Tunnel Authority General Purpose Bonds, 5.75%,
01/01/05.................................................................. 150,000 162,375
-------------
2,572,456
-------------
WATER/SEWER (10.64%)
New York City Municipal Water Financing Authority Water & Sewer System
Revenue Bonds, 7.00%, 06/15/07............................................ 105,000 118,256
New York City Municipal Water Financing Authority Water & Sewer System
Revenue Bonds, 5.20%, 06/15/05............................................ 350,000 359,187
New York State Environmental Facilities Corporation Pollution Control
Revenue Bonds, Series E, 6.60%, 06/15/05.................................. 100,000 111,250
New York State Environmental Facilities Corporation Pollution Control
Revenue Bonds, 5.40%, 05/15/06............................................ 250,000 266,250
New York State Environmental Facilities Corporation Pollution Control
Revenue Bonds, 6.40%, 06/15/03............................................ 200,000 221,000
Suffolk County Water Revenue Bonds MBIA 5.10%, 06/01/05 (4)................ 250,000 256,250
-------------
1,332,193
-------------
TOTAL MUNICIPAL OBLIGATIONS (COST $11,678,269)......................... 11,978,188
-------------
</TABLE>
F-11
<PAGE>
OFFITBANK
NEW YORK MUNICIPAL FUND
- -------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM OBLIGATIONS (0.58%)
Vista New York Tax Free Money Market Fund.................................. $73,105 $ 73,105
-------------
TOTAL SHORT-TERM OBLIGATIONS (COST $73,105)............................ 73,105
-------------
GOVERNMENT AGENCIES (2.80%)
Federal Home Loan Bank Discount Notes, 01/02/96............................ 350,000 349,944
-------------
TOTAL GOVERNMENT AGENCIES ($349,944)................................... 349,944
-------------
TOTAL INVESTMENTS (COST $12,101,318) (99.08%).......................... 12,401,237
-------------
CASH AND OTHER ASSETS, NET OF LIABILITIES (0.92%)...................... 114,670
-------------
NET ASSETS (100.00%)................................................... $ 12,515,907
-------------
-------------
</TABLE>
- ---------------
(1) Insured as to principal and interest by the American Municipal Bond
Assurance Corporation.
(2) Insured as to principal and interest by the Financial Guarantee Insurance
Corporation.
(3) Insured by the Federal Housing Administration.
(4) Insured as to principal and interest by the Municipal Bond Insurance
Association.
F-12
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES--DECEMBER 31, 1995
HIGH YIELD FUND
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at market value (Cost -- $437,732,266) (Note 1a)................. $453,521,503
Cash.......................................................................... 18,611,594
Unrealized appreciation on forward currency contracts (Note 5)................ 37,240
Receivable for fund shares sold............................................... 1,122,500
Interest receivable........................................................... 9,813,954
Dividends receivable.......................................................... 125,750
Prepaid expenses.............................................................. 21,143
-------------
Total Assets................................................................ $483,253,684
LIABILITIES:
Payable for investments purchased............................................. 1,967,365
Payable for fund shares repurchased........................................... 178,000
Income distribution payable................................................... 1,521,120
Investment advisory fee payable (Note 2)...................................... 318,229
Other payables and accrued expenses........................................... 178,589
-------------
Total Liabilities........................................................... 4,163,303
-------------
NET ASSETS...................................................................... $479,090,381
-------------
-------------
Net assets consist of:
Shares of capital stock, $.001 par value per share; 48,310,714
issued and outstanding (Note 4).............................................. $ 48,311
Additional paid-in-capital.................................................... 463,285,307
Accumulated dividends in excess of net investment income...................... (62,489)
Accumulated net realized loss on investments and foreign currency
transactions................................................................. (5,272)
Net unrealized appreciation on investments and foreign currency
transactions................................................................. 15,824,524
-------------
NET ASSETS...................................................................... $479,090,381
-------------
-------------
NET ASSET VALUE PER SHARE....................................................... $9.92
-------------
-------------
</TABLE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at market value (Cost -- $45,641,341) (Note 1a).................. $ 48,334,154
Cash (including foreign currency of $13,790).................................. 1,087,239
Interest receivable........................................................... 954,326
Prepaid expenses.............................................................. 2,965
Unrealized appreciation on forward currency contracts (Note 5)................ 40,019
------------
Total Assets................................................................ $ 50,418,703
LIABILITIES:
Payable for investments purchased............................................. 706,250
Income distribution payable................................................... 343,930
Investment advisory fee payable (Note 2)...................................... 35,872
Other payables and accrued expenses........................................... 82,206
------------
Total Liabilities........................................................... 1,168,258
------------
NET ASSETS $ 49,250,445
------------
------------
Net assets consist of:
Shares of capital stock, $.001 par value per share; 4,968,891
issued and outstanding (Note 4).............................................. $ 4,969
Additional paid-in-capital.................................................... 47,125,815
Accumulated dividends in excess of net investment income...................... (385,680)
Accumulated net realized loss on investments and foreign currency
transactions................................................................. (227,168)
Net unrealized appreciation on investments and foreign currency
transactions................................................................. 2,732,509
------------
NET ASSETS...................................................................... $ 49,250,445
------------
------------
NET ASSET VALUE PER SHARE....................................................... $9.91
------------
------------
</TABLE>
F-13
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES--DECEMBER 31, 1995
(CONTINUED)
NEW YORK MUNICIPAL FUND
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $12,101,318) (Note 1a)......................... $ 12,401,237
Receivable for investments sold............................................... 102,884
Interest receivable........................................................... 195,490
Receivable from advisor....................................................... 58,913
Receivable for fund shares sold............................................... 8,101
Deferred organization expense................................................. 23,419
----------------
Total Assets................................................................ $ 12,790,044
LIABILITIES:
Payable for investments purchased............................................. 242,247
Income distribution payable................................................... 7,293
Accrued expenses.............................................................. 24,597
----------------
Total Liabilities........................................................... 274,137
----------------
NET ASSETS...................................................................... $ 12,515,907
----------------
----------------
Net assets consist of:
Shares of capital stock, $.001 par value per share; 1,195,830
issued and outstanding (Note 4).............................................. $ 1,195
Additional paid-in-capital.................................................... 12,209,082
Accumulated net realized gain on investments.................................. 5,711
Net unrealized appreciation on investments.................................... 299,919
----------------
NET ASSETS...................................................................... $ 12,515,907
----------------
----------------
NET ASSET VALUE PER SHARE....................................................... $10.47
----------------
----------------
</TABLE>
F-14
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF OPERATIONS
HIGH YIELD FUND
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest...................................................................... $ 36,647,565
Dividend...................................................................... 704,304
----------------
Total income................................................................ $ 37,351,869
EXPENSES:
Advisory fee (Note 2)......................................................... 2,884,016
Administrative services (Note 2).............................................. 536,814
Custodian fees and expenses................................................... 233,846
Registration fees............................................................. 123,260
Professional.................................................................. 77,847
Printing...................................................................... 45,851
Transfer and shareholder servicing agent fees (Note 2)........................ 21,360
Fund accounting fee and expenses (Note 2)..................................... 38,165
Insurance..................................................................... 25,076
Trustees' fees................................................................ 3,916
Miscellaneous................................................................. 45,710
----------------
Total expenses/fees before waivers.......................................... 4,035,861
Less: expenses/fees waived (Note 2)......................................... (268,407)
----------------
Net expenses................................................................ 3,767,454
----------------
NET INVESTMENT INCOME........................................................... 33,584,415
----------------
Net realized and unrealized gain (loss): (Note 5)
Net realized gain on investments.............................................. 285,277
Net realized gain on foreign currency transactions............................ 243,545
Net change in unrealized appreciation on investments.......................... 22,052,489
Net change in unrealized depreciation on foreign currency transactions........ 39,469
----------------
