<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
---------------------------
PROSPECTUS
MAY 1, 1997
SUPPLEMENTED OCTOBER 20, 1997
THE
[LOGO]
INVESTMENT FUND, INC.
*Shares of these Funds are offered by means of a separate prospectus dated May
1, 1997 as supplemented
August 29, 1997.
<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
-------------------------------------------
The text above is not part of the Prospectus.
<PAGE>
PROSPECTUS
THE [LOGO] INVESTMENT FUND, INC.
- ------------------------------------------------
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
CERTAIN FUNDS 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 $8.25 billion in assets principally invested in global fixed income
and equity 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 May 1, 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.
----------------------------
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.
----------------------------
May 1, 1997 (Supplemented October 20, 1997)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<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................................................ 61
Additional Information...................................... 61
Reports to Shareholders..................................... 62
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 DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
PROSPECTUS SUMMARY
WHAT ARE THE FUNDS?
OFFITBANK High Yield Fund (the "High Yield Fund"), OFFITBANK Emerging Markets
Fund (the "Emerging Markets Fund"), OFFITBANK 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 supplemented date of this Prospectus, the Total
Return, Global Debt and Global Convertible 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 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.
3
<PAGE>
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 Standard & Poor's
Rating Group or Duff & Phelps Credit Rating Co., or Aaa by Moody's Investors
Services, Inc., 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 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.
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
Banking Law. The Adviser's principal business is the rendering of discretionary
investment management
4
<PAGE>
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 $8.25 billion
in assets principally invested in global fixed income and equity securities and
serves as investment adviser to twenty-one 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; and .35% in the case of each of the U.S. Government
Securities Fund, California Municipal Fund, New York Municipal Fund, Mortgage
Securities 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 .50% 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, Global Debt and Global
Convertible 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
and Global Convertible Funds declare dividends daily and pay dividends
quarterly. The Latin America Equity Fund declares and pays 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
<PAGE>
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.............................................................................. 0.73% 0.73%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (after waivers)***......................................................... 0.25% 0.50%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 0.98% 1.23%
----- -----
----- -----
EMERGING MARKETS FUND
Advisory Fee.............................................................................. 0.90% 0.90%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (after waivers)***......................................................... 0.26% 0.51%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 1.16% 1.41%
----- -----
----- -----
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*............................................................................. 0.50% 0.50%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (estimated, after waivers and/or reimbursements)***........................ 0.15% 0.40%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+...................... 0.65% 0.90%
----- -----
----- -----
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 and/or reimbursements)***........................ 0.94% 1.19%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+...................... 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 and/or reimbursements)***........................ 0.80% 1.05%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+...................... 1.50% 1.75%
----- -----
----- -----
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
U.S. GOVERNMENT SECURITIES FUND
Advisory Fee.............................................................................. 0.35% 0.35%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (estimated, after waivers and/or reimbursements)***........................ 0.15% 0.40%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+...................... 0.50% 0.75%
----- -----
----- -----
MORTGAGE SECURITIES FUND
Advisory Fee.............................................................................. 0.35% 0.35%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (estimated, after waivers and/or reimbursements)***........................ 0.15% 0.40%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+...................... 0.50% 0.75%
----- -----
----- -----
CALIFORNIA MUNICIPAL FUND
Advisory Fee.............................................................................. 0.35% 0.35%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (estimated, after waivers and/or reimbursements)***........................ 0.15% 0.40%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+...................... 0.50% 0.75%
----- -----
----- -----
NEW YORK MUNICIPAL FUND
Advisory Fee.............................................................................. 0.35% 0.35%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (after waivers and and/or reimbursements)***............................... 0.15% 0.40%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+...................... 0.50% 0.75%
----- -----
----- -----
NATIONAL MUNICIPAL FUND
Advisory Fee.............................................................................. 0.35% 0.35%
Rule 12b-1 Fees (after waiver)**.......................................................... 0.00% 0.00%
Other Expenses (estimated, after waivers and/or reimbursements)***........................ 0.15% 0.40%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+ 0.50% 0.75%
----- -----
----- -----
</TABLE>
- --------------
* Reflects voluntary fee waiver for the Latin America Equity, Global
Convertible and Global Debt Funds. 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 and 0.90% for the Global
Convertible Fund. "Advisory Fee" for the Total Return Fund assumes that all
the Fund's assets are invested in portfolio securities rather than in the
other Funds of the Company.
