<PAGE>
Registration Nos. 33-70116
811-8036
As filed with the Securities and Exchange Commission on February 14, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 10
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12
(Check appropriate box or boxes)
THE OFFITBANK INVESTMENT FUND, INC.
(Exact name of Registrant as specified in charter)
125 West 55th Street
11th Floor
New York, New York 10019
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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.
125 West 55th Street
New York, New York 10019
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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:
immediately upon filing pursuant to paragraph (b)
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on (date) pursuant to paragraph (b)
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on (date) pursuant to paragraph (a)(i)
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X 75 days after filing pursuant to paragraph (a)(ii)
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on (date) pursuant to paragraph (a)(ii) of rule 485
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60 days after filing pursuant to paragraph (a)(i)
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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, 1996 will be filed on or about February
29, 1997.
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
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 Financial Highlights
Information
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. Pending 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 and
Techniques; 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 Management; Purchase
Being Offered 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
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
<PAGE>
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OFFITBANK High Yield Fund
OFFITBANK Emerging Markets Fund
OFFITBANK Latin America Equity Fund
OFFITBANK Total Return Fund
OFFITBANK Investment Grade Global Debt Fund
OFFITBANK Global Convertible Fund
OFFITBANK U.S. Government Securities Fund
OFFITBANK Mortgage Securities Fund
OFFITBANK California Municipal Fund
OFFITBANK New York Municipal Fund
OFFITBANK National Municipal Fund
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PROSPECTUS
, 1997
THE
[LOGO]
INVESTMENT FUND, INC.
<PAGE>
-------------------------------------------
The OFFITBANK Investment Fund, Inc. currently offers eleven 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
Latin America Equity Fund
Total Return Fund
Global Debt Fund
Global Convertible Fund
U.S. Government Securities Fund
Mortgage Securities Fund
INVESTORS SEEKING TO MAXIMIZE AFTER-TAX TOTAL RETURNS SHOULD CONSIDER:
California Municipal Fund
New York Municipal Fund
National Municipal Fund
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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]LATIN AMERICA EQUITY FUND
[LOGO]TOTAL RETURN FUND
[LOGO]INVESTMENT GRADE GLOBAL DEBT FUND
[LOGO]GLOBAL CONVERTIBLE FUND
[LOGO]U.S. GOVERNMENT SECURITIES FUND
[LOGO]MORTGAGE SECURITIES FUND
[LOGO]CALIFORNIA MUNICIPAL FUND
[LOGO]NEW YORK MUNICIPAL FUND
[LOGO]NATIONAL MUNICIPAL FUND
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The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end,
management investment company offering eleven separate, no-load, non-diversified
investment portfolios which each have a different investment objective. Each
investment portfolio ("Fund") of the Company 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 LATIN AMERICA EQUITY FUND'S primary investment objective is
capital appreciation. Current income is a secondary objective.
The OFFITBANK TOTAL RETURN FUND'S investment objective is to maximize total
return from a combination of capital appreciation and current income.
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 U.S. GOVERNMENT SECURITIES FUND'S investment objective is to
seek current income.
The OFFITBANK MORTGAGE SECURITIES FUND'S investment objective is to maximize
total return from a combination of investment income and capital appreciation.
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.
The OFFITBANK NATIONAL MUNICIPAL FUND'S investment objective is to maximize
total after-tax return, 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.
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 $7.6 billion in assets principally invested in global fixed income
securities.
The address of the Company is 125 W. 55th Street, New York, New York 10019.
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 ,
1997, 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.
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, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Expense Information......................................... 9
Financial Highlights........................................ 13
Investment Objectives and Policies.......................... 15
Other Investment Policies................................... 31
Special Risk Considerations................................. 38
Limiting Investment Risks................................... 48
Management.................................................. 49
Dividends and Distributions................................. 52
Purchase of Shares.......................................... 52
Redemption of Shares........................................ 54
Shareholder Services........................................ 56
Net Asset Value............................................. 56
Taxes....................................................... 56
Performance Information..................................... 60
The Transfer................................................ 60
Additional Information...................................... 61
Reports to Shareholders..................................... 61
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
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PROSPECTUS SUMMARY
WHAT ARE THE FUNDS?
OFFITBANK High Yield Fund (the "High Yield Fund"), OFFITBANK Emerging Markets
Fund (the "Emerging Markets Fund"), OFFITBANK Latin America Equity Fund (the
"Latin America Equity Fund"), OFFITBANK Total Return Fund ("Total Return Fund"),
OFFITBANK Investment Grade Global Debt Fund ("Global Debt Fund"), OFFITBANK
Global Convertible Fund ("Global Convertible Fund"), OFFITBANK U.S. Government
Securities Fund ("U.S. Government Securities Fund"), OFFITBANK Mortgage
Securities Fund ("Mortgage Securities Fund"), OFFITBANK California Municipal
Fund (the "California Municipal Fund"), OFFITBANK New York Municipal Fund (the
"New York Municipal Fund") and OFFITBANK National Municipal Fund ("National
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, the Total Return, Global
Debt, Global Convertible, U.S. Government Securities, Mortgage Securities,
California Municipal and National Municipal Funds had not 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 LATIN AMERICA EQUITY FUND'S primary investment objective is capital
appreciation. Current income is a secondary objective. The Fund will seek to
achieve its objective by investing, under normal market conditions, at least 80%
of its total assets in equity securities of Latin American issuers (as defined
in this Prospectus). Up to 20% of the Fund's total assets may be invested in
debt securities (including convertible debt securities) of Latin American
issuers.
The TOTAL RETURN FUND'S investment objective is to maximize total return from a
combination of capital appreciation and current income. The Fund will seek to
achieve its objective by investing primarily in a portfolio of fixed-income
securities of varying maturities and by giving the Adviser broad discretion to
deploy the Fund's assets among certain segments of the fixed-income market that
the Adviser believes will best contribute to the achievement of the Fund's
objective. The Adviser may pursue the Fund's objective through investing
directly in portfolio securities as well as through investing in the other Funds
of the Company.
The GLOBAL DEBT FUND'S investment objective is to achieve 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
global 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 a diversified portfolio
of convertible debt securities, convertible preferred stocks and "synthetic"
3
<PAGE>
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 total assets may be invested in below
investment grade debt securities.
The U.S. GOVERNMENT SECURITIES FUND'S investment objective is to seek current
income. The Fund seeks to achieve its objective by investing, under normal
circumstances, at least 80% of its total assets in U.S. Government Securities
(as defined in this Prospectus). In addition, the Fund may invest up to 20% of
its total assets in other fixed income securities rated AAA by S&P or Aaa by
Moody's or deemed of comparable quality by the Adviser.
The MORTGAGE SECURITIES FUND'S investment objective is to maximize total return
from a combination of investment income and capital appreciation. The Fund seeks
to achieve its investment objective by investing at least 80% of its total
assets in a diversified portfolio of investment grade or comparable
mortgage-related securities issued by U.S. entities. Up to 20% of the Fund's
assets may be invested in investment grade or comparable fixed income securities
of U.S. and non-U.S. issuers, including mortgage related securities of issuers
in Canada, the United Kingdom, Denmark or other countries which may develop
mortgage securities markets in the future. Any Fund investment denominated in a
foreign currency will be hedged against fluctuations in value versus the U.S.
dollar.
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 (as defined in this Prospectus). 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.
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.
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
4
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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
$7.6 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; 1.00% in the case of the Latin America
Equity 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; .40% in the case of the U.S. Government Securities
Fund; and .40% in the case of each of the California Municipal Fund, New York
Municipal Fund and National Municipal Fund. With respect to the Total Return
Fund, the Adviser is entitled to receive a monthly fee from the Fund at an
annual rate of % with respect to the Fund's assets other than investments in
the other Funds of the Company. With respect to investments in other Funds,
shareholders indirectly incur a proportionate share of the advisory fees paid to
the Adviser for managing those Funds. The investment advisory fee for the High
Yield, Emerging Markets, Latin America Equity, Total Return, Global Debt, Global
Convertible and Mortgage Securities Funds 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 May 1, 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, Total Return, Global Debt, U.S. Government Securities, Mortgage
Securities, California Municipal, New York Municipal and National Municipal
Funds declare dividends daily and pay dividends monthly and the Emerging
Markets, Latin America Equity and Global Convertible Funds declare dividends
daily 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".
5
<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 a Fund generally fluctuates, to
varying degrees and depending on the objective and policies of the Fund, 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 and Latin America Equity Funds, and to the extent they invest in
emerging markets securities, the High Yield and Total Return 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.
MUNICIPAL OBLIGATIONS. The California Municipal, New York Municipal and National
Municipal Funds invest primarily in 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
these 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
6
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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 such Fund's dividends may be subject to alternative
minimum tax. In addition, each such Fund may invest up to 20% of its 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 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--Municipal Securities" in this
Prospectus and "Special Factors Affecting California Municipal Securities" and
"Special Factors Affecting New York Municipal Securities" in the related
Statement of Additional Information.
CONVERTIBLE SECURITIES. Certain Funds may invest in 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 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, Total Return and
Global Convertible Funds, up to 25% of the total amounts of the Global Debt
Fund, and up to 20% of the total assets of the Latin America Equity, California
Municipal, the New York Municipal and the National Municipal Funds, 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.
7
<PAGE>
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 (which, depending on the Fund,
could include 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) the Mortgage Securities Fund will primarily
invest in, the U.S. Government Securities Fund may invest a substantial portion
of its assets in, and each other Fund may invest from time to time 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 for investment purposes, a speculative technique known as leveraging. See
"Special Risk Considerations" for additional information regarding certain risks
associated with investment in the Funds.
8
<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%
----- -----
----- -----
LATIN AMERICA EQUITY FUND
Advisory Fee (after waiver)*.............................................................. 0.00% 0.00%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (after waivers)***......................................................... 2.00% 2.25%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 2.00% 2.25%
----- -----
----- -----
TOTAL RETURN FUND
Advisory Fee (after waiver)* % %
Rule 12b-1 Fees (after waiver)** % %
Other Expenses (estimated, after waivers)*** % %
----- -----
Total Fund Operating Expenses (estimated, after waivers)+ % %
----- -----
----- -----
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 (estimated, 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% 0.80%
----- -----
Total Fund Operating Expenses (estimated, after waivers)+ 1.50% 1.50%
----- -----
----- -----
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
U.S. GOVERNMENT SECURITIES FUND
Advisory Fee (after waiver)* 0.40% %
Rule 12b-1 Fees (after waiver)** 0.00% 0.00%
Other Expenses (estimated, after waivers)*** 0.15% 0.15%
----- -----
Total Fund Operating Expenses (estimated, after waivers)+ 0.55% 0.55%
----- -----
----- -----
MORTGAGE SECURITIES FUND
Advisory Fee (after waiver)* % %
Rule 12b-1 Fees (after waiver)** 0.00% 0.00%
Other Expenses (estimated, after waivers)*** % %
----- -----
Total Fund Operating Expenses (estimated, after waivers)+ % %
----- -----
----- -----
CALIFORNIA MUNICIPAL FUND
Advisory Fee (after waiver)*.............................................................. 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% 0.00%
Other Expenses (after waivers and reimbursements)***...................................... 0.55% 0.80%
----- -----
Total Fund Operating Expenses (after waivers and reimbursements)+......................... 0.55% 0.80%
----- -----
----- -----
NATIONAL MUNICIPAL FUND
Advisory Fee (after waiver)* 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 (estimated, after waivers)+ 0.55% 0.80%
----- -----
----- -----
</TABLE>
- --------------
* Reflects current waiver of all or a portion of advisory fee for the Latin
America Equity, Global Debt, Global Convertible, U.S. Government Securities,
Mortgage Securities, California Municipal, New York Municipal and National
Municipal Funds. Advisory fee for the Total Return Fund assumes that all the
Fund's assets are invested directly in portfolio securities rather than in
the other Funds of the Company, and reflects the current waiver of a portion
of the advisory fee. 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 such Funds at the level set forth in the table
above through at least December 31, 1997. Absent such voluntary waiver, the
ratio of advisory fee to average net assets would be 1.00% for the Latin
America Equity Fund, 0.80% for the Global Debt Fund, 0.90% for the Global
Convertible Fund, % for the U.S. Government Securities Fund, 0.40% for
the California Municipal Fund, 0.40% for the New York Municipal Fund and
0.40% for the National 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".
*** The Total Return, Global Debt, Global Convertible, U.S. Government
Securities, Mortgage Securities, California Municipal and National Municipal
Funds had not yet commenced investment operations as of the date of this
Prospectus. The amount set forth for "Other Expenses" for such Funds is
therefore based on estimates for the current fiscal year. "Other Expenses"
for each of the Funds reflect current waivers of administration fees. Such
waivers may be terminated at any time. "Other Expenses" include
10
<PAGE>
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)
% and % for the Select Shares and Advisor Shares, respectively, of
the High Yield Fund, (ii) % and % for the Select Shares and Advisor
Shares, respectively, of the Emerging Markets Fund, (iii) % and %
for the Select Shares and Advisor Shares, respectively, of the Latin America
Equity Fund, (iv) % and % for the Select Shares and Advisor Shares,
respectively, of the Total Return Fund, (v) % and % for the Select
Shares and Advisor Shares, respectively, of the Global Debt Fund, (vi) %
and % for the Select Shares and Advisor Shares, respectively, of the
Global Convertible Fund, (vii) % and % for the Select Shares and
Advisor Shares, respectively, of the U.S. Government Securities Fund, (viii)
% and % for the Select Shares and Advisor Shares, respectively, of
the Mortgage Securities Fund, (ix) % and % for the Select Shares and
Advisor Shares, respectively, of the California Municipal Fund, (x) %
and % for the Select Shares and Advisor Shares, respectively, of the New
York Municipal Fund and (xi) % and % for the Select Shares and
Advisor Shares, respectively, of the National Municipal Fund.
+ Absent the voluntary waivers referred to above, the ratio of "Total Fund
Operating Expenses" to average net assets would be (i) % and % for
the Select Shares and Advisor Shares, respectively, of the High Yield Fund,
(ii) % and % for the Select Shares and Advisor Shares, respectively,
of the Emerging Markets Fund, (iii) % and % for the Select Shares
and Advisor Shares, respectively, of the Latin America Equity Fund, %
and % for the Select Shares and Advisor Shares, respectively, of the
Total Return Fund, (v) % and % for the Select Shares and Advisor
Shares, respectively, of the Global Debt Fund, (vi) % and % for the
Select Shares and Advisor Shares, respectively, of the Global Convertible
Fund, (vii) % and % for the Select Shares and Advisor Shares,
respectively, of the U.S. Government Securities Fund, (viii) % and %
for the Select Shares and Advisor Shares, respectively, of the Mortgage
Securities Fund, (ix) 1.35% and 1.60% for the Select Shares and Advisor
Shares, respectively, of the California Municipal Fund, (x) 1.56% and 1.81%
for the Select Shares and Advisor Shares, respectively, of the New York
Municipal Fund and (xi) % and % for the Select Shares and Advisor
Shares, respectively, of the National Municipal Fund.
11
<PAGE>
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>
HIGH EMERGING LATIN AMERICA TOTAL RETURN FUND GLOBAL DEBT
YIELD FUND MARKETS FUND EQUITY FUND 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........ $ $ $ $ $ $ $ $ $
3 years....... $ $ $ $ $ $ $ $ $
5 years....... $ $ $ $ $ -- $ -- -- -- --
10 years...... $ $ $ $ $ $ -- -- --
<CAPTION>
GLOBAL CONVERTIBLE FUND
------------------------
ADVISOR SELECT ADVISOR
SHARES SHARES SHARES
----------- ----------- -----------
<S> <C> <C> <C>
1 year........ $ $ $
3 years....... $ $ $
5 years....... -- -- --
10 years...... -- -- --
</TABLE>
<TABLE>
<CAPTION>
NATIONAL
U.S. GOVERNMENT MORTGAGE SECURITIES FUND CALIFORNIA MUNICIPAL NEW YORK MUNICIPAL FUND MUNICIPAL
SECURITIES FUND FUND 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........ $ $ $ $ $ $ $ $ $
3 years....... $ $ $ $ $ $ $ $ $
5 years....... -- -- -- -- -- -- -- -- --
10 years...... -- -- -- -- -- -- -- -- --
<CAPTION>
ADVISOR
SHARES
-----------
<S> <C>
1 year........ $
3 years....... $
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.
12
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth per-share data for a share of capital stock
outstanding of the Funds and other selected information for the years ended
December 31, 1996 and 1995 and the period from commencement of investment
operations to December 31, 1994. 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, which is
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 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 May 1, 1996, all existing
shares of the Funds were reclassified as "Select Shares".
<TABLE>
<CAPTION>
HIGH YIELD FUND
---------------------------------------------------
FOR THE FOR THE
YEAR YEAR FOR THE
ENDED ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994*
--------------- --------------- ---------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period......... $ 9.92 $ 9.25 $ 10.00
--------------- --------------- ---------------
Income (loss) from investment operations
Net investment income...................... 0.90 0.72
Net realized and unrealized gains
(losses).................................. 0.67 (0.75)
--------------- --------------- ---------------
Total from investment operations......... 1.57 (0.03)
--------------- --------------- ---------------
Less dividends and distributions
Dividends (from net investment income)..... (0.89) (0.72)
Distributions (from realized gains)........ -- (0.01) --
Return of Capital.......................... -- -- --
--------------- --------------- ---------------
Total dividends and distributions........ (0.90) (0.72)
--------------- --------------- ---------------
Net Asset Value, End of Period............... $ $ 9.92 $ 9.25
--------------- --------------- ---------------
--------------- --------------- ---------------
Total Return+................................ % 17.72% (-0.27)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in thousands)... $ $479,090 $222,317
Ratio of Expenses to Average Net Assets.... %(2) 1.05%(2) 1.14%(1)(2)
Ratio of Net Income to Average Net
Assets.................................... % 9.38% 8.97%(1)
Portfolio Turnover Rate.................... % 34% 42%
<CAPTION>
EMERGING MARKETS FUND
------------------------------------------------
FOR THE FOR THE
YEAR YEAR FOR THE
ENDED ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994*
-------------- -------------- --------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period......... $ 9.91 $ 8.84 $ 10.00
------- ------- -------
Income (loss) from investment operations
Net investment income...................... 0.90 0.81
Net realized and unrealized gains
(losses).................................. 1.07 (1.16)
------- ------- -------
Total from investment operations......... 1.97 (0.35)
------- ------- -------
Less dividends and distributions
Dividends (from net investment income)..... (0.60) (0.81)
Distributions (from realized gains)........ -- -- --
Return of Capital.......................... -- (0.30) --
------- ------- -------
Total dividends and distributions........ (0.90) (0.81)
------- ------- -------
Net Asset Value, End of Period............... $ $ 9.91 $ 8.84
------- ------- -------
------- ------- -------
Total Return+................................ % 23.38% (-3.82)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in thousands)... $ $49,250 $28,117
Ratio of Expenses to Average Net Assets.... %(2) 1.50%(2) 1.50%(1)(2)
Ratio of Net Income to Average Net
Assets.................................... % 9.97% 10.39%(1)
Portfolio Turnover Rate.................... % 60% 47%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
LATIN AMERICA
EQUITY FUND*
------------------- NEW YORK MUNICIPAL FUND*
FOR THE PERIOD --------------------------------------
ENDED FOR THE FOR THE PERIOD
DECEMBER 31, 1996 YEAR ENDED ENDED
(UNAUDITED) DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ------------------ ------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period.................... $ 10.00 $ 10.47 $ 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............... %(1)(2) %(2) 0.54%(1)(2)
Ratio of Net Income to Average Net Assets............. (1) % 4.20%(1)
Portfolio Turnover Rate............................... % % 35%
</TABLE>
- ------------------
* The High Yield Fund, the Emerging Markets Fund, the Latin America Equity
Fund and the New York Municipal Fund commenced operations on March 2, 1994,
March 8, 1994, April 3, 1995 and February 12, 1996, 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, 1996, December 31, 1995, and December 31,
1994, respectively, %, 1.73% and 1.80% for the Emerging Markets Fund
for the periods ended December 31, 1996, December 31, 1995, and December
31, 1994, respectively, % for the Latin America Equity Fund for the
period ended December 31, 1996, and % and 2.09% for the New York
Municipal Fund for the periods ended December 31, 1996 and December 31,
1995, respectively.
This table does not include information with respect to the Total Return, Global
Debt, Global Convertible, U.S. Government Securities, Mortgage Securities,
California Municipal or National Municipal Funds. As of the date of this
Prospectus, these Funds had not yet commenced investment operations.
14
<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.
Through credit analysis, the Adviser seeks to protect principal and to
minimize market and individual credit risk, as well as to identify opportunity
for capital appreciation. 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".
15
<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 and mortgage-backed debt having many of the characteristics of its
corporate portfolio. In addition, 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. 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 is actively managed to seek to achieve competitive
U.S. dollar total investment return while reducing relative volatility. The Fund
attempts 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".
Through credit analysis, the Adviser seeks to protect principal and to
minimize market and individual credit risk, as well as to identify opportunities
for capital appreciation. 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
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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 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 LATIN AMERICA EQUITY FUND
The Latin America Equity Fund's investment objective is capital
appreciation. Current income is a secondary objective. The Fund will seek to
achieve its objective by investing, under normal market conditions, at least 80%
of its total assets in equity securities of Latin American issuers, as defined
below. Up to 20% of the Fund's total assets may be invested in debt securities
(including convertible debt securities) of Latin America issuers.
The Latin America Equity Fund is actively managed to seek to benefit from
investment opportunities deriving from long-term improving economic and
political conditions and other positive trends and developments in Latin
American countries. The Fund's equity strategy is "top down" oriented seeking to
invest in those countries that offer the best economic growth perspectives.
Stock selection is designed to identify companies in high growth industries that
are attractively valued based on their future earnings potential. 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 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 Equity 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.
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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 20% 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".
OFFITBANK TOTAL RETURN FUND
The investment objective of the Total Return Fund is to maximize total
return from a combination of capital appreciation and current income. The Fund
will seek to achieve its objective by investing primarily in a portfolio of
fixed-income securities of varying maturities and by giving the Adviser broad
discretion to deploy the Fund's assets among certain segments of the
fixed-income market that the Adviser believes will best contribute to the
achievement of the Fund's objective. At any point in time, the Adviser will
deploy the Fund's assets based on the Adviser's analysis of current economic and
market conditions and the relative risks and opportunities present in the
following market segments: U.S. Government Securities (as described below for
the U.S. Government Securities Fund), foreign sovereign and supranational debt
obligations, including obligations of emerging market and developing countries,
and debt instruments, convertible securities and preferred stocks of domestic
and foreign corporations, including high yield securities. To provide the
Adviser with flexibility in managing the Fund's assets, the Fund may invest
directly in the securities in these market segments or indirectly through
investing in the other Funds of the Company.
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. Portfolio holdings will be
concentrated from time to time in areas of the fixed income markets which the
Adviser believes to be relatively undervalued. 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, economic and political factors.
The "total return" sought by the Fund will consist of interest from
underlying securities, capital appreciation reflected in increases in the value
of portfolio securities or from the purchase and sale of securities, and use of
futures and options, or gains from favorable changes in foreign currency
exchange rates. Under normal market conditions, the Fund will invest its assets
in a variety of markets and instruments, including U.S. Government Securities,
investment grade fixed income securities (including asset-backed and mortgage
backed securities), high yield securities, international fixed income securities
including corporate and sovereign debt instruments of developed and emerging
market issuers, convertible securities, loan participations and assignments,
certificates of deposit and cash equivalents.
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The Total Return Fund may invest in any country where the Adviser sees
potential investment opportunities, and the percentage of the Fund's assets in
any particular country and currency, including U.S. dollars, will vary. In
making foreign fixed income investments, the Adviser may consider, among other
things, the relative growth and inflation rates of different countries. The
Adviser may also consider expected changes in foreign currency exchange rates,
including the prospects for central bank intervention, in determining the
anticipated returns of securities denominated in foreign currencies. The Adviser
may further evaluate, among other things, foreign yield curves and regulatory
and political factors, including the fiscal and monetary policies of such
countries.
The Fund may invest without limit in any of the securities in which it is
authorized to invest, including in lower quality and unrated fixed income
securities of the type described above for the High Yield Fund. 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. 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. See Appendix A to this Prospectus for a description of
ratings of Standard & Poor's Corporation ("S&P"), Moody's Investors Services,
Inc. ("Moody's") and Duff & Phelps Credit Rating Co. ("D&P"). See "Special Risk
Considerations--High Yield, High Risk Debt Securities." The Fund may also invest
without limit in corporate and sovereign debt instruments of the type described
above for the Emerging Markets Fund, which involve special risks. See "Special
Risk Considerations."
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),
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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 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
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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 of 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 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 U.S. GOVERNMENT SECURITIES FUND
The U.S. Government Securities Fund's investment objective is to seek
current income. The Fund seeks to achieve its objective by investing, under
normal circumstances, at least 80% of its total assets in U.S. Government
Securities (as defined below). In addition, the Fund may invest up to 20% of its
total assets in sovereign obligations of Australia, Canada, Denmark, France,
Germany, Japan, New Zealand and the United Kingdom, and in other fixed income
securities as described below. Any Fund investments denominated in any foreign
currency will be hedged against fluctuations in value versus the U.S. dollar.
Obligations of the U.S. Government in which the Fund may invest are in two
broad categories and include the following: (a) direct obligations of the U.S.
Treasury, which differ only in their interest rates, maturities and times of
issuance, including U.S. Treasury Bills (maturities of one year or less), U.S.
Treasury
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Notes (maturities of one to ten years), and U.S. Treasury Bonds (generally,
maturities greater than ten years); and (b) obligations, including
mortgage-backed securities, issued or guaranteed by agencies or
instrumentalities of the U.S. Government which are supported by: (i) the full
faith and credit of the U.S. Government (e.g., Government National Mortgage
Association ("GNMA") Certificates); (ii) the right of the issuer to borrow an
amount limited to a specific amount of credit from the U.S. Government; (iii)
the credit of the instrumentality (e.g., bonds issued by the Federal National
Mortgage Association ("FNMA")); or (iv) the discretionary authority of the U.S.
Government to purchase certain obligations of U.S. Government agencies or
instrumentalities (collectively, "U.S. Government Securities").
The agencies and instrumentalities that issue U.S. Government Securities
include, among others, Federal Land Banks, Farmers Home Administration, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Farm Credit
Banks, Student Loan Marketing Association and U.S. Maritime Administration.
Securities issued by the U.S. Government differ with respect to maturity and
mode of payment. The modes of payment are coupon paying and capital
appreciation. Coupon paying bonds and notes pay a periodic interest payment,
usually semi-annually, and a final principal payment at maturity. Capital
appreciation bonds and Treasury bills accrue a daily amount of interest income,
and pay a stated face amount at maturity. Most U.S. Government capital
appreciation bonds were created as a result of the separation of coupon paying
bonds into distinct securities representing the periodic coupon payments and the
final principal payments. This is referred to as "stripping". The separate
securities representing a specific payment to be made by the U.S. Government on
a specific date are also called "zero coupon bonds." Current federal tax law
requires the Fund to accrue as income daily a portion of the original issue
discount at which each zero coupon bond was purchased. See "Other Investment
Policies--Zero Coupon Securities, Pay-in-Kind Bonds and Discount Obligations."
At any given time, there is a relationship between the yield of a particular
U.S. Government Security and its maturity. This is called the "yield curve".
Since U.S. Government Securities are assumed to have relatively low credit
risks, the main determinant of yield differential between individual securities
is maturity. When the yield curve is such that longer maturities correspond to
higher yields, the yield curve has a positive slope and is referred to as a
"normal" yield curve. At certain times shorter maturities have high yields and
the yield curve is said to be "inverted". Even when the yield curve is "normal"
(i.e., has a positive slope), the relationship between yield and maturity for
some U.S. Government stripped securities is such that yields increase with
maturity up to some point, and then after peaking, decline so that the longest
maturities are not the highest yielding.
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of principal if held to maturity. Any
guarantee of the securities in the Fund, however, does not guarantee the net
asset value of the shares of the Fund. Normally, the value of the Fund's
investments varies inversely with changes in interest rates. For example, as
interest rates rise, the value of the Fund's investments will tend to decline
and as interest rates fall, the value of the Fund's investments will tend to
increase. The magnitude of these fluctuations generally will be greater when the
average maturity of the Fund's portfolio securities is longer.
