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OFFITBANK High Yield Fund
OFFITBANK Emerging Markets Fund
OFFITBANK Latin America Equity 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
APRIL 17, 1998
THE
[LOGO]
INVESTMENT FUND, INC.
<PAGE>
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The OFFITBANK Investment Fund, Inc. currently offers eight no-load
mutual funds designed to meet a variety of investment objectives.
INVESTORS LOOKING TO BROADEN THE INVESTMENT
EXPOSURE IN THEIR PORTFOLIOS SHOULD CONSIDER:
High Yield Fund
Emerging Markets Fund
Latin America Equity 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
-------------------------------------------
<PAGE>
PROSPECTUS
THE OFFITBANK INVESTMENT FUND, INC.
- ------------------------------------------------
INVESTMENT PORTFOLIOS:
OFFITBANK HIGH YIELD FUND
OFFITBANK EMERGING MARKETS FUND
OFFITBANK LATIN AMERICA EQUITY FUND
OFFITBANK U.S. GOVERNMENT SECURITIES FUND
OFFITBANK MORTGAGE SECURITIES FUND
OFFITBANK CALIFORNIA MUNICIPAL FUND
OFFITBANK NEW YORK MUNICIPAL FUND
OFFITBANK NATIONAL MUNICIPAL FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end,
management investment company offering eight 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 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 $9.5 billion in assets principally invested in global fixed income and
equity securities.
The address of the Company is 400 Bellevue Parkway, Suite 108, Wilmington,
DE 19809. Yield and other information regarding the Funds may be obtained by
calling the Company at 1-800-618-9510.
This Prospectus briefly sets forth certain information about the Funds that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Funds, contained in a Statement of Additional Information dated April 17, 1998,
as it may be amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission (the "Commission") and is available to
investors without charge by calling 1-800-618-9510. The Statement of Additional
Information is incorporated in its entirety by reference into this Prospectus.
INVESTORS ARE ADVISED THAT SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATES OF OFFITBANK, NOR
ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THE COMPANY IS NOT AUTHORIZED TO
ENGAGE IN THE BUSINESS OF BANKING.
----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------
April 17, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Expense Information......................................... 8
Financial Highlights........................................ 11
Investment Objectives and Policies.......................... 16
Other Investment Policies................................... 29
Special Risk Considerations................................. 36
Limiting Investment Risks................................... 46
Management.................................................. 46
Dividends and Distributions................................. 49
Purchase of Shares.......................................... 50
Redemption of Shares........................................ 51
Shareholder Services........................................ 53
Net Asset Value............................................. 53
Taxes....................................................... 54
Performance Information..................................... 57
The Transfer................................................ 58
Additional Information...................................... 58
Reports to Shareholders..................................... 59
Appendix A: Ratings......................................... A-1
Appendix B: Hedging and Derivatives......................... 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 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. 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 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 securities deemed to be 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
3
<PAGE>
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 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
$9.5 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; 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. The investment advisory
fee for the High Yield, Emerging Markets and Latin America Equity 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". 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.
4
<PAGE>
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. See
"Management and Shareholder Servicing Agents."
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 the Advisor 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, U.S. Government Securities, Mortgage Securities, California
Municipal, New York Municipal and National Municipal Funds declare dividends
daily and pays dividends monthly and the Emerging Markets Fund declares
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".
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".
5
<PAGE>
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 it invests in emerging
markets securities, the High Yield Fund, 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 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 "Appendix A: Special Factors Affecting the California Municipal
Fund" and "Appendix B: Special Factors Affecting the New York Municipal Fund" 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
6
<PAGE>
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 and Emerging Markets Funds, 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.
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.
7
<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.............................................................................. 0.72% 0.72%
Rule 12b-1 Fees (after waiver)*........................................................... 0.00% 0.00%
Other Expenses (after waivers)**.......................................................... 0.15% 0.40%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 0.87% 1.12%
----- -----
----- -----
EMERGING MARKETS FUND
Advisory Fee.............................................................................. 0.90% 0.90%
Rule 12b-1 Fees (after waiver)*........................................................... 0.00% 0.00%
Other Expenses (after waivers)**.......................................................... 0.39% 0.64%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 1.29% 1.54%
----- -----
----- -----
LATIN AMERICA EQUITY FUND
Advisory Fee.............................................................................. 1.00% 1.00%
Rule 12b-1 Fees (after waiver)*........................................................... 0.00% 0.00%
Other Expenses (after waivers)**.......................................................... 0.60% 0.85%
----- -----
Total Fund Operating Expenses (after waivers)+............................................ 1.60% 1.85%
----- -----
----- -----
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%
----- -----
----- -----
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
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 (after waivers and and/or reimbursements)**................................ 0.15% 0.40%
----- -----
Total Fund Operating Expenses (after waivers and/or reimbursements)+...................... 0.50% 0.75%
----- -----
----- -----
</TABLE>
- --------------
* The Advisor class of each Fund is authorized to spend up to 0.25% of its 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. Such waiver may be terminated at any time. See
"Management--Distributor".
** "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, 1998. 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) 0.23% and 0.48% for the Select Shares and Advisor Shares, respectively,
of the High Yield Fund, (ii) 0.47% and 0.72% for the Select Shares and
Advisor Shares, respectively, of the Emerging Markets Fund, (iii) 0.68% and
0.93% for the Select Shares and Advisor Shares, respectively, of the Latin
America Equity Fund, (iv) 4.09% and 4.34% for the Select Shares and Advisor
Shares, respectively, of the U.S. Government Securities Fund, (v) 1.00% and
1.25% for the Select Shares and Advisor Shares, respectively, of the
Mortgage Securities Fund, (vi) 2.77% and 3.02% for the Select Shares and
Advisor Shares, respectively, of the California Municipal Fund, (vii) 0.55%
and 0.80% for the Select Shares and Advisor Shares, respectively, of the New
York Municipal Fund and (viii) 7.08% and 7.33% 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) 0.95% and 1.45% for
the Select Shares and Advisor Shares, respectively, of the High Yield Fund,
(ii) 1.37% and 1.87% for the Select Shares and Advisor Shares, respectively,
of the Emerging Markets Fund, (iii) 1.68% and 2.18% for the Select Shares
and Advisor Shares, respectively, of the Latin America Equity Fund, (iv)
4.44% and 4.94% for the Select Shares and Advisor Shares, respectively, of
the U.S. Government Securities Fund, (v) 1.35% and 1.85% for the Select
Shares and Advisor Shares, respectively, of the Mortgage Securities Fund,
(vi) 3.12% and 3.62% for the Select Shares and Advisor Shares, respectively,
of the California Municipal Fund, (vii) 0.90% and 1.40% for the Select
Shares and Advisor Shares, respectively, of the New York Municipal Fund and
(viii) 7.43% and 7.93% for the Select Shares and Advisor Shares,
respectively, of the National Municipal Fund.
For additional information with respect to the expenses identified in the table
above, see "Management" in this Prospectus and "Management" and "Distributor" in
the Statement of Additional Information.
9
<PAGE>
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>
U.S.
GOVERNMENT
HIGH EMERGING LATIN AMERICA SECURITIES
YIELD FUND MARKETS FUND EQUITY FUND FUND
------------------------ ------------------------ ------------------------ -----------
SELECT ADVISOR SELECT ADVISOR SELECT ADVISOR SELECT
SHARES SHARES SHARES SHARES SHARES SHARES SHARES
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year.......................... $ 9 $ 11 $ 13 $ 16 $ 16 $ 19 $ 5
3 years......................... $ 28 $ 36 $ 41 $ 49 $ 50 $ 58 $ 16
5 years......................... $ 48 $ 62 $ 71 $ 84 $ 87 $ 100 $ 28
10 years........................ $ 107 $ 136 $ 156 $ 183 $ 190 $ 217 $ 63
<CAPTION>
ADVISOR
SHARES
-----------
<S> <C>
1 year.......................... $ 8
3 years......................... $ 24
5 years......................... $ 42
10 years........................ $ 93
</TABLE>
<TABLE>
<CAPTION>
NATIONAL
MORTGAGE SECURITIES FUND CALIFORNIA MUNICIPAL NEW YORK MUNICIPAL FUND MUNICIPAL
FUND FUND
------------------------ ------------------------ ------------------------ -----------
SELECT ADVISOR SELECT ADVISOR SELECT ADVISOR SELECT
SHARES SHARES SHARES SHARES SHARES SHARES SHARES
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year.......................... $ 5 $ 8 $ 5 $ 8 $ 5 $ 8 $ 5
3 years......................... $ 16 $ 24 $ 16 $ 24 $ 16 $ 24 $ 16
5 years......................... $ 28 $ 42 $ 28 $ 42 $ 28 $ 42 $ 28
10 years........................ $ 63 $ 93 $ 63 $ 93 $ 63 $ 93 $ 63
<CAPTION>
ADVISOR
SHARES
-----------
<S> <C>
1 year.......................... $ 8
3 years......................... $ 24
5 years......................... $ 42
10 years........................ $ 93
</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.
10
<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, 1997, 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 for the
Advisor Shares of Funds other than High Yield and Latin America Equity Funds are
not presented since no such shares were outstanding during the periods
presented.
<TABLE>
<CAPTION>
HIGH YIELD FUND
---------------------------------------------------
SELECT SHARES
---------------------------------------------------
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period......... $ 10.15 $ 9.92 $ 9.25
--------------- --------------- ---------------
Income (loss) from investment operations
Net investment income...................... 0.87 0.89 0.90
Net realized and unrealized gains
(losses).................................. 0.31 0.29 0.67
--------------- --------------- ---------------
Total from investment operations......... 1.18 1.18 1.57
--------------- --------------- ---------------
Less dividends and distributions
Dividends (from net investment income)..... (0.87) (0.89) (0.89)
Distributions (from realized gains)........ (0.12) (0.06) (0.01)
--------------- --------------- ---------------
Total dividends and distributions........ (0.99) (0.95) (0.90)
--------------- --------------- ---------------
Net Asset Value, End of Period............... $ 10.34 $ 10.15 $ 9.92
--------------- --------------- ---------------
--------------- --------------- ---------------
Total Return+................................ 12.09% 12.46% 17.72%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in thousands)............................ $1,346,553 $851,720 $479,090
Ratio of Expenses to Average
Net Assets(c)............................. 0.87% 0.98% 1.05%
Ratio of Net Income to Average Net
Assets.................................... 8.46% 8.86% 9.38%
Portfolio Turnover Rate.................... 47% 41% 34%
<CAPTION>
ADVISOR SHARES
--------------
FOR THE PERIOD
FOR THE PERIOD AUGUST 14,
MARCH 2, 1994 1997
THROUGH THROUGH
DECEMBER 31, DECEMBER 31,
1994* 1997*
-------------- --------------
<S> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period......... $ 10.00 $ 10.37
-------------- ------
Income (loss) from investment operations
Net investment income...................... 0.72 0.32
Net realized and unrealized gains
(losses).................................. (0.75) 0.09
-------------- ------
Total from investment operations......... (0.03) 0.41
-------------- ------
Less dividends and distributions
Dividends (from net investment income)..... (0.72) (0.32)
Distributions (from realized gains)........ -- (0.12)
-------------- ------
Total dividends and distributions........ (0.72) (0.44)
-------------- ------
Net Asset Value, End of Period............... $ 9.25 $ 10.34
-------------- ------
-------------- ------
Total Return+................................ (0.27)%(b) 3.39%(b)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in thousands)............................ $222,317 $ 15
Ratio of Expenses to Average
Net Assets(c)............................. 1.14%(a) 1.03%(a)
Ratio of Net Income to Average Net
Assets.................................... 8.97%(a) 7.87%(a)
Portfolio Turnover Rate.................... 42% 47%
</TABLE>
- ------------------
* Commencement of operations.
+ Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
(a) Annualized.
(b) Not annualized.
(c) During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been higher.
11
<PAGE>
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
-----------------------------------------------------------------------------
SELECT SHARES
-----------------------------------------------------------------------------
FOR THE PERIOD
FOR THE FOR THE FOR THE MARCH 8, 1994
PERIOD ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994*
----------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period......... $ 11.03 $ 9.91 $ 8.84 $ 10.00
-------- -------- ------- -------
Income (loss) from investment operations
Net investment income...................... 1.15 1.00 0.90 0.81
Net realized and unrealized gain
(losses).................................. -- 1.55 1.07 (1.16)
-------- -------- ------- -------
Total from investment operations......... 1.15 2.55 1.97 (0.35)
-------- -------- ------- -------
Less dividends and distributions
Dividends (from net investment income)..... (1.15) (1.00) (0.60) (0.81)
Excess of net investment income............ (0.04) -- -- --
Distributions (from realized gains)........ (0.53) (0.43) -- --
Return of Capital.......................... -- -- (0.30) --
-------- -------- ------- -------
Total dividends and distributions........ (1.72) (1.43) (0.90) (0.81)
-------- -------- ------- -------
Net Asset Value, End of Period............... $ 10.46 $ 11.03 $ 9.91 $ 8.84
-------- -------- ------- -------
-------- -------- ------- -------
Total Return+................................ 10.67% 26.56% 23.38% (3.82)%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)... $ 210,777 $ 116,144 $ 49,250 $ 28,117
Ratio of Expenses to Average Net
Assets(c)................................. 1.29% 1.16% 1.50% 1.50%(a)
Ratio of Net Income to Average Net
Assets.................................... 9.49% 9.62% 9.97% 10.39%(a)
Portfolio Turnover Rate.................... 179% 136% 60% 47%
</TABLE>
- ------------------
* Commencement of operations. As of December 31, 1997, there were no Advisor
Shares for the Emerging Markets Fund outstanding.
+ Total return is based on the change in net asset value during the period
and assumes reinvestment of all dividends and distributions.
(a) Annualized.
(b) Not Annualized.
(c) During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been higher.
12
<PAGE>
<TABLE>
<CAPTION>
LATIN AMERICA EQUITY FUND
------------------------------------------------------------
SELECT SHARES ADVISOR SHARES
--------------------------------------- -------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE FEBRUARY 13, 1996 JUNE 23, 1997
YEAR ENDED THROUGH THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1996* DECEMBER 31, 1995*
------------------ ------------------- -------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period......................... $ 11.66 $ 10.00 $ 15.11
------- ------- -------
Income (loss) from investment operations
Net investment income...................................... 0.09 0.20 (0.21)
Net realized and unrealized gain (losses).................. 2.74 2.11 (0.50)
------- ------- -------
Total from investment operations......................... 2.83 2.31 (0.71)
------- ------- -------
Less dividends and distributions
Dividends (from net investment income)..................... (0.09) (0.20) (0.01)
Excess of net investment income............................ (0.02) -- --
Distributions (from realized gains)........................ (0.25) (0.45) (0.25)
------- ------- -------
Total dividends and distributions........................ (0.36) (0.65) (0.26)
------- ------- -------
Net Asset Value, End of Period............................... $ 14.13 $ 11.66 $ 14.14
------- ------- -------
------- ------- -------
Total Return+................................................ 24.22% 23.36%(b) (4.64)%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)................... $ 55,034 $ 13,308 $ 18
Ratio of Expenses to Average Net Assets(c)................. 1.60% 2.00%(a) 1.73%(a)
Ratio of Net Income to Average Net Assets.................. 0.26% 1.97%(a) (0.73 )%(a)
Portfolio Turnover Rate.................................... 98% 133% 98%
Average Commision Rate..................................... $ .0185 $ .026 $ .0185
</TABLE>
- ------------------
* Commencement of operations.
+ Total return is based on the change in net asset value during the period
and assumes reinvestment of all dividends and distributions.
(a) Annualized.
(b) Not annualized.
(c) During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been higher.
13
<PAGE>
<TABLE>
<CAPTION>
NEW YORK MUNICIPAL FUND
---------------------------------
SELECT SHARES*
---------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
--------------- ---------------
<S> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period......... $ 10.40 $ 10.47
------- -------
Income (loss) from investment operations
Net investment income...................... 0.46 0.44
Net realized and unrealized gain
(losses).................................. 0.34 (0.06)
------- -------
Total from investment operations......... 0.80 0.38
------- -------
Less dividends and distributions
Dividends (from net investment income)..... (0.46) (0.44)
Distributions (from realized gains)........ (0.05) (0.01)
------- -------
Total dividends and distributions........ (0.51) (0.45)
------- -------
Net Asset Value, End of Period............... $ 10.69 $ 10.40
------- -------
------- -------
Total Return+................................ 7.84% 3.72%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)... $ 42,046 $ 20,158
Ratio of Expenses to Average Net
Assets(c)................................. 0.50% 0.55%
Ratio of Net Income to Average Net
Assets.................................... 4.22% 4.28%
Portfolio Turnover Rate.................... 144% 33%
<CAPTION>
CALIFORNIA
MUNICIPAL FUND
--------------
SELECT SHARES*
--------------
FOR THE PERIOD FOR THE PERIOD
APRIL 3, 1995 APRIL 2, 1997
THROUGH THROUGH
DECEMBER 31, DECEMBER 31,
1995* 1997*
-------------- --------------
<S> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period......... $ 10.00 $ 10.00
------- ------
Income (loss) from investment operations
Net investment income...................... 0.33 0.33
Net realized and unrealized gain
(losses).................................. 0.47 0.38
------- ------
Total from investment operations......... 0.80 0.71
------- ------
Less dividends and distributions
Dividends (from net investment income)..... (0.32) (0.33)
Distributions (from realized gains)........ (0.01) (0.01)
------- ------
Total dividends and distributions........ (0.33) (0.34)
------- ------
Net Asset Value, End of Period............... $ 10.47 $ 10.37
------- ------
------- ------
Total Return+................................ 8.13%(b) 7.14%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands)... $12,516 $ 4,792
Ratio of Expenses to Average Net
Assets(c)................................. 0.54%(a) 0.50%(a)
Ratio of Net Income to Average Net
Assets.................................... 4.20%(a) 4.15%(a)
Portfolio Turnover Rate.................... 35% 41%
</TABLE>
- ------------------
* Commencement of operations. As of December 31, 1997, there were no Advisor
Shares outstanding for such Funds.
+ Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.
(a) Annualized.
(b) Not Annualized.
(c) During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been higher.
14
<PAGE>
<TABLE>
<CAPTION>
NATIONAL U.S. GOVERNMENT MORTGAGE
MUNICIPAL FUND SECURITIES FUND SECURITIES FUND
-------------------- -------------------- -------------------
SELECT SHARES* SELECT SHARES* SELECT SHARES*
-------------------- -------------------- -------------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
OCTOBER 20, 1997 JULY 1, 1997 JULY 1, 1997
THROUGH THROUGH THROUGH
DECEMBER 31, 1997* DECEMBER 31, 1997* DECEMBER 31, 1997*
-------------------- -------------------- -------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA:
Net Asset Value, Beginning of Period........................ $ 10.00 $ 10.00 $ 10.00
------ ------ -------
Income (loss) from investment operations
Net investment income..................................... 0.08 0.27 0.29
Net realized and unrealized gain (losses)................. 0.19 0.19 0.22
------ ------ -------
Total from investment operations........................ 0.27 0.46 0.51
------ ------ -------
Less dividends and distributions
Dividends (from net investment income).................... (0.08) (0.27) (0.29)
Excess of net investment income........................... -- (0.01) (0.01)
Distributions (from realized gains)....................... -- (0.01) (0.04)
------ ------ -------
Total dividends and distributions....................... (0.08) (0.29) (0.34)
------ ------ -------
Net Asset Value, End of Period.............................. $ 10.19 $ 10.17 $ 10.17
------ ------ -------
------ ------ -------
Total Return+............................................... 2.70%(b) 4.71%(b) 5.10%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands).................. $ 2,805 $ 3,955 $ 17,037
Ratio of Expenses to Average Net Assets(c)................ 0.50%(a) 0.50%(a) 050%(a)
Ratio of Net Income to Average Net Assets................. 3.95%(a) 5.32%(a) 5.77%(a)
Portfolio Turnover Rate................................... 46% 153% 81%
</TABLE>
- ------------------
* Commencement of operations. As of December 31, 1997, there were no Advisor
Shares outstanding for such Funds.
+ Total return is based on the change in net asset value during the period
and assumes reinvestment of all dividends and distributions.
(a) Annualized.
(b) Not annualized.
(c) During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been higher.
15
<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".
16
<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
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instruments are expected to be non-investment grade securities (I.E., rated BB
or lower by S&P or D&P, or Ba or lower by Moody's, or if unrated, of comparable
quality as determined by the Adviser). See Appendix A to this Prospectus for a
description of ratings of S&P, Moody's and D&P. Investments in high yield, high
risk debt securities involve comparatively greater risks, including price
volatility and the risk of default in the timely payment of interest and
principal, than higher rated securities. Some of such investments may be non-
performing securities or securities in default when purchased. See "Special Risk
Considerations--High Yield, High Risk Debt Securities".
The Emerging Markets Fund may invest up to 20% of its total assets in common
stocks, preferred stocks, detachable warrants and other equity securities that
may or may not be listed or traded on a 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
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capital appreciation and intends to invest assets of the Fund in privatizations
in appropriate circumstances. The ability of foreign persons, such as the Fund,
to participate in privatizations in certain Latin American countries may be
limited by local law, or the terms on which the Fund may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that privatization programs will continue or be successful.
In selecting equity investments for the Fund, the Adviser seeks to identify
and invest in companies it believes offer potential for long-term capital
appreciation. In evaluating prospective investments, the Adviser will utilize
internal financial, economic and credit analysis resources as well as
information obtained from other sources. In selecting industries and companies
for investment, the Adviser will consider factors such as overall growth
prospects, competitive position in domestic and export markets, technology,
research and development, productivity, labor costs, raw material costs and
sources, profit margins, return on investment, capital resources, government
regulation and management.
Up to 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 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 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
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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.
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,
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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.
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
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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 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
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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 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
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("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.
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
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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".
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
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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.
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.
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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 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 canceled. 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.
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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 "Appendix A: Special Factors Affecting the California Municipal
Fund" and "Appendix B: Special Factors Affecting the New York Municipal Fund" in
the Statement of Additional Information for further information.
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, "Prime-1" by Moody's, or
"F1" 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.
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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 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
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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 and Latin America Equity Funds may 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 and Latin America Equity 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.
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
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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.
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,
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associated with the loaned portfolio securities may pass to the borrower with
the lending of the securities. The Fund's Directors or the Adviser 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
other liquid assets in a separate account having a value equal to the aggregate
amount of such Fund's commitments under forward contracts entered into with
respect to position hedges, cross-hedges and transaction hedges, to the extent
they do not already own the security subject to the transaction hedge. If the
value of the assets placed in a separate account declines, additional assets
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, 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
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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 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.
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 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). The High Yield, Emerging Markets, U.S. Government Securities and
Mortgage Securities Funds borrowing will not exceed 20% of their respective
total assets and is permitted only for temporary or emergency purposes.
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 Fund's
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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 and Latin America Equity 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 Fund 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 and Latin America Equity 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".