** 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 and Global Convertible Funds had not yet
commenced investment operations as of the supplemented date of this
Prospectus. The amount set forth for "Other Expenses" for such Funds and the
California Municipal Fund, National Municipal Fund, Mortgage Securities Fund
and U.S. Government Securities Fund is therefore based on estimates for the
current fiscal year. "Other Expenses" for the New York Municipal Fund have
been restated to reflect current expense limitation. "Other Expenses" for
each of the Funds reflect current waivers of administration fees and/or
reimbursements by the Adviser of certain expenses to maintain the Total Fund
Operating Expenses for each Fund at the level set forth above through at
least December 31, 1997. Such waivers may be terminated at any time. "Other
Expenses" include audit, administration, custody, shareholder servicing,
legal, registration, transfer agency and miscellaneous other charges. Absent
the aforementioned waivers and reimbursements, the ratio of "Other Expenses"
to average net assets would be (i) 0.33% and 0.58% for
10
<PAGE>
the Select Shares and Advisor Shares, respectively, of the High Yield Fund,
(ii) 0.34% and 0.59% for the Select Shares and Advisor Shares, respectively,
of the Emerging Markets Fund, (iii) 2.14% and 2.39% for the Select Shares
and Advisor Shares, respectively, of the Latin America Equity Fund, (iv)
1.45%
and 1.70% for the Select Shares and Advisor Shares, respectively, of the
Total Return Fund, (v) 2.05% and 2.30% for the Select Shares and Advisor
Shares, respectively, of the Global Debt Fund, (vi) 2.05% and 2.30% for the
Select Shares and Advisor Shares, respectively, of the Global Convertible
Fund, (vii) 1.47% and 1.72% for the Select Shares and Advisor Shares,
respectively, of the U.S. Government Securities Fund, (viii) 1.48% and 1.73%
for the Select Shares and Advisor Shares, respectively, of the Mortgage
Securities Fund, (ix) 1.24% and 1.49% for the Select Shares and Advisor
Shares, respectively, of the California Municipal Fund, (x) 0.85% and 1.10%
for the Select Shares and Advisor Shares, respectively, of the New York
Municipal Fund and (xi) 1.53% and 1.78% 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) 1.31% and 1.56% for
the Select Shares and Advisor Shares, respectively, of the High Yield Fund,
(ii) 1.49% and 1.74% for the Select Shares and Advisor Shares, respectively,
of the Emerging Markets Fund, (iii) 3.39% and 3.64% for the Select Shares
and Advisor Shares, respectively, of the Latin America Equity Fund, (iv)
2.20% and 2.45% for the Select Shares and Advisor Shares, respectively, of
the Total Return Fund, (v) 3.10% and 3.35% for the Select Shares and Advisor
Shares, respectively, of the Global Debt Fund, (vi) 3.20% and 3.45% for the
Select Shares and Advisor Shares, respectively, of the Global Convertible
Fund, (vii) 2.07% and 2.32% for the Select Shares and Advisor Shares,
respectively, of the U.S. Government Securities Fund, (viii) 2.08% and 2.33%
for the Select Shares and Advisor Shares, respectively, of the Mortgage
Securities Fund, (ix) 1.84% and 2.09% for the Select Shares and Advisor
Shares, respectively, of the California Municipal Fund, (x) 1.45% and 1.70%
for the Select Shares and Advisor Shares, respectively, of the New York
Municipal Fund and (xi) 2.13% and 2.38% 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........ $ 10 $ 13 $ 12 $ 14 $ 20 $ 23 $ 7 $ 9 $ 13
3 years....... $ 31 $ 39 $ 37 $ 45 $ 63 $ 70 $ 21 $ 29 $ 41
5 years....... $ 54 $ 68 $ 64 $ 77 $ 108 $ 120 -- -- --
10 years...... $ 120 $ 149 $ 141 $ 169 $ 233 $ 258 -- -- --
<CAPTION>
GLOBAL CONVERTIBLE FUND
------------------------
ADVISOR SELECT ADVISOR
SHARES SHARES SHARES
----------- ----------- -----------
<S> <C> <C> <C>
1 year........ $ 16 $ 15 $ 18
3 years....... $ 49 $ 47 $ 55
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........ $ 5 $ 8 $ 5 $ 8 $ 5 $ 8 $ 5 $ 8 $ 5
3 years....... $ 16 $ 24 $ 16 $ 24 $ 16 $ 24 $ 16 $ 24 $ 16
5 years....... -- -- -- -- -- -- 28 42 --
10 years...... -- -- -- -- -- -- 63 93 --
<CAPTION>
ADVISOR
SHARES
-----------
<S> <C>
1 year........ $ 8
3 years....... $ 24
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...................... 0.89 0.90 0.72
Net realized and unrealized gains
(losses).................................. 0.29 0.67 (0.75)
--------------- --------------- ---------------
Total from investment operations......... 1.18 1.57 (0.03)
--------------- --------------- ---------------
Less dividends and distributions
Dividends (from net investment income)..... (0.89) (0.89) (0.72)
Distributions (from realized gains)........ (0.06) (0.01) --
Return of Capital.......................... -- -- --
--------------- --------------- ---------------
Total dividends and distributions........ (0.95) (0.90) (0.72)
--------------- --------------- ---------------
Net Asset Value, End of Period............... $ 10.15 $ 9.92 $ 9.25
--------------- --------------- ---------------
--------------- --------------- ---------------