From time to time, a significant portion of the Fund's assets may be
invested in mortgage-related (including mortgage-backed) securities,
representing participation interests in pools of fixed rate and adjustable rate
residential mortgage loans issued or guaranteed by agencies or instrumentalities
of the U.S. Government. As described below with respect to the Mortgage
Securities Fund, mortgaged-backed securities generally provide monthly payments
which are, in effect, a "pass through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans. The yield on mortgage-backed securities is based on the
prepayment rates experienced over the life of the security, which tend to
increase during periods of falling interest rates. The Fund may also invest in
collateralized mortgage obligations ("CMOs"), which are debt obligations
collateralized by mortgage loans
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or mortgage pass-through certificates. Only CMOs issued or guaranteed by
agencies or instrumentalities of the U.S. Government will be included for
purposes of the Fund's policy of investing 80% of its assets in U.S. Government
Securities. For a further description of CMOs, see the Mortgage Securities Fund
below.
The Fund is not limited to the maturities of the securities in which it may
invest. Debt securities with longer maturities generally tend to produce higher
yields and are subject to greater market fluctuation as a result of changes in
interest rates than debt securities with shorter maturities.
The Adviser seeks an enhanced fixed income return through the active
management of portfolio duration and sector allocation. Investment decisions are
based on a continual evaluation of the supply and demand for capital, the
current and future shape of the yield curve, underlying trends in the direction
of interest rates and relative value among market sectors. The selection of
individual investments reflects the Adviser's view of relative value within and
among market sectors. The Adviser manages duration and maturity to take
advantage of interest rates and yield curve trends.
Up to 20% of the Fund's total assets may be allocated to other fixed income
securities, each of which will be rated AAA by S&P or Aaa by Moody's or will be
deemed of comparable quality by the Adviser, including: debt obligations issued
or guaranteed by foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom; debt obligations of supranational entities; non-U.S. dollar denominated
debt obligations of the U.S. Government; and corporate obligations including
asset-backed securities. Any Fund investment denominated in a foreign currency
will be hedged against fluctuations in value versus the U.S. dollar.
The obligations of foreign governmental entities and supranational issuers
have various kinds of government support. Obligations of foreign governmental
entities include obligations issued or guaranteed by national, provincial, state
or other governments with taxing power or by their agencies. These obligations
may or may not be supported by the full faith and credit of a foreign
government. Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions, if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income.
OFFITBANK MORTGAGE SECURITIES FUND
The investment objective of the Mortgage Securities Fund is to maximize
total return from a combination of current income and capital appreciation. The
Mortgage Securities Fund seeks to achieve this investment objective by investing
at least 80% of the value of its assets in a diversified portfolio of investment
grade or comparable mortgage-related securities.
Mortgage-related securities are securities that, directly or indirectly,
represent participations in, or are secured by and payable from, loans secured
by residential or commercial property. Mortgage-related securities include
mortgage pass-through securities, adjustable rate mortgage securities,
collateralized mortgage obligations and stripped mortgage-backed securities.
These mortgage-related securities include derivative mortgage securities.
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The Fund's primary emphasis will be on mortgage-related securities
representing interests in residential property. Residential mortgage-related
securities in the U.S. fall into three categories: (a) those issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
such as GNMA, FNMA and Federal Home Loan Mortgage Corporation ("FHLMC"); (b)
those issued by non-governmental issuers that represent interests in, or are
collateralized by, mortgage-related securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities; and (c) those issued by
non-governmental issuers that represent an interest in, or are collateralized
by, whole mortgage loans or mortgage-related securities without a government
guarantee but usually with over-collateralization or some other form of private
credit enhancement. Non-governmental issuers referred to in (b) and (c) above
include originators of and investors in mortgage loans, including savings and
loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
The residential mortgage pass-through securities in which the Fund will
invest provide for the pass-through to investors of their pro-rata share of
monthly payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans. The Fund invests
both in U.S. Government pass-through securities issued by GNMA, FNMA and FHLMC,
and in pass-through securities issued by non-governmental issuers. Each of GNMA,
FNMA and FHLMC guarantee timely distributions of interest to certificate
holders. GNMA and FNMA guarantee timely distributions of scheduled principal.
FHLMC generally guarantees only ultimate collection of principal of the
underlying mortgage loans.
The Mortgage Securities Fund may also invest in adjustable rate mortgage
securities ("ARMS"). ARMS are pass-through mortgage securities collateralized by
residential mortgages with interest rates that are adjusted from time to time.
The adjustments usually are determined in accordance with a predetermined
interest rate index and may be subject to certain limits. While the values of
ARMS, like other debt securities, generally vary inversely with changes in
market interest rates (increasing in value during periods of declining interest
rates and decreasing in value during periods of increasing interest rates), the
values of ARMS should generally be more resistant to price swings than other
debt securities because the interest rates of ARMS move with market interest
rates. The adjustable rate feature of ARMS will not, however, eliminate
fluctuations in the prices of ARMS, particularly during periods of extreme
fluctuations in interest rates. Also, since many adjustable rate mortgages only
reset on an annual basis, it can be expected that the prices of ARMS will
fluctuate to the extent that changes in prevailing interest rates are not
immediately reflected in the interest rates payable on the underlying adjustable
rate mortgages.
Commercial mortgage-related securities are generally multi-class debt or
pass-through securities backed by a mortgage loan or pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties and
cooperative apartments, hotels and motels, nursing homes, hospitals and senior
living centers. The commercial loans underlying these securities are generally
not amortizing or not fully amortizing. At their maturity date, repayment of the
remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or the sale of the property. Unlike most single
family residential mortgages, commercial real property loans often contain
provisions which substantially reduce the likelihood that such securities will
be prepaid.
The market for commercial mortgage-related securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential mortgage-related
securities. Many of the risks of investing in commercial mortgage-related
securities reflect the risks of investing in real estate securing the underlying
mortgage loans. These risks reflect the effect of local and other economic
conditions such as real estate markets, the ability of tenants to make loan
payments, and the ability of a property to attract and retain tenants.
Commercial mortgage-related securities may be less liquid and exhibit greater
price volatility than other types of mortgage-related securities.
Mortgage-related securities issued by private issuers in the U.S. may entail
greater risk than mortgage-related securities that are guaranteed by the U.S.
Government, its agencies or instrumentalities. Privately-issued mortgage
securities are issued by private originators of, or investors in, mortgage
loans, including
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mortgage bankers, commercial banks, investment banks, savings and loan
associations and special purpose subsidiaries of the foregoing. Since
privately-issued mortgage certificates are not guaranteed by an entity having
the credit status of GNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on 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 ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments of, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
The Mortgage Securities Fund may invest in collateralized mortgage
obligations ("CMOs") issued by U.S. entities. CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. CMOs may
be collateralized by GNMA, FNMA or Freddie Mac Certificates, but also may be
collateralized by whole loans or private pass-throughs (such collateral
collectively hereinafter referred to as "Mortgage Assets"). Multiclass pass-
through securities are interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche", is issued at a specified
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. The Fund has no present intention to invest in CMO
residuals.
The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to
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more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity date
or a final distribution date but may be retired earlier. PAC Bonds are a type of
CMO tranche or series designed to provide relatively predictable payment of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of mortgage-related securities.
The Fund may purchase stripped mortgage securities which are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid and to such extent, together with any other
illiquid investments, will be subject to the Fund's applicable restriction on
investments in illiquid securities.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage securities that are purchased at a substantial premium or discount
generally are extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on such securities' yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup its initial investment in these
securities even if the securities have received the highest rating by a
nationally recognized statistical rating organization.
In addition to the stripped mortgage securities described above, the Fund
may invest in similar securities such as Super POs and Levered IOs which are
more volatile than POs and IOs. Risks associated with instruments such as Super
POs are similar in nature to those risks related to investments in POs. Risks
connected with Levered IOs are similar in nature to those associated with IOs.
The Fund may also invest in other similar instruments developed in the future
that are deemed consistent with its investment objective, policies and
restrictions. POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of cash to the
Fund.
Up to 20% of the Fund's total assets may be allocated to other fixed income
securities, each of which will be rated investment grade by S&P or Moody's or
will be deemed of comparable quality by the Adviser, including: mortgage related
securities of issuers in Canada, Denmark, the United Kingdom or other countries
which may develop mortgage securities markets in the future; debt obligations
issued or guaranteed by foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom; debt obligations of supranational entities; non-U.S. dollar denominated
debt obligations of the U.S. Government; and corporate obligations including
asset-backed securities. Any Fund investment denominated in a foreign currency
will be hedged against fluctuations in value versus the U.S. dollar.
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OFFITBANK CALIFORNIA MUNICIPAL FUND, OFFITBANK NEW YORK MUNICIPAL FUND AND
OFFITBANK NATIONAL MUNICIPAL FUND
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. "Municipal Securities" as used in this Prospectus shall
be used as a general reference to California and New York Municipal Securities.
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.)
Each such 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 S&P or by Fitch Investors Service, Inc. ("Fitch"), or Aa or better by 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 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".
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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 such 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 such
Fund 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.
The types of Municipal Securities in which each such 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.
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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 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
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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 such 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.
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.
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OTHER PERMITTED INVESTMENTS. Each such 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 either 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.
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 of the Funds (other than the Municipal Funds) 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 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
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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 of the Funds (other than the U.S. Government Securities, the Mortgage
Securities and the Municipal Funds) 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, Latin America Equity, Total Return and
Global Debt Funds may, and the Global Convertible Fund will, invest in
convertible securities. The convertible securities that may be held by a 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. 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, Emerging Markets, Latin America Equity, Total Return and
Global Debt, 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 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.
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LOAN PARTICIPATIONS AND ASSIGNMENTS
Each Fund (other than the U.S. Government Securities, Mortgage Securities
and the Municipal Funds) 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
The Mortgage Securities Fund will invest substantially all of its assets,
and each of the other Funds may invest from time to time in mortgage-related
securities, consistent with its 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-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.
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ASSET-BACKED SECURITIES
Each Fund (other than the U.S. Government Securities, the Mortgage
Securities and the Municipal Funds) 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.
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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund (other than the Municipal Funds) 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
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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 (other than the U.S. Government Securities, the Mortgage
Securities and the Municipal Funds) 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 fifteen 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 such 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 six months 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 Latin America Equity, Total Return, Global Debt and the Municipal Funds
are each authorized to borrow money from banks (denominated in any currency for
the Latin America Total Return Fund) in an amount up to 25% of its 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. These 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 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.
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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 Latin America Equity, Total Return, Global Debt and the Municipal 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 debt securities
(including for certain Funds convertible debt securities) acquired at a
discount. A substantial portion of the Emerging Markets, Total Return and Global
Debt Fund's 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. The High Yield, Emerging Markets, Latin America Equity, Total Return
and Global Debt Funds 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, Latin America Equity, Total Return and Global Convertible 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, 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".
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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 Funds 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 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
The Total Return Fund may invest all or any portion of its assets in each of
the other Funds. Each other Fund reserves the right to invest up to 10% of its
total assets in the securities of other unaffiliated investment companies. Each
other 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 such 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 such other 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. To the extent that the Total Return Fund's assets are invested in the
other Funds of the Company, no advisory fee is paid at the Fund level, and
shareholders incur their proportionate share of advisory fees paid by the other
Funds.
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,
each of the Funds (other than the Municipal 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.
The Municipal Funds may, for temporary defensive purposes, invest without
limitation in taxable, high quality short term money market instruments if, in
the opinion of the Adviser, adverse conditions prevail in the markets for
Municipal
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Securities (including conditions under which such obligations are unavailable
for investment). Any net interest income derived from taxable securities and
distributed by the Municipal Funds 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 (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.
HEDGING AND DERIVATIVES
Each Fund (other than the Municipal Funds) 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 such 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. The Municipal Funds may, in order to further their
investment objectives, 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 such 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. 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;
150% for the Latin America Equity Fund; % for the Total Return Fund; 100% for
the Global Debt Fund; 100% for the Global Convertible Fund; % for the U.S.
Government Securities Fund; % for the Mortgage Securities Fund; and 60% for
each of the Municipal Funds. 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, 1996 was %
for the High Yield Fund, % for the Emerging Markets Fund, % for the Latin
America Equity Fund and % for the New York Municipal Fund. The portfolio
turnover rate for the fiscal year ended December 31, 1995 was 34% for the High
Yield Fund, 60% for the Emerging Markets Fund and 35% for the New York Municipal
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 and
depending on the objectives and policies of the Fund, 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.
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SECURITIES OF NON-U.S. ISSUERS
Each of the Funds (other than the Municipal Funds) may invest all or some
portion of its assets in 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, Total Return, Global Debt or
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 the Fund concentrates its investments in only a few countries, it 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 High
Yield, Emerging Markets, Latin America Equity, Total Return, Global Debt and
Global Convertible 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: (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.
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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. To the extent that a Fund invests 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 Fund's 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.
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
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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 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 the extent they invest outside the U.S., 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
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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, Total Return and Global
Convertible Funds may invest all or substantially all of their respective
assets, the Global Debt Fund may invest up to 25% of its total assets and the
Latin America Equity and the Municipal Funds may invest up to 20% of their 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 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.
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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 (other than the Municipal
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.
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 (other than the Municipal
Funds) may invest in sovereign debt securities. Investing in sovereign debt
securities will expose the Funds to the direct or indirect consequences of
political, social or economic changes in the countries, including developing or
emerging countries such as 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. Emerging
and developing 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
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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
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, 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.
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
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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 such 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.
TAXES. All or a portion of each Municipal 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".
CONVERTIBLE SECURITIES
GENERAL. Each Fund (other than the U.S. Government Securities Fund, the
Mortgage Securities Fund and the Municipal 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. 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
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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 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.
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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".
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, to the extent
applicable, 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 and consistent with the
Fund's objective and policies) 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
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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
assets 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.
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; and provided further, that, with respect to the
California Municipal Fund and the New York Municipal Fund, 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.
The High Yield, Emerging Markets, Total Return, Global Convertible, U.S.
Government Securities and Mortgage Securities 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 such Fund's total assets, and (b) each such
Fund will not purchase portfolio securities while such outstanding borrowing
exceeds 5% of the value of such Fund's total assets. The Global Debt and Latin
America Equity Funds may borrow money from banks and enter into reverse
repurchase agreements in an aggregate amount up to 25% of their total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing. The California Municipal, New York Municipal and National
Municipal Funds may not 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
California Municipal, New York Municipal and National Municipal Funds'
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.
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.
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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.
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; 1.00% for the Latin America Equity 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; .40% in the
case of the U.S. Government Securities Fund; and 0.40% for each of the
California Municipal, New York Municipal and National Municipal Funds. With
respect to the Total Return Fund, the Adviser is entitled to receive a monthly
fee from the Fund at the annual rate of % with respect to the Fund's assets
other than investments in the other Funds of the Company. With respect to
investments in the other Funds, shareholders indirectly incur a proportionate
share of the advisory fees paid to the Adviser for managing those Funds.
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 $7.6 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.
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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 serves 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 serve as the portfolio managers of
the Latin America Equity Fund. Jack Burks will serve as portfolio manager for
the Total Return, Global Debt, U.S. Government Securities and Mortgage
Securities Funds. Mr. Burks is a Managing Director of the Adviser, and has been
with the Adviser since 1985.
Carolyn N. Dolan, Joan Dougherty and John H. Haldeman, Jr. serve as
portfolio managers for the California Municipal, New York Municipal and National
Municipal 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
BISYS Fund Services Limited Partnership ("BISYS") 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,
BISYS receives a monthly fee based upon an annual rate of .15% of the aggregate
average daily net assets of the Funds. BISYS, headquartered in Little Falls, New
Jersey, and its affiliates support more than 5,000 financial institutions and
corporate clients through two strategic business units. BISYS Information
Services Group provides image and data processing outsourcing, and pricing
analysis to more than 600 banks nationwide. BISYS Investment Services Group
designs, administers and distributes over 30 families of proprietary mutual
funds consisting of more than 350 portfolios, and provides 401(k) marketing
support, administration, and recordkeeping services in partnership with banking
institutions and investment management companies. BISYS Fund Services, Inc., an
affiliate of BISYS, provides transfer agency and fund accounting services for
the Company.
The Chase Manhattan Bank ("Chase") serves as custodian of the assets of the
Emerging Markets Fund and the Latin America Total Return Fund. The principal
address of Chase is 4 MetroTech Center, Brooklyn, New York 11245. The Bank of
New York ("BONY") serves as custodian of the assets of the remaining Funds of
the Company. The principal address of BONY is 48 Wall Street, New York, New York
10286. BISYS Fund Services, Inc. provides transfer agency and dividend
disbursing services for the Funds. The principal business address of the
transfer agent is 3435 Stelzer Road, Columbus, Ohio 43219.
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 BISYS. The Distributor's principal offices are currently located
at 3435 Stelzer Road, Columbus, Ohio 43219.
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.
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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 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.
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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, BISYS and BISYS Fund Services, Inc. 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. 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, Total Return, Global Debt, U.S. Government Securities,
Mortgage Securities, California Municipal, New York Municipal and National
Municipal Funds declare dividends of substantially all of their net investment
income daily and pay dividends monthly, and the Emerging Markets, Latin America
Equity and Global Convertible Funds declare dividends daily and pay dividends
quarterly. Each Fund distributes, 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.
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 Huntington National Bank
(see instructions below). A completed Account Application should be forwarded to
the Company at the address noted below under "Initial Investments by
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Mail" in advance of the wire. For each Fund, notification must be given to the
Company at 1-800-618-9510 prior to 4:00 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 to:
Huntington National Bank
41 South High Street
Columbus, Ohio
ABA# 044000024
Account # 01899607163
F/B/O 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 Huntington National 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.
P.O. Box 182493
Columbus, Ohio 43218-2493
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. No third party
endorsed checks or foreign checks will be accepted.
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 4:00 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 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 at 1-800-618-9510.
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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 4:00 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., P.O. Box 182493, Columbus, Ohio 43218-2493.
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 Funds and the transfer agent from
fraud, signature guarantees are required to enable the Funds 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 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 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 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., P.O. Box 182493, Columbus, Ohio
43218-2493 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., P.O. Box 182493, Columbus, Ohio 43218-2493. 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 4:00 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.
TAXES
Each Fund intends to qualify for taxation as a regulated investment company
("RIC") under the Code, and the California Municipal, New York Municipal and
National Municipal Funds intend 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 such 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
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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 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 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
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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 Funds 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.
CALIFORNIA, NEW YORK AND NATIONAL MUNICIPAL FUNDS
Although exempt-interest dividends paid by the California Municipal, New
York Municipal and National Municipal Funds may be excluded by shareholders of
such Funds 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, receipt of exempt-interest
dividends from each Fund may 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 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.
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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.
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 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 may differ from the
standardized total return in that it may be related to a nonstandard period or
be 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 California Municipal, New
York Municipal and National Municipal 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 by 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, 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. 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
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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 Equity Fund, OFFITBANK Total Return Fund,
OFFITBANK U.S. Government Securities Fund, OFFITBANK Mortgage Securities Fund,
OFFITBANK National Municipal Fund, OFFITBANK California Municipal Fund and
OFFITBANK New York Municipal Fund. Effective May 1, 1996, all of the outstanding
shares of each of the Funds then in existence 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.
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"), Duff &
Phelps Credit Rating Co. ("D&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 CORPORATE AND 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.
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 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 Grade (VMIG). This distinction
recognizes the differences between short-term credit risk and long-term
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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 CORPORATE AND 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.
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.
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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+".
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.
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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".
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.
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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.
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.
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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.
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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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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.
B-5
<PAGE>
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 or other liquid 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 assets 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 assets 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 assets 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 assets 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 assets 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 or other liquid 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 assets 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.
B-7
<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
Bruce Treff
ASSISTANT SECRETARY
Alaina Metz
ASSISTANT SECRETARY
Carrie Zuckerman
ASSISTANT SECRETARY
Stephen Brent Wells
ASSISTANT TREASURER
Vincent M. Rella
ASSISTANT TREASURER
INVESTMENT ADVISER
OFFITBANK
520 Madison Avenue
New York, NY 10022-4213
DISTRIBUTOR
OFFIT Funds Distributor, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
CUSTODIANS
The Chase Manhattan Bank
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
(OFFITBANK EMERGING MARKETS FUND AND
OFFITBANK LATIN AMERICA EQUITY FUND)
The Bank of New York
48 Wall Street
New York, NY 10286
(ALL OTHER OFFITBANK FUNDS)
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3909
ADMINISTRATOR
BISYS Fund Services
125 W. 55th Street
New York, NY 10019
TRANSFER AND DIVIDEND
DISBURSING AGENT
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
<PAGE>
The OFFITBANK Investment Fund, Inc.
125 W. 55th Street, New York, NY 10019
(212) 758-9600
<PAGE>
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<PAGE>
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<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
125 West 55th Street
New York, New York 10019
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
_______________, 1997
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 portfolios:
OFFITBANK High Yield Fund
OFFITBANK Emerging Markets Fund
OFFITBANK Latin America Equity Fund
OFFITBANK Total Return Fund
OFFITBANK Investment Grade Global Debt Fund
OFFITBANK Global Convertible Fund
OFFITBANK U.S. Government Securities Fund
OFFITBANK Mortgage Securities Fund
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 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 ___________, 1997 (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.
<PAGE>
TABLE OF CONTENTS
Page
----
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS. . . . . . . . . . . . . . . .3
ADDITIONAL RISK CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . 10
SPECIAL FACTORS AFFECTING THE CALIFORNIA MUNICIPAL FUND. . . . . . . . . . . 10
SPECIAL FACTORS AFFECTING THE NEW YORK MUNICIPAL FUND. . . . . . . . . . . . 18
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES . . . . . . . . . . . . 45
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
PERFORMANCE CALCULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . . 51
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
-2-
<PAGE>
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.
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.
-3-
<PAGE>
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
The High Yield, Emerging Markets, Latin America Equity, Total Return,
Investment Grade Global Debt and Global Convertible Funds 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 High Yield, Emerging
Markets, Latin America Equity, Total Return, Investment Grade Global Debt and
Global Convertible 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.
BORROWING
The Latin America Equity, Total Return, Global Debt, National Municipal,
California Municipal and New York Municipal 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. These Funds may borrow for
leveraging purposes. The High Yield, Emerging Markets, Global Convertible, U.S.
Government Securities and Mortgage Securities 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.
-4-
<PAGE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Certain Funds 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 investments 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 investments
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 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 (other than the U.S.
Government Securities Fund) will invest more than 25% (35% with respect to the
National Municipal, California Municipal and New York Municipal Funds) of its
net assets in securities issued or guaranteed by the U.S. government or by its
agencies or
-5-
<PAGE>
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 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
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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.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
INTERESTS
The National Municipal, California Municipal and New York Municipal Funds
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 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.
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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
The National Municipal, California Municipal and New York Municipal Funds
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 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
The National Municipal, California Municipal and New York Municipal Funds
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 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
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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
The National Municipal, California Municipal and New York Municipal Funds
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 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
The National Municipal, California Municipal and New York Municipal Funds
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
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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. 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
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 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".
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.
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OVERVIEW
The following section provides only a brief summary of the complex factors
affecting the financial condition of California, and is based on information
obtained from California, as publicly available prior to the date of this
Statement of Additional Information. The information contained in such publicly
available documents has not been independently verified. It should be noted
that the creditworthiness of obligations issued by local issuers may be
unrelated to the creditworthiness 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 in the absence of a specific guarantee or pledge provided by
California.
During the early 1990's California experienced significant financial
difficulties, which have reduced its credit standing but the state's finances
have improved since 1995. The ratings of certain related debt of other issuers
for which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
ECONOMIC FACTORS
California's economy is the largest among the 50 states (accounting for
almost 13% of the nation's output of goods and services) and one of the largest
in the world. California's population of more than 32 million represents over
12% of the total United States population and grew by 27% in the 1980s. While
California's substantial population growth during the 1980's stimulated local
economic growth and diversification and sustained a real estate boom between
1984 and 1990, it has increased strains on California's limited water resources
and demands for government services and may impede future economic growth.
Population growth slowed since 1991 even while substantial immigration has
continued, due to a significant increase in outmigration by California
residents. Generally, the household incomes of new residents have been
substantially lower (and their education and welfare utilization higher) than
those of departing households, which may have a major long-term socioeconomic
and fiscal impact. However, with the California economy improving, the recent
net outmigration within the Continental U.S. is expected to decrease or be
reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs lost. The largest job losses
have been in Southern California, led by declines in the aerospace and
construction industries. Most of the losses were related to cuts in federal
defense spending.
Since the start of 1994, the California economy has been experiencing
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, electronics, exports, transportation, recreation and services. This
growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Pre-recession
job levels were reached in early 1996, and job growth is estimated to remain
strong for the next few years.
CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, OTHER CHARGES AND
APPROPRIATIONS
LIMITATIONS ON PROPERTY TAXES. Certain California instruments may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing power of
California local governments and districts is limited by Article XIIIA of the
California "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.
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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." Court
decisions, however, allowed non-voter approved levy of "general taxes" which
were not dedicated to a specific use.
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996, the
voters of the State approved Proposition 218, the so-called "Right to Vote on
Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State
Constitution, which contain a number of provisions affecting the ability of
local agencies to levy and collect both existing and future taxes, assessments,
fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote. Further, any general purpose tax which was imposed, extended
or increased without voter approval after December 31, 1994 must be approved by
a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a local government upon a parcel or upon a person as an incident of property
ownership, including a user fee or charge for a property related service." All
new and existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which generate revenues
exceeding the funds required to provide the property related service or are used
for unrelated purposes. There are new notice, hearing and protest procedures
for levying or increasing property related fees and charges, and, except for
fees or charges for sewer, water and refuse collection services (or fees for
electrical and gas service, which are not treated as "property related" for
purposes of Article XIIID), no property related fee or charge may be imposed or
increased without majority approval by the property owners subject to the fee or
charge or, at the option of the local agency, two-thirds voter approval by the
electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
APPROPRIATION LIMITS. The State 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
the State 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. No limit is
imposed on appropriations of funds
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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 certain capital outlay projects, (4) appropriations by the State 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 populations and any transfer of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual adjustment
factors since 1988, and depressed revenues for several years after 1990 because
of the recession, few governments, including the State, are currently operating
near their spending limits, but this condition may change over time. The
State's 1996-97 Budget Act provides for State appropriations more than $7
billion under the Article XIIIB limit. Local governments may by voter approval
exceed their spending limits for up to four years.
A 1986 initiative statute, called "Proposition 62," imposed additional
limits on local governments, by requiring either majority or 2/3 voter approval
for any increases in "general taxes" or "special taxes," respectively (other
than property taxes, which are unchangeable). Court decisions had struck down
most of Proposition 62 and many local governments, especially cities, had
enacted or raised local "general taxes" without voter approval. In September,
1995, the California Supreme Court overruled the prior cases, and upheld the
constitutionality of Proposition 62. Many aspects of this decision remain
unclear (such as its impact on charter (home rule) cities, and whether it will
have retroactive effect), but its future effect will be to further limit the
fiscal flexibility of many local governments.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies of
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
these articles on California Instruments. It is not presently possible to
predict the outcome of any pending litigation with respect to the ultimate
scope, impact or constitutionality of either these articles, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service or their obligations. Future initiatives or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
STATE DEBT
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of California
increased from $9.4 billion at June 30, 1987 to $23.3 billion at October 1,
1996. The State also had outstanding at October 1, 1996 $272 million of general
obligation commercial paper notes which will be refunded into long-term bonds at
a later date. In FY1995-96, debt service on general obligation bonds and lease
purchase debt was approximately 5.2% of General Fund revenues. State voters
approved $5.0 billion of new bond authorizations on the March 26, 1996 ballot,
and an additional $2.1 billion on the November 5, 1996 ballot.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1994-1995 were the
California personal income tax (43% of total revenues), the sales tax (34%),
bank and corporation taxes (13%), and the gross premium tax on
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insurance (3%). California maintains a Special Fund for Economic Uncertainties
("SFEU"), derived from General Fund revenues, as a reserve to meet cash needs of
the General Fund. Because of the recession, the SFEU has not been funded for
the past four years.