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
Each Fund reserves the right to invest up to 10% of its total assets in the
securities of other unaffiliated investment companies. Each Fund may not invest
more than 5% of its total assets in the securities of any one investment company
or acquire more than 3% of the voting securities of any other investment
company. No
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Fund intends to invest in such investment companies unless, in the judgment of
the Adviser, the potential benefits of such investment justify the payment of
any premium to net asset value of the investment company or of any sales charge.
Each Fund will indirectly bear its proportionate share of any management fees
and other expenses paid by investment companies in which it invests in addition
to the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
Each Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with a Fund's investment
objectives and legally permissible for such Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
Each Fund retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with each Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy,
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 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 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; 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
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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, 1997 was 47%
for the High Yield Fund, 179% for the Emerging Markets Fund, 98% for the Latin
America Equity Fund, 144% for the New York Municipal Fund, 41% for the
California Municipal Fund, 46% for the National Municipal Fund, 153% for the
U.S. Government Securities Fund, and 81% for the Mortgage Securities Fund. 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. 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.
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 Fund 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 and Latin America Equity 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
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emerging market countries, which could affect private sector companies and the
Funds, and on market conditions, prices and yields of securities in the Funds'
portfolios. There may be the possibility of nationalization or expropriation of
assets, or future confiscatory levels of taxation affecting the Funds. In the
event of nationalization, expropriation or other confiscation, a Fund may not be
fairly compensated for its loss and could lose its entire investment in the
country involved.
INVESTMENT AND REPATRIATION RESTRICTIONS. Investment by the Funds in
non-U.S. issuers may be restricted or controlled to varying degrees. These
restrictions may limit or preclude investment in certain of such issuers or
countries and may increase the costs and expenses of the Funds. For example,
certain countries require governmental approval prior to investments by foreign
persons in the country or in a particular company or industry sector or limit
investment by foreign persons to only a specific class of securities of a
company which may have less advantageous terms (including price) than securities
of the company available for purchase by nationals. Certain countries may also
restrict or prohibit investment opportunities in issuers or industries deemed
important to national interests. As a result of investment restrictions the
Funds may, in certain countries, such as Mexico, invest through intermediary
vehicles or trusts. In addition, the repatriation of both investment income and
capital from some of these countries requires governmental approval and if there
is a deterioration in a country's balance of payments or for other reasons, a
country may impose temporary restrictions on foreign capital remittances abroad.
Even where there is no outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects of the operation of the
Funds.
The Funds could be adversely affected by delays in, or a refusal to grant
any required governmental approval for repatriation of capital, as well as by
the application to a Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, a Fund was unable to distribute
substantially all of its net investment income and net capital gain 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
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.
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MARKET CHARACTERISTICS; DIFFERENCES IN SECURITIES MARKETS. The securities
markets in many countries, and in Latin American and other emerging market
countries in particular, generally have substantially less volume than the New
York Stock Exchange, and equity securities of most companies listed on such
markets may be less liquid and more volatile than equity securities of U.S.
companies of comparable size. Some of the stock exchanges outside of the United
States and in Latin American and other emerging market countries, to the extent
that established securities markets even exist, are in the earlier stages of
their development. A high proportion of the shares of many foreign companies may
be held by a limited number of persons, which may limit the number of shares
available for investment by the Funds. A limited number of issuers in most, if
not all, of these securities markets may represent a disproportionately large
percentage of market capitalization and trading volume. In addition, the
application of certain 1940 Act provisions may limit the Funds' ability to
invest in certain non-U.S. issuers and to participate in public offerings in
these countries. The limited liquidity of certain non-U.S. securities markets
may also affect the Funds' ability to acquire or dispose of securities at the
price and time it wishes to do so.
Many companies traded on securities markets in any foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country may trade at price-earning multiples higher than those of comparable
companies trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
Trading practices in certain foreign securities markets are also
significantly different from those in the United States. Brokerage commissions
and other transaction costs on the securities exchanges in many countries are
generally higher than in the United States. In addition, securities settlements
and clearance procedures in certain countries, and, in Latin American and other
emerging market countries in particular, are less developed and less reliable
than those in the United States and the Funds may be subject to delays or other
material difficulties and could experience a loss if a counterparty defaults.
Delays in settlement could 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.
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GOVERNMENT SUPERVISION; LEGAL SYSTEMS. Disclosure and regulatory standards
in certain foreign countries, including Latin American and other emerging market
countries, are in many respects less stringent than U.S. standards. There may be
less government supervision and regulation of securities exchanges, listed
companies and brokers in these countries than exists in the United States.
Brokers in some countries may not be as well capitalized as those in the United
States, so that they may be more susceptible to financial failure in times of
market, political, or economic stress, exposing the Funds to a risk of loss.
Less information may be available to the Funds than with respect to investments
in the United States and, in certain of these countries, less information may be
available to the Funds than to local market participants. In addition, existing
laws and regulations are often inconsistently applied. Foreign investors may be
adversely affected by new laws and regulations, changes to existing laws and
regulations and preemption of local laws and regulations by national laws. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.
FINANCIAL INFORMATION AND STANDARDS. Non-U.S. issuers may be subject to
accounting, auditing and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular,
the assets and profits appearing on the financial statements of certain non-U.S.
issuers may not reflect their financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting
rules may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Moreover,
substantially less information may be publicly available about non-U.S. issuers
than is available about U.S. issuers.
HIGH YIELD, HIGH RISK DEBT SECURITIES
GENERAL. The High Yield and Emerging Markets Funds may invest all or
substantially all of their respective assets in high yield, high risk debt
securities, and the Latin America Equity and the Municipal Funds may invest up
to 20% of their total assets in such 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.
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In addition, the trading volume for high yield, high risk debt securities is
generally lower than that for higher-rated securities and the secondary markets
could contract under adverse market or economic conditions independent of any
specific adverse changes in the condition of a particular issuer. These factors
may have an adverse effect on a Fund's ability to dispose of particular
portfolio investments and may limit its ability to obtain accurate market
quotations for purposes of valuing securities and calculating net asset value.
If a Fund is not able to obtain precise or accurate market quotations for a
particular security, it will become more difficult for the Company's Board of
Directors to value such Fund's portfolio securities and the Company's Directors
may have to use a greater degree of judgment in making such valuations.
Furthermore, adverse publicity and investor perceptions about lower-rated
securities, whether or not based on fundamental analysis, may tend to decrease
the market value and liquidity of such lower-rated securities. Less liquid
secondary markets may also affect each Fund's ability to sell securities at
their fair value. In addition, each of the Funds may invest up to 15% of its net
assets, measured at the time of investment, in illiquid securities, which may be
more difficult to value and to sell at fair value. If the secondary markets for
high yield, high risk debt securities contract due to adverse economic
conditions or for other reasons, certain previously liquid securities in a
Fund's portfolio may become illiquid and the proportion of the Fund's assets
invested in illiquid securities may increase.
The ratings of fixed income securities by Moody's, S&P and D&P are a
generally accepted barometer of credit risk. They are, however, subject to
certain limitations from an investor's standpoint. The rating of an issuer is
heavily weighted by past developments and does not necessarily reflect probable
future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of difference in credit risk of securities within each rating category. See
Appendix A to this Prospectus for a description of such ratings.
FIXED INCOME SECURITIES. Each of the Funds (other than the Municipal Funds)
may invest in fixed income securities. Changes in market yields will affect a
Fund's net asset value as prices of fixed income securities generally increase
when interest rates decline and decrease when interest rates rise. Prices of
longer term fixed income securities generally increase or decrease more sharply
than those of shorter term securities in response to interest rate changes,
particularly if such securities were purchased at a discount. 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 issuer developments and
changes in economic conditions than higher-rated securities. In addition, such
securities generally present a higher degree of credit risk. Corporate issuers
of securities valued below investment grade and comparable unrated 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 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.
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Many of these countries are also characterized by political uncertainty or
instability. Additional factors which may influence the ability or willingness
to service debt include, but are not limited to, a country's cash flow
situation, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of its debt service burden to the economy as a whole,
and its government's policy towards the International Monetary Fund, the World
Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely and ultimate
payments on its external debt obligations will also be strongly influenced by
the obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings from foreign trade to service its external debt, it
may need to depend on continuing loans and aid from foreign governments,
commercial banks and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Funds may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries, including those in
Latin America, are among the world's largest debtors to commercial banks, other
governments, international financial organizations and other financial
institutions. These obligors have in the past experienced substantial
difficulties in servicing their external debt obligations, which led to defaults
on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
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.
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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. During the earlier 1990's, California experienced
significant financial difficulties, which reduced its credit standing. The
State's finances have improved since 1994. 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 again, 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
"Appendix A: Special Factors Affecting the California Municipal Fund" in the
Statement of Additional Information for further information.
NEW YORK ISSUERS. New York State, New York City and other issuers of New
York Municipal Securities have, at various times in the past, encountered
financial difficulties. A continuation or recurrence of the financial
difficulties previously experienced by the issuers of New York Municipal
Securities could result in defaults or declines in the market values of those
issuers' existing obligations and, possibly, in the obligations of other issuers
of New York Municipal Securities and the income derived by the Fund and its
ability to preserve capital and liquidity could be adversely affected. See
"Appendix B: 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".
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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 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 its 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
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the price of the security underlying the warrant may not exceed the exercise
price of the warrant and the warrant may expire without any value. See
"--Hedging and Derivatives" below for a discussion of call options and stock
index call options.
A synthetic convertible security differs from a traditional convertible
security in several respects. Unlike a traditional convertible security, which
is a single security having a unitary market value, a synthetic convertible
security is comprised of two or more separate securities, each with its own
market value. Therefore, the "market value" of a synthetic convertible security
is the sum of the values of its fixed income component and its convertibility
component. For this reason, the values of a synthetic convertible security and a
traditional convertible security will respond differently to market
fluctuations.
More flexibility is possible in the assembly of a synthetic convertible
security than in the purchase of a convertible security. Synthetic convertible
securities may be selected where the two components represent one issuer or are
issued by a single issuer, thus making the synthetic convertible security
similar to a traditional convertible security. Alternatively, the character of a
synthetic convertible security allows the combination of components representing
distinct issuers which will be used when the Adviser believes that such a
combination would better promote a Fund's investment objective. A synthetic
convertible security also is a more flexible investment in that its two
components may be purchased or sold separately. For example, a Fund may purchase
a warrant for inclusion in a synthetic convertible security but temporarily hold
short-term investments while postponing the purchase of a corresponding bond
pending development of more favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline in
the price of the stock or the level of the index involved in the convertibility
component, causing a decline in the value of the call option or warrant. Should
the price of the stock fall below the exercise price and remain there throughout
the exercise period, the entire amount paid for the call option or warrant would
be lost. Since a synthetic convertible security includes the fixed income
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the fixed
income instrument.
SHORT SALES
Short sales by the Funds involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested. The
Funds are permitted to engage in short sales only with respect securities
related to those in their portfolios. The Adviser therefore expects that if the
price of the securities a Fund is required to replace in connection with a short
sale increases, the value of the related securities in the Fund's portfolio will
also increase, although not necessarily in the same proportion.
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.
YEAR 2000
The investment advisory services provided to the Funds by the Adviser depend
in large part on the smooth functioning of their computer systems. Many computer
software systems in use today cannot recognize the Year 2000, but revert to 1900
or some other date, due to the manner in which dates were encoded or calculated.
The capability of these systems to recognize the Year 2000 could have a negative
impact on the Adviser's provision of investment advisory services, including the
handling of securities trades, pricing and account services. The Adviser has
advised the Funds that it has been reviewing all of its computer systems and
actively working on necessary changes to its systems to prepare for the Year
2000 and expects that its systems will be Year 2000 compliant before such date.