Net realized and unrealized gain on investments and foreign currency
transactions.................................................................. 22,620,780
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 56,205,195
----------------
----------------
</TABLE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest (net of foreign tax withholding of $61,856) (Note 3)................. $ 3,977,593
----------------
Total income................................................................ $ 3,977,593
EXPENSES:
Advisory fee (Note 2)......................................................... 312,096
Professional.................................................................. 45,517
Administrative services (Note 2).............................................. 52,016
Custodian fees and expenses................................................... 43,367
Registration fees............................................................. 47,212
Fund accounting fee and expenses (Note 2)..................................... 30,000
Printing...................................................................... 8,992
Trustees' fees................................................................ 3,917
Insurance..................................................................... 3,966
Transfer and shareholder servicing agent fees (Note 2)........................ 4,418
Miscellaneous................................................................. 46,889
----------------
Total expenses/fees before waivers.......................................... 598,390
Less: expenses/fees waived (Note 2)......................................... (78,163)
----------------
Net expenses................................................................ 520,227
----------------
NET INVESTMENT INCOME........................................................... 3,457,366
----------------
Net realized and unrealized gain (loss): (Note 5)
Net realized gain on investments.............................................. 347,716
Net realized loss on foreign currency transactions............................ (120,599)
Net change in unrealized appreciation on investments.......................... 4,032,637
Net change in unrealized gain on foreign currency transactions................ 40,462
----------------
Net realized and unrealized gain on investments and foreign currency
transactions.................................................................. 4,300,216
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 7,757,582
----------------
----------------
</TABLE>
F-15
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF OPERATIONS (CONTINUED)
NEW YORK MUNICIPAL FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 3, 1995*
THROUGH DECEMBER 31, 1995
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest income............................................................... $ 279,456
---------
Total income................................................................ $ 279,456
EXPENSES:
Fund accounting fee and expenses (Note 2)..................................... 27,192
Professional.................................................................. 31,869
Advisory fee (Note 2)......................................................... 23,448
Custodian fees and expenses................................................... 6,150
Administrative services (Note 2).............................................. 8,793
Registration.................................................................. 2,760
Trustees' fees................................................................ 2,667
Printing...................................................................... 7,930
Transfer and shareholder servicing agent fees (Note 2)........................ 1,662
Amortization of organization expenses......................................... 4,119
Miscellaneous................................................................. 6,481
---------
Total expenses/fees before waivers.......................................... 123,071
Less: expenses/fees waived (Note 2)......................................... (90,986)
---------
Net expenses................................................................ 32,085
---------
NET INVESTMENT INCOME........................................................... 247,371
---------
Net realized and unrealized gain (loss):
Net realized gain on investments.............................................. 11,983
Net unrealized appreciation on investments.................................... 299,919
---------
Net realized and unrealized gain on investments................................. 311,902
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 559,273
---------
---------
</TABLE>
* Commencement of operations
F-16
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
HIGH YIELD FUND
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FROM
ENDED MARCH 2, 1994*
DECEMBER 31, 1995 THROUGH DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income........................................ $33,584,415 $12,499,514
Net realized gain (loss) on investments and foreign currency
transactions................................................ 528,822 (118,093)
Net change in unrealized appreciation/(depreciation) on
investments and foreign currency transactions............... 22,091,958 (6,267,434)
----------------- -------------------------
Net increase in net assets resulting from operations......... 56,205,195 6,113,987
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:..............
Net investment income........................................ (33,572,903) (12,673,292)
Realized gains............................................... (316,224) 0
----------------- -------------------------
Total dividends and distributions to shareholders............ (33,889,127) (12,673,292)
CAPITAL STOCK TRANSACTIONS (NOTE 4):
Net increase in net assets from capital share transactions... 234,457,225 228,843,060
----------------- -------------------------
Total increase in net assets................................. 256,773,293 222,283,755
NET ASSETS:
Beginning of period.......................................... 222,317,088 33,333
----------------- -------------------------
End of period................................................ $479,090,381 $222,317,088
----------------- -------------------------
----------------- -------------------------
</TABLE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FROM
ENDED MARCH 8, 1994*
DECEMBER 31, 1995 THROUGH DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income........................................ $3,457,366 $2,164,046
Net realized gain/(loss) on investments and foreign currency
transactions................................................ 227,117 (1,991,878)
Net change in unrealized appreciation/(depreciation) on
investments and foreign currency transactions............... 4,073,099 (1,340,590)
----------------- -------------------------
Net increase (decrease) in net assets resulting from
operations.................................................. 7,757,582 (1,168,422)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................................ (2,305,453) (2,164,046)
Return of capital............................................ (1,151,913) 0
----------------- -------------------------
Total dividends and distribution to shareholders............. (3,457,366) (2,164,046)
----------------- -------------------------
CAPITAL STOCK TRANSACTIONS (NOTE 4):
Net increase in net assets from capital share transactions... 16,833,223 31,416,141
----------------- -------------------------
Total increase in net assets................................. 21,133,439 28,083,673
NET ASSETS:
Beginning of period.......................................... 28,117,006 33,333
----------------- -------------------------
End of period................................................ $49,250,445 $28,117,006
----------------- -------------------------
----------------- -------------------------
</TABLE>
NEW YORK MUNICIPAL FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 3, 1995*
THROUGH DECEMBER
31, 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------
OPERATIONS:
Net investment income....................................... $247,371
Net realized gain on investments............................ 11,983
Net unrealized appreciation on investments.................. 299,919
-------------------
Net increase in net assets resulting from operations........ 559,273
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:.............
Net investment income....................................... (250,088)
Realized gains.............................................. (3,555)
-------------------
Total dividends and distributions to shareholders........... (253,643)
CAPITAL STOCK TRANSACTIONS (NOTE 4):
Net increase in net assets from capital share
transactions............................................... 12,210,237
-------------------
Total increase in net assets................................ 12,515,867
NET ASSETS:
Beginning of period......................................... 40
-------------------
End of period............................................... $12,515,907
-------------------
-------------------
</TABLE>
* Commencement of operations
F-17
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
FINANCIAL HIGHLIGHTS
HIGH YIELD FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM MARCH
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK FOR THE YEAR 2, 1994*
OUTSTANDING THROUGH THE PERIOD: ENDED DECEMBER 31, 1995 THROUGH DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $ 9.25 $ 10.00
-------- --------
Net investment income....................................................... 0.90 0.72
Net realized and unrealized gain/(loss)..................................... 0.67 (0.75)
-------- --------
Total from investment operations............................................ 1.57 (0.03)
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................................... (0.89) (0.72)
Realized gains.............................................................. (0.01) 0
-------- --------
Total dividends and distributions............................................. (0.90) (0.72)
-------- --------
NET ASSET VALUE, END OF PERIOD................................................ $ 9.92 $ 9.25
-------- --------
-------- --------
TOTAL INVESTMENT RETURN+:..................................................... 17.72% -.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................... $479,090 $222,317
Ratios to average net assets:
Expenses.................................................................... 1.05%(2) 1.14%(1)(2)
Net investment income....................................................... 9.38% 8.97%(1)
PORTFOLIO TURNOVER RATE....................................................... 34% 42%
</TABLE>
- ---------------
* Commencement of operations
(1) Annualized
(2) If the Fund had borne all expenses that were assumed or waived by the
Administrator, the above annualized expense ratio would have been 1.13% and
1.22% for the period ended December 31, 1995, and December 31, 1994,
respectively.
+Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK FOR THE YEAR MARCH 8, 1994*
OUTSTANDING THROUGH THE PERIOD: ENDED DECEMBER 31, 1995 THROUGH DECEMBER 31, 1994
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $ 8.84 $ 10.00
-------- --------
Net investment income....................................................... 0.90 0.81
Net realized and unrealized (loss).......................................... 1.07 (1.16)
-------- --------
Total from investment operations............................................ 1.97 (0.35)
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................................... (0.60) (0.81)
Return of Capital........................................................... (0.30) 0
-------- --------
Total dividends and distributions............................................. (0.90) (0.81)
-------- --------
NET ASSET VALUE, END OF PERIOD................................................ $ 9.91 $ 8.84
-------- --------
-------- --------
TOTAL INVESTMENT RETURN+:..................................................... 23.38% -3.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................... $ 49,250 $ 28,117
Ratios to average net assets:
Expenses.................................................................... 1.50%(2) 1.50%(1)(2)
Net investment income....................................................... 9.97% 10.39%(1)
PORTFOLIO TURNOVER RATE....................................................... 60% 47%
</TABLE>
- ---------------
* Commencement of operations
(1) Annualized.
(2) If the Fund had borne all expenses that were assumed or waived by the
Advisor and Administrator, the above annualized expense ratio would have
been 1.73% and 1.80% for the period ended December 31, 1995 and December 31,
1994, respectively.
+Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
F-18
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
NEW YORK MUNICIPAL FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGH THE APRIL 3, 1995*
PERIOD: THROUGH DECEMBER 31, 1995
<S> <C>
- ---------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $ 10.00
-------
Net investment income....................................................... 0.33
Net realized and unrealized gains on investments............................ 0.47
-------
Total from investment operations............................................ 0.80
-------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................................... (0.32)
Capital gains............................................................... (0.01)
-------
Total dividends and distributions............................................. (0.33)
-------
NET ASSET VALUE, END OF PERIOD................................................ $ 10.47
-------
-------
TOTAL INVESTMENT RETURN+:..................................................... 8.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................... $ 12,516
Ratios to average net assets:
Expenses.................................................................... 0.54%(1)(2)
Net investment income....................................................... 4.20%(1)
PORTFOLIO TURNOVER RATE....................................................... 35%
</TABLE>
- ---------------
* Commencement of operations
(1) Annualized
(2) If the Fund had borne all expenses that were assumed or waived by the
Advisor and Administrator, the above annualized expense ratio would have
been 2.09%.
+Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
F-19
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES. The OFFITBANK Investment Fund, Inc. (the
"Company") was incorporated in Maryland on September 8, 1993. The Company is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). Each Fund operates as a non-diversified, open-end management investment
company. The Company consists of seven separately managed funds. OFFITBANK High
Yield Fund, OFFITBANK Investment Grade Global Debt Fund, OFFITBANK Emerging
Markets Fund, OFFITBANK National Municipal Fund, OFFITBANK California Municipal
Fund, OFFITBANK New York Municipal Fund and OFFITBANK Global Convertible Fund.
Of these, only the High Yield, Emerging Markets and New York Municipal Funds
have commenced operations on March 2, 1994, March 8, 1994 and April 3, 1995,
respectively. Prior to March 2, 1994, the Company had no operations other than
those relating to organizational matters and the issuance to Furman Selz
Incorporated at $10.00 per share of 3,333, 3,333 and 3,334 shares, respectively,
of OFFITBANK High Yield, OFFITBANK Investment Grade Global Debt and OFFITBANK
Emerging Markets Funds (collectively referred to as the "Funds"). On March 2,
1994 8,653,427 shares of OFFITBANK High Yield Fund were exchanged for portfolio
securities with an aggregate value of $86,534,272. This exchange represented a
transfer of assets from The Senior Securities Fund, L.P. (the "Partnership");
the Partnership's investment adviser was OFFITBANK (the "Adviser") and the
general partner was an affiliate of the Adviser.
The preparation of financial statements prepared in accordance with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates. The following are significant accounting
policies followed by the Company in the preparation of its financial statements:
a. VALUATION OF SECURITIES. Equity securities held by a Fund are valued at the
last sale price on the exchange or in the principal over-the-counter market in
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price. Other securities held by a Fund generally are valued based on quoted bid
prices. Short-term debt investments having maturities of 60 days or less are
amortized to maturity based on their cost, and if applicable, adjusted for
foreign exchange translation. Securities for which market quotations are not
readily available are valued at fair value determined in good faith by or under
the direction of the Company's Board of Directors. Securities quoted in foreign
currencies initially are valued in the currency in which they are denominated
and then are translated into U.S. dollars at the prevailing foreign exchange
rate. Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics.
b. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Fund are
maintained in U.S. dollars as follows:
i. market value of investment securities and other assets and liabilities at the
exchange rate on the valuation date.
ii. purchases and sales of investment securities, income and expenses at the
exchange rate prevailing on the respective date of such transactions.
The resultant exchange gains and losses are included in the Statement of
Operations.
c. ORGANIZATIONAL EXPENSES. Costs incurred in connection with the organization
and initial registration of the New York Municipal Fund have been deferred and
are being amortized on a straight-line basis over sixty months beginning with
the Fund's commencement of operations. OFFITBANK assumed the organizational
expenses for the High Yield and Emerging Markets Funds.
d. ALLOCATION OF EXPENSES. Expenses directly attributable to a Fund are charged
to that Fund. Other expenses are allocated proportionately among each Fund in
relation to the net assets of each Fund or on another reasonable basis.
e. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of premium and accretion of discount on investments, is
accrued daily.
f. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net investment
income are declared daily and paid quarterly in the case of the Emerging Markets
Fund and monthly for the High Yield and New York Municipal Funds. Distributions
of net realized gains are normally declared and paid at least annually by each
Fund.
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require a reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
F-20
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
g. FEDERAL INCOME TAXES. Each Fund intends to continue to qualify as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
and distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
2. INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION AGREEMENTS. The Company
has entered into an investment advisory agreement (the "Investment Advisory
Agreement") with the Adviser. The Investment Advisory Agreement provides that
each Fund pays the Adviser an investment advisory fee that is calculated and
paid monthly at the annual rates of .40% of net assets for the New York
Municipal Fund, .85% on the first $200,000,000 of net assets and .75% on amounts
in excess thereof in the case of the High Yield Fund, and .90% on the first
$200,000,000 and .80% on amounts in excess thereof in the case of the Emerging
Markets Fund, of each Fund's average daily net assets. The Adviser provides
portfolio management and certain administrative, clerical and bookkeeping
services for the Company. For the year ended December 31, 1995, the Adviser was
entitled to fees of $2,884,016 for the High Yield Fund, $312,096 for the
Emerging Markets Fund, and $23,448 for the New York Municipal Fund. The Adviser
waived fees of $52,155 for the Emerging Markets Fund and $23,280 for the New
York Municipal Fund.
Furman Selz LLC ("Furman Selz") provides the Company with administrative, fund
accounting, dividend disbursing and transfer agency services pursuant to an
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include day-to-day administration of matters
related to the corporate existence of the Company, maintenance of its records,
preparation of reports, supervision of the Company's arrangements with its
custodian and assistance in the preparation of the Company's registration
statements under federal and state laws. Pursuant to the Administration
Agreement, the Company pays Furman Selz a monthly fee for its services which on
an annualized basis will not exceed .15% of the average daily net assets of the
Company. The fees are allocated among the Funds on the basis of their relative
net assets. For the year ended December 31, 1995, Furman Selz was entitled to
fees of $536,814 for the High Yield Fund, $52,016 for the Emerging Markets Fund
and $8,793 for the New York Municipal Fund. Furman Selz waived fees of $268,407
for the High Yield Fund, $26,008 for the Emerging Markets Fund and $8,793 for
the New York Municipal Fund.
As Administrator, Furman Selz provides the Funds with fund accounting related
services. For these services Furman Selz is paid a fee of $2,500 per month per
Fund. For the year ended December 31, 1995, Furman Selz earned fees, including
reimbursement of out of pocket expenses, of $38,165, $30,000 and $27,192 for the
High Yield, Emerging Markets Fund and New York Municipal Fund, respectively.