GENERAL. Throughout the 1980s, California 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 General Fund revenues
(currently about 35%).
Since the start of 1990-91 Fiscal Year, California has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected California's tax revenues. It also caused increased expenditures for
health and welfare programs. California is also facing 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. These
structural concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the late
1980's until 1992-93, the State had a period of nearly chronic budget imbalance,
with expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the SFEU
approaching $2.8 billion at its peak at June 30, 1993. Starting in the 1990-91
Fiscal Year and for each year thereafter, each budget required multibillion
dollar actions to bring projected revenues and expenditures into balance and to
close large "budget gaps" which were identified. The Legislature and Governor
eventually agreed on a number of different steps to produce Budget Acts in the
Years 1991-92 to 1994-95, including significant cuts in health and welfare
program expenditures;
transfer of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on
local government;
transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;
reduction in growth of support for higher education programs, coupled with
increases in student fees;
revenue increases (particularly in the 1991-92 Fiscal Year budget), most of
which were for a short duration;
increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal
aid than the State Administration had requested); and
various one-time adjustment and accounting changes. Despite these budget
actions, the effects of the recession led to large unanticipated deficits
in the SFEU, as compared to projected positive balances. By the start of
the 1993-94 Fiscal Year, the accumulated deficit was so large (almost $2.8
billion) that it was impractical to budget to retire it in one year, so a
two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final
retirement of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in Fiscal Year 1992-93 (following two years of excess
expenditures over
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revenues), the General Fund had positive operating results in Fiscal Years
1993-94 through 1995-96, which have reduced the accumulated budget deficit to
less than $100 million as of June 30, 1996.
The State Department of Finance estimated that the General Fund received
revenues of about $46.1 billion in FY 1995-96, about $2 billion higher than was
originally expected, as a result of the strengthening economy. Expenditures
totaled about $45.4 billion, also about $2 billion higher than budgeted, in part
because of the constitutional requirement to disburse revenues to local school
districts, and in part because federal actions to reduce welfare costs and to
pay for costs of illegal immigrants were not forthcoming.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller was forced to issue approximately $3.8
billion of registered warrants ("IOUs") over a 2-month period to pay a variety
of obligations representing prior years' or continuing appropriations, and
mandates from court orders. Available funds were used to make
constitutionally-mandated payments, such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring 1992
until 1995, the State had to rely on issuance of short-term notes which matured
in a subsequent fiscal year to finance its ongoing deficit and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowing during a fiscal
year.
Current Budget. The 1996-97 budget Act was signed by the Governor on July
15, 1996, along with various implementing bills. The Legislature rejected the
Governor's proposed 15% cut in personal income taxes (to be phased over three
years), but did approve a 5% cut in bank and corporation taxes, to be effective
for income years starting on January 1, 1997. As a result, revenues for the
Fiscal Year are estimated to total $47,643 billion, a 3.3 percent increase over
the final estimated 1995-96 revenues. The Budget Act contains General Fund
appropriations totaling $47,251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by $1.65
billion total above revised 1995-96 levels. Almost half of this money was
budgeted to fund class- size reductions in kindergarten and grades 1-3. Also,
for the second year in a row, the full cost of living allowance (3.2 percent)
was funded. The funding increases have brought K-12 expenditures to almost
$4,800 per pupil, an almost 15% increase over the level prevailing during the
recession years.
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts require federal law changes (including welfare reform, which was
enacted), federal waivers, or federal budget appropriations in order to be
achieved. Ultimate federal actions after enactment of the Budget Act will allow
the State to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of California and
the California State University system, with no increases in student fees for
the second consecutive year.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act
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appropriated a modest budget reserve in the SFEU of $305 million, as of June 30,
1997. The General Fund fund balance, however, still reflects $1.6 billion of
"loans" which the General Fund made to local schools in the recession years,
representing cash outlays above the mandatory minimum funding level. Settlement
of litigation over these transactions in July 1996 calls for repayment of these
loans over the period ending in 2001-02, about equally split between outlays
from the General Fund and from schools' entitlements. The 1996-97 Budget Act
contained a $150 million appropriation from the General Fund toward this
settlement.
The Department of Finance projected, when the Budget Act was passed, that,
on June 30, 1997, the State's available internal borrowable (cash) resources
will be $2.9 billion, after payment of all obligations due by that date, so that
no external cross-fiscal year borrowing will be needed. The State will continue
to rely on internal borrowing and intra-year external note borrowing to meet its
cash flow requirements.
The Department of Finance has reported that, through the first five months
of the 1996-97 fiscal year, General Fund revenues have been about $460 million
(2.7%) above projection, reflecting the continued strength of the State's
economic recovery. This is offset by required increased payments to schools,
and lower than expected savings resulting from federal welfare reform actions.
The State has not yet given any prediction of how the federal welfare reform law
will impact the State's finances, or those of its local agencies; this State is
in the midst of making many decisions concerning implementation of the new
welfare law. A complete update of the FY 1996-97 budget will be released by the
Governor in early January, 1997, along with his proposed budget for FY 1997-98.
BOND RATINGS
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's from "AAA" levels which had existed prior to the recession.
In 1996, Fitch and Standard & Poor's raised their ratings of California's
general obligation bonds, which are currently assigned ratings of "A+" from
Standard & Poor's, "A1" from Moody's and "A+" from Fitch. 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 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 California to make significant future expenditures or may
substantially impair revenues. Trial courts have recently entered tentative
decisions or injunctions which would overturn several parts of the state's
recent budget compromises. The matters covered by these lawsuits include a
deferral of payments by California to the Public Employees Retirement System and
reductions in welfare payments. These cases are subject to further proceedings
and appeals, and if California eventually loses, the final remedies may not have
to be implemented in one year.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA INSTRUMENTS. There are a number of stat
agencies, instrumentalities and political subdivisions of the State 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 very considerably from the credit
quality of obligations backed by the full faith and credit of the State 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 the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for
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around 75% of General Fund spending. To reduce California 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 loss of all 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 in 1993,
dedicating 0.5% of the sales tax 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 that 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. A number of counties, both
rural and urban, have also indicated that their budgetary condition is extremely
serious. At the start of the 1995-96 fiscal year, Los Angeles County, the
largest in the State, had to make significant cuts in services and personnel,
particularly in the health care system, in order to balance its budget. The
County's debt was downgraded by Moody's and S&P in the summer of 1995. Orange
County, which recently emerged from federal bankruptcy protection, has
substantially reduced services and personnel in order to live within much
reduced means.
ASSESSMENT BONDS. California instruments 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 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 state 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 the State of 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 District's lease. The trial
court upheld the validity of the lease, and the case was subsequently settled.
Any ultimate judgment in any future case against the position taken by 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
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may be affected by changes in state regulations governing cost reimbursements to
health care providers under Medi-Cal (the State'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 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.
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 that 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. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars
in damages. The federal government provided more than $13 billion in aid for
both earthquakes, and neither event is expected to have any long-term
negative economic impact. Any security in the California Portfolio 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 Securities available as of 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
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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.
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. State-guaranteed bonds issued
by the Thruway Authority were fully retired on July 1, 1995.
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 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 State 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
interested in acquiring operational equipment, or in certain cases, real
property. Legislation enacted in 1986 established restrictions upon and
centralized State control, through the Comptroller and the Director of the
Budget, over the issuance of COPs representing the State's contractual
obligation, subject to annual appropriation by the Legislature and availability
of money, to make installment or lease-purchase payments for the State's
acquisition of such equipment or 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 although there can be no assurance that such a default or call
will not occur in the future.
The State also employs moral obligation 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 statutory provisions require the State, subject to
appropriation by the Legislature,
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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 although there can be no assurance that such a default will not occur
in the future.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1996-97 fiscal
year. The State expects to issue $411 million in general obligation bonds
(including $153.6 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $101 million in COPs during the State's 1996-97
fiscal year for equipment purchases. The projection of the State regarding its
borrowings for the 1996-97 fiscal year may change if circumstances require.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.15 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1996-97
capital projects. Included therein are borrowings by (i) DASNY for SUNY, The
City University of New York ("CUNY"), health facilities, and mental health
facilities; (ii) Thruway Authority for the Dedicated Highway and Bridge Trust
Fund and Consolidated Highway Improvement Program; (iii) UDC (doing business as
the Empire State Development Corporation) for prison and youth facilities; (iv)
the Housing Finance Agency ("HFA") for housing programs; and (v) borrowings by
the Environmental Facilities Corporation ("EFC") or other authorities. In
addition, the Legislature has authorized DASNY to refinance a $787 million
pension obligation of the State.
In the 1996 legislative session, the Legislature approved the Governor's
proposal to present to the voters in November 1996 a $1.75 billion State general
obligation bond referendum to finance various environmental improvement and
remediation projects. If the Clean Water, Clean Air Bond Act is approved by the
voters, the amount of general obligation bonds issued during the 1996-97 fiscal
year may increase above the $411 million currently included in the 1996-97
Borrowing Plan to finance a portion of this new program.
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") was created to provide financing assistance to New York
City (the "City"). 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 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
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increasing by 1.3 percent while such taxes increased 4 percent in the nation.
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.
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, 1996, and ends on
March 31, 1997, and is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the State's 1996-97 fiscal year, commencing on April
1, 1996, was enacted by the Legislature on July 13, 1996. The State Financial
Plan for the 1996-97 fiscal year was formulated on July 25, 1996 and is based on
the State's budget as enacted by the Legislature and signed into law by the
Governor, as well as actual results for the first quarter of the current fiscal
year. The 1996-97 State Financial Plan is updated in October and January. The
1996-97 State Financial Plan is projected to be balanced on a cash basis. Total
General Fund receipts and transfers from other funds are projected to be $33.17
billion, while total General Fund disbursements and transfers to other funds are
projected to be $33.12 billion. After adjustments for
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comparability, the adopted 1996-97 budget projects a year-over-year increase in
General Fund disbursements of 0.2 percent. As compared to the Governor's
proposed budget as revised on March 20, 1996, the State's adopted budget for
1996-97 increases General Fund spending by $842 million, primarily from
increases for education, special education and higher education ($563 million).
Resources used to fund these additional expenditures include $540 million in
increased revenues projected for 1996-97 based on higher than projected tax
collections during the first half of calendar 1996, $110 million in projected
receipts from a new State tax amnesty program, and other resources including
certain non-recurring resources.
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, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. In addition, the State Financial Plan
is based upon forecasts of national and State economic activity. Economic
forecasts have frequently failed to predict accurately the timing and magnitude
of changes in the national and the State economies. Many uncertainties exist in
forecasts of both the national and State economies, including consumer attitudes
toward spending, the extent of corporate and governmental restructuring, federal
fiscal and monetary policies, the level of interest rates, and the condition of
the world economy, which could have an adverse effect on the State. Actual
results could differ materially and adversely from projections and those
projections may be changed materially and adversely from time to time.
The 1996-97 State Financial Plan includes actions that will have an effect
on the budget outlook for State fiscal year 1996-97 and beyond. The State
Division of the Budget estimates that the 1996-97 State Financial Plan contains
actions that provide non-recurring resources or savings totaling approximately
$1.3 billion, or 3.9% of total General Fund receipts. These include the use of
$481 million in surplus funds available from the Medical Malpractice Insurance
Association, $134 million in savings from a refinancing of certain pension
obligations, $88 million in projected savings from bond refundings, and $36
million in surplus fund transfers. The balance is composed of $314 million in
resources carried forward from the State's 1995-96 fiscal year and various other
actions, including that portion of the proposed tax amnesty program that is
projected to be non-recurring.
The State closed projected budget gaps of $5.0 billion and $3.9 billion for
its 1995-96 and 1996-97 fiscal years, respectively. The 1997-98 gap was
projected at $1.44 billion, based on the Governor's proposed budget of December
1995. As a result of changes made in the enacted budget, that gap is now
expected to be larger.
The out-year projection will be impacted by a variety of factors. Enacted
tax reductions, which reduced receipts in the 1996-97 State fiscal year by an
incremental $2.4 billion, are projected to reduce receipts in the 1997-98 State
fiscal year by an additional increment of $2.1 billion. The use of up to $1.3
billion of non-recurring resources in 1996-97, and the annualized costs of
certain program increases in the 1996-97 enacted budget, will both add
additional pressure in closing the 1997-98 gap. However, actions undertaken in
the State's 1996-97 fiscal year, such as workforce reductions, health care and
education reforms, and strict controls on State agency spending, are expected to
provide larger recurring savings in State fiscal year 1997-98. Sustained growth
in the State's economy and continued declines in welfare caseload and Medicaid
costs would produce additional savings in the 1997-98 Financial Plan.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the Federal government and other factors have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given
fiscal year, the State would be required to take actions to increase receipts
and/or reduce 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. There can be no assurance, however, that the Legislature will enact the
Governor's proposals or 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.
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On October 29,1996, the State issued its second quarterly update to the
1996-97 State Financial Plan based on updated economic forecasts, actual
receipts and disbursements for the first six months of the fiscal year and an
assessment of changing program requirements. The update reflects a balanced
1996-97 State Financial Plan, with a reserve for contingencies in the General
Fund of $300 million, which will be utilized to help offset a variety of
potential risks and other unexpected contingencies that the State may face
during the balance of the 1996-97 fiscal year. Actual receipts through the
first two quarters of the 1996-97 State fiscal year reflect
stronger-than-expected growth in most taxes, with actual receipts exceeding
expectations by $276 million, and, based on the revised economic outlook and
actual receipts for the first six months of 1996-97, projected General Fund
receipts for the 1996-97 State fiscal year have been increased by $420 million.
Uncertainties with regard to the economy, as well as the outcome of certain
litigation now pending against the State, could produce adverse effects on the
State's projections of receipts and disbursements. For example, changes to
current levels of interest rates or deteriorating world economic conditions
could have an adverse effect on the State economy and produce results in the
current fiscal year that are worse than predicted. Similarly, adverse judgments
in legal proceedings against the State could exceed amounts reserved in the
1996-97 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
On August 13, 1996, the State Comptroller released a report in which he
identified several risks to the State Financial Plan and estimated that the
State faces a potential imbalance in receipts and disbursements of approximately
$3 billion for the State's 1997-98 fiscal year and approximately $3.2 billion
for the State's 1998-99 fiscal year. The 1997-98 fiscal year estimate by the
State Comptroller is within the range previously discussed by the State Division
of the Budget.
The Governor is required to submit a balanced budget to the State
Legislature and has indicated that he will close any potential imbalance in the
1997-98 Financial Plan primarily through General Fund expenditure reductions and
without increases in taxes or deferrals of scheduled tax reductions. It is
expected by the State Division of the Budget that the State's 1997-98 Financial
Plan will reflect a continuing strategy of substantially reduced State spending,
including agency consolidations, reductions in the State workforce, and
efficiency and productivity initiatives. The division of the Budget intends to
update the State Financial Plan and provide an update to the Annual Information
Statement upon release of the 1997-98 Executive Budget.
On August 22,1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. On October
16,1996, the Governor submitted the State's TANF implementation plan to the
federal government, as required under the new federal welfare law. Legislation
will be required to implement the State's TANF plan. The Governor has indicated
that he plans to introduce legislation necessary to conform with federal law
shortly, and that he may submit amendments to the State plan if necessary. The
Governor's proposals will be available for consideration by the Legislature
either before the end of calendar 1996 or in the 1997 legislative session. It
is expected by the State that funding levels provided under the federal TANF
block grant will be higher than currently anticipated in the State's financial
plan. However, the net fiscal impact of any changes to the State's welfare
programs that are necessary to conform with federal law will be dependent upon
such factors as the ability of the State to avoid any federal fiscal penalties,
the level of additional resources required to comply with any new State and/or
federal requirements, and the division of non-federal welfare costs between the
State and its localities. States are required to comply with the new federal
welfare reform law no later than July 1,1997. Given the size and scope of the
changes required under federal law, it is likely that these proposals will
produce extensive public discussions. There can be no assurances that the State
Legislature will enact welfare reform proposals as submitted by the Governor and
as required under federal law.
In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A 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, and there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline.
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
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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 4.6 percent.
Nominal spending from ail 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. There can be no assurance that these gap-closing measures can be
implemented as planned.
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 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
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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.
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 1996-97 fiscal year, activity in these
funds is expected to comprise 6 percent of total governmental receipts and
disbursements.
Total receipts in this fund type are projected at $3.58 billion.
Disbursements from this fund type are projected to be $3.85 billion, a decrease
of $120 million (3.1 percent) over prior-year levels, due in part to a
reclassification of economic development projects to the category of grants to
local governments in the General Fund. The Dedicated Highway and Bridge Trust
Fund is the single largest dedicated fund, comprising an estimated $920 million
(24 percent) of the activity in this fund type. Total spending for capital
projects will be financed through a combination of sources: federal grants (28
percent), public authority bond proceeds (34 percent), general obligation bond
proceeds (12 percent), and pay-as-you-go revenues (26 percent).
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 1996-97 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
other funds established to accumulate moneys for the payment of debt service.
In the 1996-97 fiscal year, total disbursements in this fund type are projected
at $2.58 billion, an increase of $164 million or 16.8 percent. The projected
transfer from the General Fund of $1.59 billion is expected to finance 62
percent of these payments.
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. General
Fund moneys are also transferred to other funds, primarily to support certain
capital projects and debt service payments in other fund types. A narrative
description of cash-basis results in the General Fund is presented below,
followed by a tabular presentation of the actual General Fund results for the
prior three fiscal years.
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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. A national recession, followed by the lingering economic slowdown in the
New York and regional economy, resulted in repeated shortfalls in receipts and
three budget deficits during those years. During its last four fiscal years,
however, the State has recorded balanced budgets on a cash basis, with positive
fund balances as described below.
The State ended its 1995-96 fiscal year on March 31, 1996 with a General
Fund cash surplus. The DOB reported that revenues exceeded projections by $270
million, while spending for social service programs was lower than forecast by
$120 million and all other spending was lower by $55 million. From the
resulting benefit of $445 million, a $65 million voluntary deposit was made into
the TSRF, and $380 million was used to reduce 1996-97 Financial Plan liabilities
by accelerating 1996-97 payments, deferring 1995-96 revenues, and making a
deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of $129
million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance includes
$237 million on deposit in the TSRF, to be used in the event of any future
General Fund deficit as provided under the State Constitution and State Finance
Law. In addition, $41 million is on deposit in the CRF. The CRF was
established in State fiscal year 1993-94 to assist the State in financing the
costs of extraordinary litigation. The remaining $9 million reflects amounts on
deposit in the Revenue Accumulation Fund. This fund was created to hold certain
tax receipts temporarily before their deposit to other accounts. In addition,
$678 million was on deposit in the tax refund reserve account, of which $521
million was necessary to complete the restructuring of the State's cash flow
under the LGAC program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions
enacted and effective in both 1994 and 1995. General Fund disbursements totaled
$32.68 billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1
994-95 levels. Mid-year spending reductions, taken as part of a management
review undertaken in October at the direction of the Governor, yielded savings
from Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies.
Together with decreased social services spending, this management review
accounts for the bulk of the decline in spending.
The State ended its 1994-95 fiscal year with the General Fund in balance.
The $241 million decline in the fund balance reflects the planned use of $264
million from the CRF, partially offset by the required deposit of $23 million to
the TSRF. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9 percent
from 1993-94 levels. General Fund disbursements totaled $33.40 billion for the
1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal year.
The increase in disbursements was primarily the result of one-time litigation
costs for the State, funded by the use of the CRF, offset by $188 million in
spending reductions initiated in January 1995 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.
The State ended its 1993-94 fiscal year with a General Fund cash surplus,
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. A deposit of $268 million was made to the CRF, with a
withdrawal during the year of $3 million, and a deposit of $67 million was made
to the TSRF. These three transactions result in the change in fund balance of
$332 million. In addition, a deposit of $1.14 billion was made to the tax
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refund reserve account, of which $1.03 billion was available for budgetary
purposes in the 1994-95 fiscal year. (For more information on the personal
income tax refund reserve account, see Table 5.) 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 General Fund closing balance was $399 million, of
which $265 million was on deposit in the CRF and $134 million in the TSRF. The
CRF was initially funded with a transfer of $100 million attributable to a
positive margin recorded in the 1992-33 fiscal year.
General Fund receipts totaled $32.23 billion, an increase of 2.6 percent
from 1992-93 levels. General Fund disbursements totaled $31.90 billion for the
1993-94 fiscal year, 3.5 percent higher than the previous fiscal year. Receipts
were higher in part due to improved tax collections from renewed State economic
growth although the State continued to lag behind the national economic
recovery. Disbursements were higher due in part to increased local assistance
costs for school aid and social services, accelerated payment of certain
Medicaid expenses, and the cost of an additional payroll for State employees.
Activity in the three other governmental funds has remained relatively
stable over the last three fiscal years, with federally-funded programs
comprising approximately two-thirds of these funds. The most significant change
in the structure of these funds has been the redirection, beginning in the
1993-94 fiscal year, of a portion of transportation-related revenues from the
General Fund to two new dedicated funds in the Special Revenue and Capital
Projects Fund types. These revenues are used to support the capital programs of
the Department of Transportation and the MTA.
In the Special Revenue Funds, disbursements increased from $22.72 billion
to $26.26 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.
Disbursements in the Capital Projects Funds grew from $3.10 billion to
$3.97 billion over the last three years, as spending for transportation and
mental hygiene programs increased, partially offset by declines for corrections
and environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained stable,
and reimbursements from public authority bonds (primarily transportation
related) increased. The increase in the negative fund balance in 1994-95
resulted from delays in reimbursements caused by delays in the timing of public
authority bond sales.
Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and the
continued implementation of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. The growth in LGAC debt
service was offset by reduced short-term borrowing costs reflected in the
General Fund.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. For example, various proposals relating
to federal tax and spending policies that are currently being publicly discussed
and debated could, if enacted, have a significant impact on the State's
financial condition in the current and future fiscal years. Because of the
uncertainty and unpredictability of the changes, their impact cannot, as a
practical matter, be included in the assumptions underlying the State's
projections at this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending,
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the extent of corporate and governmental restructuring, federal fiscal and
monetary policies, the level of interest rates, and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience results in the current
fiscal year that are worse than predicted, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or
revenue sources is generally made by estimating the change in yield of such tax
or revenue source caused by economic and other factors, rather than by
estimating the total yield of such tax or revenue source from its estimated tax
base. The forecasting methodology, however, ensures that State fiscal year
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the federal
government, and changes in the demand for and use of State services.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth in this Annual
Information Statement. In the past, the State has taken management actions and
made use of internal sources to address potential State Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given
fiscal year, the State would be required to take actions to increase receipts
and/or reduce 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. There can be no assurance, however, that the Legislature will enact the
Governor's proposals or 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.
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 February 14, 1994, S&P revised its
outlook to positive and, on August 5, 1996, 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 July 26, 1996,
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.
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AUTHORITIES. The fiscal stability of the State is related, in part, to the
fiscal stability of its public authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Public 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, 1995 there were 17
Authorities that had outstanding debt of $100 million or more each, and the
aggregate outstanding debt, including refunding bonds, of all state public
authorities was $73.45 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 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 HFA, 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 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
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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 1996-97 fiscal year, total State
assistance to the MTA is estimated by the State to be approximately $1.09
billion.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of a new $11.98 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"), and authorized the MTA to submit
the 1995-99 Capital Program to the Capital Program Review Board for approval.
This plan will supersede the overlapping portion of the MTA's 1992-96 Capital
Program. This is the fourth capital plan since the Legislature authorized
procedures for the adoption, approval and amendment of MTA capital programs and
is designed to upgrade the performance of the MTA's transportation systems by
investing in new rolling stock, maintaining replacement schedules for existing
assets and bringing the MTA system into a state of good repair. The 1995-99
Capital Program assumes the issuance of an estimated $5.1 billion in bonds under
this $6.5 billion aggregate bonding authority. The remainder of the plan is
projected to be financed through assistance from the State, the federal
government, and the City of New York, and from various other revenues generated
from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions for
the 1995-99 Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1995-99
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 assistance.cal 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.
LOCALITIES. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1996-97
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.
MUNICIPAL INDEBTEDNESS. Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1994, the total
indebtedness of all localities in the State other than the City was
approximately $17.7 billion. A small portion (approximately $82.9 million) of
that indebtedness represented borrowing to finance budgetary deficits and was
issued pursuant to State enabling 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
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financing is outstanding. Fifteen localities had outstanding indebtedness for
deficit financing at the close of their fiscal year ending in 1994.
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) employee welfare benefit plans seeking a declaratory judgment nullifying on
the ground of federal preemption provisions of Section 2807-c of the Public
Health Law and implementing regulations which impose a bad debt and charity care
allowance on all hospital bills and a 13 percent surcharge on inpatient bills
paid by employee welfare benefit plans; (ii) several challenges to provisions of
Chapter 81 of the Laws of 1995 which alter 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) challenges to the practice of using patients'
Social Security benefits for the costs of care of patients of State Office of
Mental Health facilities; (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 SS
301; and (xii) an action for reimbursement from the State for certain costs
arising out of the provision of preschool services and programs for children
with handicapping conditions, pursuant to Sections 4410 (10) and (11) of the
Education Law.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1996-97 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1996, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $474
million. There can be no assurance that an adverse decision in any of the above
cited proceedings would not exceed the amount of the 1996-97 State Financial
Plan reserves for the payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced 1996-97 State Financial Plan.
NEW YORK CITY
The fiscal health of the State may also be impacted by the fiscal health of
its localities, particularly the City, which continues to require significant
financial assistance from the State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
State could also be affected by the ability of the City to market its securities
successfully in the public credit markets. The City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAAP standards. The City's financial plans
are usually prepared quarterly, and the annual financial report for its most
recent completed fiscal year is prepared at the end of October of each year.
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
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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 imminence' 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 the City prepares
annually and updates periodically and which includes the City's capital revenue
and expense projections and outlines 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 financial plan. The City is required to submit its financial plans to
review bodies, including the 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. Unforeseen developments and 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.
Implementation of the Financial Plan is also dependent upon the ability
of the City and certain Covered Organizations to market their securities
successfully. The City issues securities to finance, refinance and
rehabilitate infrastructure and other capital needs, as well as for seasonal
financing needs. The City currently projects that if no action is taken, it
will exceed its State Constitutional general debt limit beginning in City
fiscal year 1998. The current Financial Plan includes certain alternative
methods of financing a portion of the City's capital program which require
State or other outside approval. Future developments concerning the City or
its Covered Organizations, and public discussion of such developments, as
well as prevailing market conditions and securities credit ratings, may
affect the ability or cost to sell securities issued by the City or such
Covered Organizations and may also affect the market for their outstanding
securities.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service requirements
for, and Financial Plan compliance by, the City and its Covered Organizations.
According to recent staff reports, the City's economy has experienced weak
employment and moderate wage and income growth throughout the mid-1990s.
Although this trend is expected to continue for the rest of the decade, there is
the risk of a slowdown in the City's economy in the next few years, which would
depress revenue growth and put further strains on the City's budget. These
reports have also indicated that recent City budgets have been balanced in part
through the use of non-recurring resources; that the City's Financial Plan tends
to rely on actions outside its direct control; that the City has not yet brought
its long-term expenditure growth in line with recurring revenue growth; and that
the City is therefore likely to continue to face substantial future budget gaps
that must be closed with reduced expenditures and/or increased revenues.
The 1997-2000 Financial Plan projects revenues and expenditures for the
1997 fiscal year balanced in accordance with GAAP. The projections for the 1997
fiscal year reflect proposed actions to close a previously projected gap of
approximately $2.6 billion for the 1997 fiscal year. The proposed actions for
the 1997 fiscal
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year include (i) additional agency actions totaling $1.2 billion; (ii) a revised
tax reduction program which would increase projected tax revenues by $385
million due to the four year extension of the 12.5% personal income tax
surcharge and other actions; (iii) savings resulting from cost containment in
entitlement programs to reduce City expenditures and additional proposed State
aid of $75 million; (iv) the assumed receipt of revenues relating to rent
payments for the City's airports totaling $269 million, which are currently the
subject of a dispute with the Port Authority; (v) the sale of the City's
television station for $207 million; and (vi) pension cost savings totaling $134
million resulting from a proposed increase in the earnings assumption for
pension assets from 8.5% to 8.75%, $40 million of which the City currently does
not expect to be achieved. There can be no assurance that these gap-closing
measures can be implemented as planned.