In addition, the Adviser has been advised by
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the Company's service providers that they are also in the process of modifying
their systems with the same goal. There can, however, be no assurance that the
Adviser or any other service provider will be successful in achieving Year 2000
compliance, or that interaction with other non-complying computer systems will
not impair services to the Funds at that time.
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 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.
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LIMITING INVESTMENT RISKS
To further protect investors, the Funds have adopted the following
investment limitations:
1.
No Fund may invest 25% or more of the value of its total assets in
securities of issuers in any one industry; provided, that there is no
limitation with respect to investment in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; 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, 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 Fund may borrow money from banks and enter into reverse repurchase
agreements in an aggregate amount of up to 25% of its 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.
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
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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; and 0.35% for each of the U.S. Government
Securities, Mortgage Securities, California Municipal, New York Municipal and
National Municipal 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 $9.5 billion in assets and serves as investment
adviser to nineteen registered investment companies (or portfolios thereof). The
principal business address of the Adviser is 520 Madison Avenue, New York, New
York 10022.
PORTFOLIO MANAGERS. Stephen T. Shapiro serves as the portfolio manager for
the High Yield Fund. Mr. Shapiro is a Managing Director of the Adviser and has
been associated with the Adviser since 1983. Dr. Wallace Mathai-Davis and
Richard M. Johnston serve as portfolio managers of the Emerging Markets Fund.
Dr. Mathai-Davis is a Managing Director of the Adviser and has been associated
with the Adviser since 1986. 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 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 serves as the portfolio manager for the New York Municipal
Fund. Ms. Dolan and Michael Pietronico serve as portfolio managers for the
National Municipal Fund. Ms. Dolan has been with the Adviser since 1983 with
responsibilities for the Adviser's tax sensitive and cross market portfolios.
Mr. Pietronico has been with the Adviser since 1992, and specializes in
municipal securities. John H. Haldeman, Jr. serves as the portfolio manager for
the California Municipal Fund. Mr. Haldeman has been with the Adviser since 1988
with responsibilities in fixed income portfolio management, specializing in
municipal securities.
ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT
PFPC Inc. ("PFPC"), an indirect wholly owned subsidiary of PNC Bank Corp.
(the "Administrator"), performs administrative and fund accounting services for
the Company, and is responsible for certain clerical, record keeping and
bookkeeping services, except those performed by the Adviser, or by Chase or BONY
in their capacity as custodians of the Company. The services provided by PFPC as
Administrator include regulatory compliance, assistance in the preparation and
filing of post-effective amendments to the Company's registration statement with
the Commission, preparation of annual, semi-annual and other reports to
shareholders and the Commission, filing of federal and state income tax returns,
preparation of financial and management reports, preparation of board meeting
materials, preparation and filing of blue sky registrations and monitoring
compliance with the amounts and conditions of each state's qualification. For
the administrative and fund accounting services PFPC provides to the Company,
PFPC is paid an annual fee calculated daily and paid monthly which will not
exceed .125% of average daily net assets. From time to time, the Administrator
may waive all or a portion of its fees.
In addition to the services provided by PFPC to the Company as
Administrator, PFPC also provides transfer agency and dividend disbursing
services to the Company pursuant to a separate agreement.
A further discussion of the terms of the Company's administrative, fund
accounting and transfer agency arrangements is contained in the Statement of
Additional Information.
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CUSTODIAN
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.
A further discussion of the terms of the Company's custody 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 Provident Distributors, Inc. The Distributor's principal offices
are currently located at Four Falls Corporate Center, 6th Floor, West
Conshohocken, PA 19428-2961.
Solely for the purpose of reimbursing the Distributor for activities
primarily intended to result in the sale of the Advisor Shares, each Fund is
authorized to spend up to 0.25% of its net assets annually with respect to the
Advisor Shares of the Fund in accordance with a Plan of Distribution (the
"Plan") pursuant to Rule 12b-1 promulgated under the 1940 Act. Activities for
which the Distributor may be reimbursed include (but are not limited to) the
development and implementation of direct mail promotions and advertising for the
Funds and the preparation, printing and distribution of prospectuses for the
Funds to recipients other than existing shareholders.
Although it is anticipated that some promotional activities will be
conducted on a Company-wide basis, payments made by the Funds under the Plan
will generally be used to finance the distribution of the Advisor 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.
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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.
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 PFPC 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, 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 Fund declares dividends daily and pays
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,
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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 PNC Bank (see
instructions below). A completed Account Application should be forwarded to the
Company at the address noted below under "Initial Investments by Mail" in
advance of the wire. For each Fund, notification must be given to the Company at
1-800-618-9510 prior to 4:00 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:
PNC Bank
Philadelphia, Pennsylvania
ABA# 031-0000-53
Account # 86-0179-1617
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 PNC 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.
c/o PFPC Inc.
P.O. Box 8701
Wilmington, DE 19809
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
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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.
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.,
c/o PFPC Inc., P.O. Box 8701, Wilmington, DE 19809.
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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.
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 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,
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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.
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., c/o PFPC Inc., P.O. Box 8701,
Wilmington, DE 19809 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., c/o PFPC Inc., P.O. Box 8701, Wilmington, DE
19809. 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
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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 Subchapter M of the Internal Revenue Code of 1986, as
amended (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 gain (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 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
gain, 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 gain 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 RIC 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 RIC 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 RIC 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
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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 gain
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 gain net
income 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 gain and other income. If a Fund qualifies as a
RIC, 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 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 gain 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 will be subject to one of the following special tax regimes:
(i) the Fund is liable for U.S. federal income tax, and an additional charge in
the nature of interest, on a portion of any "excess distribution" from such
foreign entity or any gain from the disposition of such shares, even if the
entire distribution or gain is paid out by the Fund as a dividend to its
shareholders; (ii) if the Fund was able and elected to treat a PFIC as a
"qualified electing fund," the Fund would be required each year to include in
income, and distribute to shareholders in accordance with the distribution
requirements set forth above, the Fund's pro rata share of the ordinary
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earnings and net capital gains of the PFIC, whether or not such earnings or
gains are distributed to the Funds or (iii) the Fund is entitled to
mark-to-market annually the shares of the PFIC, and is required to distribute to
shareholders any such mark-to-market gains in accordance with the distribution
requirements set forth above. While it is possible that the Funds may invest in
PFICs, it is not anticipated that such investments would be material.
A Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number, (ii) the Internal Revenue Service ("IRS") notifies the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (iii)
when required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding.
CALIFORNIA, NEW YORK AND NATIONAL MUNICIPAL FUNDS
Although exempt-interest dividends paid by the California Municipal, New
York Municipal and National Municipal Funds may be excluded by shareholders of
such Funds from their gross income for regular federal income tax purposes,
under the Code all or a portion of such dividends may be (i) a preference item
for purposes of the alternative minimum tax, (ii) a component of the "ACE"
adjustment for purposes of determining the amount of corporate alternative
minimum tax or (iii) a factor in determining the extent to which a shareholder's
Social Security benefits are taxable. Moreover, receipt of exempt-interest
dividends from each Fund may affect the federal tax liability of certain foreign
corporations, S Corporations and insurance companies. Furthermore, under the
Code, interest on indebtedness incurred or continued to purchase or carry
portfolio shares, which interest is deemed to relate to exempt-interest
dividends, will not be deductible by shareholders of the Fund for federal income
tax purposes.
Each Fund may 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 RIC 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 exempt
interest 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,
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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 gain and other taxable income will be taxed as
dividends for purposes of California personal income taxation. The Fund's net
capital gain for federal income tax purposes will be taxed as long-term capital
gain 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 gain 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 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
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earned by an investment in a Fund is reinvested, and will therefore be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Total return and yield quotations are computed separately for each
class of shares of a Fund. Each Fund presents performance information for each
class of shares commencing with the Fund's inception (or the inception of the
Partnership with respect to the High Yield Fund). Performance information for
each class of shares may also reflect performance for time periods prior to the
introduction of such class, and the performance for such prior time periods will
not reflect any fees and expenses payable by such class that were not borne by
the Fund prior to the introduction of such class. The California Municipal, New
York Municipal and National Municipal Funds may also present from time to time
their respective tax-equivalent yields. The tax-equivalent yield is calculated
by determining the portion of yield which is tax-exempt and by calculating the
equivalent taxable yield and adding to such amount any fully taxable yield.
The performance of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia and Far East Index or Morgan Stanley Capital International World
Index. The performance information may also include evaluations of the Funds
published by nationally recognized ranking services and by various national or
local financial publications, such as BUSINESS WEEK, FORBES, FORTUNE,
INSTITUTIONAL INVESTOR, MONEY, THE WALL STREET JOURNAL, BARRON'S, KIPLINGER'S,
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
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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 eleven classes of shares, corresponding to shares of OFFITBANK High
Yield Fund, OFFITBANK Emerging Markets Fund, OFFITBANK Total Return Fund,
OFFITBANK Investment Grade Global Debt Fund, OFFITBANK Global Convertible Fund,
OFFITBANK Latin America Equity Fund, OFFITBANK U.S. Government Securities Fund,
OFFITBANK Mortgage Securities Fund, OFFITBANK California Municipal Fund,
OFFITBANK New York Municipal Fund and OFFITBANK National Municipal Fund.
Effective May 1, 1996, all of the outstanding shares of each of the Funds then
in existence were reclassified as "Select Shares" and each Fund began offering a
new class of shares, designated as "Advisor Shares." The per-share net asset
value of each class of shares in a Fund is calculated separately and may differ
as between classes as a result of different fees or expenses payable by the
classes and the allocation of certain class-specific expenses to the appropriate
class to which such expenses apply. The Company's Board of Directors may, in the
future, authorize the issuance of additional classes of capital stock
representing shares of additional investment portfolios or additional classes of
shares of the Funds.
Holders of a Fund's shares will vote in the aggregate, and not by series or
class, with shareholders of the Company's other current and future portfolios on
all matters, except where voting by portfolio or class is required by law or
where the matter involved affects only one portfolio or class. Under the
corporate law of Maryland, the Company's state of incorporation, and the
Company's By-Laws (except as required under the 1940 Act), the Company is not
required and does not currently intend to hold annual meetings of shareholders
for the election of directors. Shareholders, however, do have the right to call
for a meeting to consider the removal of one or more of the Company's directors
if such a request is made, in writing, by the holders of at least 10% of the
Company's outstanding voting securities. A more complete statement of the voting
rights of shareholders is contained in the Statement of Additional Information.
All shares of the Company, when issued, will be fully paid and
nonassessable.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York, serves as counsel to the Company.
REPORTS TO SHAREHOLDERS
Each Fund sends shareholders semi-annual and audited annual reports, each of
which include listings of investment securities held by each Fund at the end of
the period covered. In an effort to reduce the Funds' printing and mailing
costs, the Funds may consolidate the mailing of their semi-annual and annual
reports by household. This consolidation means that a household having multiple
accounts with the identical address of record would receive a single copy of
each report. When a Fund's annual report is combined with the Prospectus into a
single document, the Fund will mail the combined document to each shareholder to
comply with legal requirements. Any shareholder who does not want this
consolidation to apply to his or her account should contact the Company or the
Funds' transfer agent.
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APPENDIX A
RATINGS
The following is a description of certain ratings of Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Services, Inc. ("Moody's"), 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.
COMMERCIAL PAPER RATINGS
A 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. The
following summarizes the rating categories used by S&P for commercial paper:
"A-1"--Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2"--Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations rated "A-1".