Total Return+................................ 12.46% 17.72% (0.27)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in thousands)... $851,720 $479,090 $222,317
Ratio of Expenses to Average Net Assets.... 0.98%(2) 1.05%(2) 1.14%(1)(2)
Ratio of Net Income to Average Net
Assets.................................... 8.86% 9.38% 8.97%(1)
Portfolio Turnover Rate.................... 41% 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...................... 1.00 0.90 0.81
Net realized and unrealized gains
(losses).................................. 1.55 1.07 (1.16)
-------------- ------- -------
Total from investment operations......... 2.55 1.97 (0.35)
-------------- ------- -------
Less dividends and distributions
Dividends (from net investment income)..... (1.00) (0.60) (0.81)
Distributions (from realized gains)........ (0.43) -- --
Return of Capital.......................... -- (0.30) --
-------------- ------- -------
Total dividends and distributions........ (1.43) (0.90) (0.81)
-------------- ------- -------
Net Asset Value, End of Period............... $ 11.03 $ 9.91 $ 8.84
-------------- ------- -------
-------------- ------- -------
Total Return+................................ 26.56% 23.38% (3.82)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in thousands)... $116,144 $49,250 $28,117
Ratio of Expenses to Average Net Assets.... 1.16%(2) 1.50%(2) 1.50%(1)(2)
Ratio of Net Income to Average Net
Assets.................................... 9.62% 9.97% 10.39%(1)
Portfolio Turnover Rate.................... 136% 60% 47%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
LATIN AMERICA
EQUITY FUND*(3) NEW YORK MUNICIPAL FUND*
------------------ --------------------------------------
FOR THE PERIOD FOR THE FOR THE PERIOD
ENDED YEAR ENDED ENDED
DECEMBER 31, 1996 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................................. 0.20 0.44 0.33
Net realized and unrealized gain (losses)............. 2.11 (.06) 0.47
------- ------- -------
Total from investment operations.................... 2.31 0.38 0.80
------- ------- -------
Less dividends and distributions
Dividends (from net investment income)................ (0.20) (0.44) (0.32)
Distributions (from realized gains)................... (0.45) (0.01) (0.01)
------- ------- -------
Total dividends and distributions................... (0.65) (0.45) (0.33)
------- ------- -------
Net Asset Value, End of Period.......................... $ 11.66 $ 10.40 $ 10.47
------- ------- -------
------- ------- -------
Total Return+........................................... 23.36% 3.72% 8.13%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands).............. $ 13,308 $ 20,158 $ 12,516
Ratio of Expenses to Average Net Assets............... 2.00%(1)(2) 0.55%(2) 0.54%(1)(2)
Ratio of Net Income to Average Net Assets............. 1.97(1) 4.28% 4.20%(1)
Portfolio Turnover Rate............................... 133% 33% 35%
Average Commision Rate................................ $ 0.026 N/A N/A
</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, February 12, 1996 and April 3, 1995, 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 1.06%, 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, 1.24%, 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, 3.14% for the Latin America Equity Fund for the
period ended December 31, 1996, and 1.20% and 2.09% for the New York
Municipal Fund for the periods ended December 31, 1996 and December 31,
1995, respectively.
(3) Prior to May 1, 1997, this Fund was the Latin America Total Return Fund.
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 December 31, 1996, 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 S&P, Moody's and D&P, and "Special Risk Considerations--High Yield,
High Risk Debt Securities" below. 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), there is no limit on the
amount the Fund may invest in issuers located in any one country, or in
securities
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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
international portfolio of convertible debt securities, convertible preferred
stocks and "synthetic" convertible securities consisting of a combination of
debt securities or preferred stock and warrants or options. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
traditional convertible securities and may invest up to 35% in synthetic
convertible securities. All or a portion of the Fund's total assets may be
invested in below investment grade debt securities. Under normal circumstances,
the Fund will be invested in at least three different countries, one of which
may be the United States. Subject to the restriction that the Fund will not
invest 25% or more of its total assets in obligations issued by any one country,
its agencies, instrumentalities or political subdivisions, there is no limit on
the amount the Fund may invest in issuers located in any one country, or in
securities denominated in the currency of any one country. The Fund's
investments may be denominated in any currency, including U.S. dollars.