The Financial Plan also sets forth projections for the 1998 through 2000
fiscal years and projects gaps of $1.7 billion, $2.7 billion and $3.4 billion
for the 1998, 1999 and 2000 fiscal years, respectively.
The projections for the 1997 through 2000 fiscal years assume (i)
approval by the Governor and the State Legislature of the extension of the
12.5% personal income tax surcharge, which is projected to provide revenue of
$171 million, $447 million, $478 million and $507 million in the 1997 through
2000 fiscal years, respectively, (ii) collection of the projected rent
payments for the City's airports, which may depend on the successful
completion of negotiations with the Port Authority or the enforcement of the
City's rights under the existing leases thereto through pending legal
actions; (iii) the ability of HHC and BOE to identify actions to offset
substantial City and State revenue reductions and the receipt by BOE of
additional State aid; and (iv) State approval of the cost containment
initiatives and State aid proposed by the City. The Financial Plan does not
reflect any increased costs which the City might incur as a result of welfare
legislation recently enacted by Congress.
The City's financial plans have been the subject of extensive public
comment and criticism. On July 16, 1996, the staff of the City Comptroller
issued a report on the Financial Plan. The report concluded that the City's
fiscal situation remains serious, and that the City faces budgetary risks of
approximately $787 million to $941 million for the 1997 fiscal year, which
increase to $4.1 6 billion to $4.31 billion for fiscal year 2000.
In connection with the Financial Plan, the City has outlined a gap-closing
program for the 1998 through 2000 fiscal years to substantially reduce the
remaining $1.7 billion, $2.7 billion and $3.4 billion projected budget gaps for
such fiscal years. This program, which is not specified in detail, assumes
additional agency programs to reduce expenditures or increase revenues by $674
million, $959 million and $1.1 billion in the 1998 through 2000 fiscal years,
respectively; additional reductions in entitlement cost of $400 million, $750
million and $1.0 billion in the 1998 through 2000 fiscal years, respectively;
additional savings of $250 million, $300 million and $500 million in the 1998
through 2000 fiscal years, respectively, resulting from restructuring City
government by consolidating operations, privatization and mandate management and
other initiatives; additional proposed federal and State aid of $105 million,
$200 million and $300 million in the 1998 through 2000 fiscal years,
respectively; additional revenue initiatives and asset sales of $155 million,
$350 million and $400 million in the 1998 through 2000 fiscal years,
respectively; and the availability in each of the 1998 through 2000 fiscal years
of $100 million of the General Reserve.
The City's projected budget gaps for the 1999 and 2000 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1998 budget are not taken into account in projecting the budget gaps
for the 1999 and 2000 fiscal years.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years, and is projected to achieve balanced operating results for
the 1997 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
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ASSUMPTIONS
The 1997-2000 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 1997-2000 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 1997 through 2000 fiscal years; continuation of projected
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; 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; 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.
The projections and assumptions contained in the 1997-2000 Financial Plan
are subject to revision which may involve substantial change, and no assurance
can be given that 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. The principal projections and assumptions described below are
based on information available in May 1996.
Substantially all of the City's full-time employees are members of labor
unions. The Financial Emergency Act requires that all collective bargaining
agreements entered into by the City and the Covered Organizations be consistent
with the City's current financial plan, except for certain awards arrived at
through impasse procedures. During a Control Period, and subject to the
foregoing exception, the Control Board would be required to disapprove
collective bargaining agreements that are inconsistent with the City's current
financial plan.
Under applicable law, the City may not make unilateral changes in wages,
hours or working conditions under any of the following circumstances: (i) during
the period of negotiations between the City and a union representing municipal
employees concerning a collective bargaining agreement; (ii) if an impasse panel
is appointed, then during the period commencing on the date on which such panel
is appointed and ending sixty days thereafter or thirty days after it submits
its report, whichever is sooner, subject to extension under certain
circumstances to permit completion of panel proceedings; or (iii) during the
pendency of an appeal to the Board of Collective Bargaining. Although State law
prohibits strikes by municipal employees, strikes and work stoppages by
employees of the City and the Covered Organizations have occurred.
The 1997-2000 Financial Plan projects that the authorized number of
City-funded employees whose salaries are paid directly from City funds, as
opposed to federal or State funds, will decrease from an estimated level of
206,716 on June 30, 1996 to an estimated level of 203,793 by June 30, 2000,
before implementation of the gap-closing program outlined in the Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. The City has reached settlements with unions representing
approximately two-thirds of the City's workforce. The Financial Plan reflects
the costs of the settlements and assumes similar increases for all other
City-funded employees.
The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement. Legislation passed in February 1996 will place collective
bargaining matters relating to police and firefighters, including impasse
proceedings, under the jurisdiction of the State Public Employment Relations
Board ("PERB"), instead of the New York City Office
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of Collective Bargaining ("OCB"). OCB considers wage levels of municipal
employees in similar cities in the United States in reaching its determinations,
while PERB's determinations take into account wage levels in both private and
public employment in comparable communities, particularly within the State. In
addition, PERB can approve only two-year contracts, unlike OCB which can approve
longer contracts. For these reasons, among others, PERB jurisdiction could
result in labor settlements which impose higher costs on the City than those
reached under existing procedures. 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 Uniformed Firefighters Association
("UFA"). In addition, on February 29, 1996, the City commenced an action in the
State Supreme Court seeking a declaratory judgment confirming that OCB, rather
than PERB, has jurisdiction over collective bargaining matters relating to
police. On April 10, 1996, the Court issued a decision which found the
legislation in violation of the home rule provisions of the State Constitution,
and held that OCB and not PERB had jurisdiction over collective bargaining
matters relating to police. On September 12, 1996, the Appellate Division,
First Department affirmed this decision. The PBA has appealed the Appellate
Division decision.
The projections for the 1997 through 2000 fiscal years reflect the costs of
the settlements with the United Federation of Teachers ("UFT") and a coalition
of unions headed by District Council 37 of the American Federation of State,
County and Municipal Employees ("District Council 37"), which together represent
approximately two-thirds of the City's workforce, and assume that the City will
reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements. 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. Costs
associated with similar settlements for all City-funded employees would total
$49 million, $459 million and $1.2 billion in the 1997, 1998 and 1999 fiscal
years, respectively, and exceed $2 billion in each fiscal year after the 1999
fiscal year. There can be no assurance that the City will reach an agreement
with the unions that have not yet reached a settlement with the City 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 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 PBA and the 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 July 16, 1996, the City Comptroller issued a report on the Financial
Plan, which concluded that the City's fiscal situation remains serious. With
respect to the 1997 fiscal year, the report identified between $787 million and
$941 million in potential risks, including (i) $319 million in airport-related
payments from the Port Authority that are the subject of arbitration; (ii) $202
million to $266 million in risks related to BOE resulting primarily from
unidentified expenditure reductions and projected State aid which has not been
appropriated by the State Legislature; (iii) possible tax revenue shortfalls
totaling $69 million, reflecting the potential impact that rising interest rates
may have on the economy; and (iv) $144 million relating to projected overtime
savings. In addition, the report noted that HHC has not provided any details
with respect to assumed expenditure reductions and revenue enhancements to close
a projected deficit for the 1997 fiscal year, and that HHC faces additional
uncertainties, including the impact of reform of the State's health care
reimbursement methodology, lower Medicaid and Medicare revenues due to proposed
reductions by the Federal Government and the impact of proposals to privatize
certain hospital facilities. The report also noted that the City's capital
budget includes risks in the 1997 fiscal year of $777 million, including $607
million in capital from the proposed sale of the
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City's water and sewer system, which the City Comptroller has opposed and which
was ruled unconstitutional in a unanimous decision of the Appellate Division of
the State Supreme Court.
With respect to fiscal years 1998 through 2000, the report identified total
risks of between $2.47 billion and $2.58 billion for the 1998 fiscal year, $3.38
billion and $3.53 billion for the 1999 fiscal year and $4.16 billion and $4.31
billion for fiscal year 2000, which include the gaps identified in the Financial
Plan and the same categories of risks for fiscal years 1998 through 2000 that
the report identified for the 1997 fiscal year. With respect to the City's
capital budget for the 1998 through 2000 fiscal years, the report identified
risks of $1.5 billion, $1.7 billion and $1.4 billion, respectively, including
the risk that the proposed Infrastructure Finance Agency may not be approved by
the State Legislature. The report also noted that the City's reliance on $1.5
billion of nonrecurring actions for the 1997 fiscal year to close current year
budget gaps and, therefore, defer them into future fiscal years, has resulted in
a rapid increase in the size of estimated budget gaps for the later years of the
Financial Plan. The largest of these recent budget actions include City labor
contracts, which defer major costs until the end of the contract period, bond
refundings, and the sale of Mitchell-Lama mortgages. In a subsequent report,
the City Comptroller set forth various proposals to relieve overcrowding in the
public schools, including year-round schooling, double shifts, busing to nearby
schools with available space, and federal funding for new school construction
and renovation projects.
On July 18, 1996, the staff of the OSDC issued a report on the Financial
Plan. The report concluded that, while the City will end the 1996 fiscal year
with a balanced budget, the City has made no progress towards structural budget
balance, despite its headcount and entitlement reduction programs and higher
revenue collections. The report noted that the City relied on $1.4 billion in
non-recurring resources to achieve budget balance in the 1996 fiscal year and,
as a result, future projected gaps have increased to the largest the City has
ever faced. The report projected budget gaps of $74 million, $1.8 billion, $2.7
billion and $3.5 billion, and identified additional risks of $774 million, $1.3
billion, $1.0 billion and $1.1 billion, for the 1997 through 2000 fiscal years,
respectively. The principal risks identified in the report relate to (i)
uncertain State education aid and mandate relief, and unspecified expenditure
reductions, relating to BOE, totaling $327 million in the 1997 fiscal year and
$402 million in each of the 1998, 1999 and 2000 fiscal years; (ii) the receipt
of Port Authority lease payments totaling $314 million and $226 million in the
1997 and 1998 fiscal years, respectively; (iii) State approval of a four-year
extension to the City's personal income tax surcharge which would generate
revenues of $171 million, $447 million, $478 million and $507 million in the
1997 through 2000 fiscal years, respectively; and (iv) the receipt of $200
million in the 1998 fiscal year in connection with a proposed sale of the New
York Coliseum. The report noted that the large future budget gaps result
primarily from tax cuts and the cost of labor agreements, and that revenues are
projected to increase 1.2% per year during the period covered by the Financial
Plan, while expenditures are projected to increase 6% per year. The report
further noted that the City's economy is heavily dependent on profits in the
securities sector, which are volatile, and that there is a strong likelihood of
a downturn in the national and local economies during the period of the
Financial Plan, which creates a risk to City tax collections beyond those
quantified in the report. In addition, the report noted that HHC could face a
budget gap of approximately $370 million for the 1997 fiscal year, resulting
from lower hospital utilization and other factors, and, with respect to the
capital plan, the report noted that the City anticipates funding over the next
four years of approximately $5.7 billion which is uncertain, including financing
from the proposed sale of the water and sewer system, savings from amendments to
the Wicks Law and the proceeds from the sale of bonds issued by the proposed
Infrastructure Finance Authority.
On July 18, 1996, the staff of the Control Board issued a report on the
Financial Plan. The report identified risks totaling $594 million, $1.1
billion, $851 million and $813 million, for the 1997 fiscal year, the 1998
fiscal year, the 1999 fiscal year and fiscal year 2000, respectively. The
principal risks identified in the report included (i) revenues from the proposed
extension of the 12.5% personal income tax surcharge totaling $171 million, $394
million, $419 million and $445 million in the 1997 through 2000 fiscal years,
respectively, which requires State legislation; (ii) implementation by BOE of
various actions, totaling $56 million in the 1997 fiscal year and $334 million
in each of the 1998 through 2000 fiscal years, which include unspecified
reductions and uncertain State funding; (iii) the receipt of $314 million and
$226 million from the Port Authority in the 1997 and 1998 fiscal years,
respectively, which is the subject of arbitration; and (iv) the potential for
greater than forecast overtime spending totaling between $71 and $77 million in
each of the 1997 through 2000 fiscal years. Taking into account the risks
identified in the report and the unprecedented gaps projected in the Financial
Plan,
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<PAGE>
the Control Board identified projected gaps of $2.8 billion, $3.5 billion and
$4.2 billion for the 1998 fiscal year, the 1999 fiscal year and fiscal year
2000, respectively. The report concluded that the City has not addressed its
underlying problems, which include inadequate and unstable revenue growth, high
debt service expenditures and increasing costs of health care and employee
fringe benefits. The report noted that by fiscal year 2000, City-funded
revenues will have grown by only 6.1% since the 1996 fiscal year, which is
substantially below the expected rate of inflation, while expenditures are
expected to grow at about the expected rate of inflation. The report noted that
this problem is increased by the volatility and cyclicality of the City's tax
revenues, which do not grow uniformly from one year to the next and which are
sensitive to fluctuations of the securities industry. The report further noted
that the City is approaching the limit on outstanding general obligation debt
permitted under the State Constitution and, as a result, has proposed the
creation of the Infrastructure Finance Authority. In addition, the report
stated that the City's structural imbalance has led to insufficient funding for
maintaining the existing capital plant through the expense budget, and
questioned whether the current capital plan is affordable over the long term.
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.
On December 17, 1996, the Control Board issued a report noting that the
City's general tax revenues are growing much more slowly than the City's
expenditures, which will make it increasingly difficult to balance the budget.
On the same day, the staff of the City Comptroller issued a report which tended
to support the Control Board report, finding that the rate of growth of personal
income in the City was much lower than the national rate.
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 has issued $2.4 billion of short-term obligations
for fiscal year 1997 to finance the current estimate of its seasonal cash flow
needs for the 1997 fiscal year. Seasonal financing requirements for the 1996
fiscal year increased to $2.4 billion from $2.2 billion and $1.75 billion in the
1995 and 1994 fiscal years, respectively. Seasonal financing requirements were
$1.4 billion and $2.25 billion in the 1993 and 1992 fiscal years, respectively.
The delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes exceeding those expected early in
such fiscal years.
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 1997-2000 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, 1996 amounted to approximately $2.8
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
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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 Credit Watch. 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 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 Fitch
Alert with negative implications. On November 5, 1996, Fitch removed the City's
general obligation bonds from Fitch Alert although Fitch stated that the outlook
remains negative. 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, SOP 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-.
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.
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.
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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 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;
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<PAGE>
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 indices;]
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.
Investment restrictions (1) through (5) described above, (6) with respect
to the National Municipal, California Municipal and New York Municipal Funds 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 (11) are nonfundamental policies of the Funds, and may
be changed by a vote of the Company's Board of Directors.
In addition, each of the High Yield, Emerging Markets, Investment Grade
Global Debt, Global Convertible and Latin America Total Return Funds may not:
1. 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) (other than Municipal Funds);
2. invest for the purpose of exercising control over management of any
company;
3. invest in puts, call, straddles or spreads, except as described in (9)
above;
4. 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;
Investment restriction (1) is a fundamental policy of the High Yield,
Emerging Markets, Investment Grade Global Debt, Global Convertible and Latin
America Total Return Funds, while restrictions (2) through (4) are
nonfundamental.
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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.
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<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.
<TABLE>
<CAPTION>
Positions Principal
Held With Occupation(s)
Name and Address the Company Past 5 Years
- ---------------- ----------- -------------
<S> <C> <C>
Morris W. Offit* Chairman of the President and Director, OFFITBANK (1983-
OFFITBANK Board, President present).
520 Madison Avenue and Director
New York, NY 10022
Age: 59 Years
Edward J. Landau Director Member, Lowenthal, Landau, Fischer & Bring,
Lowenthal, Landau, Fischer P.C. (1960 - present); Director, Revlon
& Bring, P.C. Group Inc. (cosmetics), Revlon Consumer
250 Park Avenue Products Inc. (cosmetics), Pittsburgh
New York, NY 10177 Annealing Box (metal fabricating) and Clad
Age: 66 Years Metals Inc. (cookware).
The Very Reverend James Parks Morton Director Retired; formerly Dean of Cathedral of St.
285 Riverside Drive John the Divine (1972 - 1996).
New York, NY 10025
Age: 67 Years
Wallace Mathai-Davis Secretary and Managing Director, OFFITBANK (1986-
OFFITBANK Treasurer present).
520 Madison Avenue
New York, NY 10022
Age: 51 Years
Bruce Treff Assistant Counsel, BISYS Fund Services, Inc. since
3435 Stelzer Road Secretary September 1995. Previously, Manager,
Columbus, Ohio 43219 Alliance Capital Management, L.P.
Age: 29 Years
Alaina Metz Assistant Chief Administrative Officer of BISYS Fund
3435 Stelzer Road Secretary Services, Inc. from June 1995 to present.
Columbus, Ohio 43219 Previously, Supervisor of Blue Sky
Age: 29 Years Department at Alliance Capital Management,
May 1989 to June 1995.
Carrie Zuckerman Assistant Manager of BISYS Fund Services from January
12 West 55th Street Secretary 1997 to present. Previously, Associate
New York, NY 10019 Director at Furman Selz LLC.
Age: 29 Years
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stephen Brent Wells Assistant Managing Director, OFFITBANK
520 Madison Avenue Treasurer
New York, NY 10022
Age:
Vincent M. Rella Assistant Controller, OFFITBANK
520 Madison Avenue Treasurer
New York, NY 10022
Age:
</TABLE>
* "Interested person" as defined in the 1940 Act.
The Company pays each Director who is not also an officer or affiliated
person an annual fee of $10,000 and a fee of $1,250 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, 1996)
<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 -0- -0-
The Very Reverend
James Parks Morton -0- -0-
</TABLE>
As of December 31, 1996, the Directors and officers, as a group, did not
own 1% or more of the Company or of any Fund.
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
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 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
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<PAGE>
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; 1.00% of OFFITBANK Latin America Equity Fund's average daily
net assets; .40% of OFFITBANK U.S. Government Securities Fund's average daily
net assets; __% of OFFITBANK Mortgage Securities Fund's average daily net
assets; .40% of OFFITBANK National Municipal Fund's average daily net assets;
.40% of OFFITBANK California Municipal Fund's average daily net assets and .40%
of OFFITBANK New York Municipal Fund's average daily net assets. With respect
to OFFITBANK Total Return Fund, the Adviser is entitled to receive a monthly fee
from the Fund at the annual rate of __% with respect to the Fund's assets other
than investments in the other Funds of the Company. 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, 1996, the High Yield Fund paid the Adviser
$______ in advisory fees, the Adviser earned $______, but waived $______, in
advisory fees for the Emerging Markets Fund, earned $______, but waived
$_______, in advisory fees for the Latin America Equity Fund, and earned
$______, but waived $______ in advisory fees for the New York Municipal Fund.
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 and earned $23,448, but
waived $23,280, in advisory fees for the New York Municipal 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 at the time,
Furman Selz LLC ("Furman Selz"), on December 29, 1993. The Advisory Agreement
for these Funds was most recently re-approved by the Company's Board of
Directors on December 18, 1996. The Advisory Agreement relating to the Latin
America Equity, Global Convertible, National Municipal, California Municipal and
New York Municipal Funds was approved by such Funds' sole shareholder at the
time, Furman Selz, on January 31, 1995, and was most recently approved by the
Company's Board of Directors on December 18, 1996. The Advisory Agreement with
respect to the Total Return, U.S. Government Securities and Mortgage Securities
Funds was approved by the Company's Board of Directors on _______, 1997, and by
each Fund's sole shareholder, ___________, on ________, 1997. Unless sooner
terminated, the Advisory Agreements will continue in effect until February 6,
1998, with respect to the High Yield, Global Debt and Emerging Markets Funds,
until February 7, 1998 with respect to the Latin America Equity, Global
Convertible, National Municipal, California Municipal and New York Municipal
Funds, and until ________, 1999 with respect to the Total Return, U.S.
Government Securities and Mortgage Securities Funds, 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 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 BISYS Fund
Services (the "Distributor"), with its principal office at 3435 Stelzer Road,
Columbus, Ohio 43219, distributes the shares of the Company. Prior to January
1, 1997, the Distributor was a wholly-owned subsidiary of Furman Selz. Under a
distribution agreement with the Company (the "Distribution Agreement"), the
Distributor, as agent of the Company, agrees to use its best efforts as
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, 1996, 1995 and 1994, no distribution costs were incurred by the
Funds.
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<PAGE>
The Plan, together with the Distribution Agreement, 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 the High
Yield, Global Debt and Emerging Markets Funds, on December 29, 1993 and on
October 17, 1994 with respect to the Global Convertible, Latin America Equity,
National Municipal, California Municipal and New York Municipal Funds. The
Plan, as amended, was most recently approved by the Company's Board of Directors
on September 26, 1996. On September 26, 1996, the Distribution Agreement with
the Distributor was approved by the Directors. The Plan was approved by the
Company's Board of Directors with respect to the Total Return, U.S. Government
Securities and Mortgage Securities Funds on ________________, 1997.
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
BISYS Fund Services Limited Partnership ("BISYS") provides the Company with
administrative services pursuant to an Administration Agreement dated as of
October 1, 1996 (the "Administration Agreement") with respect to each of the
Funds. The services provided by and the fees payable to BISYS for such services
are described in the Prospectus. The Administration Agreement was approved by
the Company's Board of Directors on September 26, 1996. The Administration
Agreement with BISYS will continue in effect until January 1, 1998 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, BISYS performs certain
administrative and clerical services. BISYS 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 BISYS a monthly fee
which on an annualized basis will not exceed .15% of the average daily net
assets of the Company. BISYS Fund Services, Inc., an affiliate of BISYS,
provides accounting services to the Company pursuant to a separate Fund
Accounting Agreement. Under the Fund Accounting Agreement, each Fund pays
BISYS Fund Services, Inc. a fee of $30,000 each year for the services provided
under the Agreement.
Prior to January 1, 1997, Furman Selz served as the Company's
administrator. For the fiscal year ended December 31, 1996, Furman Selz was
entitled to fees of $______ for the High Yield Fund, $______ for the Emerging
Markets Fund, $______ for the Latin America Equity Fund and $______ for the New
York Municipal Fund. Of such fees, Furman Selz waived $______, $______, $______
and $______ for the High Yield Fund, Emerging Markets Fund, Latin America Equity
Fund and New York Municipal Funds, respectively. For the fiscal 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. Of such fees earned, Furman Selz waived $268,407, $26,008 and
$8,793 for the High Yield, the Emerging Markets and the New York Municipal
Funds, respectively. For the fiscal period ended December 31, 1995, Furman Selz
waived its entire fee of $8,793 from the New York Municipal Fund. 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
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such fees earned, Furman Selz waived $104,606 and $15,613 for the High Yield
Fund and the Emerging Markets Fund, respectively.
BISYS Fund Services, Inc. also serves as the Company's Transfer Agent and
Dividend Disbursing Agent pursuant to a Transfer Agency Agreement dated as of
October 1, 1996 (the "Transfer Agency Agreement"). Under the Transfer Agency
Agreement, the Transfer Agent has agreed, among other things, to: (i) process
shareholder purchase and redemption orders; (ii) issue periodic statements to
shareholders; (iii) process transfers, exchanges and dividend payments; and (iv)
maintain all shareholder records for each account in the Company. Under the
Transfer Agency Agreement, the Transfer Agent is entitled to a fee of $15.00 per
account per year. The Transfer Agency Agreement with BISYS Fund Services, Inc.
was approved at the September 26, 1996 Board of Directors meeting and continues
in effect until January 1, 1998 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. For the fiscal year ended December 31, 1996,
Furman Selz, which previously served as the Fund's transfer agent, was entitled
to fees of $______, $______, $______ and $______ for the High Yield Fund,
Emerging Markets Fund, Latin America Equity Fund and New York Municipal Fund,
respectively. 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. For the period ended December 31, 1995, Furman Selz received
$1,662 from the New York Municipal Fund in transfer agency fees.
The Chase Manhattan Bank (the "Chase") serves as the Company's custodian
pursuant to custodian agreements with the Company dated February 7, 1994 with
respect to the Global Debt and Emerging Markets Funds, and February 8, 1995 with
respect to the Global Convertible and Latin America Equity Funds (the "Custodian
Agreements"). Prior to ____________, 1996, Chase also served as the custodian
for the High Yield and New York Municipal Funds. Chase is located at 4
MetroTech Center, 18th Floor, Brooklyn, New York 11245. The Bank of New York
("BONY") serves as custodian of the assets of the High Yield, Total Return, U.S.
Government Securities, Mortgage Securities, National Municipal, California
Municipal and New York Municipal Funds. The principal business address of BONY
is 48 Wall Street, New York, New York 10286. Under the Custodian Agreements,
each Custodian has agreed to maintain a separate account or accounts in the name
of each applicable Fund; hold and disburse portfolio securities on account of
each Fund; collect and receive all income and other payments and distributions
on account of each Fund's portfolio securities; and make periodic reports to the
Company's Board of Directors concerning the Funds' operations. Each 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.
For the fiscal year ended December 31, 1996, Chase received $______,
$______, $______ and $______ from the High Yield, Emerging Markets, Latin
America Equity and New York Municipal Funds, respectively. For the year ended
December 31, 1996, BONY received $______ and $______ from the High Yield and New
York Municipal Funds. For the fiscal year ended December 31, 1995, Chase
received $233,846, $43,367 and $6,150 from the High Yield, Emerging Markets and
New York Municipal Funds, respectively. Chase 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, Emerging Markets and New York
Municipal Funds did not pay any
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brokerage commissions for the fiscal periods ended December 31, 1996 and 1995.
The Latin America Equity Fund paid brokerage commissions of $______ for the
fiscal period ended December 31, 1996.
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, Total Return and Latin
America Equity 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
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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.
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.
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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:
n
P (1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 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, the Emerging Markets Fund, the
Latin America Total Return Fund and the New York Municipal Fund for certain time
periods ended December 31, 1996.
High Yield Fund
---------------
Select Advisor
Shares Shares*
------ -------
1 year 12.46 12.46
5 years 14.87 14.87
10 years 12.74 12.74
Emerging Markets Fund
---------------------
Select Advisor
Shares Shares*
------ -------
1 year 26.56 26.56
Since inception (March 8, 1994) 15.37 15.37
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Latin America Total Return Fund
-------------------------------
Select Advisor
Shares Shares*
------ -------
Since inception (February 12, 23.36 23.36
1996)
New York Municipal Fund
-----------------------
Select Advisor
Shares Shares*
------ -------
1 year -0.34 -0.34
Since inception (April 3, 1995) 12.14 12.14
- --------------------
* The return figures do not reflect the distribution and service fees
currently paid with respect to the Advisor Shares of the Fund. At December
31, 1996, no Advisor Shares had been issued to the public.
As described in the Prospectus under the caption "Expense Information," the
High Yield Fund, Emerging Markets, Latin America Total Return and New York
Municipal 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:
6
Yield = 2[( a-b ) + 1) -1]
-------
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
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
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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 for the Advisor Shares of the High Yield, Emerging
Markets, Latin America Total Return and New York Municipal Funds for the period
ended December 31, 1996, was 8.51%, 9.73%, 4.41% and 4.32% respectively.
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.
Each Fund may also advertise its "risk adjusted return," which reflects the
total return of the Fund over time adjusted to reflect volatility of the Fund.
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.
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 indices may be used to illustrate historic performance 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
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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
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.
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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. 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,
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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 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.
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.
-54-
<PAGE>
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 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 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., 125 West
52nd Street, New York, New York 10020. 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
-55-
<PAGE>
two accounts is identical. Requests for expedited exchanges received prior to
4:00 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 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.