However, the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
"A-3"--Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B"--Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C"--Obligations are currently vulnerable to nonpayment and are dependent on
favorable business, financial, and economic conditions for the obligor to meet
its financial obligation.
"D"--Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:
"Prime-1"--Issuers (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2"--Issuers (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
A-1
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"Prime-3"--Issuers (or supporting institutions) have an acceptable ability
for repayment of senior short-term debt obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
"Not Prime"--Issuers do not fall within any of the Prime rating categories.
The three rating categories of D&P for investment grade commercial paper and
short-term debt are "D-1," "D-2" and "D-3." D&P employs three designations,
"D-1+," "D-1" and "D-1-," within the highest rating category. The following
summarizes the rating categories used by D&P for commercial paper:
"D-1+"--Debt possesses the highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1"--Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-"--Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2"--Debt possesses 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.
"D-3"--Debt possesses satisfactory liquidity and other protection factors
qualify issues as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
"D-4"--Debt possesses 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.
"D-5"--Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that have time horizons
of less than 12 months for most obligations, or up to three years for U.S.
public finance securities. The following summarizes the rating categories used
by Fitch for short-term obligations:
"F1"--Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2"--Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of securities rated "F1".
"F3"--Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
"B"--Securities possess speculative credit quality. this designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C"--Securities possess high default risk. This designation indicates that
the capacity for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
"D"--Securities are in actual or imminent payment default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for corporate
and municipal debt:
A-2
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"AAA"--An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA"--An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
"A"--An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB"--An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"BB," "B," "CCC," "CC" and "C"--Debt is regarded as having significant
speculative characteristics. "BB" indicates the least degree of speculation and
"C" the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
"BB"--Debt is less vulnerable to non-payment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
"B"--Debt is more vulnerable to non-payment than obligations rated "BB", but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
"CCC"--Debt is currently vulnerable to non-payment, and is dependent upon
favorable business, financial and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse business,
financial or economic conditions, the obligor is not likely to have the capacity
to meet its financial commitment on the obligation.
"CC"--An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C"--The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
"D"--An obligation rated "D" is in payment default. This rating is used when
payments on an obligation are not made on the date due, even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. "D" rating is also used upon the filing of a
bankruptcy petition or the taking of similar action if payments on an obligation
are jeopardized.
PLUS (+) OR MINUS (-)--The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
"r"--This rating is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa"--Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
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.
A-3
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"Aa"--Bonds 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 possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa"--Bonds 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," "B," "Caa," "Ca," and "C"--Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---)--Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by D&P for
corporate and municipal long-term debt:
"AAA"--Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA"--Debt is considered of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A"--Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB"--Debt possesses below-average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP"--Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
A-4
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The following summarizes the ratings used by Fitch for corporate and
municipal bonds:
"AAA"--Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of investment risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is very unlikely to be adversely affected
by foreseeable events.
"AA"--Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A"--Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of investment risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB"--Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of investment
risk. The capacity for timely payment of financial commitments is adequate, but
adverse changes in circumstances and in economic conditions are more likely to
impair this category.
"BB"--Bonds considered to be speculative. These ratings indicate that there
is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B"--Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC", "C"--Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD" and "D"--Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
MUNICIPAL NOTE RATINGS
A S&P rating reflects the liquidity concerns and market access risks unique
to notes due in three years or less. The following summarizes the ratings used
by Standard & Poor's Ratings Group for municipal notes:
"SP-1"--The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2"--The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3"--The issuers of these municipal notes exhibit speculative capacity to
pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk. The
following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
"MIG-1"/"VMIG-1"--This designation denotes best quality, enjoying strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
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"MIG-2"/"VMIG-2"--This designation denotes high quality, with margins of
protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3"--This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4"--This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG"--This designation denotes speculative quality and lack of margins of
protection.
D&P uses the short-term ratings described under Commercial Paper Ratings for
municipal notes.
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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.
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A Fund's inability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are determined by
negotiation of the parties. It is anticipated that any Fund authorized to use
OTC options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, 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.
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Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, 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
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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.
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.
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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 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 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
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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.
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
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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.
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
Dr. Wallace Mathai-Davis
SECRETARY AND TREASURER
Stephen Brent Wells
ASSISTANT TREASURER
Vincent M. Rella
ASSISTANT TREASURER
INVESTMENT ADVISER
OFFITBANK
520 Madison Avenue
New York, NY 10022-4213
DISTRIBUTOR
OFFIT Funds Distributor, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, PA 19428-2961
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; TRANSFER AND DIVIDEND
DISBURSING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
<PAGE>
The OFFITBANK Investment Fund, Inc.
400 Bellevue Parkway, Suite 108, Wilmington, DE 19809
(800) 618-9510
<PAGE>
PART B
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
April 17, 1998
The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end,
management investment company that currently intends to offer eight
portfolios offering a variety of investment alternatives. This Statement of
Additional Information relates to the following portfolios:
OFFITBANK HIGH YIELD FUND
OFFITBANK EMERGING MARKETS FUND
OFFITBANK LATIN AMERICA EQUITY FUND
OFFITBANK TOTAL RETURN FUND
OFFITBANK INVESTMENT GRADE GLOBAL DEBT FUND
OFFITBANK GLOBAL CONVERTIBLE FUND
OFFITBANK U.S. GOVERNMENT SECURITIES FUND
OFFITBANK MORTGAGE SECURITIES FUND
OFFITBANK CALIFORNIA MUNICIPAL FUND
OFFITBANK NEW YORK MUNICIPAL FUND
OFFITBANK NATIONAL MUNICIPAL FUND
(individually, a "Fund", and collectively, the "Funds"). This Statement of
Additional Information sets forth information about the Company applicable to
each of the Funds.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Company's
Prospectus dated April 17, 1998 (the "Prospectus"). This Statement of
Additional Information contains additional information to that set forth in the
Prospectus and should be read in conjunction with the Prospectus, additional
copies of which may be obtained without charge by writing or calling the Company
at the address and telephone number set forth above.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information on Portfolio Instruments . . . . . . . . . . . . . . 3
Additional Risk Considerations. . . . . . . . . . . . . . . . . . . . . . . 9
Investment Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Management of the Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Administration, Transfer Agency, Fund Accounting and Custody Services . . . 16
Portfolio Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Performance Calculations. . . . . . . . . . . . . . . . . . . . . . . . . . 19
Additional Information Concerning Dividends, Distributions and Taxes. . . . 22
Shareholder Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Appendix A: Special Factors Affecting the California Municipal Fund . . . . A-1
Appendix B: Special Factors Affecting the New York Municipal Fund . . . . . B-1
</TABLE>
<PAGE>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
The following information relates to or supplements the description of
the Funds' investment policies contained in the Prospectus.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. A repurchase agreement
is a transaction in which the seller of a security commits itself at the time
of the sale to repurchase that security from the buyer at a mutually agreed
upon time and price. The Funds will enter into repurchase agreements only
with dealers, domestic banks or recognized financial institutions which, in
the opinion of the Adviser based on guidelines established by the Company's
Board of Directors, present minimal credit risks. The Adviser will monitor
the value of the securities underlying the repurchase agreement at the time
the transaction is entered into and at all times during the term of the
repurchase agreement to ensure that the value of the securities always
exceeds the repurchase price. In the event of default by the seller under the
repurchase agreement, the Fund may incur costs and experience time delays in
connection with the disposition of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. A reverse
repurchase agreement is a borrowing transaction in which the Fund transfers
possession of a security to another party, such as a bank or broker/dealer,
in return for cash, and agrees to repurchase, the security in the future at
an agreed upon price, which includes an interest component. Whenever the
Funds enter into reverse repurchase agreements as described in the
Prospectus, they will place in a segregated custodian account liquid assets
having a value equal to the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure such equivalent value is
maintained. Reverse repurchase agreements are considered to be borrowings by
the Funds under the Investment Company Act of 1940, as amended (the "1940
Act").
ASSET-BACKED SECURITIES
Each of the Funds may invest in asset-backed securities. Asset-backed
securities are generally issued as pass through certificates, which represent
undivided fractional ownership interests in the underlying pool of assets, or
as debt instruments, and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties.
Payments of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or other enhancement
issued by a financial institution unaffiliated with the entities issuing the
securities. Assets which, to date, have been used to back asset-backed
securities include motor vehicle installment sales contracts or installment
loans secured by motor vehicles, and receivables from revolving credit
(credit card) agreements.
Asset-backed securities present certain risks which are, generally,
related to limited interests, if any, in related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities. If the letter of credit is exhausted, holders
of asset-backed securities may also experience delays in payments or losses
if the full amounts due on underlying sales contracts are not realized.
Because asset-backed securities are relatively new, the market experience in
these securities is limited and the market's ability to sustain liquidity
through all phases of the market cycle has not been tested.
CREDIT SUPPORT. Asset-backed securities often contain elements of credit
support to lessen the effect of the potential failure by obligors to make
timely payments on underlying assets. Credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying asset.
Liquidity protection ensures that the pass through of payments due on the
installment sales contracts and installment loans
Page 3
<PAGE>
which comprise the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in
the pool. Such protection may be provided through guarantees, insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transaction or through a
combination of such approaches. The Funds will not pay any additional fees
for such credit support. However, the existence of credit support may
increase the market price of the security.
DEPOSITORY RECEIPTS
The High Yield, Emerging Markets, Latin America Equity, Total Return,
Investment Grade Global Debt and Global Convertible Funds may hold equity
securities of foreign issuers in the form of American Depository Receipts
("ADRs"), American Depository Shares ("ADSs") and European Depository
Receipts ("EDRs"), or other securities convertible into securities of
eligible issuers. These securities may not necessarily be denominated in the
same currency as the securities for which they may be exchanged. ADRs and
ADSs typically are issued by an American bank or trust company which
evidences ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depository Receipts
("CDRs"), are receipts issued in Europe typically by foreign banks and trust
companies that evidence ownership of either foreign or domestic securities.
Generally, ADRs and ADSs in registered form are designed for use in United
States securities markets and EDRs and CDRs in bearer form are designed for
use in European securities markets. For purposes of the Fund's investment
policies, the Fund's investments in ADRs, ADSs, EDRs, and CDRs will be deemed
to be investments in the equity securities representing securities of foreign
issuers into which they may be converted.
WARRANTS OR RIGHTS
Warrants or rights may be acquired by each of the High Yield, Emerging
Markets, Latin America Equity, Total Return, Investment Grade Global Debt and
Global Convertible Funds in connection with other securities or separately,
and provide the applicable Fund with the right to purchase at a later date
other securities of the issuer. Warrants or rights acquired by a Fund in
units or attached to securities will be deemed to be without value for
purpose of this restriction. These limits are not fundamental policies of the
Funds and may be changed by the Company's Board of Directors without
shareholder approval.