Furman Selz acts as Transfer Agent for the Fund and receives reimbursement of
certain expenses plus a per account fee of $15.00 per year. For the year ended
December 31, 1995, Furman Selz was entitled to fees of $21,360 for the High
Yield Fund, $4,418 for the Emerging Markets Fund and $1,662 for the New York
Municipal Fund.
OFFITBANK has voluntarily agreed to cap the expense ratio for the New York
Municipal Fund at 0.55%. In order to maintain this ratio, the Adviser has agreed
to reimburse the Fund $58,913.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. an affiliate of Furman Selz.
Under the Distribution Agreement, the Distributor, as agent of the Company,
agrees to use its best efforts as sole distributor of the Company's shares.
Under the Plan of Distribution, each Fund is authorized to spend up to 0.25% of
its average daily net assets to compensate the Distributor for its services. The
Distribution Agreement provides that the Company will bear the costs of the
registration of its shares with the Commission and various states and the
printing of its prospectuses, statements of additional information and reports
to shareholders. For the year ended December 31, 1995, no distribution costs
were incurred.
3. INVESTMENTS. Purchases and sales of securities for the year ended December
31, 1995, other than short-term securities, aggregated $320,118,978 and
$112,261,736 for the High Yield Fund, $44,274,204 and $15,499,351 for the
Emerging Markets Fund and $23,235,759 and $11,541,800 for New York Municipal
Fund. The cost of securities is substantially the same for Federal income tax
purposes as it is for financial reporting purposes.
<TABLE>
<CAPTION>
EMERGING NEW YORK
HIGH YIELD MARKETS MUNICIPAL
----------- ---------- ----------
<S> <C> <C> <C>
Aggregate cost............ $437,732,266 $45,641,341 $12,101,318
----------- ---------- ----------
----------- ---------- ----------
Gross unrealized
appreciation............. $19,342,329 $2,766,290 $ 299,919
Gross unrealized
depreciation............. (3,553,092) (73,477) 0
----------- ---------- ----------
Net unrealized
appreciation............. $15,789,237 $2,692,813 $ 299,919
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The Funds may purchase instruments from financial institutions, such as banks
and broker-dealers, subject to the seller's agreement to repurchase them at an
agreed upon time and price ("repurchase agreements"). The seller under a
repurchase agreement is required to maintain the value of the securities subject
to the agreement at not less than the repurchase price. Default by the seller
would, however, expose the relevant Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
A Fund's net investment income from foreign issuers may be subject to non-U.S.
withholding taxes, thereby reducing the Fund's net investment income.
F-21
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
4. CAPITAL STOCK TRANSACTIONS. The Company's Articles of Incorporation, permit
the Company to issue ten billion shares (par value $0.001). Transactions in
shares of common stock for the years ended December 31, 1995 and December 31,
1994, were as follows:
<TABLE>
<CAPTION>
HIGH YIELD FUND
--------------------------------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Beginning balance...... 24,029,315 $233,612,861 3,334 $ 33,333
---------- ------------ ---------- ------------
Shares sold............ 26,556,487 256,321,969 25,384,239 246,382,259
Shares issued in
reinvestment of
dividends and
distributions......... 2,237,907 21,843,278 942,483 8,874,728
Shares redeemed........ (4,512,995) (43,708,022) (2,300,741) (21,677,459)
---------- ------------ ---------- ------------
Net increase........... 24,281,399 234,457,225 24,025,981 233,579,528
---------- ------------ ---------- ------------
Ending balance......... 48,310,714 $468,070,086 24,029,315 $233,612,861
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
-----------------------------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Beginning balance.......... 3,180,297 $31,449,474 3,334 $ 33,333
---------- ----------- --------- -----------
Shares sold................ 2,699,458 25,099,840 3,093,896 30,656,902
Shares issued in
reinvestment of dividends
and distributions......... 231,369 2,172,548 155,505 1,471,277
Shares redeemed............ (1,142,233) (10,439,165) (72,438) (712,038)
---------- ----------- --------- -----------
Net increase............... 1,788,594 16,833,223 3,176,963 31,416,141
---------- ----------- --------- -----------
Ending balance............. 4,968,891 $48,282,697 3,180,297 $31,449,474
---------- ----------- --------- -----------
---------- ----------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
NEW YORK MUNICIPAL FUND
-----------------------
PERIOD ENDED
DECEMBER 31, 1995
-----------------------
SHARES AMOUNT
---------- -----------
<S> <C> <C> <C> <C>
Beginning balance........ 4 $ 40
---------- -----------
Shares sold.............. 1,507,243 15,433,921
Shares issued in
reinvestment of
dividends and
distributions........... 19,264 198,979
Shares redeemed.......... (330,681) (3,422,663)
---------- -----------
Net increase............. 1,195,826 12,210,237
---------- -----------
Ending balance........... 1,195,830 $12,210,277
---------- -----------
---------- -----------
</TABLE>
In connection with the transfer of assets of the High Yield Fund described in
Note 1, $4,736,468 was credited to unrealized appreciation, representing
unrealized appreciation on the portfolio securities received from the
partnership on the transfer date.
5. DERIVATIVE INSTRUMENTS. The Funds may invest in various financial instruments
including positions in forward currency contracts, currency swaps and purchased
foreign currency options. The Funds enter into such contracts for the purpose of
hedging exposure to changes in foreign currency exchange rates on their
portfolio holdings.
Each of the Funds is also permitted to enter into swap agreements to manage
interest rate or currency exposure. Swap agreements involve the commitment to
exchange with another party cash flows which are based upon the application of
interest rates, currency movements or other financial indices to a notional
principal amount. Gains and losses associated with currency swap transactions
entered into by the Emerging Markets Fund are included in realized gains and
losses on foreign currency transactions.
A forward foreign exchange contract is a commitment to sell or buy a foreign
currency at a future date at a negotiated exchange rate. The Fund bears the
market risk which arises from possible changes in foreign exchange values. Risks
may arise from the potential inability of counterparties to meet the terms of
their contracts and from unanticipated movements in the value of the foreign
currency relative to the U.S. dollar. Forward foreign exchange contracts may
involve market or credit risk in excess of the amounts reflected on the Fund's
statement of assets and liabilities.
The gain or loss from the difference between the cost of original contracts and
the amount realized upon the closing of such contracts is included in net
realized gain on foreign exchange. Fluctuations in the value of forward
contracts held at December 31, 1995 are recorded for financial reporting
purposes as unrealized gains and losses by the Funds.
The tables below indicate the High Yield Fund's and Emerging Markets Fund's
outstanding forward currency contract positions at December 31, 1995.
HIGH YIELD FUND
<TABLE>
<CAPTION>
VALUE ON UNREALIZED
ORIGI- VALUE AT APPRECIATION
CONTRACT MATURITY NATION DECEMBER 31, (DEPREC-
CURRENCY AMOUNTS DATE DATE 1995 IATION)
----------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Buy CHF $ 527,500 1-8-96 $ 377,865 $ 457,712 $ 79,847
Sell CHF (527,500) 1-8-96 (366,065) (457,712) (91,647)
Buy CHF 1,582,500 1-8-96 1,133,596 1,373,135 239,539
Sell CHF (1,582,500) 1-8-96 (1,141,775) (1,373,135) (231,360)
Sell CAD (5,000,000) 2-14-96 (3,695,901) (3,662,000) 33,901
Buy CHF 434,600 3-11-96 294,444 379,580 85,136
Sell CHF (434,600) 3-11-96 (303,492) (379,580) (76,088)
Buy CHF 1,575,000 3-18-96 1,092,233 1,376,708 284,475
Sell CHF (1,575,000) 3-18-96 (1,112,288) (1,376,708) (264,420)
Buy CHF 308,750 5-30-96 270,833 271,885 1,052
Sell CHF (308,750) 5-30-96 (248,690) (271,885) (23,195)
------------
Net unrealized depreciation on forward positions............................ $ 37,240
------------
------------
</TABLE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
VALUE ON UNREALIZED
ORIGI- VALUE AT APPRECIATION
CONTRACT MATURITY NATION DECEMBER 31, (DEPREC-
CURRENCY AMOUNTS DATE DATE 1995 IATION)
----------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sell DEM $(1,390,000) 2-21-96 $(1,000,648) $ (960,629) $ 40,019
</TABLE>
A purchased option contract gives the Fund the right to sell (puts) or purchase
(calls) a specified amount of foreign currency at a fixed price. The maximum
exposure to loss for any purchased option is limited to the premium initially
paid for the option. Such options are reflected at value in the Fund's portfolio
of investments.