-56-
<PAGE>
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 January 31, 1997, the following persons owned of record or
beneficially 5% or more of the outstanding shares of any class of shares of a
Fund of the Company:
EMERGING MARKETS FUND SHARES OWNED PERCENTAGE
- --------------------- ------------ ----------
GAF Corporation Master
Retirement Trust 1,096,958.028 10.997%
Trustee-Bankers Trust Co. (Select)
Attention: Clare Petosa
Mail Stop 3048
34 Exchange Place
Jersey City, N.J. 07302
Mall Investment LP 1,742,327.314 17.467%
215 Keo Way (Select)
Des Moines, IA 50309
Donaldson Lufkin & 2,662.500 100%
Jenrette Securities Corp. (Advisor)
Advisor Shares
One Pershing Plaza
Jersey City, N.J. 07399
NEW YORK MUNICIPAL FUND SHARES OWNED PERCENTAGE
- ----------------------- ------------ ----------
Peter J. Solomon & Abigail
R. Solomon 131,604.069 6.099%
250 West 88th Street (Select)
Abigail R. Solomon 1995 Trust
New York, N.Y. 10024
OFFITBANK Capital 463,621.559 21.487%
Attn: Vincent Rella (Select)
520 Madison Avenue, 27th Floor
New York, N.Y. 10022
Sylvia Slifka 198,764.853 9.212%
870 Fifth Avenue (Select)
New York, N.Y. 10021
LATIN AMERICA EQUITY FUND SHARES OWNED PERCENTAGE
- ------------------------- ------------ ----------
Lighthouse Inc. 224,618.149 9.384%
111 East 59th Street (Select)
New York, N.Y. 10022
Mall Investment L.P. 1,226,415.520 51.238%
215 Keo Way (Select)
Des Moines, IA 50309
-57-
<PAGE>
INVESTMENT GRADE GLOBAL DEBT FUND SHARES OWNED PERCENTAGE
- --------------------------------- ------------ ----------
Furman Selz LLC 3,333.333 100%
230 Park Avenue, 9th Floor (Select)
New York, NY 10169
CALIFORNIA MUNICIPAL FUND SHARES OWNED PERCENTAGE
- ------------------------- ------------ ----------
Furman Selz LLC 5 100%
230 Park Avenue, 9th Floor (Select)
New York, NY 10169
NATIONAL MUNICIPAL FUND SHARES OWNED PERCENTAGE
- ----------------------- ------------ ----------
Furman Selz LLC 5 100%
230 Park Avenue, 9th Floor (Select)
New York, NY 10169
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.
FINANCIAL INFORMATION
The financial statements of the Company are incorporated by reference to
the Annual Report for the year ended December 31, 1996 filed with the
Commission.
-58-
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Included in the Prospectus:
(1) Financial Highlights for the periods ended December 31,
1994, December 31, 1995 and December 31, 1996.*
Included in Statement of Additional Information:
(1) Portfolios of Investments dated December 31, 1996.**
(2) Statements of Assets and Liabilities dated December 31,
1996.**
(3) Statements of Operations for the period ended December 31,
1996.**
(4) Statement of Changes in Net Assets for the periods ended
December 31, 1995 and December 31, 1996.**
(5) Financial Highlights for the period ended December 31,
1996.**
(6) Notes to Financial Statements dated December 31, 1996.**
(b) Exhibits:
Exhibit
Number Description
------ -----------
1(a) -- Registrant's Articles of Incorporation (1)
1(b) -- Registrant's Amended and Restarted Articles of
Incorporation.(3)
1(c) -- Registrant's Form of Articles Supplementary.(5)
1(d) -- Registrant's Form of Articles Supplementary -
filed herewith.
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)
- ---------------------------------
* To be filed by subsequent amendment.
** Incorporated by reference to the Registrant's Annual Report filed with the
Securities and Exchange Commission on February __, 1997 (Accession
No. __________)
<PAGE>
4(b) -- Form of Stock Certificate for shares of Class B
stock.(5)
4(c) -- Form of Stock Certificate for shares of Class C
stock.(3)
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)
4(i) -- Form of Stock Certificate for shares of Class I
stock - filed herewith
4(j) -- Form of Stock Certificate for shares of Class J
stock - filed herewith
4(k) -- Form of Stock Certificate for shares of Class K
stock - filed herewith
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) -- Agreement to Advisory Agreement between the Registrant and
OFFITBANK reflecting the change in name of the Latin America
Equity, to Latin America Total Return Fund.(6)
5(d) Form of Advisory Agreement between Registrant and OFFITBANK U.S.
Government Securities Fund, OFFITBANK Mortgage Securities Fund
and OFFITBANK Total Return Fund - filed herewith
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)
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)
<PAGE>
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 May 1, 1996, and the creation
of Advisor Shares.(7)
6(e) -- Form of Distribution Agreement between Registrant and OFFIT Funds
Distributor, Inc. - filed herewith
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) -- Form of Custodian Agreement between Registrant and The Bank of
New York.(8)
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)
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
<PAGE>
Agents.(7)
9(h) -- Form of Fund Administration Agreement between Registrant and
BISYS Fund Services - filed herewith
9(i) -- Form of Transfer Agency Agreement between Registrant and BISYS
Fund Services - filed herewith
9(j) -- Form of Fund Accounting Agreement between Registrant and BISYS
Fund Services - filed herewith
10 -- Opinion and Consent of Piper & Marbury.(3)
11(a) -- Consent of Price Waterhouse LLP. (8)
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)
13(c) -- Form of Share Purchase Agreement between the Registrant and OFFIT
Funds Distributor with respect to U.S. Government Securities
Fund, Mortgage Securities Fund and Total Return Fund. (8)
14 -- None.
15(a) -- Form of Plan Distribution.(2)
15(b) -- Amendment to Plan of Distribution.(7)
16(a) -- Schedule of computation for the High Yield, Emerging Markets and
New York Municipal Funds.(6)
16(b) -- Schedule of computation for the Latin America Total Return Fund
(8).
18 -- Form of Amended Multiclass Plan Pursuant to Rule 18f-3.(7)
27 -- Financial Data Schedule.(8)
- ----------
(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").
<PAGE>
(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) Exhibit is incorporated by reference to Post-Effective Amendment No. 7,
filed on April 27, 1996, to the Registration Statement.
(8) 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 January 31, 1997
-------------- ----------------
Shares of OFFITBANK High Yield Fund, par value
$.001 per share. . . . . . . . . . . . . . . . . . . . . . . 816
Shares of OFFITBANK Emerging Markets Fund,
par value $.001 per share. . . . . . . . . . . . . . . . . . 158
Shares of OFFITBANK Investment Grade Global Debt,
par value $.001 per share. . . . . . . . . . . . . . . . . . 0
Shares of OFFITBANK Latin America Total Return Fund,
par value $.001 per share. . . . . . . . . . . . . . . . . . 53
Shares of OFFITBANK Global Convertible Fund,
par value $.001 per share. . . . . . . . . . . . . . . . . . 1
Shares of OFFITBANK National Municipal Fund,
par value $.001 per share. . . . . . . . . . . . . . . . . . 1
Shares of OFFITBANK California Municipal Fund,
par value $.001 per share. . . . . . . . . . . . . . . . . . 1
<PAGE>
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 OFFIT Funds Distributor, Inc. (Exhibit 6(e) 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 policy as 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.
<PAGE>
Principal Occupation
or Other Employment
of a Substantial
Position with Nature During the
Name OFFITBANK 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, 10021
David I. Margolis Director Chairman and Chief
Coltec Industries, Inc. Executive Officer,
430 Park Avenue Coltec Industries, Inc.
New York, New York 10022
Harvey M. Meyerhoff Director Chairman of the Board,
Magna Holdings, Inc. Magna Holdings, Inc.
25 South Charles Street
Suite 2100
Baltimore, MD 21201
George Randolph Packard Director Professor, The Paul H.
4425 Garfield Street, N.W. Nitze School of Advanced
Washington, D.C. 20007 International Studies,
Johns Hopkins University
B. Lance Sauerteig, Esq. Director President, First Spring
First Spring Corporation Corporation
499 Park Avenue
New York, NY 10022
Item 29. PRINCIPAL UNDERWRITER.
(a) Not applicable.
(b)
Positions and
Name and Principal Positions and Offices Offices with
Business Address with Underwriter Registrant
Lynn J. Mangum Chairman/CEO None
150 Clove Road
Little Falls, NJ 07424
Robert J. McMullan Executive Vice President/ None
150 Clove Road Treasurer
Little Falls, NJ 07424
<PAGE>
J. David Huber President None
3435 Stelzer Road
Columbus, Ohio 43219
Kevin J. Dell Vice President/ General None
150 Clove Road Counsel/Secretary
Little Falls, NJ 07424
Mark J. Rybarczyk Senior Vice President None
11 Greenway Plaza
Suite 300
Houston, TX 77046
Dennis Sheehan Senior Vice President None
150 Clove Road
Little Falls, NJ 07424
William Tomko Senior Vice President None
3435 Stelzer Road
Columbus, Ohio 43219
George Martinez Senior Vice President None
3435 Stelzer Road
Columbus, Ohio 43219
Dale Smith Vice President None
3435 Stelzer Road
Columbus, Ohio 43219
Michael Burns Vice President None
3435 Stelzer Road
Columbus, Ohio 43219
Bruce Treff Assistant Secretary None
3435 Stelzer Road
Columbus, Ohio 43219
Annamaria Porcaro Assistant Secretary None
150 Clove Road
Little Falls, NJ 07424
(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.
125 West 55th Street
11th Floor
New York, New York 10019
(records relating to the Company)
<PAGE>
(2) OFFITBANK
520 Madison Avenue
New York, New York 10022
(advisory records)
(3) OFFIT Funds Distributor, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
(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 conjunction 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Amendment to its 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 14th day of February, 1997.
THE OFFITBANK INVESTMENT FUND, INC.
By /s/ Morris W. Offit
--------------------------
Morris W. Offit, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the 14th day of February, 1997.
SIGNATURE TITLE
- --------- -----
/s/ Morris W. Offit Director, Chairman of
- --------------- the Board and President
Morris W. Offit (Principal Executive
Director)
* Director
- ---------------
Edward J. Landau
*
- ---------------
The Very Reverend James Parks Morton Director
/s/ Morris W. Offit
- ---------------
Morris W. Offit
Attorney-in-fact
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description of Exhibit Numbered Page
- ------- ------------------------------------
1(d) Articles Supplementary
4(i) Form of Stock Certificate
4(j) Form of Stock Certificate
4(k) Form of Stock Certificate
5(d) Form Advisory Agreement
6(e) Form of Distribution Agreement
9(h) Form of Administration Agreement
9(i) Form of Transfer Agency Agreement
9(j) Form of Fund Accounting Agreement
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
FORM OF ARTICLES SUPPLEMENTARY
The OFFITBANK Fund, Inc., a Maryland corporation having its principal
office in Baltimore City, Maryland (the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation's Board of Directors has authorized the
creation of three additional portfolios of the Corporation and three
corresponding new classes of capital stock of the Corporation: Class I, Class J
and Class K.
SECOND: Pursuant to the authority of the Board of Directors to
classify and reclassify unissued shares of capital stock of the Corporation, the
Board of Directors has:
(a) duly divided and reclassified 340,909,091 shares of the
authorized and unissued shares of Class A Common Stock of the
Corporation, par value $.001 per share, 340,909,091 shares of the
authorized and unissued shares of Class B Common Stock of the
Corporation, par value $.001 per share and 227,272,727 shares of the
authorized and unissued shares of Class C Common Stock of the
Corporation, par value $.001 per share, into Class I Common Stock and
has provided for the issuance of such class;
(b) duly divided and reclassified 113,636,364 shares of the
authorized and unissued shares of Class C Common Stock of the
Corporation, par value $.001 per share, 340,909,091 shares of the
authorized and unissued shares of Class D Common Stock of the
Corporation, par value $.001 per share, 340,909,091 shares of
authorized and unissued shares of Class E Common Stock of the
Corporation, par value $.001 per share, and 113,636,363 shares of the
authorized and unissued shares of Class F Common Stock of the
Corporation, par value $.001 per share, into Class J Common Stock and
has provided for the issuance of such class; and
(c) duly divided and reclassified 227,272,728 shares of the
authorized and unissued shares of Class F Common Stock of the
Corporation, par value $.001 per share, 340,909,091 shares of the
authorized and unissued shares of Class G Common Stock of the
Corporation, par value $.001 per share, and 340,909,091 shares of the
authorized and unissued shares of Class H Common Stock of the
Corporation, par value $.001 per share, into Class K Common Stock and
has provided for the issuance of such class;
Any class of Common Stock shall be referred to herein individually as
a "Class" and collectively, together with any further classes from time to time
established, as "Classes."
<PAGE>
2
THIRD: The shares of Class I Common Stock, Class J Common Stock and
Class K Common Stock, as so divided and reclassified by the Corporation's Board
of Directors, shall have the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption set forth in the Corporation's Charter and shall be
subject to all provisions of the Corporation's Charter relating to shares of
Class A, Class B, Class C, Class D, Class E, Class F, Class G and Class H Common
Stock, respectively, and to stock of the Corporation generally, except as
otherwise set forth in these Articles Supplementary.
FOURTH: The shares aforesaid have been duly classified or
reclassified by the Board of Directors pursuant to the authority and power
contained in the Corporation's Charter.
FIFTH: These Articles Supplementary do not increase the authorized
stock of the Corporation.
<PAGE>
3
IN WITNESS WHEREOF, THE OFFITBANK INVESTMENT FUND, INC. has caused
these presents to be signed in its name and on its behalf by its President and
witnessed by its Assistant Secretary on __________, 1997.
THE OFFITBANK INVESTMENT FUND, INC.
---------------------------------------------
Morris W. Offit
President
WITNESS:
- ------------------------------
Wallace Mathai-Davis
Secretary
THE UNDERSIGNED, Morris W. Offit, President of THE OFFITBANK
INVESTMENT FUND, INC., who executed on behalf of the Corporation the foregoing
Articles Supplementary of which this certificate is made a part, hereby
acknowledges in the name and on behalf of said Corporation the foregoing
Articles Supplementary to be the corporate act of said Corporation and hereby
certifies that to the best of his knowledge, information and belief the matters
and facts set forth therein with respect to the authorization and approval
thereof are true in all material respects under the penalties of perjury.
----------------------------------------
Morris W. Offit
<PAGE>
Exhibit 4i
- ----------------- ---------------
NUMBER SHARES
- ----------------- ---------------
THE OFFITBANK INVESTMENT FUND, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF MARYLAND
OFFITBANK TOTAL RETURN FUND
----------------
ACCOUNT No. ALPHA CODE CUSIP.
----------------
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS I OF CAPITAL STOCK OF
THE PAR VALUE OF $0.001 EACH OF OFFITBANK TOTAL RETURN FUND transferable only on
the books of the Corporation by the holder hereof, in person or by duly
authorized attorney, upon the surrender of this certificate properly endorsed.
This certificate is not value until countersigned by the Transfer Agent.
WITNESS the facsimile Seal of the Corporation and the facsimile signature of its
duly authorized officers. The Corporation is authorized to issue more than one
class of stock and will furnish to any stockholder upon request without charge a
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the stock of each
class which the Corporation is authorized to issue.
Dated:
Clerk
- ----------------------------------- ------------------------------
Secretary President
<PAGE>
EXPLANATION OF ABBREVIATIONS
The following abbreviations, when used in the form of ownership on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Abbreviations in addition to those
appearing below may be used.
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
JT TEN As joint tenants, with right of TEN IN COM As tenants n common
survivorship and not as tenants TEN BY ENT As tenants by the entireties
in common UNIF GIFT MIN ACT Uniform Gifts to Minors
<CAPTION>
Abbre- Equivalent Abbre- Equivalent
viation ---------- viation ----------
------- -------
<S> <C> <C> <C>
ADM Administrator(s) FDN Foundation
Administratrix PL Public Laws
AGMT Agreement TR (As) trustee (s), for, of
CUST Custodian for UA Under agreement
EST Estate. Of estate of UW Under will of. Of will of.
EX Executor(s), Executrix Under last will & Testament
FBO For the benefit of
- ------------------------------------------------------------------------------------------------------------------------------------
TRANSFER FORM
PLEASE INSERT SOCIAL SECURITY OR OTHER FOR VALUE RECEIVED................hereby sell, assign and transfer unto
IDENTIFYING NUMBER OF ASSIGNEE (I / we)
- --------------------------------------
- --------------------------------------
Please print or typewrite name and address including postal zip
code of assignee of Capital Stock represented by this Certificate
and do hereby irrevocably constitute and appoint Shares to transfer
the said shares on the books of the Corporation with full power of
substitution in the premises
Attorney
Dated:
SIGNATURE Signatures(s)
GUARANTEED BY (The signature to this assignment must correspond with the name as
written upon the face of this Certificate in every particular,
without alteration or enlargement or any change whatsoever. If
more than one owner, all must sign.)
(Signature must be guaranteed by a commercial bank or trust
company or member firm of any national stock exchange.)
IMPORTANT NOTICE:
When you sign your name to this Transfer Form without filling in the name of your Assignee this share certificate becomes fully
negotiable similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you fill in
the name of the new owner in the Assignee space.
Alternatively, instead of using this Transfer Form, you may sign a separate "stock power" form and then mail the Certificate
and the signed "stock power" in separate envelopes. For added protection, use registered mail for Certificate.
- ------------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FORM
The undersigned hereby tenders to the Corporation this Certificate properly endorsed with any requisite guarantee of signature and
supporting papers and requests the redemption of __________ Shares (indicate the number of shares to be redeemed. A new certificate
will be issued for any unredeemed balance) of capital stock represented by this Certificate in accordance with the terms of the
Articles of Incorporation dated September 8, 1993, and all amendments thereto.
SIGNATURE Signatures(s)
GUARANTEED BY (The signature to this request for redemption must correspond with
the name as written upon the face of this Certificate in every
particular, without alteration or enlargement or any change
whatsoever. If more than one owner, all must sign.)
(Signature must be guaranteed by a commercial bank or trust
company or member firm of any national stock exchange.)
-------------------------------------------------------------------
Address
</TABLE>
<PAGE>
Exhibit 4j
- ---------------- ----------------
NUMBER SHARES
- ---------------- ----------------
THE OFFITBANK INVESTMENT FUND, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF MARYLAND
OFFITBANK U.S. GOVERNMENT SECURITIES FUND
----------------
ACCOUNT No. ALPHA CODE CUSIP.
----------------
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS J OF CAPITAL STOCK OF
THE PAR VALUEOF $0.001 EACH OF OFFITBANK U.S. GOVERNMENT SECURITIES FUND
transferable only on the books of the Corporation by the holder hereof, in
person or by duly authorized attorney, upon the surrender of this certificate
properly endorsed. This certificate is not value until countersigned by the
Transfer Agent.
WITNESS the facsimile Seal of the Corporation and the facsimile signature of its
duly authorized officers. The Corporation is authorized to issue more than one
class of stock and will furnish to any stockholder upon request without charge a
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the stock of each
class which the Corporation is authorized to issue.
Dated:
Clerk
- ----------------------------------- ------------------------------
Secretary President
<PAGE>
EXPLANATION OF ABBREVIATIONS
The following abbreviations, when used in the form of ownership on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Abbreviations in addition to those
appearing below may be used.
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
JT TEN As joint tenants, with right of TEN IN COM As tenants n common
survivorship and not as tenants TEN BY ENT As tenants by the entireties
in common UNIF GIFT MIN ACT Uniform Gifts to Minors
<CAPTION>
Abbre- Equivalent Abbre- Equivalent
viation ---------- viation ----------
------- -------
<S> <C> <C> <C>
ADM Administrator(s) FDN Foundation
Administratrix PL Public Laws
AGMT Agreement TR (As) trustee (s), for, of
CUST Custodian for UA Under agreement
EST Estate. Of estate of UW Under will of. Of will of.
EX Executor(s), Executrix Under last will & Testament
FBO For the benefit of
- ------------------------------------------------------------------------------------------------------------------------------------
TRANSFER FORM
PLEASE INSERT SOCIAL SECURITY OR OTHER FOR VALUE RECEIVED......................hereby sell, assign and transfer unto
IDENTIFYING NUMBER OF ASSIGNEE (I / we)
- --------------------------------------
- --------------------------------------
Please print or typewrite name and address including postal zip
code of assignee of Capital Stock represented by this Certificate
and do hereby irrevocably constitute and appoint Shares to transfer
the said shares on the books of the Corporation with full power of
substitution in the premises
Attorney
Dated:
SIGNATURE Signatures(s)
GUARANTEED BY (The signature to this assignment must correspond with the name as
written upon the face of this Certificate in every particular,
without alteration or enlargement or any change whatsoever. If
more than one owner, all must sign.)
(Signature must be guaranteed by a commercial bank or trust
company or member firm of any national stock exchange.)
IMPORTANT NOTICE:
When you sign your name to this Transfer Form without filling in the name of your Assignee this share certificate becomes fully
negotiable similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you fill in
the name of the new owner in the Assignee space.
Alternatively, instead of using this Transfer Form, you may sign a separate "stock power" form and then mail the Certificate
and the signed "stock power" in separate envelopes. For added protection, use registered mail for Certificate.
- ------------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FORM
The undersigned hereby tenders to the Corporation this Certificate properly endorsed with any requisite guarantee of signature and
supporting papers and requests the redemption of __________ Shares (indicate the number of shares to be redeemed. A new certificate
will be issued for any unredeemed balance) of capital stock represented by this Certificate in accordance with the terms of the
Articles of Incorporation dated September 8, 1993, and all amendments thereto.
SIGNATURE Signatures(s)
GUARANTEED BY (The signature to this request for redemption must correspond with
the name as written upon the face of this Certificate in every
particular, without alteration or enlargement or any change
whatsoever. If more than one owner, all must sign.)
(Signature must be guaranteed by a commercial bank or trust
company or member firm of any national stock exchange.)
-------------------------------------------------------------------
Address
</TABLE>
<PAGE>
Exhibit 4k
- ---------------- ----------------
NUMBER SHARES
- ---------------- ----------------
THE OFFITBANK INVESTMENT FUND, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF MARYLAND
OFFITBANK MORTGAGE SECURITIES FUND
----------------
ACCOUNT No. ALPHA CODE CUSIP.
----------------
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS K OF CAPITAL STOCK OF
THE PAR VALUEOF $0.001 EACH OF OFFITBANK MORTGAGE SECURITIES FUND transferable
only on the books of the Corporation by the holder hereof, in person or by duly
authorized attorney, upon the surrender of this certificate properly endorsed.
This certificate is not value until countersigned by the Transfer Agent.
WITNESS the facsimile Seal of the Corporation and the facsimile signature of its
duly authorized officers. The Corporation is authorized to issue more than one
class of stock and will furnish to any stockholder upon request without charge a
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the stock of each
class which the Corporation is authorized to issue.
Dated:
Clerk
- ------------------------------------ ---------------------------
Secretary President
<PAGE>
EXPLANATION OF ABBREVIATIONS
The following a+bbreviations, when used in the form of ownership on the
face of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations. Abbreviations in addition to
those appearing below may be used.
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
JT TEN As joint tenants, with right of TEN IN COM As tenants n common
survivorship and not as tenants TEN BY ENT As tenants by the entireties
in common UNIF GIFT MIN ACT Uniform Gifts to Minors
<CAPTION>
Abbre- Equivalent Abbre- Equivalent
viation ---------- viation ----------
------- -------
<S> <C> <C> <C>
ADM Administrator(s) FDN Foundation
Administratrix PL Public Laws
AGMT Agreement TR (As) trustee (s), for, of
CUST Custodian for UA Under agreement
EST Estate. Of estate of UW Under will of. Of will of.
EX Executor(s), Executrix Under last will & Testament
FBO For the benefit of
- ------------------------------------------------------------------------------------------------------------------------------------
TRANSFER FORM
PLEASE INSERT SOCIAL SECURITY OR OTHER FOR VALUE RECEIVED......................hereby sell, assign and transfer unto
IDENTIFYING NUMBER OF ASSIGNEE (I / we)
- --------------------------------------
- --------------------------------------
Please print or typewrite name and address including postal zip
code of assignee of Capital Stock represented by this Certificate
and do hereby irrevocably constitute and appoint Shares to transfer
the said shares on the books of the Corporation with full power of
substitution in the premises
Attorney
Dated:
SIGNATURE Signatures(s)
GUARANTEED BY (The signature to this assignment must correspond with the name as
written upon the face of this Certificate in every particular,
without alteration or enlargement or any change whatsoever. If
more than one owner, all must sign.)
(Signature must be guaranteed by a commercial bank or trust
company or member firm of any national stock exchange.)
IMPORTANT NOTICE:
When you sign your name to this Transfer Form without filling in the name of your Assignee this share certificate becomes fully
negotiable similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you fill in
the name of the new owner in the Assignee space.
Alternatively, instead of using this Transfer Form, you may sign a separate "stock power" form and then mail the Certificate
and the signed "stock power" in separate envelopes. For added protection, use registered mail for Certificate.
- ------------------------------------------------------------------------------------------------------------------------------------
REDEMPTION FORM
The undersigned hereby tenders to the Corporation this Certificate properly endorsed with any requisite guarantee of signature and
supporting papers and requests the redemption of __________ Shares (indicate the number of shares to be redeemed. A new certificate
will be issued for any unredeemed balance) of capital stock represented by this Certificate in accordance with the terms of the
Articles of Incorporation dated September 8, 1993, and all amendments thereto.
SIGNATURE Signatures(s)
GUARANTEED BY (The signature to this request for redemption must correspond with
the name as written upon the face of this Certificate in every
particular, without alteration or enlargement or any change
whatsoever. If more than one owner, all must sign.)
(Signature must be guaranteed by a commercial bank or trust
company or member firm of any national stock exchange.)
-------------------------------------------------------------------
Address
</TABLE>
<PAGE>
INVESTMENT ADVISORY AGREEMENT
THE OFFITBANK INVESTMENT FUND, INC.
125 West 55th Street
New York, New York 10019
____________, 1997
OFFITBANK
520 Madison Avenue
New York, New York 10022
Dear Sir or Madam:
This will confirm the agreement between the undersigned (the "Company") and
you (the "Investment Adviser") as follows:
1. The Company is an open-end investment company which currently has
eleven investment portfolios. The Company proposes to engage in the business of
investing and reinvesting the assets of the OFFITBANK Total Return Fund,
OFFITBANK U.S. Government Securities Fund and OFFITBANK Mortgage Securities Fund
(individually a "Fund", collectively, the "Funds") in the manner and in
accordance with the investment objectives and limitations specified in the
Company's Articles of Incorporation and Articles Supplementary (the "Articles")
and the currently effective prospectus, including the documents incorporated by
reference therein (the "Prospectus"), relating to the Company and the Funds,
included in the Company's Registration Statement, as amended from time to time
(the "Registration Statement"), filed by the Company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Securities Act of
1933, as amended. Copies of the documents referred to in the preceding sentence
have been furnished to the Investment Adviser. Any amendments to these
documents shall be furnished to the Investment Adviser.
2. The Company employs the Investment Adviser to (a) make investment
strategy decisions for the Funds, (b) manage the investing and reinvesting of
the Funds' assets as specified in paragraph 1, (c) place purchase and sale
orders on behalf of the Funds and (d) provide continuous supervision of each
Fund's investment portfolio.
3. (a) The Investment Adviser shall, at is expense, provide the
Funds with office space, furnishings and equipment and personnel required by it
to perform the services to be provided by the Investment Adviser pursuant to
this Agreement. The Investment Adviser has also agreed to pay the Company's
organizational expenses.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Funds' expenses and
<PAGE>
-2-
liabilities, including taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Adviser or any of its
affiliates); fees payable to the Securities and Exchange 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 the custodian and transfer agent; insurance
premiums; auditing any legal expenses; costs of shareholders' reports and
shareholders' meetings; any extraordinary expenses; and brokerage fees and
commissions, if any, in connection with the purchase or sale of portfolio
securities.
4. As manager of the Funds' assets, the Investment Adviser shall make
investments for the Funds' account in accordance with the investment objectives
and limitations set forth in the Articles, the Prospectus, the 1940 Act, the
provisions of the Internal Revenue Code of 1986, as amended, relating to
regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Adviser shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Funds' accounts and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Adviser is authorized on behalf of the Company, from
time to time when deemed to be in the best interests of the Company and to the
extent permitted by applicable law, to purchase and/or sell securities in which
the Investment Adviser or any of its affiliates underwrites, deals in and/or
makes a market and/or may perform or seek to perform investment banking services
for issuers of such securities. The Investment Adviser is further authorized,
to the extent permitted by applicable law, to select brokers for the execution
of trades for the Company, which broker may be an affiliate of the Investment
Adviser, provided that the best competitive execution price is obtained at the
time of the trade execution.