BORROWING
The Latin America Equity, Total Return, Global Debt, National Municipal,
California Municipal and New York Municipal Funds' borrowings will not exceed
25% of each Fund's respective total assets (including the amount borrowed),
less all liabilities and indebtedness other than the borrowings and may use
the proceeds of such borrowings for investment purposes. These Funds may
borrow for leveraging purposes. The High Yield, Emerging Markets, Global
Convertible, U.S. Government Securities and Mortgage Securities Funds
borrowings will not exceed 20% of their respective total assets and is
permitted only for temporary or emergency purposes other than to meet
redemptions. Any borrowing by the Funds may cause greater fluctuation in the
value of their shares than would be the case if the Funds did not borrow. In
the event that the Funds employ leverage, they would be subject to certain
additional risks. Use of leverage creates an opportunity for greater growth
of capital but would exaggerate any increases or decreases in the Funds' net
asset values. When the income and gains on securities purchased with the
proceeds of borrowings exceed the costs of such borrowings, the Funds'
earnings or net asset values will increase faster than otherwise would be the
case; conversely, if such income and gains fail to exceed such costs, the
Funds' earnings or net asset values would decline faster than would otherwise
be the case.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Certain Funds may purchase or sell forward foreign currency exchange
contracts ("forward contracts") as part of its portfolio investment strategy.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A Fund may enter
into a forward contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, for example, when a Fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of such Fund's portfolio securities
denominated in such foreign currency. Conversely, when a Fund believes that
the
Page 4
<PAGE>
U.S. dollar may suffer a substantial decline against foreign currency, it may
enter into a forward purchase contract to buy that foreign currency for a
fixed dollar amount ("position hedge"). In this situation, a Fund may, in the
alternative, enter into a forward contract to sell a different foreign
currency for a fixed U.S. dollar amount where such Fund believes that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the
currency in which portfolio securities of the Fund are denominated
("cross-hedge"). Each Fund's custodian will place cash not available for
investment or U.S. government securities or other liquid investments in a
separate account having a value equal to the aggregate amount of such Fund's
commitments under forward contracts entered into with respect to position
hedges, cross-hedges and transaction hedges, to the extent they do not
already own the security subject to the transaction hedge. If the value of
the securities placed in a separate account declines, additional cash or
investments will be placed in the account on a daily basis so that the value
of the account will equal the amount of such Fund's commitments with respect
to such contracts. As an alternative to maintaining all or part of the
separate account, a Fund may purchase a call option permitting such Fund to
purchase the amount of foreign currency being hedged by a forward sale
contract at a price no higher than the forward contract price or a Fund may
purchase a put option permitting such Fund to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the forward contract price. Unanticipated changes in currency prices may
result in poorer overall performance for a Fund than if it had not entered
into such contracts. If the party with which a Fund enters into a forward
contract becomes insolvent or breaches its obligation under the contract,
then the Fund may lose the ability to purchase or sell a currency as desired.
LOANS OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Fund may make
secured loans of portfolio securities amounting to not more than 30% of its
total assets. Securities loans are made to broker/dealers or institutional
investors pursuant to agreements requiring that the loans continuously be
secured by collateral at least equal at all times to the value of the
securities lent plus any accrued interest, "marked to market" on a daily
basis. The collateral received will consist of cash, U.S. short-term
government securities, bank letters of credit or such other collateral as may
be permitted under the Fund's investment program and by regulatory agencies
and approved by the Company's Board of Directors. While the securities loan
is outstanding, the Fund will continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Fund has a right to call each loan and obtain the securities on five business
days' notice. To the extent applicable, the Fund will not have the right to
vote equity securities while they are being lent, but it will call in a loan
in anticipation of any important vote. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delay in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans only will be made to firms deemed by the Adviser to be of
good standing and will not be made unless, in the judgment of the Adviser,
the consideration to be earned from such loans would justify the risk.
U.S. GOVERNMENT OBLIGATIONS
Except for temporary defensive purposes, no Fund (other than the U.S.
Government Securities and Mortgage Securities Funds) will invest more than
25% (35% with respect to the National Municipal, California Municipal and New
York Municipal Funds) of its net assets in securities issued or guaranteed by
the U.S. government or by its agencies or instrumentalities. Such securities
in general include a wide variety of U.S. Treasury obligations consisting of
bills, notes and bonds, which principally differ only in their interest
rates, maturities and times of issuance. Securities issued or guaranteed by
U.S. government agencies and instrumentalities are debt securities issued by
agencies or instrumentalities established or sponsored by the U.S. government.
In addition to the U.S. Treasury obligations described above, the Funds
may invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected
securities are traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
program, the interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial
institutions, which then trade the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full
faith and credit of the U.S. Treasury (e.g., direct pass-through certificates
of the Government National Mortgage Association); (b) the limited authority
of the issuer or guarantor to borrow from the U.S. Treasury (e.g.,
obligations of Federal Home Loan Banks); or (c) only the credit of the issuer
or guarantor (e.g., obligations of the Federal
Page 5
<PAGE>
Home Loan Mortgage Corporation). In the case of obligations not backed by the
full faith and credit of the U.S. Treasury, the agency issuing or
guaranteeing the obligation is principally responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities
and that have been established or sponsored by the U.S. government include,
in addition to those identified above, the Bank for Cooperatives, the
Export-Import Bank, the Federal Farm Credit System, the Federal Intermediate
Credit Banks, the Federal Land Banks, the Federal National Mortgage
Association and the Student Loan Marketing Association.
BANK OBLIGATIONS
As stated in the Prospectus, bank obligations that may be purchased by
each Fund include certificates of deposit, bankers' acceptances and fixed
time deposits. A certificate of deposit is a short-term negotiable
certificate issued by a commercial bank against funds deposited in the bank
and is either interest-bearing or purchased on a discount basis. A banker's
acceptance is a short-term draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction. The
borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed
time deposits are obligations of branches of U.S. banks or foreign banks
which are payable at a stated maturity date and bear a fixed rate of
interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in
the deposit to a third party. The Funds do not consider fixed time deposits
illiquid for purposes of the restriction on investment in illiquid securities.
Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may
be made and the interest rates and fees that may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit
losses arising from possible financial difficulties of borrowers might affect
a bank's ability to meet its obligations. Bank obligations may be general
obligations of the parent bank or may be limited to the issuing branch by the
terms of the specific obligations or by government regulation.
Investors should also be aware that securities of foreign banks and
foreign branches of U.S. banks may involve investment risks in addition to
those relating to domestic bank obligations. Such investment risks include
future political and economic developments, the possible imposition of
foreign withholding taxes on interest income payable on such securities held
by a Fund, the possible seizure or nationalization of foreign assets and the
possible establishment of exchange controls or other foreign governmental
laws or restrictions which might affect adversely the payment of the
principal of and interest on such securities held by a Fund. In addition,
there may be less publicly-available information about a foreign issuer than
about a U.S. issuer, and foreign issuers may not be subject to the same
accounting, auditing and financial record-keeping standards and requirements
as U.S. issuers.
VARIABLE AND FLOATING RATE INSTRUMENTS
Securities purchased by each Fund may include variable and floating rate
instruments, which provide for adjustments in the interest rate on certain reset
dates or whenever a specified interest rate index changes, respectively.
Variable and floating rate instruments are subject to the credit quality
standards described in the Prospectus. In some cases the Fund may require that
the obligation to pay the principal of the instrument be backed by a letter or
line of credit or guarantee. Although a particular variable or floating rate
demand instrument might not be actively traded in a secondary market, in some
cases, the Fund may be entitled to principal on demand and may be able to resell
such notes in the dealer market. With respect to the floating and variable rate
notes and demand notes described in the Prospectus, the Adviser will consider
the earning power, cash flows and other liquidity ratios of the issuers or
guarantors of such notes and will continuously monitor their financial ability
to meet payment obligations when due.
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MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
INTERESTS
The National Municipal, California Municipal and New York Municipal
Funds may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government
to acquire equipment and facilities. Income from such obligations is
generally exempt from state and local taxes in the state of issuance.
Municipal leases frequently involve special risks not normally associated
with general obligations or revenue bonds. Leases and installment purchase
or conditional sale contracts (which normally provide for title to the leased
asset to pass eventually to the governmental issuer) have evolved as a means
for governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of debt. The
debt issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by
the appropriate legislative body on a yearly or other periodic basis. In
addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy
of the leased premises or utilizing the leased equipment. Although the
obligations may be secured by the leased equipment or facilities, the
disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover a Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The
certificates are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation
may be deemed to be illiquid for the purpose of the Funds' 15% limitation on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such limitation. In determining the
liquidity of municipal lease obligations and certificates of participation,
the Adviser will consider a variety of factors including: (1) the
willingness of dealers to bid for the security; (2) the number of dealers
willing to purchase or sell the obligation and the number of other potential
buyers; (3) the frequency of trades or quotes for the obligation; and (4) the
nature of the marketplace trades. In addition, the Adviser will consider
factors unique to particular lease obligations and certificates of
participation affecting the marketability thereof. These include the general
creditworthiness of the issuer, the importance to the issuer of the property
covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
Each Fund may purchase participations in Municipal Securities held by a
commercial bank or other financial institution. Such participations provide
a Fund with the right to a pro rata undivided interest in the underlying
Municipal Securities. In addition, such participations generally provide a
Fund with the right to demand payment, on not more than seven days' notice,
of all or any part of such Fund's participation interest in the underlying
Municipal Security, plus accrued interest. Each Fund will only invest in
such participations if, in the opinion of bond counsel, counsel for the
issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax
and California income tax, in the case of the California Municipal Fund, or
New York State, New York City and City of Yonkers personal income tax, in the
case of the New York Municipal Fund.
PRE-REFUNDED MUNICIPAL SECURITIES
The National Municipal, California Municipal and New York Municipal
Funds may invest in pre-refunded Municipal Securities. The principal of and
interest on pre-refunded Municipal Securities are no longer paid from the
original revenue source for the securities. Instead, the source of such
payments is typically an escrow fund consisting of obligations issued or
guaranteed by the U.S. Government. The assets in the escrow fund are derived
from the proceeds of refunding bonds issued by the same issuer as the
pre-refunded Municipal Securities. Issuers of Municipal Securities use this
advance refunding technique to obtain more favorable terms with respect to
securities that are not yet subject to call or redemption by the issuer. For
example, advance refunding enables an issuer to refinance debt at lower
market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms
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until they mature or are redeemed by the Issuer. Pre-refunded Municipal
Securities are usually purchased at a price which represents a premium over
their face value.
TENDER OPTION BONDS
The National Municipal, California Municipal and New York Municipal
Funds may invest in tender option bonds. A tender option bond is a Municipal
Security (generally held pursuant to a custodial arrangement) having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term-tax-exempt rates. The bond is typically
issued in conjunction with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such
institution grants the security holders the option, at periodic intervals, to
tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the date of
such determination. Thus, after payment of this fee, the security holder
effectively holds a demand obligation that bears interest at the prevailing
short-term, tax-exempt rate. However, an institution will not be obligated
to accept tendered bonds in the event of certain defaults or a significant
downgrade in the credit rating assigned to the issuer of the bond. The
liquidity of a tender option bond is a function of the credit quality of both
the bond issuer and the financial institution providing liquidity. Tender
option bonds are deemed to be liquid unless, in the opinion of the Adviser,
the credit quality of the bond issuer and the financial institution is
deemed, in light of the Fund's credit quality requirements, to be inadequate.
No Fund will purchase tender option bonds unless at the time of such
purchase the Adviser reasonably expects that (a) based upon its assessment of
current and historical interest rate trends, prevailing short-term tax-exempt
rates will not exceed the stated interest rate on the underlying municipal
obligations at the time of the next tender fee adjustment, and (b) the
circumstances which might entitle the grantor of a tender option to terminate
the tender option would not occur prior to the time of the next tender
opportunity. At the time of each tender opportunity, a Fund will exercise the
tender option with respect to any tender option bonds unless the Adviser
reasonably expects that, (a) based upon its assessment of current and
historical interest rate trends, prevailing short-term tax-exempt rates will
not exceed the stated interest rate on the underlying municipal obligations
at the time of the next tender fee adjustment, and (b) the circumstances
which might entitle the grantor of a tender option to terminate the tender
option would not occur prior to the time of the next tender opportunity. Each
Fund will exercise the tender feature with respect to tender option bonds, or
otherwise dispose of their tender option bonds, prior to the time the tender
option is scheduled to expire pursuant to the terms of the agreement under
which the tender option is granted. Each Fund will purchase tender option
bonds only when it is satisfied that (a) the custodial and tender option
arrangements, including the fee payment arrangements, will not adversely
affect the tax-exempt status of the underlying municipal obligations and (b)
payment of any tender fees will not have the effect of creating taxable
income for the Funds.