The Emerging Markets Fund also is invested in indexed securities whose value is
linked directly to changes in foreign currencies, interest rates and other
financial indices. Indexed securities may be more volatile than the underlying
instrument but the risk of loss is limited to the amount of the original
investment.
6. OTHER MATTERS. The Emerging Markets Fund and the High Yield Fund invest in
obligations of foreign entities
F-22
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
and securities denominated in foreign currencies that involve risk not typically
involved in domestic investments. Such risks include fluctuations in foreign
exchange rates, ability to convert proceeds into U.S. dollars, less publicly
available information about foreign financial instruments, less liquidity
resulting from substantially less trading volume, more volatile prices and
generally less government supervision of foreign securities markets and issuers.
7. FEDERAL INCOME TAX STATUS. During the year ended December 31, 1995, the
Emerging Markets Fund and High Yield Fund utilized their capital loss carryovers
of $81,854 and $133,424 respectively. At December 31, 1995, the Emerging Markets
Fund had available net capital loss carryovers of $170,976, which will be
available through December 31, 2002 to offset future capital gains, to the
extent provided by regulations.
The Emerging Markets Fund has incurred $29,039 and $1,731 of post-October net
capital and foreign currency losses during the year ended December 31, 1995.
These losses are deemed to arise on the first business day of the next taxable
year.
As of December 31, 1995, the Emerging Markets and High Yield Funds had permanent
book/tax differences primarily attributable to foreign currency gains and
losses. To reflect reclassifications arising from permanent book/tax differences
as of December 31, 1995, the Emerging Markets Fund charged paid in capital
$1,151,913, accumulated dividends in excess of net investment income was charged
$385,680 and accumulated net realized loss was credited $1,537,593. The High
Yield Fund reclassified $99,777 between net investment income and realized
capital gains; paid in capital was not affected.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------------------------------------
To the Board of Directors
and Shareholders of The
OFFITBANK Investment Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of OFFITBANK High Yield Fund,
OFFITBANK Emerging Markets Fund and OFFITBANK New York Municipal Fund (the
"Funds," each constituting a portfolio of The OFFITBANK Investment Fund,
Inc.) at December 31, 1995, the results of each of their operations for the
year then ended, and the changes in each of their net assets and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1995
by correspondence with the custodian and brokers, provide a reasonable basis
for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
February 15, 1996
F-24
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Included in the Prospectuses:
Financial Highlights for the periods ended December 31, 1995 and
December 31, 1994 for the High Yield and Emerging Markets Funds
and for the period ended December 31, 1995 for the New York
Municipal Fund.
Included in the Statements of Additional Information:
(1) Statements of Assets and Liabilities for the Investment
Grade Global Debt, California Municipal and National
Municipal Funds as of December 31, 1995.
(2) Independent Accountant's Reports dated February 28, 1996.
(3) Portfolio of Investments as of December 31, 1995.
(4) Statements of Assets and Liabilities for the period ended
December 31, 1995.
(5) Statement of Operations for the period ended December 31,
1995.
(6) Statement of Changes in Net Assets for the periods ended
December 31, 1995 and December 31, 1994.
(7) Financial Highlights for the periods ended December 31, 1995
and December 31, 1994.
(8) Notes to Financial Statements dated December 31, 1995.
(9) Independent Accountant's Report dated February 15, 1996.
(b) Exhibits:
Exhibit
Number Description
------- -----------
1(a) -- Registrant's Articles of Incorporation.(1)
1(b) -- Registrant's Amended and Restated Articles
of Incorporation.(3)
1(c) -- Registrant's Form of Articles Supplementary.(5)
<PAGE>
2(a) -- Registrant's By-Laws.(1)
2(b) -- Registrant's Amended and Restated By-Laws.(3)
3 -- None.
4(a) -- Form of Stock Certificate for shares of Class A stock.(3)
4(b) -- Form of Stock Certificate for shares of Class B stock.(3)
4(c) -- Form of Stock Certificate for shares of Class C stock.(3)
4(d) -- Form of Stock Certificate for shares of Class D stock.(5)
4(e) -- Form of Stock Certificate for shares of Class E stock.(5)
4(f) -- Form of Stock Certificate for shares of Class F stock.(5)
4(g) -- Form of Stock Certificate for shares of Class G stock.(5)
4(h) -- Form of Stock Certificate for shares of Class H stock.(5)
5(a) -- Form of Advisory Agreement between Registrant and
OFFITBANK with respect to the High Yield, Global Debt and
Emerging Markets Funds.(3)
5(b) -- Form of Advisory Agreement between the Registrant and
OFFITBANK with respect to the Global Convertible, Latin
America Equity, National Municipal, California Municipal
and New York Municipal Funds.(5)
5(c) -- Amendment to Advisory Agreement between the Registrant and
OFFITBANK reflecting the change in name of the Latin
America Equity Fund to Latin America Total Return Fund.(6)
6(a) -- Form of Distribution Agreement between Registrant and
Furman Selz Incorporated with respect to the High Yield,
Global Debt and Emerging Markets Funds.(2)
C-2
<PAGE>
6(b) -- Form of Supplement to the Distribution Agreement between
Registrant and OFFIT Funds Distributor, Inc. with respect
to the Global Convertible, Latin America Equity, National
Municipal, California Municipal and New York Municipal
Funds.(5)
6(c) -- Amendment to the Distribution Agreement between Registrant
and OFFIT Funds Distributor, Inc. reflecting the change in
name of the Latin America Equity Fund to Latin America
Total Return Fund.(6)
6(d) -- Amendment to the Distribution Agreement in connection with
the reclassification of existing shares of each Fund as
"Select Shares" as of the close of business ____, 1996,
and the creation of Advisor Shares.
7 -- None.
8(a) -- Form of Custodian Agreement between Registrant and The
Chase Manhattan Bank, N.A. (the "Custodian") with respect
to the High Yield, Global Debt and Emerging Markets
Funds.(3)
8(b) -- Form of Custodian Agreement between Registrant and the
Custodian with respect to the Global Convertible, Latin
America Equity, National Municipal, California Municipal
and New York Municipal Funds.(5)
8(c) -- Amendment to the Custodian Agreement between Registrant
and the Custodian with respect to the Latin America Total
Return Fund.(7)
9(a) -- Form of Fund Administration Agreement between Registrant
and Furman Selz Incorporated with respect to the High
Yield, Global Debt and Emerging Markets Funds.(2)
9(b) -- Form of Transfer Agency Agreement between Registrant and
Furman Selz Incorporated with respect to the High Yield,
Global Debt and Emerging Markets Funds.(2)
C-3
<PAGE>
9(c) -- Form of Supplement to the Fund Administration Agreement
between Registrant and Furman Selz Incorporated with
respect to the Global Convertible, Latin America Equity,
National Municipal, California Municipal and New York
Municipal Funds.(5)
9(d) -- Form of Supplement to the Transfer Agency Agreement
between Registrant and Furman Selz Incorporated with
respect to the Global Convertible, Latin America Equity,
National Municipal, California Municipal and New York
Municipal Funds.(5)
9(e) -- Amendment to the Administration Agreement between
Registrant and Furman Selz LLC reflecting the change in
name of the Latin America Equity Fund to Latin America
Total Return Fund.(6)
9(f) -- Amendment to the Transfer Agency Agreement between
Registrant and Furman Selz LLC reflecting the change in
name of the Latin America Equity Fund to Latin America
Total Return Fund.(6)
9(g) -- Form of Shareholder Servicing Agreement between the
Registrant and Shareholder Servicing Agents.