In evaluating proposed investments the Adviser will seek to maximize the
total return on the Fund's portfolio in terms of U.S. dollars. In this regard,
the Adviser will consider factors that relate both to various securities markets
and to specific securities traded in those markets. In evaluating markets, the
Adviser will consider such factors as the condition and growth potential of
various economies and securities markets, currency and taxation factors
(including the applicability and rate of withholding taxes) and other pertinent
financial, social, national and political factors. In analyzing convertible
securities, the Adviser will consider both the yield on the convertible security
and the potential capital appreciation that is offered by the underlying common
stock. There can be no assurance that the Fund will achieve its investment
objective.
The convertible securities to be held by the Fund include any corporate debt
security or preferred stock that may be converted into underlying shares of
common stock and include both traditional convertible securities and synthetic
convertible securities. The common stock underlying convertible securities may
be
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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 Notes (maturities of one to ten years), and U.S. Treasury Bonds
(generally, maturities greater than ten
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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 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.
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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 D&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 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, CMOs 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 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, Moody's or D&P
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 "MUNICIPAL FUNDS")
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 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 other high quality debt securities in a separate
account having a value equal to the aggregate amount of such
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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 Equity 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; 100% for the Total Return Fund; 100% for
the Global Debt Fund; 100% for the Global Convertible Fund; 75% for the U.S.
Government Securities Fund; 75% 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 41%
for the High Yield Fund, 136% for the Emerging Markets Fund, 133% for the Latin
America Equity Fund and 33% 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 or Total Return 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.
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.
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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 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
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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 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
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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 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, 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 Latin America Equity, Total Return and Global Debt
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 next $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; and 0.35% for
each of the U.S. Government Securities, Mortgage Securities, 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 .50% 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 $8.25 billion in assets and serves as investment
adviser to twenty-one 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 serves as the portfolio manager 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 Equity 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 and BISYS 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 and Global
Convertible Funds declare dividends daily and pay dividends quarterly. The Latin
America Equity Fund declares and pays 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, Martin Luther King, Jr. 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 (i.e, its investment company taxable income, as that term is defined in
the Code, determined without regard to the deduction for dividends paid) and net
capital gains (i.e, the excess of a Fund's net realized long-term capital gain
over its net realized short-term capital loss), if any, that are
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distributed to its shareholders, provided that the Fund distributes each taxable
year (i) at least 90% of its net investment income for such taxable year, and
(ii) at least 90% of the excess of its tax-exempt interest income net of certain
deductions allocable to such income. Each Fund will be treated as a separate
entity for federal income tax purposes, and thus the provisions of the Code,
applicable to regulated investment companies generally will be applied to each
Fund separately, rather than to the Company as a whole. In addition, net capital
gains, net investment 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 of net capital gains which are designated by a Fund as "capital
gain dividends" are taxable to shareholders as long-term capital gain.
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.
Depending on the residence of the shareholder for tax purposes,
distributions from a Fund may also be subject to state and local taxes or
withholding taxes. Shareholders are advised to consult with their own tax
advisors about state and local tax matters.
Most states provide that a regulated investment company may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. government securities (such
as U.S. Treasury obligations). Thus, for residents of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities should be free from state and local income taxes to the
extent that the interest income from such investments would have been exempt
from state and local income taxes if such securities had been held directly by
the respective shareholders themselves. Certain states, however, do not allow a
regulated investment company to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of U.S.
government securities unless the regulated investment company holds at least a
required amount of U.S. government securities. Accordingly, for residents of
these states, distributions derived from a Fund's investment in certain types of
U.S. government securities may not be entitled to the exemptions from state and
local taxes that would be available if the shareholders had purchased U.S.
government securities directly. The exemption from state and local income taxes
does not preclude states from asserting other taxes on the ownership of U.S.
government securities.
Each Fund intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of a non-deductible 4% federal excise
tax. To do so, each Fund intends to distribute an amount at least equal to (i)
98% of its calendar year ordinary income, (ii) 98% of its capital gains net
income (the excess of short and long-term capital gain over short and long-term
capital loss) for the one-year period ending October 31st, and (iii) 100% of any
undistributed ordinary or capital gain net income from the prior calendar year.
Although dividends generally will be treated as distributed when paid, dividends
declared in October, November or December, payable to shareholders of record on
a specified date in one of those months and paid during the following January
will be treated as having been distributed by a Fund (and received by the
shareholders) on December 31 of the year declared.