Each Fund intends to invest in tender option bonds the interest on which
will, in the opinion of bond counsel, counsel for the issuer of interests
therein or counsel selected by the Investment Adviser, be exempt from regular
federal income tax and, in the case of the California Municipal Fund,
California state income tax, or in the case of the New York Municipal Fund,
New York State, New York City and City of Yonkers personal income tax.
However, because there can be no assurance that the Internal Revenue Service
(the "Service") will agree with such counsel's opinion in any particular
case, there is a risk that a Fund will not be considered the owner of such
tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. Additionally, the federal income tax treatment of
certain other aspects of these investments, including the proper tax
treatment of tender option bonds and the associated fees, in relation to
various regulated investment company tax provisions is unclear. Each Fund
intends to manage its portfolio in a manner designed to eliminate or minimize
any adverse impact from the tax rules applicable to these investments.
AUCTION RATE SECURITIES
The National Municipal, California Municipal and New York Municipal
Funds may invest in auction rate securities. Auction rate securities consist
of auction rate Municipal Securities and auction rate preferred securities
issued by closed-end investment companies that invest primarily in Municipal
Securities. Provided that the auction mechanism is successful, auction rate
securities usually permit the holder to sell the securities in an auction at
par value at specified intervals. The dividend is reset by "Dutch" auction
in which bids are made by broker-dealers and other institutions for a certain
amount of securities at a specified minimum yield. The dividend rate set by
the auction is the lowest interest or
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<PAGE>
dividend rate that covers all securities offered for sale. While this
process is designed to permit auction rate securities to be traded at par
value, there is the risk that an auction will fail due to insufficient demand
for the securities.
Dividends on auction rate preferred securities issued by a closed-end
fund may be designated as exempt from federal income tax to the extent they
are attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided
that the preferred securities are treated as equity securities for federal
income tax purposes and the closed-end fund complies with certain tests under
the Internal Revenue Code. For purposes of complying with the 35% limitation
on each Fund's investments in securities other than Municipal Securities,
auction rate preferred securities will not be treated as Municipal Securities
unless substantially all of the dividends on such securities are expected to
be exempt from regular federal income taxes and, in the case of the
California Fund, California state income tax, or, in the case of the New York
Fund, New York State, New York City and City of Yonkers personal income tax.
Each Fund's investments in auction rate preferred securities of
closed-end funds are subject to the limitations prescribed by the Investment
Company Act of 1940 (the "Act") and certain state securities regulations.
These limitations include a prohibition against acquiring more than 3% of the
voting securities of any other investment company and investing more than 5%
of such Fund's assets in securities of any one investment company or more
than 10% of its assets in securities of all investment companies. Each Fund
will indirectly bear its proportionate share of any management fees paid by
such closed-end funds in addition to the advisory and administration fees
payable directly by such Fund.
INSURANCE
The National Municipal, California Municipal and New York Municipal
Funds may invest in "insured" tax-exempt Municipal Securities. Insured
Municipal Securities are those for which scheduled payments of interest and
principal are guaranteed by a private (non-governmental) insurance company.
The insurance only entitles a Fund to receive the face or par value of the
securities held by such Fund. The insurance does not guarantee the market
value of the Municipal Securities or the value of the shares of a Fund.
Each Fund may utilize new issue or secondary market insurance. A new
issue insurance policy is purchased by a bond issuer who wishes to increase
the credit rating of a security. By paying a premium and meeting the
insurer's underwriting standards, the bond issuer is able to obtain a high
credit rating (usually, Aaa from Moody's Investors Service, Inc. ("Moody's")
or AAA from Standard & Poor's Ratings Group ("Standard & Poor's") for the
issued security. Such insurance is likely to increase the purchase price and
resale value of the security. New issue insurance policies are
noncancellable and continue in force as long as the bonds are outstanding.
A secondary market insurance policy is purchased by an investor (such as
a Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. Each Fund may purchase bonds
which have already been insured under a secondary market insurance policy by
a prior investor, or a Fund may itself purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be
covered by only one of the above types of policies. All of the insurance
policies used by the Funds will be obtained only from insurance companies
rated, at the time of purchase, Aaa by Moody's or AAA by Standard & Poor's.
ADDITIONAL RISK CONSIDERATIONS
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
See "Limiting Investment Risks" in the Prospectus. The sale of restricted or
illiquid securities require more time and result in higher brokerage charges
or dealer discounts and other selling expenses than the sale of securities
eligible for trading on securities exchanges or in the over-the-counter
markets. Restricted securities often sell at a price lower than similar
securities that are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Company's Board
of Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
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Securities Act of 1933 and commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, are liquid or illiquid. The Board has
delegated the function of making day to day determinations of liquidity to
the Adviser, pursuant to guidelines reviewed by the Board. The Adviser takes
into account a number of factors in reaching liquidity decisions, including,
but not limited to: (i) the frequency of trading in the security; (ii) the
number of dealers who make quotes for the security; (iii) the number of
dealers who have undertaken to make a market in the security; (iv) the number
of other potential purchasers; and (v) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers
are solicited and the mechanics of transfer). The Adviser will monitor the
liquidity of securities in each Fund's portfolio and report periodically on
such decisions to the Board of Directors.
NON-U.S. WITHHOLDING TAXES
A Fund's net investment income from foreign issuers may be subject to
non-U.S. withholding taxes, thereby reducing the Fund's net investment
income. See "Additional Information Concerning Taxes".
INVESTING IN PUERTO RICO, THE UNITED STATES VIRGIN ISLANDS AND GUAM
Although the economy of Puerto Rico expanded significantly from fiscal
1984 through fiscal 1990, the rate of this expansion slowed during and after
fiscal 1991. Growth in fiscal 1994 will depend on several factors, including
the state of the U.S. economy, the exchange rate of the U.S. dollar, the cost
of borrowing and the relative stability in the price of oil. Puerto Rico is
required to import all of its oil.
Puerto Rico has a diversified economy dominated by the manufacturing and
service sectors. Manufacturing is the largest sector in terms of gross
domestic product and is more diversified than during earlier phases of Puerto
Rico's industrial development. The service sector, particularly finance,
insurance and real estate, grew significantly in response to the expansion of
the manufacturing sector. However, government layoffs and a recession driven
slowdown in tourism have lead to weakness in these areas and have had a
negative ripple effect on services as well. In addition, legislation was
adopted in August 1993 which will phase out over a number of years certain
tax benefits to U.S. corporations with manufacturing operations in Puerto
Rico. Puerto Rico's unemployment rate tends to be significantly higher than
the average rate for the United States.
Puerto Rico exercises virtually the same control over its internal
affairs as do the fifty states; however, it differs from the states in its
relationship with the federal government. Most federal taxes, except those
such as social security taxes that are imposed by mutual consent, are not
levied in Puerto Rico.
Puerto Rico's financial reporting was first conformed to generally
accepted accounting principles in fiscal 1990. Non-recurring revenues have
been used frequently to balance recent years' budgets. This reliance on
non-recurring revenues and economic weakness led Standard & Poor's to change
its outlook from stable to negative. Standard & Poor's rates Puerto Rico
general obligation debt A, while Moody's rates it Baa1.
The United States Virgin islands ("USVI") are located approximately
1,100 miles east-southeast of Miami and are made up of St. Croix, St. Thomas
and St. John. The economy is heavily reliant on the tourism industry, with
roughly 43% of non-agricultural employment in tourist-related trade and
services. However, a recession-driven decline in visitors to the Virgin
Islands has caused unemployment to increase.
An important component of the USVI revenue base is the federal excise
tax on rum exports. The preferential tariff treatment the USVI rum industry
currently enjoys could be reduced under the North American Free Trade
Agreement. Increased competition from Mexican rum producers could reduce USVI
rum imported to the U.S., decreasing excise tax revenues generated. There is
currently no rated, unenhanced Virgin Islands debt outstanding.
Guam, an unincorporated U.S. territory, is located 1,500 miles southeast
of Tokyo. Population has grown consistently since 1970. The U.S. military
is a key component of Guam's economy. The federal government directly
comprises more than 10% of the employment base, with a substantial component
of the service sector to support these personnel. Guam is expected to
benefit from the closure of the Subic Bay Naval Base and the Clark Air Force
Base in the
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<PAGE>
Philippines. Guam is also heavily reliant on tourists, particularly the
Japanese. There is currently no rated, unenhanced Guam debt outstanding.
INVESTMENT LIMITATIONS
In addition to the restrictions described under "Limiting Investment Risks"
in the Prospectus, each Fund may not:
1. purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase and sell currency forward
contracts, options on foreign currencies and may otherwise engage in
transactions in foreign currencies;
2. make loans, except that a Fund may (a) (i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in
loans and participations in accordance with its investment objectives
and policies, (b) make loans of portfolio securities and (c) enter
into repurchase agreements with respect to portfolio securities;
3. underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with a Fund's investment
program may be deemed to be an underwriting;
4. purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein);
5. purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5% of
a Fund's total assets in the case of any one other investment company
and 10% of such total assets in the case of all other investment
companies in the aggregate. This restriction shall not apply to
investment company securities received or acquired by a Fund pursuant
to a merger or plan of reorganization;
6. sell securities short (except for short positions in a futures
contract or forward contract or short sales against the box and except
in connection with Hedging and Derivatives);
7. invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;
8. pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings [and to the extent related to the
deposit of assets in escrow in connection with the writing of covered
put and call options and the purchase of securities on a forward
commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to futures contracts and
options on futures contracts, securities or indices;]
9. investment in stock or bond futures and/or options on futures unless
(i) not more than 5% of a Fund's total assets are required as deposit
to secure obligations under such futures and/or options on futures
contracts, provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing such 5%;
10. purchase or retain securities of an issuer if those officers or
Directors of the Fund or its investment adviser who own more than 1/2
of 1% of such issuer's securities together own more than 5% of the
securities of such issuer; and
11. invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous operation.
Investment restrictions (1) through (5) described above, (6) with
respect to the National Municipal, California Municipal and New York
Municipal Funds and those set forth in the Prospectus under "Limiting
Investment Risks" are
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<PAGE>
fundamental policies of the Funds which may be changed only when permitted by
law and approved by the holders of a majority of a Fund's outstanding voting
securities, as described under "General Information -- Capital Stock".
Restrictions (7) through (11) are nonfundamental policies of the Funds, and
may be changed by a vote of the Company's Board of Directors.
In addition, each of the High Yield, Emerging Markets, Investment Grade
Global Debt, Global Convertible and Latin America Equity Funds may not:
1. purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary
for the clearance of transactions, and except for initial and
variation margin payments in connection with the use of options,
futures contracts, options thereon or forward currency contracts; a
Fund may also make deposits of margin in connection with futures and
forward contracts and options thereon) (other than Municipal Funds);
2. invest for the purpose of exercising control over management of any
company;
3. invest in puts, call, straddles or spreads, except as described in (9)
above;
Investment restriction (1) is a fundamental policy of the High Yield,
Emerging Markets, Investment Grade Global Debt, Global Convertible and Latin
America Equity Funds, while restrictions (2) and (3) are nonfundamental.
If a percentage restriction on investment or use of assets set forth above
is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the
Company for the past five years are listed below.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE FUND PRINCIPAL OCCUPATION(S) PAST 5 YEARS
--------------------- ------------------------------ ------------------------------------
<S> <C> <C>
Morris W. Offit* Chairman of the Board, President and Director,
OFFITBANK President, and Director OFFITBANK (1983-present).