10 -- Opinion and Consent of Piper & Marbury.(3)
11(a) -- Consent of Price Waterhouse LLP.
11(b) -- Powers of Attorney for Messrs. Landau and Morton.(2)
12 -- None.
13(a) -- Form of Share Purchase Agreement between Registrant and
Furman Selz Incorporated with respect to the High Yield,
Global Debt and Emerging Markets Funds.(3)
13(b) -- Form of Share Purchase Agreement between Registrant and
Furman Selz Incorporated with respect to the Global
Convertible, Latin America Equity, National Municipal,
California Municipal and New York Municipal Funds.(5)
C-4
<PAGE>
14 -- None.
15(a) -- Form of Plan of Distribution.(2)
15(b) -- Amendment to Plan of Distribution.
16 -- Schedule of computation for the High Yield, Emerging
Markets and New York Municipal Funds.(6)
18 -- Form of Amended Multiclass Plan Pursuant to Rule 18f-3.
27 -- Financial Data Schedules for the High Yield, Emerging
Markets and New York Municipal Funds.(6)
- ---------------
(1) Exhibit is incorporated by reference to the Registrant's Registration
Statement on Form N-1A, filed October 8, 1993, Registration Nos. 33-70116
and 811-8036 (the "Registration Statement").
(2) Exhibit is incorporated by reference to Pre-Effective Amendment No. 1,
filed November 24, 1993 to the Registration Statement.
(3) Exhibit is incorporated by reference to Pre-Effective Amendment No. 2,
filed January 31, 1994, to the Registration Statement.
(4) Exhibit is incorporated by reference to Post-Effective Amendment No. 2,
filed on August 26, 1994, to the Registration Statement.
(5) Exhibit is incorporated by reference to Post-Effective Amendment No. 3,
filed on November 25, 1994, to the Registration Statement.
(6) Exhibit is incorporated by reference to Post-Effective Amendment No. 6,
filed on February 29, 1996, to the Registration Statement.
(7) To be filed by amendment to this Registration Statement.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
Number of
Record
Holders at
Title of Class April 24, 1996
-------------- --------------
Shares of OFFITBANK High Yield Fund, par value
$.001 per share . . . . . . . . . . . . . . . . . . . . . 764
C-5
<PAGE>
Shares of OFFITBANK Emerging Markets Fund, par value
$.001 per share . . . . . . . . . . . . . . . . . . . . . 137
Shares of OFFITBANK Investment Grade Global Debt Fund,
par value $.001 per share . . . . . . . . . . . . . . . . 1
Shares of OFFITBANK Latin America Total Return Fund,
par value $.001 per share . . . . . . . . . . . . . . . . 2
Shares of OFFITBANK Global Convertible Fund,
par value $.001 per share . . . . . . . . . . . . . . . . 0
Shares of OFFITBANK National Municipal Fund,
par value $.001 per share . . . . . . . . . . . . . . . . 1
Shares of OFFITBANK California Municipal Fund,
par value $.001 per share . . . . . . . . . . . . . . . . 1
Shares of OFFITBANK New York Municipal Fund,
par value $.001 per share . . . . . . . . . . . . . . . . 48
Item 27. INDEMNIFICATION.
Reference is made to Article VII of Registrant's Articles of
Incorporation (Exhibit 1 hereto), Article IV of Registrant's By-laws (Exhibit 2
hereto) and Paragraph 4 of the Form of Distribution Agreement between Registrant
and Furman Selz Incorporated (Exhibit 6 hereto).
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, Registrant understands that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by Registrant of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as
C-6
<PAGE>
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser provides a wide range of asset management services to
individuals, institutions and retirement benefit plans.
To the knowledge of Registrant, none of the Directors or executive officers
of the Adviser except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature.
Principal Occupation or Other
Employment of a Substantial
Position with Nature During
Name OFFITBANK the Past Two Years
------- ------------- ------------------------------
H. Furlong Baldwin Director Chairman of the Board,
Mercantile Safe Deposit & Mercantile Bankshares
Trust Co.
Two Hopkins Plaza
Baltimore, MD 21201
Alessandro di Montezemolo Director Private Investor
200 East 65th Street
New York, NY 10021
David I. Margolis Director Chairman and Chief Executive
Coltec Industries Inc Officer, Coltec Industries
430 Park Avenue Inc
New York, NY 10022
Harvey M. Meyerhoff Director Chairman of the Board, Magna
Magna Holdings, Inc. Holdings, Inc.
25 South Charles Street
Suite 2100
Baltimore, MD 21201
George Randolph Packard Director Professor, The Paul H. Nitze
4425 Garfield Street, N.W. School of Advanced
Washington, D.C. 20007 International Studies, Johns
Hopkins University
B. Lance Sauerteig, Esq. Director President, First Spring
First Spring Corporation 499 Corporation
Park Avenue
New York, NY 10022
Item 29. PRINCIPAL UNDERWRITER.
C-7
<PAGE>
(a) Not applicable.
(b) The information required by this Item 29(b) with respect to each
director, officer or partner of OFFIT Funds Distributor, Inc. is incorporated by
reference to Schedule A of Form BD filed by OFFIT Funds Distributor, Inc.
pursuant to the Securities Exchange Act of 1934 (SEC File No. 8-46960).
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "1940
Act"), and the rules thereunder will be maintained at the offices of:
(1) The OFFITBANK Investment Fund, Inc.
237 Park Avenue, Suite 910
New York, New York 10017
(records relating to the Company)
(2) OFFITBANK
520 Madison Avenue
New York, New York 10022
(advisory records)
(3) OFFIT Funds Distributor, Inc.
230 Park Avenue
New York, New York 10169
(records of principal underwriter)
Item 31. MANAGEMENT SERVICES.
Not applicable.
Item 32. UNDERTAKINGS.
(a) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of one or more of Registrant's
directors when requested in writing to do so by the holders of at least 10% of
Registrant's outstanding shares of common stock and, in connection with such
meeting, to assist in communications with other shareholders in this regard, as
provided under Section 16(c) of the 1940 Act.
(b) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's annual report to shareholders, upon
request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the Investment Company Act of 1940, as amended,
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of New York
and State of New York on the 29th day of April, 1996. The registrant
represents that this Registration Statement is filed solely for a purpose
specified in paragraph (b)(1) of rule 485 under the Securities Act and that no
material event requiring disclosure in the prospectuses contained herein,
other than one listed in paragraph (b)(1) of rule 485 has occurred since the
filing date of a post-effective amendment filed under paragraph (a) of rule
485 which has not become effective.
THE OFFITBANK INVESTMENT FUND, INC.
By: /s/ Wallace Mathai-Davis
-------------------------
Wallace Mathai-Davis,
Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated on the 29th day of April, 1996.