6. In consideration of the Investment Adviser's undertaking to render the
services described in this agreement, the Company agrees that the Investment
Adviser 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 Investment Adviser against any
liability to the Company or its stockholders to which the Investment Adviser
would otherwise be subject by reason of willful misfeasance, bad faith or gross
<PAGE>
-3-
negligence in the performance of the Investment Adviser's duties under this
agreement or by reason of the Investment Adviser's reckless disregard of its
obligations and duties hereunder.
7. In consideration of the services to be rendered by the Investment
Adviser under this agreement, the Company shall pay the Investment Adviser
monthly fees on the first Business Day (as defined in the Prospectus) of each
month based upon the average daily net assets of each Fund during the preceding
month (as determined on the days and at the time set forth in the Prospectus for
determining net asset value per share) at the following annual rates: ___% for
the assets of the OFFITBANK Total Return Fund not invested in the other Funds of
the Company; ___% for the assets of the OFFITBANK U.S. Government Securities
Fund; and ___% for the assets of the OFFITBANK Mortgage Securities Fund. If the
fees payable to the Investment Adviser pursuant to this paragraph 7 begins to
accrue before the end of any month or if this agreement terminates before the
end of any month, the fees for the period from such date to the end of such
month or from the beginning of such month to the date of termination, as the
case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs. For
purposes of calculating each such monthly fee, the value of the Funds' net
assets shall be computed in the manner specified in the Prospectus and the
Articles for the computation of the value of the Funds' net asset in connection
with the determination of the net asset value of shares of the Funds' capital
stock
8. If the aggregate expenses incurred by, or allocated to, each Fund in
any fiscal year shall exceed the expense limitations applicable to such Fund
imposed by state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall
reimburse such Fund for such excess. The Investment Adviser's reimbursement
obligation will be limited to the amount of fees it received under this
agreement during the period in which such expense limitations were exceeded,
unless otherwise required by applicable laws or regulations. With respect to
portions of a fiscal year in which this contract shall be in effect, the
foregoing limitations shall be prorated according to the proportion which that
portion of the fiscal year bears to the full fiscal year. Any payments required
to be made by this paragraph 8 shall be made once a year promptly after the end
of the Company's fiscal year.
9. This agreement shall continue in effect until two years from the date
hereof and thereafter with respect to each Fund for successive annual periods,
provided that such continuance is specifically approved at least annually (a) by
the vote of a
<PAGE>
-4-
majority of such Fund's outstanding voting securities (as defined in the 1940
Act) or 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 by any Fund at
any time, without the payment of any penalty, by a vote of a majority of such
Fund'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 Investment Adviser or by the Investment Adviser on 60 days'
written notice to the Company. This agreement may remain in effect with respect
to a Fund even if it has been terminated in accordance with this paragraph with
respect to the other Funds. This agreement shall terminate automatically in the
event of its assignment (as defined in the 1940 Act).
10. Upon expiration or earlier termination of this agreement, the Company
shall, if reference to "OFFITBANK" is made in the corporate name of the Company
or in the names of the Funds and if the Investment Adviser requests in writing,
as promptly as practicable change its corporate name and the names of the Funds
so as to eliminate all reference to "OFFITBANK", and thereafter the Company and
the funds shall cease transacting business in any corporate name using the words
"OFFITBANK" or any other reference to the Investment Adviser or "OFFITBANK".
The foregoing rights of the Investment Adviser and obligations of the Company
shall not deprive the Investment Adviser, or any affiliate thereof which has
"OFFITBANK" in its name, of, but shall be in addition to, any other rights or
remedies to which the Investment Adviser and any such affiliate may be entitled
in law or equity by reason of any breach of this agreement by the Company, and
the failure or omission of the Investment Adviser to request a change of the
Company's or the Funds' name or a cessation of the use of the name of
"OFFITBANK" as described in this paragraph 10 shall not under any circumstances
be deemed a waiver of the right to require such change or cessation at any time
thereafter for the same or any subsequent breach.
<PAGE>
-5-
11. Except to the extent necessary to perform the Investment Adviser's
obligations under this agreement, nothing herein shall be deemed to limit or
restrict the right of the Investment Adviser, or any affiliate of the Investment
Adviser, or any employee of the Investment Adviser, to engage in any other
business or to devote time and attention to the management or other aspects of
any other business, whether of a similar or dissimilar nature, or to render
services of any kind to any other corporation, firm, individual or association.
12. This agreement shall be governed by the laws of the State of Maryland.
If the foregoing correctly sets forth the agreement between the Company and
the Investment Adviser, please so indicate by signing and returning to the
Company the enclosed copy hereof.
Very truly yours,
THE OFFITBANK INVESTMENT FUND, INC.
By:
-----------------------------------
ACCEPTED:
OFFITBANK
By:
-------------------------
<PAGE>
DISTRIBUTION AGREEMENT
AGREEMENT made this 1st day of October, 1996, between THE OFFITBANK
INVESTMENT FUND, INC. (the "Company"), a Maryland corporation, and OFFIT FUNDS
DISTRIBUTOR, INC. ("Distributor"), a Delaware corporation.
WHEREAS, the Company is an open-end management investment company,
organized as a Maryland corporation and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, it is intended that Distributor act as the distributor of the
units of beneficial interest ("Shares") of each of the investment portfolios of
the Company (such portfolios being referred to individually as a "Fund" and
collectively as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES AS DISTRIBUTOR; CONVERSION TO THE SERVICES.
1.1 Distributor (i) will act as agent for the distribution of the
Shares covered by the registration statement and prospectus of the Company then
in effect under the Securities Act of 1933, as amended (the "Securities Act")
and (ii) will perform such additional services as are provided in this Section 1
(collectively, the "Services"). In connection therewith, the Company agrees to
convert to the Distributor's data processing systems and software (the "BISYS
System"). The Company shall cooperate with the Distributor to provide the
Distributor with all necessary information and assistance required to
successfully convert to the BISYS System. The Distributor shall provide the
Company with a schedule relating to such conversion and the parties agree that
the conversion may progress in stages. The date upon which all Services shall
have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." The Distributor hereby accepts such engagement and agrees to
perform the Services commencing, with respect to each individual Service, on the
date that the conversion of such Service to the BISYS System has been completed.
The Distributor shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted. As used
in this Agreement, the term "registration statement" shall mean Parts A (the
prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term
"prospectus" shall mean each form of prospectus and Statement of Additional
Information used by the Funds for delivery to shareholders and prospective
shareholders after the effective dates of the above-referenced registration
statements, together with any amendments and supplements thereto.
<PAGE>
1.2 Distributor agrees to use appropriate efforts to solicit orders
for the sale of the Shares and will undertake such advertising and promotion as
it believes reasonable in connection with such solicitation. The Company
understands that Distributor is now and may in the future be the distributor of
the shares of several investment companies or series (together, "Investment
Companies") including Companies having investment objectives similar to those of
the Company. The Company further understands that investors and potential
investors in the Company may invest in shares of such other Investment
Companies. The Company agrees that Distributor's duties to such Investment
Companies shall not be deemed in conflict with its duties to the Company under
this paragraph 1.2.
Distributor shall, at its own expense, finance appropriate
activities which it deems reasonable, which are primarily intended to result in
the sale of the Shares, including, but not limited to, advertising, compensation
of underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current Shareholders, and the printing and mailing of
sales literature.
1.3 In its capacity as distributor of the Shares, all activities of
Distributor and its partners, agents, and employees shall comply with all
applicable laws, rules and regulations, including, without limitation, the 1940
Act, all rules and regulations promulgated by the Commission thereunder and all
rules and regulations adopted by any securities association registered under the
Securities Exchange Act of 1934.
1.4 Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Company.
1.5 Distributor will transmit any orders received by it for purchase
or redemption of the Shares to the transfer agent and custodian for the Funds.
1.6 Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Company's officers may decline to accept any orders for, or make any
sales of, the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.7 Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others.
1.8 The Company agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
the Shares for sale in such states as Distributor may designate.
1.9 The Company shall furnish from time to time, for use in
connection with the sale of the Shares, such information with respect to the
Funds and the Shares as Distributor may reasonably request; and the Company
warrants that the statements contained in any such information
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shall fairly show or represent what they purport to show or represent. The
Company shall also furnish Distributor upon request with: (a) unaudited
semi-annual statements of the Funds' books and accounts prepared by the Company,
(b) a monthly itemized list of the securities in the Funds, (c) monthly balance
sheets as soon as practicable after the end of each month, and (d) from time to
time such additional information regarding the financial condition of the Funds
as Distributor may reasonably request.
1.10 The Company represents to Distributor that, with respect to the
Shares, all registration statements and prospectuses filed by the Company with
the Commission under the Securities Act have been carefully prepared in
conformity with requirements of said Act and rules and regulations of the
Commission thereunder. The registration statement and prospectus contain all
statements required to be stated therein in conformity with said Act and the
rules and regulations of said Commission and all statements of fact contained in
any such registration statement and prospectus are true and correct.
Furthermore, neither any registration statement nor any prospectus includes an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
to a purchaser of the Shares. The Company may, but shall not be obligated to,
propose from time to time such amendment or amendments to any registration
statement and such supplement or supplements to any prospectus as, in the light
of future developments, may, in the opinion of the Company's counsel, be
necessary or advisable. If the Company's counsel shall determine that such
amendment/amendments or supplement/supplements is/are necessary or advisable and
the Company shall not propose such amendment or amendments and/or supplement or
supplements within fifteen days after receipt by the Company of a written
request from Distributor to do so, Distributor may, at its option, terminate
this Agreement. The Company shall not file any amendment to any registration
statement or supplement to any prospectus without giving Distributor reasonable
notice thereof in advance; provided, however, that nothing contained in this
Agreement shall in any way limit the Company's right to file at any time such
amendments to any registration statement and/or supplements to any prospectus,
of whatever character, as the Company may deem advisable, such right being in
all respects absolute and unconditional.
1.11 The Company authorizes Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of the Shares. The Company agrees to indemnify, defend and hold Distributor,
its several partners and employees, and any person who controls Distributor
within the meaning of Section 15 of the Securities Act free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which Distributor, its partners
and employees, or any such controlling person, may incur under the Securities
Act or under common law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact contained in any
registration statement or any prospectus or arising out of or based upon any
omission, or alleged omission, to state a material fact required to be stated in
either any registration statement or any prospectus or necessary to make the
statements in either thereof not misleading; provided, however, that the
Company's agreement to indemnify Distributor, its partners or employees, and any
such controlling person shall not be
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<PAGE>
deemed to cover any claims, demands, liabilities or expenses arising out of any
statements or representations as are contained in any prospectus and in such
financial and other statements as are furnished in writing to the Company by
Distributor and used in the answers to the registration statement or in the
corresponding statements made in the prospectus, or arising out of or based upon
any omission or alleged omission to state a material fact in connection with the
giving of such information required to be stated in such answers or necessary to
make the answers not misleading; and further provided that the Company's
agreement to indemnify Distributor and the Company's representations and
warranties hereinbefore set forth in paragraph 1.10 shall not be deemed to cover
any liability to the Company or its Shareholders to which Distributor would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of Distributor's
reckless disregard of its obligations and duties under this Agreement. The
Company's agreement to indemnify Distributor, its partners and employees and any
such controlling person, as aforesaid, is expressly conditioned upon the Company
being notified of any action brought against Distributor, its partners or
employees, or any such controlling person, such notification to be given by
letter or by telegram addressed to the Company at its principal office in
Columbus, Ohio and sent to the Company by the person against whom such action is
brought, within 10 days after the summons or other first legal process shall
have been served. The failure to so notify the Company of any such action shall
not relieve the Company from any liability which the Company may have to the
person against whom such action is brought by reason of any such untrue, or
allegedly untrue, statement or omission, or alleged omission, otherwise than on
account of the Company's indemnity agreement contained in this paragraph 1.11.
The Company will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but, in such case, such defense
shall be conducted by counsel of good standing chosen by the Company and
approved by Distributor, which approval shall not be unreasonably withheld. In
the event the Company elects to assume the defense of any such suit and retain
counsel of good standing approved by Distributor, the defendant or defendants in
such suit shall bear the fees and expenses of any additional counsel retained by
any of them; but in case the Company does not elect to assume the defense of any
such suit, or in case Distributor reasonably does not approve of counsel chosen
by the Company, the Company will reimburse Distributor, its partners and
employees, or the controlling person or persons named as defendant or defendants
in such suit, for the fees and expenses of any counsel retained by Distributor
or them. The Company's indemnification agreement contained in this paragraph
1.11 and the Company's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of Distributor, its partners and employees, or any
controlling person, and shall survive the delivery of any Shares.
This Agreement of indemnity will inure exclusively to
Distributor's benefit, to the benefit of its several partners and employees, and
their respective estates, and to the benefit of the controlling persons and
their successors. The Company agrees promptly to notify Distributor of the
commencement of any litigation or proceedings against the Company or any of its
officers or Directors in connection with the issue and sale of any Shares.
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<PAGE>
1.12 Distributor agrees to indemnify, defend and hold the Company, its
several officers and Directors and any person who controls the Company within
the meaning of Section 15 of the Securities Act free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
costs of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which the Company, its officers
or Directors or any such controlling person, may incur under the Securities Act
or under common law or otherwise, but only to the extent that such liability or
expense incurred by the Company, its officers or Directors or such controlling
person resulting from such claims or demands, shall arise out of or be based
upon any untrue, or alleged untrue, statement of a material fact contained in
information furnished in writing by Distributor to the Company and used in the
answers to any of the items of the registration statement or in the
corresponding statements made in the prospectus, or shall arise out of or be
based upon any omission, or alleged omission, to state a material fact in
connection with such information furnished in writing by Distributor to the
Company required to be stated in such answers or necessary to make such
information not misleading. Distributor's agreement to indemnify the Company,
its officers and Directors, and any such controlling person, as aforesaid, is
expressly conditioned upon Distributor being notified of any action brought
against the Company, its officers or Directors, or any such controlling person,
such notification to be given by letter or telegram addressed to Distributor at
its principal office in Columbus, Ohio, and sent to Distributor by the person
against whom such action is brought, within 10 days after the summons or other
first legal process shall have been served. Distributor shall have the right of
first control of the defense of such action, with counsel of its own choosing,
satisfactory to the Company, if such action is based solely upon such alleged
misstatement or omission on Distributor's part, and in any other event the
Company, its officers or Directors or such controlling person shall each have
the right to participate in the defense or preparation of the defense of any
such action. The failure to so notify Distributor of any such action shall not
relieve Distributor from any liability which Distributor may have to the
Company, its officers or Directors, or to such controlling person by reason of
any such untrue or alleged untrue statement, or omission or alleged omission,
otherwise than on account of Distributor's indemnity agreement contained in this
paragraph 1.12.
1.13 No Shares shall be offered by either Distributor or the Company
under any of the provisions of this Agreement and no orders for the purchase or
sale of Shares hereunder shall be accepted by the Company if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act or if and so long as a current prospectus as required by Section
10(b)(2) of said Act is not on file with the Commission; provided, however, that
nothing contained in this paragraph 1.13 shall in any way restrict or have an
application to or bearing upon the Company's obligation to repurchase Shares
from any Shareholder in accordance with the provisions of the Company's
prospectus, Articles of Incorporation, or Bylaws.
1.14 The Company agrees to advise Distributor as soon as reasonably
practical by a notice in writing delivered to Distributor or its counsel:
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<PAGE>
(a) of any request by the Commission for amendments to the
registration statement or prospectus then in effect or for
additional information;
(b) in the event of the issuance by the Commission of any stop
order suspending the effectiveness of the registration
statement or prospectus then in effect or the initiation by
service of process on the Company of any proceeding for that
purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration
statement or prospectus then in effect or which requires the
making of a change in such registration statement or
prospectus in order to make the statements therein not
misleading; and
(d) of all action of the Commission with respect to any
amendment to any registration statement or prospectus which
may from time to time be filed with the Commission.
For purposes of this section, informal requests by or acts of the
Staff of the Commission shall not be deemed actions of or requests by the
Commission.
1.15 Distributor agrees on behalf of itself and its partners and
employees to treat confidentially and as proprietary information of the Company
all records and other information relative to the Company and its prior, present
or potential Shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except, after prior notification to and approval in writing by the Company,
which approval shall not be unreasonably withheld and may not be withheld where
Distributor may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Company.
1.16 This Agreement shall be governed by the laws of the State of New
York.
2. FEE.
Distributor shall receive from the Funds identified in the
Distribution and Shareholder Service Plan attached as Schedule A hereto (the
"Distribution Plan Funds") a distribution fee at the rate and upon the terms and
conditions set forth in such Plan. The distribution fee shall be accrued daily
and shall be paid on the first business day of each month, or at such time(s) as
the Distributor shall reasonably request.
6
<PAGE>
3. SALE AND PAYMENT.
Shares of a Fund may be subject to a sales load and may be subject to
the imposition of a distribution fee pursuant to the Distribution and
Shareholder Service Plan referred to above. To the extent that Shares of a Fund
are sold at an offering price which includes a sales load or at net asset value
subject to a contingent deferred sales load with respect to certain redemptions
(either within a single class of Shares or pursuant to two or more classes of
Shares), such Shares shall hereinafter be referred to collectively as "Load
Shares" (in the case of Shares that are sold with a front-end sales load or
Shares that are sold subject to a contingent deferred sales load), "Front-End
Load Shares" or "CDSL Shares" and individually as a "Load Share," a "Front-End
Load Share" or a "CDSL Share." A Fund that contains Front-End Load Shares shall
hereinafter be referred to collectively as "Load Funds" or "Front-End Load
Funds" and individually as a "Load Fund" or a "Front-end Load Fund." A Fund
that contains CDSL Shares shall hereinafter be referred to collectively as "Load
Funds" or "CDSL Funds" and individually as a "Load Fund" or a "CDSL Fund."
Under this Agreement, the following provisions shall apply with respect to the
sale of, and payment for, Load Shares.
3.1 Distributor shall have the right to purchase Load Shares at their
net asset value and to sell such Load Shares to the public against orders
therefor at the applicable public offering price, as defined in Section 4
hereof. Distributor shall also have the right to sell Load Shares to dealers
against orders therefor at the public offering price less a concession
determined by Distributor, which concession shall not exceed the amount of the
sales charge or underwriting discount, if any, referred to in Section 4 below.
3.2 Prior to the time of delivery of any Load Shares by a Load Fund
to, or on the order of, Distributor, Distributor shall pay or cause to be paid
to the Load Fund or to its order an amount in Boston or New York clearing house
funds equal to the applicable net asset value of such Shares. Distributor may
retain so much of any sales charge or underwriting discount as is not allowed by
Distributor as a concession to dealers.
4. PUBLIC OFFERING PRICE.
The public offering price of a Load Share shall be the net asset value
of such Load Share, plus any applicable sales charge, all as set forth in the
current prospectus of the Load Fund. The net asset value of Shares shall be
determined in accordance with the provisions of the Articles of Incorporation
and Bylaws of the Company and the then-current prospectus of the Load Fund.
5. ISSUANCE OF SHARES.
The Company reserves the right to issue, transfer or sell Load Shares
at net asset value (a) in connection with the merger or consolidation of the
Company or the Load Fund(s) with any other investment company or the acquisition
by the Company or the Load Fund(s) of all or substantially all of the assets or
of the outstanding Shares of any other investment company; (b) in
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connection with a pro rata distribution directly to the holders of Shares in the
nature of a stock dividend or split; (c) upon the exercise of subscription
rights granted to the holders of Shares on a pro rata basis; (d) in connection
with the issuance of Load Shares pursuant to any exchange and reinvestment
privileges described in any then-current prospectus of the Load Fund; and (e)
otherwise in accordance with any then-current prospectus of the Load Fund.
6. TERM, DURATION AND TERMINATION.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on the date this Agreement is executed by both parties and
ending on the date that is one year after the Conversion Date. Thereafter, if
not terminated, this Agreement shall continue with respect to a particular Fund
automatically for successive one-year terms, provided that such continuance is
specifically approved at least annually by (a) the vote of a majority of those
members of the Company's Board of Directors who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
for the purpose of voting on such approval, and (b) the vote of the Company's
Board of Directors or the vote of a majority of the outstanding voting
securities of such Fund. This Agreement is terminable without penalty, on not
less than sixty days' prior written notice, by the Company's Board of Directors,
by vote of a majority of the outstanding voting securities of the Company or by
the Distributor. This Agreement will also terminate automatically in the event
of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and assignment" shall have
the same meanings as ascribed to such terms in the 1940 Act.)
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first written
above.
THE OFFITBANK INVESTMENT OFFIT FUNDS DISTRIBUTOR, INC.
FUND, INC.
By: By:
------------------------------------ -------------------------------
Title: Title:
--------------------------------- ----------------------------
Date: Date:
---------------------------------- -----------------------------
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Dated: October 1, 1996
SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
BETWEEN
THE OFFITBANK INVESTMENT FUND, INC.
AND
OFFIT FUNDS DISTRIBUTOR, INC.
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
<PAGE>
Exhibit 9h
ADMINISTRATION AGREEMENT
THIS AGREEMENT is made as of this 1st day of October, 1996, by and between
THE OFFITBANK INVESTMENT FUND, INC., a Maryland corporation (the "Company"), and
BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a BISYS FUND SERVICES (the
"Administrator"), an Ohio limited partnership.
WHEREAS, the Company is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), consisting of several series of shares of common stock ("Shares"); and
WHEREAS, the Company desires the Administrator to provide, and the
Administrator is willing to provide, management and administrative services to
such series of the Company as the Company and the Administrator may agree on
("Portfolios") and as listed on Schedule A attached hereto and made a part of
this Agreement, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Company and the Administrator hereby agree as
follows:
ARTICLE 1. RETENTION OF THE ADMINISTRATOR; CONVERSION TO THE SERVICES.
The Company hereby engages the Administrator to act as the administrator of the
Portfolios and to furnish the Portfolios with the management and administrative
services as set forth in Article 2 below (collectively, the "Services"), and, in
connection therewith, the Company agrees to convert to the Administrator's data
processing systems and software (the "BISYS System") as necessary in order to
receive the Services. The Company shall cooperate with the Administrator to
provide the Administrator with all necessary information and assistance required
to successfully convert to the BISYS System. The Administrator shall provide
the Company with a schedule relating to such conversion and the parties agree
that the conversion may progress in stages. The date upon which all Services
shall have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." The Administrator hereby accepts such engagement and agrees
to perform the Services commencing, with respect to each individual Service, on
the date that the conversion of such Service to the BISYS System has been
completed. The Administrator shall determine in accordance with its normal
acceptance procedures when the applicable Service has been successfully
converted.
The Administrator shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Company in any way and shall
not be deemed an agent of the Company.
ARTICLE 2. ADMINISTRATIVE SERVICES. The Administrator shall perform or
supervise the performance by others of administrative services in connection
with the operations of the Portfolios, and, on behalf of the Company, will
investigate, assist in the selection of and conduct relations with
<PAGE>
custodians, depositories, accountants, legal counsel, underwriters, brokers and
dealers, corporate fiduciaries, insurers, banks and persons in any other
capacity deemed to be necessary or desirable for the Portfolios' operations.
The Administrator shall provide the Directors of the Company with such reports
regarding investment performance as they may reasonably request but shall have
no responsibility for supervising the performance by any investment adviser or
sub-adviser of its responsibilities.
The Administrator shall provide the Company with regulatory reporting, all
necessary office space, equipment, personnel, compensation and facilities
(including facilities for meetings of shareholders ("Shareholders") and
directors of the Company) for handling the affairs of the Portfolios and such
other services as the Administrator shall, from time to time, determine to be
necessary to perform its obligations under this Agreement. In addition, at the
request of the Board of Directors, the Administrator shall make reports to the
Company's Directors concerning the performance of its obligations hereunder.
Without limiting the generality of the foregoing, the Administrator shall:
(a) calculate contractual Company expenses and control all disbursements
for the Company, and as appropriate compute the Company's yields,
total return, expense ratios, portfolio turnover rate and, if
required, portfolio average dollar-weighted maturity;
(b) prepare and file with the SEC Post-Effective Amendments to the
Company's Registration Statement, Notices of Annual or Special
Meetings of Shareholders and Proxy materials relating to such
meetings; accumulate information for and, subject to the approval by
the Company's Treasurer, prepare reports to the Company's shareholders
of record and the SEC including, but not necessarily limited to, the
preparation and filing of (i) Semi-Annual Reports on Form N-SAR and
(ii) Notices pursuant to Rule 24f-2;
(c) prepare such reports, applications and documents (including reports
regarding the sale and redemption of Shares as may be required in
order to comply with Federal and state securities law) as may be
necessary or desirable to register the Company's Shares with state
securities authorities, monitor the sale of Company Shares for
compliance with state securities laws, and file with the appropriate
state securities authorities the registration statements and reports
for the Company and the Company's Shares and all amendments thereto,
as may be necessary or convenient to register and keep effective the
Company and the Company's Shares with state securities authorities to
enable the Company to make a continuous offering of its Shares;
(d) review and provide advice and counsel on all sales literature (E.G.,
advertisements, brochures and shareholder communications) with respect
to each of the Portfolios;
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(e) administer contracts on behalf of the Company with, among others, the
Company's investment adviser, distributor, custodian, transfer agent
and fund accountant;
(f) supervise the Company's transfer agent with respect to the payment of
dividends and other distributions to Shareholders;
(g) calculate performance data of the Portfolios for dissemination to
information services covering the investment company industry;
(h) coordinate and supervise the preparation and filing of the Company's
tax returns;
(i) examine and review the operations and performance of the various
organizations providing services to the Company or any Portfolio of
the Company, including, without limitation, the Company's investment
adviser, distributor, custodian, fund accountant, transfer agent,
outside legal counsel and independent public accountants, and at the
request of the Board of Directors, report to the Board on the
performance of organizations;
(j) assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and printing of the
Company's semi-annual and annual reports to Shareholders;
(k) assist with the design, development, and operation of the Portfolios,
including new classes, investment objectives, policies and structure;
(l) provide individuals reasonably acceptable to the Company's Board of
Directors to serve as officers of the Company, who will be responsible
for the management of certain of the Company's affairs as determined
by the Company's Board of Directors;
(m) advise the Company and its Board of Directors on matters concerning
the Company and its affairs;
(n) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the Company in
accordance with the requirements of Rules 17g-1 and 17d-1(d)(7) under
the 1940 Act as such bonds and policies are approved by the Company's
Board of Directors;
(o) monitor and advise the Company and its Portfolios on their regulated
investment company status under the Internal Revenue Code of 1986, as
amended;
(p) perform all administrative services and functions of the Company and
each Portfolio to the extent administrative services and functions are
not provided to the Company or such Portfolio pursuant to the
Company's or such Portfolio's investment advisory
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agreement, distribution agreement, custodian agreement, transfer agent
agreement and fund accounting agreement;
(q) furnish advice and recommendations with respect to other aspects of
the business and affairs of the Portfolios as the Company and the
Administrator shall determine desirable; and
(r) assist in monitoring and developing compliance procedures for each
Portfolio which will include, among other matters, procedures to
monitor compliance with each Portfolio's investment objective,
policies, restrictions, tax matters and applicable laws and
regulations;
(s) monitor the Company's arrangements with respect to services provided
by financial institutions which are, or wish to become, shareholder
servicing agents for the Company ("Shareholder Servicing Agents").
With respect to Shareholding Servicing Agents, the Administrator shall
specifically monitor and review the services rendered by the
Shareholder Servicing Agents to their customers, who are the
beneficial owners of Shares, pursuant to agreements between the
Company and such Shareholder Servicing Agents ("Shareholder Servicing
Agreements"), including, among other things, reviewing the
qualifications of financial institutions wishing to be Shareholder
Servicing Agents, assisting in the execution and delivery of
Shareholder Servicing Agreements, reporting to the Board of Directors
with respect to the amounts paid or payable by the Company from time
to time under the Shareholder Servicing Agreements and the nature of
the services provided by Shareholder Servicing Agents, and maintaining
appropriate records in connection with its monitoring duties; and
(t) provide legal advice and counsel to the Company with respect to
regulatory matters including: monitoring regulatory and legislative
developments which may affect the Company and assisting in the
strategic response to such developments, counseling and assisting the
Company in routine regulatory examinations or investigations of the
Company, and working closely with outside counsel to the Company in
response to any litigation or non-routine regulatory matters.