A Fund may be 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. federal income tax regulations as paid by its
shareholders. The Emerging Markets and Latin America Equity Funds expect to
qualify for this election. Each of these Funds
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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. federal income 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 it distributes
to its shareholders, whether dividends or capital gain distributions, will
generally not be treated as foreign source taxable income. If the Fund makes
this election, a shareholder will be treated as receiving foreign source income
in an amount equal to the sum of his proportionate share of foreign income taxes
paid by the Fund and the portion of dividends paid by the Fund representing
income earned from foreign sources. This limitation must be applied separately
to certain categories of income and the related foreign taxes.
Ordinary income dividends paid by a Fund to shareholders who are
non-resident aliens or foreign entities will be subject to a 30% withholding tax
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law or the income is "effectively connected" with a U.S.
trade or business. Generally, subject to certain exceptions, capital gain
dividends paid to non-resident shareholders or foreign entities will not be
subject to U.S. federal income 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
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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 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 applicable to
corporations. Shareholders receiving Social Security benefits should note that
all exempt-interest dividends will be taken into account in determining the
taxability of such benefits.
Each Fund intends that substantially all dividends and distributions it pays
to its shareholders will be designated as exempt-interest dividends and as such
will be exempt from regular federal income taxes. However, to the extent each
Fund earns ordinary income from taxable investments or gains attributable to
accrued market discount or realizes capital gains, some portion of its dividends
and distributions may not qualify as exempt-interest dividends and may be
subject to regular federal income taxes.
The exemption of exempt-interest dividend income from regular federal income
taxation does not necessarily result in similar exemptions for such income under
the income or other tax laws of state or local taxing authorities. In general,
states exempt from state income tax only that portion of any exempt-interest
dividend that is derived from interest received by a regulated investment
company on its holdings of obligations issued by that state or its political
subdivisions and instrumentalities and other obligations exempt from state
taxation by federal law.
A notice detailing the tax status of dividends and distributions paid by
each of the Funds will be mailed annually to each Fund's shareholders. As part
of this notice, the Fund will report to its shareholders the percentage of
interest income earned by the Fund during the preceding year on tax-exempt
obligations indicating, on a state-by-state basis, the source of such income.
CALIFORNIA STATE TAXATION. Individual shareholders of the California
Municipal Fund who are subject to California personal income taxation will not
be required to include in their California gross income that portion of their
federally tax-exempt dividends which the Fund clearly and accurately identifies
as directly attributable to interest earned on obligations, the interest on
which is exempt from California personal income tax, provided that at least 50%
of the value of the Fund's total assets consist of obligations the interest on
which is exempt from California personal income taxation. Distributions to
individual shareholders derived from interest on Municipal Obligations issued by
governmental authorities in states other than California, short-term capital
gains and other taxable income will be taxed as dividends for purposes of
California personal income taxation. The Fund's long-term capital gains for
federal income tax purposes will be taxed as long-term capital gains to
individual shareholders of the Fund for purposes of California personal income
taxation. Gain or loss, if any, resulting from an exchange or redemption of
shares will be recognized in the year of exchange or redemption. Present
California law taxes both long-term and short-term capital gains at the rates
applicable to ordinary income. California has an alternative minimum tax similar
to the federal alternative minimum tax. Generally corporate shareholders of the
California Municipal Fund subject to the California franchise tax will be
required to include any gain on an exchange or redemption of shares and all
distributions or exempt-interest, capital gains and other taxable income, if
any, as income subject to such tax. 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
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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.
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
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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 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
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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
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RISK FACTORS
Hedging and Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of the Hedging and Derivatives could result in losses greater than
if they had not been used. Use of put and call options could result in losses to
a Fund, force the sale or purchase of portfolio securities at inopportune times
or for prices higher than (in the case of put options) or lower than (in the
case of call options) current market values, or cause a Fund to hold a security
it might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to a Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Losses resulting from the use of Hedging and Derivatives will reduce a
Fund's net asset value, and possibly income, and the losses can be greater than
if Hedging and Derivatives had not been used.
RISKS OF HEDGING AND DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Derivatives may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and will be subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of positions taken as part of
non-U.S. Hedging and Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of data on which to make trading decisions than in the United States, (3) delays
in a Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lower trading volume and liquidity.
B-6
<PAGE>
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Derivatives by a Fund will require, among other
things, that the Fund segregate cash 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
Stephen Brent Wells
ASSISTANT TREASURER
Vincent M. Rella
ASSISTANT TREASURER
Matthew A. Constancio
ASSISTANT SECRETARY
Ellen Stoutamire
ASSISTANT SECRETARY
Alaina Metz
ASSISTANT SECRETARY
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, Inc.
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