Signature Title
--------- ------
* Morris W. Offit Director, Chairman of the
- ------------------------ Board and President
(Principal Executive
Officer)
* Edward J. Landau Director
- ------------------------
* Director
- ------------------------
The Very Reverend James Parks Morton
/s/ Wallace Mathai-Davis Wallace Mathai-Davis Secretary and Treasurer
- ------------------------ (Principal Financial and
Accounting Officer)
*By: /s/ Wallace Mathai-Davis
------------------------
Wallace Mathai-Davis
Attorney-in-fact
C-9
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
6(d) Amendment to Distribution Agreement
9(g) Form of Shareholder Servicing Agreement
11(a) Consent of Price Waterhouse LLP
15(b) Amendment to Plan of Distribution
18 Form of Amended Multiclass Plan Pursuant to Rule 18f-3
C-10
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
AMENDMENT TO DISTRIBUTION AGREEMENT
AMENDMENT, dated as of May 1, 1996, to the Distribution Agreement (as
amended, the "Agreement"), dated as of February 7, 1994, between the OFFITBANK
Investment Fund, Inc. (the "Company"), a Maryland corporation, and OFFIT Funds
Distributor, Inc. (the "Distributor"), a Delaware corporation, as follows:
All references in the Agreement to "Fund", "Funds" or "Shares", to the
extent such terms relate to and Fund of the Company or shares of
common stock thereof, shall apply solely to the Select Shares and the
Advisor Shares of the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers, as of the day and year first above
written.
THE OFFITBANK INVESTMENT
FUND, INC.
By: ___________________________
Title:
OFFIT FUNDS DISTRIBUTOR, INC.
By: ______________________________
Title:
<PAGE>
Exhibit 9(g)
FORM OF
SHAREHOLDER SERVICING AGREEMENT
SHAREHOLDER SERVICING AGREEMENT, dated as of _________ __ 1996, by and
between The OFFITBANK Investment Fund, Inc. (the "Company"), a Maryland
corporation, and [ ] (the "Financial Institution"), as a shareholder
servicing agent hereunder (the "Agent") relating to transactions in shares of
capital stock, $.001 par value (the "Shares"), of any of the existing investment
portfolios offered by the Company (the "Funds"). In the event that the Company
establishes one or more portfolios other than the Funds with respect to which it
decides to retain the Financial Institution hereunder, the Company shall
promptly notify the Financial Institution in writing. If the Financial
Institution is willing to render such services, it shall notify the Company in
writing whereupon such portfolio shall become a Fund hereunder.
The Company and the Financial Institution hereby agree as follows:
1. APPOINTMENT. The Financial Institution, as Agent, hereby agrees
to perform certain services for its customers (the "Customers") as hereinafter
set forth. The Agent's appointment hereunder is non-exclusive, and the parties
recognize and agree that, from time to time, the Company may enter into other
shareholder servicing agreements, in writing, with other financial institutions.
2. SERVICES TO BE PERFORMED. The Agent, as agent for its Customers,
shall be responsible for performing shareholder administrative support services
for shareholders of Adviser Shares, which will include the following, among
other things: assisting in aggregating and processing purchase, exchange and
redemption transactions; placing net purchase and redemption orders with the
Company's distributor; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or redeem shares;
processing dividend payments; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in shareholder-
designated accounts, as necessary; providing periodic statements showing a
customer's positions in the Funds; furnishing (either separately or on an
integrated basis with other reports sent to a shareholder by an Agent) monthly
and year-end statements and confirmations of purchases, exchanges and
redemptions; transmitting, on behalf of the Company, proxy statements, annual
reports, updating prospectuses and other communications from the Company to the
shareholders of the Funds; and receiving, tabulating and transmitting to the
Company proxies executed by shareholders with respect to meetings of
shareholders of the Funds other similar services if requested by the Company or
a shareholder of the Advisor Shares of a Fund.
<PAGE>
The Agent shall provide all personnel and facilities necessary in
order for it to perform the functions described in this paragraph with respect
to its Customers.
3. FEES.
3.1. FEES FROM THE COMPANY. In consideration for the services
described in Section 2 hereof and the incurring of expenses in connection
therewith, the Agent shall receive a fee, computed daily and payable monthly, at
the annual rate of ___ of 1% of the average daily net asset value of Advisor
Shares of each Fund for which the Agent from time to time performs services
under this Agreement on behalf of Customers. Fees with respect to Customers'
Advisor Shares in any one Fund will be paid exclusively from the assets of that
Fund in which such Customer's assets are invested. For purposes of determining
the fees payable to the Agent hereunder, the value of the Company's net assets
shall be computed in the manner specified in the Company's then-current
prospectus and statement of additional information (the "Prospectus") for
computation of the net asset value of the Company's Shares.
3.2. FEES FROM CUSTOMERS. It is agreed that the Financial
Institution may impose certain conditions on Customers, in addition to or
different from those imposed by the Company, such as requiring a minimum initial
investment or imposing limitations on the amounts of transactions. It is also
understood that the Financial Institution may directly credit or charge fees to
Customers in connection with an investment in the Funds. The Financial
Institution shall credit or bill Customers directly for such credits or fees.
In the event the Financial Institution charges Customers such fees, it shall
make appropriate prior written disclosure (such disclosure to be in accordance
with all applicable laws) to Customers both of any direct fees charged to the
Customer and of the fees received or to be received by it from the Company
pursuant to Section 3.1 of this Agreement. It is understood however, that in no
event shall the Financial Institution have recourse or access as Agent or
otherwise to the account of any shareholder of the Company except to the extent
expressly authorized by law or by such shareholder, or to any assets of the
Company, for payment of any direct fees referred to in this Section 3.2.
4. APPROVAL OF MATERIALS TO BE CIRCULATED. Advance copies or proofs
of all materials which are to be generally circulated or disseminated by the
Agent to Customers or prospective Customers which identify or describe the
Company shall be provided to the Company at least 10 days prior to such
circulation or dissemination (unless the Company consents in writing to a
shorter period), and such materials shall not be circulated or disseminated or
further circulated or disseminated at any time after the Company shall have
given written notice to the Agent of any objection thereto.
<PAGE>
Nothing in this Section 4 shall be construed to make the Company
liable for the use of any information about the Company which is disseminated by
the Agent.
5. COMPLIANCE WITH LAWS, ETC. The Agent shall comply with all
applicable federal and state laws and regulations in the performance of its
duties under this Agreement, including securities laws.
6. LIMITATION OF AGENT'S LIABILITY. In consideration of the Agent's
undertaking to render the services described in this Agreement, the Company
agrees that the Agent shall not be liable under this Agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this Agreement, provided that nothing in this Agreement
shall be deemed to protect or purport to protect the Agent against any liability
to the Company or its stockholders to which the Agent would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of the Agent's duties under this Agreement or by reason of the
Agent's reckless disregard of its obligations and duties hereunder.
7. INDEMNIFICATION. The Company agrees to indemnify and hold
harmless the Agent from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the Investment Company Act of 1940, as amended, and any state and
foreign securities and blue sky laws, all as or to be amended from time to time)
and expenses, including attorneys' fees and disbursements arising directly or
indirectly from (i) any misstatements or omissions in the Company's Prospectus,
or (ii) any action or thing which the Agent takes or does or omits to take or do
reasonably believed by the Agent to be at the request or direction or in
reliance on the advice or instructions, whether oral or written, of the Company
provided, that the Agent shall not be indemnified against any liability to the
Company or to its shareholders (or any expenses incident to such liability)
arising out of the Agent's own willful misfeasance, bad faith or gross
negligence in the performance of its duties hereunder or by reason of its
reckless disregard of its obligations and duties hereunder. In order that the
indemnification provision contained in this paragraph shall apply, it is
understood that if in any case the Company may be asked to indemnify or save the
Agent harmless, the Company shall be fully and promptly advised of all pertinent
facts concerning the situation in question, and it is further understood that
the Agent will use all reasonable care to identify and notify the Company
promptly concerning any situation which presents or appears likely to present
the probability of such a claim for indemnification against the Company. The
Company shall have the option to defend the Agent against any claim which may be
the subject of this indemnification and, in the event that the Company so
elects, it will so notify the Agent
<PAGE>
and thereupon the Company shall take over complete defense for the claim, and
the Agent shall in such situation incur no further legal or other expenses for
which it shall seek indemnification under this paragraph. The Agent shall in no
case confess any claim or make any compromise or settlement in any case in which
the Company will be asked to indemnify the Agent, except with the Company's
prior written consent.