In performing its duties as administrator of the Company, the Administrator
(i) will act in accordance with the Articles of Incorporation, By-Laws and
prospectuses of the Company and with the instructions and directions of the
Board of Directors of the Company and will conform to and comply with the
requirements of the 1940 Act and all other applicable federal or state laws and
regulations and (ii) will consult with legal counsel to the Company, as
necessary and appropriate.
The Administrator shall perform such other services for the Company that
are mutually agreed upon by the parties from time to time. Such services may
include performing internal audit examinations; mailing the annual reports of
the Portfolios; preparing an annual list of Shareholders;
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<PAGE>
and mailing notices of Shareholders' meetings, proxies and proxy statements, for
all of which the Company will pay the Administrator's out-of-pocket expenses.
ARTICLE 3. ALLOCATION OF CHARGES AND EXPENSES.
(A) THE ADMINISTRATOR. The Administrator shall furnish at its own expense
the executive, supervisory and clerical personnel necessary to perform its
obligations under this Agreement. The Administrator shall also provide the
items which it is obligated to provide under this Agreement, and shall pay all
compensation, if any, of officers of the Company as well as all Directors of the
Company who are affiliated persons of the Administrator or any affiliated
corporation of the Administrator; provided, however, that unless otherwise
specifically provided, the Administrator shall not be obligated to pay the
compensation of any employee of the Company retained by the Directors of the
Company to perform services on behalf of the Company.
(B) THE COMPANY. The Company assumes and shall pay or cause to be paid
all other expenses of the Company not otherwise allocated herein, including,
without limitation, taxes; interest; fees (including fees paid to its Directors
who are not affiliated with the investment adviser or any of its affiliates);
fees payable to the Securities and Exchange 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 the custodian and transfer agent; insurance
premiums; auditing and legal expenses; costs of shareholders' reports and
Shareholders' meetings; any extraordinary expenses; and brokerage fees and
commissions, if any, in connection with the purchase or sale of portfolio
securities.
ARTICLE 4. COMPENSATION OF THE ADMINISTRATOR.
(A) ADMINISTRATION FEE. For the services to be rendered, the facilities
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Company shall pay to the Administrator compensation at an annual
rate specified in Schedule A attached hereto. Such compensation shall be
calculated and accrued daily, and paid to the Administrator monthly.
If the Conversion Date occurs subsequent to the first day of a month
or termination of this Agreement occurs before the last day of a month, the
Administrator's compensation for that part of the month in which this Agreement
is in effect shall be prorated in a manner consistent with the calculation of
the fees as set forth above. Payment of the Administrator's compensation for
the preceding month shall be made promptly.
(B) SURVIVAL OF COMPENSATION RIGHTS. All rights of compensation under
this Agreement for services performed as of the termination date shall survive
the termination of this Agreement.
ARTICLE 5. LIMITATION OF LIABILITY OF THE ADMINISTRATOR. The duties of
the Administrator shall be confined to those expressly set forth herein, and no
implied duties are assumed by or may be asserted against the Administrator
hereunder. The Administrator shall not be liable for any error
5
<PAGE>
of judgment or mistake of law or for any loss arising out of any act or omission
in carrying out its duties hereunder, except a loss resulting from willful
misfeasance, bad faith or negligence in the performance of its duties, or by
reason of reckless disregard of its obligations and duties hereunder, except as
may otherwise be provided under provisions of applicable law which cannot be
waived or modified hereby. (As used in this Article 5, the term "Administrator"
shall include partners, officers, employees and other agents of the
Administrator as well as the Administrator itself.)
So long as the Administrator acts in good faith and with due diligence and
without negligence or reckless disregard of its obligations hereunder, the
Company assumes full responsibility and shall indemnify the Administrator and
hold it harmless from and against any and all actions, suits and claims, whether
groundless or otherwise, and from and against any and all losses, damages,
costs, charges, reasonable counsel fees and disbursements, payments, expenses
and liabilities (including reasonable investigation expenses) arising directly
or indirectly out of the Administrator's actions taken or nonactions with
respect to the performance of services hereunder. The Administrator agrees to
indemnify and hold harmless the Company, its employees, agents, Directors,
officers and nominees from and against any and all actions, suits and claims,
whether groundless or otherwise, and from and against any and all judgements,
liabilities, losses, damages, costs, charges, reasonable counsel fees and other
expenses of every nature and character arising out of or in any way relating to
the Administrator's bad faith, willful misfeasance, negligence or reckless
disregard by it of its obligations and duties, with respect to the performance
of services under this Agreement. The indemnity and defense provisions set
forth herein shall indefinitely survive the termination of this Agreement.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case the indemnifying party may be asked to indemnify
or hold the other party harmless, the indemnifying party shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the indemnified party will use all reasonable
care to identify and notify the indemnifying party promptly concerning any
situation which presents or appears likely to present the probability of such a
claim for indemnification against the indemnifying party, but failure to do so
in good faith shall not affect the rights hereunder.
The indemnifying party shall be entitled to participate at its own expense
or, if it so elects, to assume the defense of any suit brought to enforce any
claims subject to this indemnity provision. If the indemnifying party elects to
assume the defense of any such claim, the defense shall be conducted by counsel
chosen by the indemnifying party and satisfactory to the other party, whose
approval shall not be unreasonably withheld. In the event that the indemnifying
party elects to assume the defense of any suit and retain counsel, the
indemnified party shall bear the fees and expenses of any additional counsel
retained by it. If the indemnifying party does not elect to assume the defense
of a suit, it will reimburse the other party for the reasonable fees and
expenses of any counsel retained by the other party.
6
<PAGE>
The Administrator may apply to the Company at any time for instructions and
may consult counsel for the Company or its own counsel and with accountants and
other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with such
instructions or with the opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. The Administrator will not be held to have
notice of any change of authority of any officers, employees or agents of the
Company until receipt of written notice thereof from the Company.
ARTICLE 6. ACTIVITIES OF THE ADMINISTRATOR. The services of the
Administrator rendered to the Company are not to be deemed to be exclusive. The
Administrator is free to render such services to others and to have other
businesses and interests. It is understood that directors, officers, employees
and Shareholders are or may be or become interested in the Administrator, as
officers, employees or otherwise and that partners, officers and employees of
the Administrator and its counsel are or may be or become similarly interested
in the Company, and that the Administrator may be or become interested in the
Company as a Shareholder or otherwise.
ARTICLE 7. DURATION OF THIS AGREEMENT. The Term of this Agreement shall
be as specified in Schedule A hereto.
ARTICLE 8. ASSIGNMENT. This Agreement shall not be assignable by either
party without the written consent of the other party; provided, however, that
the Administrator may, at its expense, subcontract with any entity or person
concerning the provision of the services contemplated hereunder. The
Administrator shall not, however, be relieved of any of its obligations under
this Agreement by the appointment of such subcontractor and provided further,
that the Administrator shall be responsible, to the extent provided in Article 5
hereof, for all acts of such subcontractor as if such acts were its own. This
Agreement shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
ARTICLE 9. AMENDMENTS. This Agreement may be amended by the parties
hereto only if such amendment is specifically approved (i) by the vote of a
majority of the Directors of the Company, and (ii) by the vote of a majority of
the Directors of the Company who are not parties to this Agreement or interested
persons of any such party, cast in person at a Board of Directors meeting called
for the purpose of voting on such approval.
For special cases, the parties hereto may amend such procedures set forth
herein as may be appropriate or practical under the circumstances, and the
Administrator may conclusively assume that any special procedure which has been
approved by the Company does not conflict with or violate any requirements of
its Articles of Incorporation or then current prospectuses, or any rule,
regulation or requirement of any regulatory body.
7
<PAGE>
ARTICLE 10. CERTAIN RECORDS. The Administrator shall maintain customary
records in connection with its duties as specified in this Agreement. Any
records required to be maintained and preserved pursuant to Rules 31a-1 and 31a-
2 under the 1940 Act which are prepared or maintained by the Administrator on
behalf of the Company shall be prepared and maintained at the expense of the
Administrator, but shall be the property of the Company and will be made
available to or surrendered promptly to the Company on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Company and follow the
Company's instructions as to permitting or refusing such inspection; provided
that the Administrator may exhibit such records to any person in any case where
it is advised by its counsel that it may be held liable for failure to do so,
unless (in cases involving potential exposure only to civil liability) the
Company has agreed to indemnify the Administrator against such liability.
ARTICLE 11. DEFINITIONS OF CERTAIN TERMS. The terms "interested person"
and "affiliated person," when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
ARTICLE 12. NOTICE. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice to the
other party at the following address: if to the Administrator, to it at 3435
Stelzer Road, Columbus, Ohio 43219; if to the Company, to it at ___________
____________________________________, or at such other address as such party
may from time to time specify in writing to the other party pursuant to this
Section.
ARTICLE 13. GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the State of New York and the applicable provisions
of the 1940 Act. To the extent that the applicable laws of the State of New
York, or any of the provisions herein, conflict with the applicable provisions
of the 1940 Act, the latter shall control.
ARTICLE 14. MULTIPLE ORIGINALS. This Agreement may be executed in two or
more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
THE OFFITBANK INVESTMENT
FUND, INC.
By:
---------------------------------------
Title:
---------------------------------------
BISYS FUND SERVICES LIMITED PARTNERSHIP
BY: BISYS FUND SERVICES, INC.
GENERAL PARTNER
By:
-----------------------------------------
Title:
--------------------------------------
9
<PAGE>
SCHEDULE A
TO THE ADMINISTRATION AGREEMENT
DATED AS OF OCTOBER 1, 1996
BETWEEN THE OFFITBANK INVESTMENT FUND, INC.
AND
BISYS FUND SERVICES LIMITED PARTNERSHIP
Portfolios: This Agreement shall apply to all Portfolios of the Company,
either now or hereafter created (collectively, the "Portfolios").
The current portfolios of __the Company are set forth below:
OFFITBANK High Yield Fund
OFFITBANK Emerging Markets Fund
OFFITBANK Latin America Total Return Fund
OFFITBANK New York Municipal Fund
Fees: Pursuant to Article 4, in consideration of services rendered and
expenses assumed pursuant to this Agreement, the Company will pay
the Administrator on the first business day of each month, or at
such time(s) as the Administrator shall request and the parties
hereto shall agree, a fee computed daily at the annual rate of:
Fifteen one-hundredths of one percent (.15%) of the
Company's average daily net assets.
The fee for the period from the day of the month upon which the
Conversion Date occurs until the end of that month shall be
prorated according to the proportion which such period bears to
the full monthly period. Upon any termination of this Agreement
before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period
bears to the full monthly period and shall be payable upon the
date of termination of this Agreement.
For purposes of determining the fees payable to the
Administrator, the value of the net assets of a particular
Portfolio shall be computed in the manner described in the
Company's Articles of Incorporation or in the Prospectus or
Statement of Additional Information respecting that Portfolio
as from time to time is in effect for the computation of the
value of such net assets in connection with the determination of
the liquidating value of the shares of such Portfolio.
The parties hereby confirm that the fees payable hereunder shall
be applied to each Portfolio as a whole, and not to separate
classes of shares within the Portfolios.
A-1
<PAGE>
Term: The initial term of this Agreement (the "Initial Term") shall be
for a period commencing on the date this Agreement is executed by
both parties and ending on the date that is one year after the
Conversion Date. Thereafter, unless otherwise terminated as
provided herein, this Agreement shall be renewed automatically
for successive one-year periods ("Rollover Periods"). This
Agreement may be terminated without penalty (i) by provision of
60 days advance written notice of nonrenewal to the other party
prior to the end of the Initial Term or the then-current Rollover
Period, (ii) by mutual agreement of the parties, (iii) for
"cause," as defined below, upon the provision of 60 days advance
written notice by the party alleging cause, or (iv) by provision
of 90 days advance written notice of termination during a
Rollover Period.
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence or reckless disregard on
the part of the party to be terminated with respect to its
obligations and duties set forth herein; (b) multiple negligent
acts on the part of the party to be terminated which in the
aggregate constitute a serious failure to perform satisfactorily
that party's obligations hereunder; (c) a material breach of this
Agreement that has not been remedied for 45 days following
receipt of written notice of such breach from the nonbreaching
party; or (d) a "service standard deficiency," as defined below.
For purposes of this Agreement, a service standard deficiency
shall be defined as (i) any pattern of substandard performance
over a 60-day period with respect to such service standards as
the parties shall agree upon relating to the duties and
obligations of the Administrator herein or to the duties and
obligations of the Administrator or an affiliate of the
Administrator pursuant to any other service agreement with the
Company ("Service Standards") or (ii) any "asset withdrawal," as
defined below, by a Shareholder which, in the aggregate, exceeds
$1 million, that can be reasonably attributed to a failure on the
part of the Administrator or an affiliate of the Administrator to
meet one or more Service Standards. For purposes of this
Agreement, "asset withdrawal" shall include any combination of
(i) a redemption of Company Shares and/or (ii) a withdrawal of
assets from any non-mutual fund account or other mutual fund
account held by a Company Shareholder that is advised by the
Company's investment adviser or an affiliate of such investment
adviser. A copy of the current Service Standards that have been
agreed upon by the parties is attached hereto and made a part
hereof.
Notwithstanding the foregoing, after such termination, for so
long as the Administrator, with the written consent of the
Company, in fact continues to perform any one or more of the
services contemplated by this Agreement or any schedule or
exhibit hereto, the provisions of this Agreement, including
without limitation the provisions dealing with indemnification,
shall continue in full force and effect. Compensation due the
Administrator and unpaid by the Company upon such
A-2
<PAGE>
termination shall be immediately due and payable upon and
notwithstanding such termination.
If, during the first six months of the Initial Term, for any
reason other than cause, as defined herein, the Administrator is
replaced as fund manager and administrator, or if a third party
is added to perform all or a part of the services provided by the
Administrator under this Agreement (excluding any
sub-administrator appointed by the Administrator as provided in
Article 7 hereof), then the Company shall make a one-time cash
payment, as liquidated damages, to the Administrator equal to the
balance due the Administrator for the remainder of such Initial
Term, assuming for purposes of calculation of the payment that
the asset level of the Company on the date the Administrator is
replaced, or a third party is added, will remain constant for
the balance of such term.
If, during the second six months of the Initial Term, for any
reason other than cause, as defined herein, the Administrator is
replaced as fund manager and administrator, or if a third party
is added to perform all or a part of the services provided by the
Administrator under this Agreement (excluding any
sub-administrator appointed by the Administrator as provided in
Article 7 hereof), then the Company shall make a one-time cash
payment, as liquidated damages to the Administrator equal to
one-half of the balance due the Administrator for the remainder
of such Initial Term, assuming for purposes of calculation of
the payment that the asset level of the Company on the date the
Administrator is replaced, or a third party is added, will remain
constant for the balance of such term.
A-3
<PAGE>
Exhibit 9i
TRANSFER AGENCY AGREEMENT
-------------------------
AGREEMENT made this 1st day of October, 1996, between THE OFFITBANK
INVESTMENT FUND, INC. (the "Company"), a Maryland corporation, and BISYS FUND
SERVICES, INC. ("BISYS"), a Delaware corporation.
WHEREAS, the Company desires that BISYS perform certain services for each
series of the Company (individually referred to herein as a "Fund" and
collectively as the "Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. RETENTION OF BISYS; CONVERSION TO THE SERVICES.
The Company hereby engages BISYS to act as the transfer agent for the
Funds to perform (i) the transfer agent services set forth in Schedule A hereto
(the "Initial Services"), (ii) such special services (the "Special Services")
incidental to the performance of such services as may be agreed to by the
parties from time to time (for such fees as the parties may agree as aforesaid)
and (iii) such additional services (collectively with the Initial Services and
the Special Services, the "Services"), as may be agreed to by the parties from
time to time and set forth in an amendment to said Schedule A (for such fees as
the parties may agree as aforesaid), and, in connection therewith, the Company
agrees to convert to BISYS' data processing systems and software (the "BISYS
System") as necessary in order to receive the Services. The Company shall
cooperate with BISYS to provide BISYS with all necessary information and
assistance required to successfully convert to the BISYS System. BISYS shall
provide the Company with a schedule relating to such conversion and the parties
agree that the conversion may progress in stages. The date upon which all
Initial Services shall have been converted to the BISYS System shall be referred
to herein as the "Conversion Date." BISYS hereby accepts such engagement and
agrees to perform the Services commencing, with respect to each individual
Service, on the date that the conversion of such Service to the BISYS System has
been completed. BISYS shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted.
BISYS may, in its discretion, appoint in writing other parties
qualified to perform transfer agency services reasonably acceptable to the
Company (individually, a "Sub-transfer Agent") to carry out some or all of its
responsibilities under this Agreement with respect to a Fund; provided, however,
that the Sub-transfer Agent shall be the agent of BISYS and not the agent of the
Company or such Fund, and that BISYS shall be fully responsible for the acts of
such Sub-transfer Agent and shall not be relieved of any of its responsibilities
hereunder by the appointment of such Sub-transfer Agent.
<PAGE>
2. FEES.
The Company shall pay BISYS for the services to be provided by BISYS
under this Agreement in accordance with, and in the manner set forth in,
Schedule B hereto. Fees for any additional services to be provided by BISYS
pursuant to an amendment to Schedule A hereto shall be subject to mutual
agreement at the time such amendment to Schedule A is proposed.
3. REIMBURSEMENT OF EXPENSES.
In addition to paying BISYS the fees described in Section 2 hereof,
the Company agrees to reimburse BISYS for BISYS' out-of-pocket expenses in
providing services hereunder, including without limitation, the following:
(a) All freight and other delivery and bonding charges incurred by
BISYS in delivering materials to and from the Company and in
delivering all materials to shareholders;
(b) All direct telephone, telephone transmission and telecopy or
other electronic transmission expenses incurred by BISYS in
communication with the Company, the Company's investment adviser
or custodian, dealers, shareholders or others as required for
BISYS to perform the services to be provided hereunder;
(c) Costs of postage, couriers, stock computer paper, statements,
labels, envelopes, checks, reports, letters, tax forms, proxies,
notices or other form of printed material which shall be required
by BISYS for the performance of the services to be provided
hereunder;
(d) The cost of microfilm or microfiche of records or other
materials; and
(e) Any expenses BISYS shall incur at the written direction of an
officer of the Company thereunto duly authorized.
4. EFFECTIVE DATE.
This Agreement shall become effective as of the date first written
above (the "Effective Date").
5. TERM.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on the date this Agreement is executed by both parties and
ending on the date that is one year after the Conversion Date. Thereafter,
unless otherwise terminated as provided herein, this Agreement shall be renewed
automatically for successive one-year periods ("Rollover Periods").
2
<PAGE>
This Agreement may be terminated without penalty (i) by provision of 60 days
advance written notice of nonrenewal to the other party prior to the end of the
Initial Term or the then-current Rollover Period, (ii) by mutual agreement of
the parties, (iii) for "cause," as defined below, upon the provision of 60 days
advance written notice by the party alleging cause, or (iv) by provision of 90
days advance written notice of termination during a Rollover Period.
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence or reckless disregard on the part of
the party to be terminated with respect to its obligations and duties set forth
herein; (b) multiple negligent acts on the part of the party to be terminated
which in the aggregate constitute a serious failure to perform satisfactorily
that party's obligations hereunder; (c) a material breach of this Agreement that
has not been remedied for 45 days following receipt of written notice of such
breach from the nonbreaching party; or (d) a "service standard deficiency," as
defined below.
For purposes of this Agreement, a service standard deficiency shall be
defined as (i) any pattern of substandard performance over a 60-day period with
respect to such service standards as the parties shall agree upon relating to
the duties and obligations of BISYS herein or to the duties and obligations of
BISYS or an affiliate of BISYS pursuant to any other service agreement with the
Company ("Service Standards") or (ii) any "asset withdrawal," as defined below,
by a Shareholder which, in the aggregate, exceeds $1 million, that can be
reasonably attributed to a failure on the part of BISYS or an affiliate of BISYS
to meet one or more Service Standards. For purposes of this Agreement, "asset
withdrawal" shall include any combination of (i) a redemption of Company Shares
and/or (ii) a withdrawal of assets from any non-mutual fund account or other
mutual fund account held by a Company Shareholder that is advised by the
Company's investment adviser or an affiliate of such investment adviser. A copy
of the current Service Standards that have been agreed upon by the parties is
attached hereto and made a part hereof.
Notwithstanding the foregoing, after such termination, for so long as
BISYS, with the written consent of the Company, in fact continues to perform any
one or more of the services contemplated by this Agreement or any schedule or
exhibit hereto, the provisions of this Agreement, including without limitation
the provisions dealing with indemnification, shall continue in full force and
effect. Compensation due BISYS and unpaid by the Company upon such termination
shall be immediately due and payable upon and notwithstanding such termination.
If, during the first six months of the Initial Term, for any reason
other than cause, as defined herein, BISYS is replaced as transfer agent, or if
a third party is added to perform all or a part of the services provided by
BISYS under this Agreement (excluding any sub-transfer agent appointed by BISYS
as provided in Section 1 hereof), then the Company shall make a one-time cash
payment, as liquidated damages, to BISYS equal to the balance due BISYS for the
remainder of such Initial Term, assuming for purposes of calculation of the
payment that the asset level of the Company on the date BISYS is replaced, or a
third party is added, will remain constant for the balance of such term.
3
<PAGE>
If, during the second six months of the Initial Term, for any reason
other than cause, as defined herein, BISYS is replaced as transfer agent, or if
a third party is added to perform all or a part of the services provided by
BISYS under this Agreement (excluding any sub-transfer agent appointed by BISYS
as provided in Section 1 hereof), then the Company shall make a one-time cash
payment, as liquidated damages to BISYS equal to one-half of the balance due
BISYS for the remainder of such Initial Term, assuming for purposes of
calculation of the payment that the asset level of the Company on the date BISYS
is replaced, or a third party is added, will remain constant for the balance of
such term.
6. UNCONTROLLABLE EVENTS.
BISYS assumes no responsibility hereunder, and shall not be liable for
any damage, loss of data, delay or any other loss whatsoever caused by events
beyond its reasonable control.
7. LEGAL ADVICE.
BISYS shall notify the Company at any time BISYS believes that it is
in need of the advice of counsel (other than counsel in the regular employ of
BISYS or any affiliated companies) with regard to BISYS' responsibilities and
duties pursuant to this Agreement; and after so notifying the Company, BISYS, at
its discretion, shall be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Company or
Funds unless relating to a matter involving BISYS' willful misfeasance, bad
faith, gross negligence or reckless disregard with respect to BISYS'
responsibilities and duties hereunder and BISYS shall in no event be liable to
the Company or any Fund or any shareholder or beneficial owner of the Company
for any action reasonably taken pursuant to such advice.
8. INSTRUCTIONS.
Whenever BISYS is requested or authorized to take action hereunder
pursuant to instructions from a shareholder, or a properly authorized agent of a
shareholder ("shareholder's agent"), concerning an account in a Fund, BISYS
shall be entitled to rely upon any certificate, letter or other instrument or
communication, believed by BISYS to be genuine and to have been properly made,
signed or authorized by an officer or other authorized agent of the Company or
by the shareholder or shareholder's agent, as the case may be, and shall be
entitled to receive as conclusive proof of any fact or matter required to be
ascertained by it hereunder a certificate signed by an officer of the Company or
any other person authorized by the Company's Board of Directors or by the
shareholder or shareholder's agent, as the case may be.
As to the services to be provided hereunder, BISYS may rely
conclusively upon the terms of the Prospectuses and Statement of Additional
Information of the Company relating to the Funds to the extent that such
services are described therein unless BISYS receives written instructions to the
contrary in a timely manner from the Company.
4
<PAGE>
9. STANDARD OF CARE; RELIANCE ON RECORDS AND INSTRUCTIONS;
INDEMNIFICATION.
BISYS shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Company
for any action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. The Company agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or nonactions with respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information, records, instructions or requests given or
made to BISYS by the Company, the investment adviser and on any records provided
by any fund accountant or custodian thereof; provided that this indemnification
shall not apply to actions or omissions of BISYS in cases of its own bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties; and further provided that prior to confessing any claim
against it which may be the subject of this indemnification, BISYS shall give
the Company written notice of and reasonable opportunity to defend against said
claim in its own name or in the name of BISYS.
BISYS agrees to indemnify and hold harmless the Company, its
employees, agents, Directors, officers and nominees from and against any and all
actions, suits and claims, whether groundless of otherwise, and from and against
any and all judgements, liabilities, losses, damages, costs, charges, reasonable
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' bad faith, willful misfeasance, negligence or
reckless disregard by it of its obligations and duties, with respect to the
performance of services under this Agreement provided, that, prior to confessing
any claim against it which may be the subject of this indemnification, the
Company shall give BISYS written notice of and a reasonable opportunity to
defend against said claim in its own name or in the name of the Company.
10. RECORD RETENTION AND CONFIDENTIALITY.
BISYS shall keep and maintain on behalf of the Company all books and
records which the Company or BISYS is, or may be, required to keep and maintain
pursuant to any applicable statutes, rules and regulations, including without
limitation Rules 31a-1 and 31a-2 under the Investment Company Act of 1940, as
amended (the "1940 Act"), relating to the maintenance of books and records in
connection with the services to be provided hereunder. BISYS further agrees
that all such books and records shall be the property of the Company and to make
such books and records available for inspection by the Company or by the
Securities and Exchange Commission (the "Commission") at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Company and its shareholders, except when requested to divulge
such information by duly-constituted authorities or court process, or requested
by a shareholder or shareholder's agent with respect to information concerning
an account as to which such shareholder
5
<PAGE>
has either a legal or beneficial interest or when requested by the Company, the
shareholder, or shareholder's agent, or the dealer of record as to such account.
11. REPORTS.
BISYS will furnish to the Company and to its properly-authorized
auditors, investment advisers, examiners, distributors, dealers, underwriters,
salesmen, insurance companies and others designated by the Company in writing,
such reports at such times as are prescribed in Schedule C attached hereto, or
as subsequently agreed upon by the parties pursuant to an amendment to
Schedule C.
12. RIGHTS OF OWNERSHIP.
All computer programs and procedures developed to perform services
required to be provided by BISYS under this Agreement are the property of BISYS.
All records and other data except such computer programs and procedures are the
exclusive property of the Company and all such other records and data will be
furnished to the Company in appropriate form as soon as practicable after
termination of this Agreement for any reason.
13. RETURN OF RECORDS.
BISYS may at its option at any time, and shall promptly upon the
Company's demand, turn over to the Company and cease to retain BISYS' files,
records and documents created and maintained by BISYS pursuant to this Agreement
which are no longer needed by BISYS in the performance of its services or for
its legal protection. If not so turned over to the Company, such documents and
records will be retained by BISYS for six years from the year of creation. At
the end of such six-year period, such records and documents will be turned over
to the Company unless the Company authorizes in writing the destruction of such
records and documents.
14. BANK ACCOUNTS.
The Company and the Funds shall establish and maintain such bank
accounts with such bank or banks as are selected by the Company, as are
necessary in order that BISYS may perform the services required to be performed
hereunder. To the extent that the performance of such services shall require
BISYS directly to disburse amounts for payment of dividends, redemption proceeds
or other purposes, the Company and Funds shall provide such bank or banks with
all instructions and authorizations necessary for BISYS to effect such
disbursements.
15. REPRESENTATIONS OF THE COMPANY.
The Company certifies to BISYS that: (a) as of the close of business
on the Effective Date, each Fund which is in existence as of the Effective Date
has authorized unlimited shares, and (b) by virtue of its Articles of
Incorporation, shares of each Fund which are redeemed by the
6
<PAGE>
Company may be sold by the Company from its treasury, and (c) this Agreement has
been duly authorized by the Company and, when executed and delivered by the
Company, will constitute a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
16. REPRESENTATIONS OF BISYS.
BISYS represents and warrants that: (a) BISYS has been in, and shall
continue to be in, substantial compliance with all provisions of law, including
Section 17A(c) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), required in connection with the performance of its duties under this
Agreement; and (b) the various procedures and systems which BISYS has
implemented with regard to safekeeping from loss or damage attributable to fire,
theft or any other cause of the blank checks, records, and other data of the
Company and BISYS' records, data, equipment, facilities and other property used
in the performance of its obligations hereunder are adequate and that it will
make such changes therein from time to time as are required for the secure
performance of its obligations hereunder.