8. LIMITATION OF SHAREHOLDER LIABILITY, ETC. The Agent hereby agrees
that obligations assumed by the Company pursuant to this Agreement shall be
limited in all cases to the Company and its assets and that the Agent shall not
seek satisfaction of any such obligation from the shareholders or any
shareholder of the Company. It is further agreed that the Agent shall not seek
satisfaction of any such obligations from the Board of Directors or any
individual Director of the Company.
9. NOTICES. All notices or other communications hereunder to either
party shall be in writing or by confirming telegram, cable, telex or facsimile
sending device. Notices shall be addressed (a) if to the Company, at the
address of the Company, or (b) if to the Agent, at _______________________.
10. FURTHER ASSURANCES. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
11. TERMINATION. This Agreement will continue in effect until two
years from the date hereof and thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually (a) by
the Company's Board of Directors and (b) by the vote, cast in person at a
meeting called for the purpose, of a majority of the Company's directors who are
not parties to this Agreement or "interested persons" (as defined in the 1940
Act) of any such party. This Agreement may be terminated at any time, without
the payment of any penalty, by a vote of a majority of the Company's outstanding
voting securities (as defined in the 1940 Act) or by a vote of a majority of the
Company's entire Board of Directors on 60 days' written notice to the Agent or
by the Agent on (60) days' written notice to the Company. Notice of termination
of the Shareholder Servicing Plan by the Board of Directors, pursuant to which
this Agreement has been entered, shall constitute a notice of termination of
this Agreement.
12. CHANGES; AMENDMENTS. This Agreement may be changed or amended
only by written instrument signed by both parties.
13. REPORTS. The Agent will provide the Company or its designees
such information as the Company or its designees may reasonably request
(including, without limitation, periodic certifications confirming the provision
to Customers of the services described herein), and will otherwise cooperate
with the
<PAGE>
Company and its designees (including, without limitation, any auditors
designated by the Company), in connection with the preparation of reports to its
Board of Directors concerning this Agreement and the monies paid or payable
under this Agreement, as well as any other reports or filings that may be
required by law.
14. SUBCONTRACTING BY AGENT. The Agent may subcontract for the
performance of the Agent's obligations hereunder with any one or more persons,
including but not limited to any one or more persons which is an affiliate of
the Agent; PROVIDED, HOWEVER, that the Agent shall be as fully responsible to
the Company for the acts and omissions of any subcontractor as it would be for
its own acts or omissions. The Agent shall notify the Company of any such
arrangements no later than the next meeting of the Company's Board of Directors
following the entry by the Agent into such arrangements. Notwithstanding this
paragraph or paragraph 11 of this Agreement, the Company reserves the right to
terminate this Agreement immediately or upon such notice as the Company, in its
sole discretion, determines to give, and without payment of any penalty, if the
Company notifies the Agent that any subcontractor of the Agent is unacceptable
to the Company for any reason and the Agent does not terminate its arrangements
with such subcontractor as promptly as reasonably practicable.
15. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of New York.
16. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement has been executed on behalf of the Company by the undersigned not
individually, but in the capacity indicated.
THE OFFITBANK INVESTMENT FUND, INC.
By:____________________
Title:
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the relevant Statement of Additional Information
constituting part of the Post-Effective Amendment No. 8 to the registration
statement on Form N-1A (the "Registration Statement") of (i) our report dated
February 15, 1996 relating to the financial statements and financial highlights
of OFFITBANK High Yield Fund, OFFITBANK Emerging Markets Fund and OFFITBANK New
York Municipal Fund and (ii) our reports dated February 28, 1996 relating to the
statement of assets and liabilities of OFFITBANK Investment Grade Global Debt
Fund, OFFITBANK National Municipal Fund and OFFITBANK California Municipal Fund,
which appear in such Statement of Additional Information. We also consent to
the incorporation by reference of our reports into the corresponding Prospectus
constituting part of such Registration Statement, and to the references to us
under the heading "Independent Accountants" in each of the Statements of
Additional Information and under the heading "Financial Highlights" in the
relevant Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
April 29, 1996
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
AMENDMENT TO PLAN OF DISTRIBUTION
AMENDMENT, dated as of May 1, 1996, to the Plan of Distribution (as
amended, the "Plan"), dated as of February 7, 1994, as adopted by The OFFITBANK
Investment Fund, Inc. (the "Company"), a Maryland corporation, as follows:
All references in the Plan to "Fund", "Funds" or "Shares", to the
extent such terms relate to the Funds of the Company or shares of
common stock thereof, shall apply solely to the Select Shares and the
Advisor Shares of the Company.
THE OFFITBANK INVESTMENT
FUND, INC.
By: ___________________________
Title:
<PAGE>
Exhibit 18
THE OFFITBANK INVESTMENT FUND, INC.
FORM OF AMENDED MULTICLASS PLAN PURSUANT TO RULE 18f-3
UNDER THE INVESTMENT COMPANY ACT OF 1940
May __, 1996
I. BACKGROUND
This plan (the "PLAN") pertains to the issuance by The OFFITBANK
Investment Fund, Inc. (the "COMPANY") of multiple classes of capital stock of
each of its portfolios (each a "FUND" and collectively, a "FUND") and is being
adopted by the Company pursuant to Rule 18f-3 under the Investment Company Act
of 1940, as amended (the "ACT").
The Company's Board members, including a majority of its Directors who
are not "interested persons" (as defined in the Act), have found that this Plan
is in the best interests of each class individually and the Company as a whole.
The Company's Charter authorizes the Company to offer two classes of
shares of each Fund: Select Shares and Advisor Shares. REFERENCE SHOULD BE
MADE TO THE COMPANY'S PROSPECTUS FOR FURTHER INFORMATION ABOUT THE COMPANY'S
MULTIPLE CLASS STRUCTURE.
II. ELIGIBILITY
Select Shares may be purchased by investors who are able to meet the
high initial investment requirements of Select Shares and to existing Select
Shares shareholders in connection with additional investments and the
reinvestment of dividends on outstanding Select Shares. Select Shares may be
purchased from OFFIT Funds Distributor, Inc. Advisor Shares shares may be
purchased from Shareholder Servicing Agents selected by the Company, or through
selected security dealers or agents.
III. SALES LOADS
Both Select Shares and Advisor Shares are sold without the imposition
of a sales charge.
IV. DISTRIBUTION FEES
A. The Select Shares and the Advisor Shares are subject to the Plan
of Distribution, dated as of February 7, 1994 and as amended on April __ 1996,
as adopted pursuant to Rule 12b-1 under the Act.
<PAGE>
V. ALLOCATION OF EXPENSES
Expenses of the Funds are borne by the various classes of shares of
the Funds on the basis of relative net assets, except that (i) Advisor Shares
and Select Shares bear their own fees and expenses pursuant to the Plan of
Distribution and (ii) expenses which are specifically attributable to a
particular class of the Funds' shares would be allocated directly to the
particular class to which they are attributable.
VI. VOTING RIGHTS
Except as described below with respect to the Funds' Distribution
Plan, all shares of the Funds have equal voting rights and will be voted in the
aggregate and not by class, except where voting by class is required by law.
The Select Shares and Advisor Shares each have exclusive voting rights under the
Plan of Distribution with respect to matters pertaining solely to one or the
other of the classes of the Funds' shares under the Plan.
VII. EXCHANGE FEATURES
Shares of each class of the Funds shall have such exchange privileges
as shall be approved by the Funds' Board of Directors from time to time and as
set forth in the prospectus pertaining to each Fund.
VIII. AMENDMENTS
No material amendment to this Plan may be made unless it is first
approved by a majority of both (a) the full Board of Directors of the Company
and (b) those Directors who are not interested persons of the Company, as that
term is defined in the Act.