17. INSURANCE.
BISYS shall notify the Company should its insurance coverage with
respect to professional liability or errors and omissions coverage be canceled
or reduced. Such notification shall include the date of change and the reasons
therefor. BISYS shall notify the Company of any material claims against it with
respect to services performed under this Agreement, whether or not they may be
covered by insurance, and shall notify the Company from time to time as may be
appropriate of the total outstanding claims made by BISYS under its insurance
coverage.
18. INFORMATION TO BE FURNISHED BY THE COMPANY AND FUNDS.
The Company has furnished to BISYS the following:
(a) Copies of the Articles of Incorporation of the Company and of any
amendments thereto, certified by the proper official of the state
in which such Declaration has been filed.
(b) Copies of the following documents:
1. The Company's By-Laws and any amendments thereto.
2. Certified copies of resolutions of the Board of Directors
covering the following matters:
7
<PAGE>
A. Approval of this Agreement and authorization of a
specified officer of the Company to execute and deliver
this Agreement and authorization for specified officers
of the Company to instruct BISYS hereunder; and
B. Authorization of BISYS to act as Transfer Agent for the
Company on behalf of the Funds.
(c) A list of all officers of the Company, together with specimen
signatures of those officers, who are authorized to instruct
BISYS in all matters.
(d) Two copies of the following (if such documents are employed by
the Company):
1. Prospectuses and Statement of Additional Information;
2. Distribution Agreement; and
3. All other forms commonly used by the Company or its
Distributor with regard to their relationships and
transactions with shareholders of the Funds.
(e) A certificate as to shares of beneficial interest of the Company
authorized, issued, and outstanding as of the Effective Date of
BISYS' appointment as Transfer Agent (or as of the date on which
BISYS' services are commenced, whichever is the later date) and
as to receipt of full consideration by the Company for all shares
outstanding, such statement to be certified by the Treasurer of
the Company.
19. INFORMATION FURNISHED BY BISYS.
BISYS has furnished to the Company the following:
(a) BISYS' Articles of Incorporation.
(b) BISYS' By-Laws and any amendments thereto.
(c) Certified copies of actions of BISYS covering the following
matters:
1. Approval of this Agreement, and authorization of a specified
officer of BISYS to execute and deliver this Agreement;
2. Authorization of BISYS to act as Transfer Agent for the
Company.
8
<PAGE>
(d) A copy of the most recent independent accountants' report
relating to internal accounting control systems as filed with the
Commission pursuant to Rule 17Ad-13 under the Exchange Act.
20. AMENDMENTS TO DOCUMENTS.
The Company shall furnish BISYS written copies of any amendments to,
or changes in, any of the items referred to in Section 18 hereof forthwith upon
such amendments or changes becoming effective. In addition, the Company agrees
that no amendments will be made to the Prospectuses or Statement of Additional
Information of the Company which might have the effect of changing the
procedures employed by BISYS in providing the services agreed to hereunder or
which amendment might affect the duties of BISYS hereunder unless the Company
first obtains BISYS' approval of such amendments or changes.
21. RELIANCE ON AMENDMENTS.
BISYS may rely on any amendments to or changes in any of the documents
and other items to be provided by the Company pursuant to Sections 18 and 20 of
this Agreement and the Company hereby indemnifies and holds harmless BISYS from
and against any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and other expenses of every nature
and character which may result from actions or omissions on the part of BISYS in
reasonable reliance upon such amendments and/or changes. Although BISYS is
authorized to rely on the above-mentioned amendments to and changes in the
documents and other items to be provided pursuant to Sections 18 and 20 hereof,
BISYS shall be under no duty to comply with or take any action as a result of
any of such amendments or changes unless the Company first obtains BISYS'
written consent to and approval of such amendments or changes.
22. COMPLIANCE WITH LAW.
Except for the obligations of BISYS set forth in Section 10 hereof,
the Company assumes full responsibility for the preparation, contents, and
distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act, and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS shall have no obligation to take
cognizance of any laws relating to the sale of the Company's shares. The
Company represents and warrants that no shares of the Company will be offered to
the public until the Company's registration statement under the 1933 Act and the
1940 Act has been declared or becomes effective.
23. NOTICES.
Any notice provided hereunder shall be sufficiently given when sent by
registered or certified mail to the party required to be served with such notice
at the following address: if to the Company, to it at _________________________;
if to BISYS, to it at 3435 Stelzer
9
<PAGE>
Road, Columbus, Ohio 43219, or at such other address as such party may from time
to time specify in writing to the other party pursuant to this Section.
24. HEADINGS.
Paragraph headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
25. ASSIGNMENT.
This Agreement and the rights and duties hereunder shall not be
assignable by either of the parties hereto except by the specific written
consent of the other party. This Section 25 shall not limit or in any way
affect BISYS' right to appoint a Sub-transfer Agent pursuant to Section 1
hereof. This Agreement shall be binding upon, and shall inure to the benefit
of, the parties hereto and their respective successors and permitted assigns.
26. GOVERNING LAW.
This Agreement shall be governed by and provisions shall be construed
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
THE OFFITBANK INVESTMENT
FUND, INC.
By:
------------------------------------------
Title:
---------------------------------------
BISYS FUND SERVICES, INC.
By:
------------------------------------------
Title:
---------------------------------------
10
<PAGE>
Dated: October 1, 1996
SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE OFFITBANK INVESTMENT FUND, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENCY SERVICES
------------------------
1. SHAREHOLDER TRANSACTIONS
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend option,
taxpayer identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10 under the Securities
Exchange Act of 1934, as amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new shares,
through dividend reimbursement.
2. SHAREHOLDER INFORMATION SERVICES
a. Make information available to shareholder servicing unit and other
remote access units regarding trade date, share price, current
holdings, yields, and dividend information.
b. Produce detailed history of transactions through duplicate or special
order statements upon request.
c. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements or marketing material to current
shareholders.
A-1
<PAGE>
3. COMPLIANCE REPORTING
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers and the States in which the
Fund is registered.
b. Prepare and distribute appropriate Internal Revenue Service forms for
corresponding Fund and shareholder income and capital gains.
c. Issue tax withholding reports to the Internal Revenue Service.
4. DEALER/LOAD PROCESSING (IF APPLICABLE)
a. Provide reports for tracking rights of accumulation and purchases made
under a Letter of Intent.
b. Account for separation of shareholder investments from transaction
sale charges for purchase of Fund shares.
c. Calculate fees due under 12b-1 plans for distribution and marketing
expenses.
d. Track sales and commission statistics by dealer and provide for
payment of commissions on direct shareholder purchases in a load Fund.
5. SHAREHOLDER ACCOUNT MAINTENANCE
a. Maintain all shareholder records for each account in the Company.
b. Issue customer statements on scheduled cycle, providing duplicate
second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
A-2
<PAGE>
SCHEDULE B
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE OFFITBANK INVESTMENT FUND, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENT FEES
-------------------
Effective as of the Conversion Date, the Transfer Agent shall receive an account
maintenance fee of $15.00 per year for each account which is in existence at any
time during the month for which payment is made, such fee to be paid in equal
monthly installments. The Transfer Agent shall be entitled to this account
maintenance fee on all accounts maintained in its records during the year,
including those accounts which have a zero balance during any portion of the
year.
ADDITIONAL SERVICES:
Additional services such as IRA processing, development of interface
capabilities, servicing of 403(b) and 408(c) accounts, management of cash sweeps
between DDAs and mutual fund accounts and coordination of the printing and
distribution of prospectuses, annual reports and semi-annual reports are subject
to additional fees which will be quoted upon request. Programming costs or
database management fees for special reports or specialized processing will be
quoted upon request.
OUT-OF-POCKET EXPENSES:
BISYS shall be entitled to be reimbursed for all reasonable out-of-pocket
expenses including, but not limited to, the expenses set forth in Section 3 of
the Transfer Agency Agreement to which this Schedule B is attached.
B-1
<PAGE>
SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE OFFITBANK INVESTMENT FUND, INC.
AND
BISYS FUND SERVICES, INC.
REPORTS
-------
1. Daily Shareholder Activity Journal
2. Daily Fund Activity Summary Report
a. Beginning Balance
b. Dealer Transactions
c. Shareholder Transactions
d. Reinvested Dividends
e. Exchanges
f. Adjustments
g. Ending Balance
3. Daily Wire and Check Registers
4. Monthly Dealer Processing Reports
5. Monthly Dividend Reports
6. Sales Data Reports for Blue Sky Registration
7. Annual report by independent public accountants concerning BISYS'
shareholder system and internal accounting control systems to be filed with
the Securities and Exchange Commission pursuant to Rule 17Ad-13 of the
Securities Exchange Act of 1934, as amended.
C-1
<PAGE>
FUND ACCOUNTING AGREEMENT
AGREEMENT made this 1st day of October, 1996, between THE OFFITBANK
INVESTMENT FUND, INC. (the "Company"), a Maryland corporation, and BISYS FUND
SERVICES, INC. ("Fund Accountant"), a corporation organized under the laws of
the State of Delaware.
WHEREAS, the Company desires that Fund Accountant perform certain fund
accounting services for each investment portfolio of the Company, all as now or
hereafter may be established from time to time (individually referred to herein
as the "Fund" and collectively as the "Funds"); and
WHEREAS, Fund Accountant is willing to perform such services on the terms
and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES AS FUND ACCOUNTANT; CONVERSION TO SERVICES.
The Company hereby engages Fund Accountant to perform fund accounting
services as set forth in this Section 1 (collectively, the "Services"), and, in
connection therewith, the Company agrees to convert to Fund Accountant's data
processing systems and software (the "BISYS System") as necessary in order to
receive the Services. The Company shall cooperate with Fund Accountant to
provide Fund Accountant with all necessary information and assistance required
to successfully convert to the BISYS System. Fund Accountant shall provide the
Company with a schedule relating to such conversion and the parties agree that
the conversion may progress in stages. The date upon which all Services shall
have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." Fund Accountant hereby accepts such engagement and agrees to
perform the Services commencing, with respect to each individual Service, on the
date that the conversion of such Service to the BISYS System has been completed.
Fund Accountant shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted.
(a) MAINTENANCE OF BOOKS AND RECORDS. Fund Accountant will keep and
maintain the following books and records of each Fund pursuant to
Rule 31a-1 under the Investment Company Act of 1940 (the "Rule"):
(i) Journals containing an itemized daily record in detail of
all purchases and sales of securities, all receipts and
disbursements of cash and all other debits and credits,
as required by subsection (b)(1) of the Rule;
<PAGE>
(ii) General and auxiliary ledgers reflecting all asset,
liability, reserve, capital, income and expense accounts,
including interest accrued and interest received, as
required by subsection (b)(2)(I) of the Rule;
(iii) Separate ledger accounts required by subsection
(b)(2)(ii) and (iii) of the Rule; and
(iv) A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of
the Rule.
(b) PERFORMANCE OF DAILY ACCOUNTING SERVICES. In addition to the
maintenance of the books and records specified above, Fund
Accountant shall perform the following accounting services daily
for each Fund:
(i) Calculate the net asset value per share utilizing prices
obtained from the sources described in subsection
1(b)(ii) below;
(ii) Obtain security prices from independent pricing services,
or if such quotes are unavailable, then obtain such
prices from each Fund's investment adviser or its
designee, as approved by the Company's Board of
Directors;
(iii) Verify and reconcile with the Fund's custodian all daily
trade activity;
(iv) Compute, as appropriate, each Fund's net income and
capital gains, dividend payables, dividend factors, 7-day
yields, 7-day effective yields, 30-day yields, and
weighted average portfolio maturity;
(v) Review daily the net asset value calculation and dividend
factor (if any) for each Fund prior to release to
shareholders, check and confirm the net asset values and
dividend factors for reasonableness and deviations, and
distribute net asset values and yields to NASDAQ;
(vi) Report to the Company the daily market pricing of
securities in any money market Funds, with the comparison
to the amortized cost basis;
(vii) Determine unrealized appreciation and depreciation on
securities held in variable net asset value Funds;
(viii) Amortize premiums and accrete discounts on securities
purchased at a price other than face value, if requested
by the Company;
2
<PAGE>
(ix) Update fund accounting system to reflect rate changes, as
received from a Fund's investment adviser, on variable
interest rate instruments;
(x) Post Fund transactions to appropriate categories;
(xi) Accrue expenses of each Fund according to instructions
received from the Company's Administrator;
(xii) Determine the outstanding receivables and payables for
all (1) security trades, (2) Fund share transactions and
(3) income and expense accounts;
(xiii) Provide accounting reports in connection with the
Company's regular annual audit and other audits and
examinations by regulatory agencies; and
(xiv) Provide such periodic reports as the parties shall agree
upon, as set forth in a separate schedule.
(c) SPECIAL REPORTS AND SERVICES.
(i) Fund Accountant may provide additional special reports
upon the request of the Company or a Fund's investment
adviser, which may result in an additional charge, the
amount of which shall be agreed upon between the parties.
(ii) Fund Accountant may provide such other similar services
with respect to a Fund as may be reasonably requested by
the Company, which may result in an additional charge,
the amount of which shall be agreed upon between the
parties.
(d) ADDITIONAL ACCOUNTING SERVICES. Fund Accountant shall also
perform the following additional accounting services for each
Fund:
(i) Provide monthly a download (and hard copy thereof) of the
financial statements described below, upon request of the
Company. The download will include the following items:
Statement of Assets and Liabilities,
Statement of Operations,
Statement of Changes in Net Assets, and
Condensed Financial Information;
3
<PAGE>
(ii) Provide accounting information for the following:
(A) federal and state income tax returns and federal
excise tax returns;
(B) the Company's semi-annual reports with the
Securities and Exchange Commission ("SEC") on Form
N-SAR;
(C) the Company's annual, semi-annual and quarterly
(if any) shareholder reports;
(D) registration statements on Form N-1A and other
filings relating to the registration of Shares;
(E) the Administrator's monitoring of the Company's
status as a regulated investment company under
Subchapter M of the Internal Revenue Code, as
amended;
(F) annual audit by the Company's auditors; and
(G) examinations performed by the SEC.
2. SUBCONTRACTING.
Fund Accountant may, at its expense, subcontract with any entity or
person concerning the provision of the services contemplated hereunder;
provided, however, that Fund Accountant shall not be relieved of any of its
obligations under this Agreement by the appointment of such subcontractor and
provided further, that Fund Accountant shall be responsible, to the extent
provided in Section 6 hereof, for all acts of such subcontractor as if such acts
were its own.
3. COMPENSATION.
The Company shall pay Fund Accountant for the services to be provided
by Fund Accountant under this Agreement in accordance with, and in the manner
set forth in, Schedule A hereto, as such Schedule may be amended from time to
time.
4. REIMBURSEMENT OF EXPENSES.
In addition to paying Fund Accountant the fees described in Section
3 hereof, the Company agrees to reimburse Fund Accountant for its
out-of-pocket expenses in providing services hereunder, including without
limitation the following:
4
<PAGE>
(a) All direct telephone, telephone transmission and telecopy or other
electronic transmission expenses incurred by Fund Accountant in
communication with the Company, the Company's investment advisor or
custodian, dealers or others as required for Fund Accountant to
perform the services to be provided hereunder;
(b) The cost of obtaining security market quotes pursuant to Section
l(b)(ii) above;
(c) Any expenses Fund Accountant shall incur at the written direction of
an officer of the Company thereunto duly authorized; and
(d) Any additional expenses reasonably incurred by Fund Accountant, upon
receipt of prior approval from the Company, in the performance of its
duties and obligations under this Agreement.
5. EFFECTIVE DATE.
This Agreement shall become effective with respect to a Fund as of the
date first written above.
6. TERM.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on the date this Agreement is executed by both parties and
ending on the date that is one year after the Conversion Date. Thereafter,
unless otherwise terminated as provided herein, this Agreement shall be renewed
automatically for successive one-year periods ("Rollover Periods"). This
Agreement may be terminated without penalty (i) by provision of 60 days advance
written notice of nonrenewal to the other party prior to the end of the Initial
Term or the then-current Rollover Period, (ii) by mutual agreement of the
parties, (iii) for "cause," as defined below, upon the provision of 60 days
advance written notice by the party alleging cause, or (iv) by provision of 90
days advance written notice of termination during a Rollover Period.
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence or reckless disregard on the part of
the party to be terminated with respect to its obligations and duties set forth
herein; (b) multiple negligent acts on the part of the party to be terminated
which in the aggregate constitute a serious failure to perform satisfactorily
that party's obligations hereunder; (c) a material breach of this Agreement that
has not been remedied for 45 days following receipt of written notice of such
breach from the nonbreaching party; or (d) a "service standard deficiency," as
defined below.
For purposes of this Agreement, a service standard deficiency shall be
defined as (i) any pattern of substandard performance over a 60-day period with
respect to such service standards as the parties shall agree upon relating to
the duties and obligations of Fund Accountant herein or to the duties and
obligations of Fund Accountant or an affiliate of Fund Accountant
5
<PAGE>
pursuant to any other service agreement with the Company ("Service Standards")
or (ii) any "asset withdrawal," as defined below, by a Shareholder which, in the
aggregate, exceeds $1 million, that can be reasonably attributed to a failure on
the part of Fund Accountant or an affiliate of Fund Accountant to meet one or
more Service Standards. For purposes of this Agreement, "asset withdrawal"
shall include any combination of (i) a redemption of Company Shares and/or (ii)
a withdrawal of assets from any non-mutual fund account or other mutual fund
account held by a Company Shareholder that is advised by the Company's
investment adviser or an affiliate of such investment adviser.
Notwithstanding the foregoing, after such termination, for so long as
Fund Accountant, with the written consent of the Company, in fact continues to
perform any one or more of the services contemplated by this Agreement or any
schedule or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Compensation due Fund Accountant and unpaid by the Company
upon such termination shall be immediately due and payable upon and
notwithstanding such termination.
If, during the first six months of the Initial Term, for any reason
other than cause, as defined herein, Fund Accountant is replaced as fund
accountant, or if a third party is added to perform all or a part of the
services provided by Fund Accountant under this Agreement (excluding any
sub-accountant appointed by Fund Accountant as provided in Section 2 hereof),
then the Company shall make a one-time cash payment, as liquidated damages, to
Fund Accountant equal to the balance due Fund Accountant for the remainder of
such Initial Term, assuming for purposes of calculation of the payment that the
asset level of the Company on the date Fund Accountant is replaced, or a third
party is added, will remain constant for the balance of such term.
If, during the second six months of the Initial Term, for any reason
other than cause, as defined herein, Fund Accountant is replaced as fund
accountant, or if a third party is added to perform all or a part of the
services provided by Fund Accountant under this Agreement (excluding any
sub-accountant appointed by Fund Accountant as provided in Section 2 hereof),
then the Company shall make a one-time cash payment, as liquidated damages to
Fund Accountant equal to one-half of the balance due Fund Accountant for the
remainder of such Initial Term, assuming for purposes of calculation of the
payment that the asset level of the Company on the date Fund Accountant is
replaced, or a third party is added, will remain constant for the balance of
such term.
7. STANDARD OF CARE; RELIANCE ON RECORDS AND INSTRUCTIONS;
INDEMNIFICATION.
Fund Accountant shall use its best efforts to insure the accuracy of
all services performed under this Agreement, but shall not be liable to the
Company for any action taken or omitted by Fund Accountant in the absence of bad
faith, willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties. A Fund agrees to indemnify and hold harmless
6
<PAGE>
Fund Accountant, its employees, agents, directors, officers and nominees from
and against any and all claims, demands, actions and suits, whether groundless
or otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Fund Accountant's actions
taken or nonactions with respect to the performance of services under this
Agreement with respect to such Fund or based, if applicable, upon reasonable
reliance on information, records, instructions or requests with respect to such
Fund given or made to Fund Accountant by a duly authorized representative of the
Company; provided that this indemnification shall not apply to actions or
omissions of Fund Accountant in cases of its own bad faith, willful misfeasance,
negligence or from reckless disregard by it of its obligations and duties, and
further provided that prior to confessing any claim against it which may be the
subject of this indemnification, Fund Accountant shall give the Company written
notice of and reasonable opportunity to defend against said claim in its own
name or in the name of Fund Accountant.
Fund Accountant agrees to indemnify and hold harmless the Company, its
employees, agents, Directors, officers and nominees from and against any and all
actions, suits and claims, whether groundless or otherwise, and from and against
any and all judgements, liabilities, losses, damages, costs, charges, reasonable
counsel fees and other expenses of every nature and character arising out or in
any way relating to Fund Accountant's bad faith, willful misfeasance, negligence
or reckless disregard by it of its obligations and duties, with respect to the
performance of services under this Agreement; provided, that, prior to
confessing any claim against it which may be the subject of this
indemnification, the Company shall give Fund Accountant written notice of and a
reasonable opportunity to defend against said claim in its own name or in the
name of the Company.
8. RECORD RETENTION AND CONFIDENTIALITY.
Fund Accountant shall keep and maintain on behalf of the Company all
books and records which the Company and Fund Accountant is, or may be, required
to keep and maintain pursuant to any applicable statutes, rules and regulations,
including without limitation Rules 31a-1 and 31a-2 under the Investment Company
Act of 1940, as amended (the "1940 Act"), relating to the maintenance of books
and records in connection with the services to be provided hereunder. Fund
Accountant further agrees that all such books and records shall be the property
of the Company and to make such books and records available for inspection by
the Company or by the Securities and Exchange Commission at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Company and its shareholders; except when requested to divulge
such information by duly-constituted authorities or court process.
9. UNCONTROLLABLE EVENTS.
Fund Accountant assumes no responsibility hereunder, and shall not be
liable, for any damage, loss of data, delay or any other loss whatsoever caused
by events beyond its reasonable control.
7
<PAGE>
10. REPORTS.
Fund Accountant will furnish to the Company and to its properly
authorized auditors, investment advisers, examiners, distributors, dealers,
underwriters, salesmen, insurance companies and others designated by the Company
in writing, such reports and at such times as are prescribed pursuant to the
terms and the conditions of this Agreement to be provided or completed by Fund
Accountant, or as subsequently agreed upon by the parties pursuant to an
amendment hereto.
11. RIGHTS OF OWNERSHIP.
All computer programs and procedures developed to perform services
required to be provided by Fund Accountant under this Agreement are the property
of Fund Accountant. All records and other data except such computer programs
and procedures are the exclusive property of the Company and all such other
records and data will be furnished to the Company in appropriate form as soon as
practicable after termination of this Agreement for any reason.
12. RETURN OF RECORDS.
Fund Accountant may at its option at any time, and shall promptly upon
the Company's demand, turn over to the Company and cease to retain Fund
Accountant's files, records and documents created and maintained by Fund
Accountant pursuant to this Agreement which are no longer needed by Fund
Accountant in the performance of its services or for its legal protection. If
not so turned over to the Company, such documents and records will be retained
by Fund Accountant for six years from the year of creation. At the end of such
six-year period, such records and documents will be turned over to the Company
unless the Company authorizes in writing the destruction of such records and
documents.
13. REPRESENTATIONS OF THE COMPANY.
The Company certifies to Fund Accountant that: (1) as of the close of
business on each Conversion Date, each Fund that is in existence as of the
Conversion Date has authorized unlimited shares, and (2) this Agreement has been
duly authorized by the Company and, when executed and delivered by the Company,
will constitute a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
14. REPRESENTATIONS OF FUND ACCOUNTANT.
Fund Accountant represents and warrants that: (1) the various
procedures and systems which Fund Accountant has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
the records, and other data of the Company and Fund Accountant's records, data,
equipment facilities and other property used in the performance of its
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obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder, and (2) this Agreement has been duly authorized by Fund Accountant
and, when executed and delivered by Fund Accountant, will constitute a legal,
valid and binding obligation of Fund Accountant, enforceable against Fund
Accountant in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting the
rights and remedies of creditors and secured parties.
15. INSURANCE.
Fund Accountant shall notify the Company should any of its insurance
coverage be canceled or reduced. Such notification shall include the date of
change and the reasons therefor. Fund Accountant shall notify the Company of
any material claims against it with respect to services performed under this
Agreement, whether or not they may be covered by insurance, and shall notify the
Company from time to time as may be appropriate of the total outstanding claims
made by Fund Accountant under its insurance coverage.
16. INFORMATION TO BE FURNISHED BY THE COMPANY AND FUNDS.
The Company has furnished to Fund Accountant the following:
(a) Copies of the Articles of Incorporation of the Company and of any
amendments thereto, certified by the proper official of the state
in which such document has been filed.
(b) Copies of the following documents:
(i) The Company's Bylaws and any amendments thereto; and
(ii) Certified copies of resolutions of the Board of Directors
covering the approval of this Agreement, authorization of
a specified officer of the Company to execute and deliver
this Agreement and authorization for specified officers
of the Company to instruct Fund Accountant thereunder.
(c) A list of all the officers of the Company, together with specimen
signatures of those officers who are authorized to instruct Fund
Accountant in all matters.
(d) Two copies of the Prospectuses and Statements of Additional
Information for each Fund.
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17. INFORMATION FURNISHED BY FUND ACCOUNTANT.
(a) Fund Accountant has furnished to the Company the following:
(i) Fund Accountant's Articles of Incorporation; and
(ii) Fund Accountant's Bylaws and any amendments thereto.
(b) Fund Accountant shall, upon request, furnish certified copies of
corporate actions covering the following matters:
(i) Approval of this Agreement, and authorization of a
specified officer of Fund Accountant to execute and
deliver this Agreement; and
(ii) Authorization of Fund Accountant to act as fund
accountant for the Company and to provide accounting
services for the Company.
18. AMENDMENTS TO DOCUMENTS.
The Company shall furnish Fund Accountant written copies of any
amendments to, or changes in, any of the items referred to in Section 16 hereof
forthwith upon such amendments or changes becoming effective. In addition, the
Company agrees that no amendments will be made to the Prospectuses or Statements
of Additional Information of the Company which might have the effect of changing
the procedures employed by Fund Accountant in providing the services agreed to
hereunder or which amendment might affect the duties of Fund Accountant
hereunder unless the Company first obtains Fund Accountant's approval of such
amendments or changes.
19. COMPLIANCE WITH LAW.
Except for the obligations of Fund Accountant set forth in Section 8
hereof, the Company assumes full responsibility for the preparation, contents
and distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the 1940 Act and any other laws, rules and regulations of
governmental authorities having jurisdiction. Fund Accountant shall have no
obligation to take cognizance of any laws relating to the sale of the Company's
Shares. The Company represents and warrants that no Shares of the Company will
be offered to the public until the Company's registration statement under the
Securities Act and the 1940 Act has been declared or becomes effective.
20. NOTICES.
Any notice provided hereunder shall be sufficiently given when sent by
registered or certified mail to the party required to be served with such notice
at the following address: if to the
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Company, to it at _____________________________________________________________;
if to BISYS, to it at 3435 Stelzer Road, Columbus, Ohio 43219, or at such other
address as such party may from time to time specify in writing to the other
party pursuant to this Section.
21. HEADINGS.
Paragraph headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
22. ASSIGNMENT.
This Agreement and the rights and duties hereunder shall not be
assignable with respect to a Fund by either of the parties hereto except by the
specific written consent of the other party. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
23. GOVERNING LAW.
This Agreement shall be governed by and provisions shall be construed
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
THE OFFITBANK INVESTMENT
FUND, INC.
By:
------------------------------------------
Title:
---------------------------------------
BISYS FUND SERVICES, INC.
By:
------------------------------------------
Title:
---------------------------------------
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Dated: October __, 1996
SCHEDULE A
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN
THE OFFITBANK INVESTMENT FUND, INC.
AND
BISYS FUND SERVICES, INC..
FEES
Fund Accountant shall be entitled to receive an annual fee of $30,000 from each
Fund.
THE OFFITBANK INVESTMENT BISYS FUND SERVICES, INC.
FUND, INC.
By: By:
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A-1