520 Madison Avenue
New York, NY 10022
Age: 61 Years
Edward J. Landau Director Member, Lowenthal, Landau,
Lowenthal, Landau, Fischer & Bring, P.C. (1960-
Fischer present); Director, Revlon
& Bring, P.C. Group Inc. (cosmetics),
250 Park Avenue Revlon Consumer Products
New York, NY 10177 Inc. (cosmetics), Pittsburgh
Age: 70 Years Annealing Box (metal
fabricating) and Clad Metals
Inc. (cookware).
The Very Reverend James Director Retired; formerly Dean of
Parks Morton Cathedral of St. John the
Cathedral of St. John Divine (1972 - 1996).
the Divine
1047 Amsterdam Avenue
New York, NY 10025
Age: 58 Years
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Dr. Wallace Mathai- Secretary and Treasurer Managing Director, OFFITBANK
Davis (1986 to present).
OFFITBANK
520 Madison Avenue
New York, NY 10022
Age: 53 Years
Stephen Brent Wells Assistant Treasurer Managing Director, OFFITBANK
OFFITBANK (1994 to present).
520 Madison Avenue
New York, NY 10022
Age: 53 Years
Vincent M. Rella Assistant Treasurer Managing Director, OFFITBANK
OFFITBANK (1997 to present);
520 Madison Avenue Controller, OFFITBANK (1986
New York, NY 10022 to 1997).
Age: 45 Years
Martin R. Dean Assistant Treasurer Regulatory and Compliance
BISYS Fund Services Officer, BISYS Fund
3435 Stelzer Road Services (May 1994 to
Columbus, OH 43219 present); Previously, Senior
Age: 34 Years Manager, KPMG Peat Marwick,
LLP.
Matthew Constancio Assistant Secretary Manager, Client Legal
BISYS Fund Services Services, BISYS Fund
3435 Stelzer Road Services (November 1996 to
Columbus, OH 43219 present); Previously, Mutual
Age: 33 Years Fund Administrator, Payden &
Rygel Investment Group.
Alaina Metz Assistant Secretary Chief Administrative
BISYS Fund Services Officer, BISYS Fund
3435 Stelzer Road Services, (June 1995 to
Columbus, OH 43219 present); Previously,
Age: 30 Years Supervisor of Blue Sky
Department, Alliance Capital
Management, L.P. (May 1989
to June 1995).
Ellen Stoutamire Assistant Secretary Vice President, Client Legal
BISYS Fund Services Services, BISYS Fund
3435 Stelzer Road Services; Previously,
Columbus, OH 43219 Associate Counsel, Franklin
Age: 49 Years Templeton Mutual Funds; Vice
President and General
Counsel, Pioneer Western
Corporation.
</TABLE>
- -------------------
* "Interested person" of the Fund as defined in the 1940 Act.
The Board of Directors has designated an audit committee to advise the
full Board with respect to accounting, auditing and financial matters
affecting the Company. The Audit Committee is comprised of Mr. Landau and
The Very Reverend Morton and meets periodically.
The Company pays each Director who is not also an officer or affiliated
person an annual fee of $10,000 and a fee of $1,250 for each Board of
Directors and Board committee meeting attended and are reimbursed for all
out-of-pocket expenses relating to attendance at meetings. Directors who are
affiliated with the Adviser do not receive compensation from the Company but
are reimbursed for all out-of-pocket expenses relating to attendance at
meetings.
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<PAGE>
DIRECTOR COMPENSATION
(the following table shows the compensation paid by the Company to the Directors
for calendar year 1997)
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM REGISTRANT AND
COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS FUND COMPLEX*
NAME OF DIRECTOR FROM THE REGISTRANT FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS
---------------- ------------------- ------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Morris W. Offit $0 $0 $0 $0
Edward J. $17,500.00 $0 $0 $28,853.26
Landau
The Very $17,500.00 $0 $0 $29,353.26
Reverend James
Parks Morton
</TABLE>
- -------------------
* For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.
INVESTMENT ADVISER
The Company has retained OFFITBANK, a New York State chartered trust
company, to act as its investment adviser (the "Adviser"). The advisory
agreements (the "Advisory Agreements") between the Adviser and the Company
provide that the Adviser shall manage the operations of the Company, subject
to policy established by the Board of Directors of the Company. Pursuant to
the Advisory Agreements, the Adviser manages the Company's investment
portfolios, directs purchases and sales of the portfolio securities and
reports thereon to the Company's officers and directors regularly. In
addition, the Adviser pays the compensation of the Company's officers,
employees and directors affiliated with the Adviser. The Company bears all
other costs of its operations, including the compensation of its directors
not affiliated with the Adviser.
For its services under the Advisory Agreements, the Adviser receives
from each Fund an advisory fee. The fee is payable monthly at an annual rate
of .85% of the first $200,000,000, .75% on the next $400,000,000 and .65% on
amounts in excess of $600,000,000 of OFFITBANK High Yield Fund's average
daily net assets; .90% of the first $200,000,000 and .80% on amounts in
excess thereof of OFFITBANK Emerging Markets Fund's average daily net assets;
.80% of the first $200,000,000 and .70% on amounts in excess thereof of
OFFITBANK Investment Grade Global Debt Fund's average daily net assets; .90%
of OFFITBANK Global Convertible Fund's average daily net assets; 1.00% of
OFFITBANK Latin America Equity Fund's average daily net assets; .35% of
OFFITBANK U.S. Government Securities Fund's average daily net assets; .35% of
OFFITBANK Mortgage Securities Fund's average daily net assets; .35% of
OFFITBANK National Municipal Fund's average daily net assets; .35% of
OFFITBANK California Municipal Fund's average daily net assets and .35% of
OFFITBANK New York Municipal Fund's average daily net assets. With respect
to OFFITBANK Total Return Fund, the Adviser is entitled to receive a monthly
fee from the Fund at the annual rate of .50% with respect to the Fund's
assets other than investments in the other Funds of the Company. The Adviser
may waive all or part of its fee from time to time in order to increase a
Fund's net investment income available for distribution to shareholders. The
Funds will not be required to reimburse the Adviser for any advisory fees
waived. The Adviser may from time to time, at its own expense, provide
compensation to financial institutions for performing administration or other
tentative services for their customers. These services may include
maintaining account records, processing orders to purchase, redeem and
exchange shares and answering customer inquiries. For the fiscal year ended
December 31, 1997, the Adviser earned fees of $7,832,049 for the High Yield
Fund, earned fees of $1,527,416 for the Emerging Markets Fund, earned fees of
$589,281 for the Latin America Equity Fund, earned fees of $108,310 and
waived fees of $79,754 for the New York Municipal Fund, earned and waived
fees of $7,908 for the California Municipal Fund, earned and waived fees of
$1,654 for the National Municipal Fund, earned and waived fees of $3,596 for
the U.S. Government Securities Fund, and earned and waived fees of $20,098
for the Mortgage Securities Fund. For the fiscal year ended December 31,
1996, the High Yield Fund paid the Adviser $4,989,174 in advisory fees, the
Emerging Markets Fund paid the Adviser $759,339; in advisory fees, the
Adviser earned $69,937, but waived $69,937, in advisory fees for the New York
Municipal Fund and earned $53,176, but waived $53,176, in advisory fees for
the Latin America Equity Fund. For the fiscal year ended December 31, 1995,
the High Yield Fund paid the Adviser $2,884,016 in advisory fees, the Adviser
earned $312,096, but waived $52,155, in advisory fees for the Emerging
Markets Fund and earned $23,448, but waived $23,280, in advisory fees for the
New York Municipal Fund.
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<PAGE>
The Advisory Agreement with respect to the High Yield, Global Debt and
Emerging Markets Funds was approved by each Fund's sole shareholder at the
time, Furman Selz LLC ("Furman Selz"), on December 29, 1993. The Advisory
Agreement for these Funds was most recently re-approved by the Company's
Board of Directors on December 4, 1997. The Advisory Agreement relating to
the Latin America Equity, Global Convertible, National Municipal, California
Municipal and New York Municipal Funds was approved by such Funds' sole
shareholder at the time, Furman Selz, on January 31, 1995, and was most
recently approved by the Company's Board of Directors on December 4, 1997.
The Advisory Agreement with respect to the Total Return, U.S. Government
Securities and Mortgage Securities Funds was approved by the Company's Board
of Directors on April 10, 1997. Unless sooner terminated, the Advisory
Agreements will continue in effect until February 7, 1999, with respect to
the High Yield, Global Debt and Emerging Markets Funds, until February 8,
1999 with respect to the Latin America Equity, Global Convertible, National
Municipal, California Municipal and New York Municipal Funds, and until June
1, 1999 with respect to the Total Return, U.S. Government Securities and
Mortgage Securities Funds, and from year to year thereafter if such
continuance is approved at least annually by the Company's Board of Directors
or by a vote of a majority (as defined under "General Information -- Capital
Stock") of the outstanding shares of each Fund, and, in either case, by a
majority of the directors who are not parties to the contract or "interested
persons" (as defined in the 1940 Act) of any party by votes cast in person at
a meeting called for such purpose. The Advisory Agreements may each be
terminated by the Company or the Adviser on 60 days' written notice, and will
terminate immediately in the event of its assignment.
DISTRIBUTOR
OFFIT Funds Distributor, Inc. (the "Distributor"), a wholly-owned
subsidiary of Provident Distributors, Inc., with its principal office at Four
Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961,
distributes the shares of the Company. From January 1, 1997 to June 1, 1998,
the Distributor was a wholly-owned subsidiary of BISYS Fund Services Limited
Partnership, d/b/a BISYS Fund Services. Prior to January 1, 1997, the
Distributor was a wholly-owned subsidiary of Furman Selz. Under a
distribution agreement with the Company (the "Distribution Agreement"), the
Distributor, as agent of the Company, agrees to use its best efforts as
distributor of the Company's shares. Solely for the purpose of reimbursing
the Distributor for its expenses incurred in certain activities primarily
intended to result in the sale of Advisor Shares of the Funds, the Company
has adopted a Plan of Distribution (the "Plan") under Section 12(b) of the
1940 Act and Rule 12b-1 thereunder. Under the Plan and Distribution
Agreement, each Fund is authorized to spend for the account of Advisor Shares
up to 0.25% of its average daily net assets solely attributable to Advisor
Shares annually, to reimburse the Distributor for such activities primarily
intended to result in the sale of Advisor Shares, which are summarized in the
Prospectus. For the fiscal periods ended December 31, 1997, 1996 and 1995, no
distribution costs were incurred by the Funds.
The Plan, together with the Distribution Agreement, continue in effect
with respect to a particular Fund from year to year if such continuance is
approved at least annually by the Company's Board of Directors and by a
majority of the Directors who have no direct or indirect financial interest
in the operation of the Plan or in any agreement related to the Plan
("Qualified Directors") and who are not "interested persons" (as defined in
the 1940 Act) of any party by votes cast in person at a meeting called for
such purpose. In approving the continuance of the Plan and the Distribution
Agreement, the Directors must determine that the Plan is in the best interest
of the shareholders of each Fund. The Plan was approved by Furman Selz, as
sole shareholder of the High Yield, Global Debt and Emerging Markets Funds,
on December 29, 1993 and on October 17, 1994 with respect to the Global
Convertible, Latin America Equity, National Municipal, California Municipal
and New York Municipal Funds. The Plan, as amended, was most recently
approved by the Company's Board of Directors on December 4, 1997. On
December 4, 1997, the Distribution Agreement with the Distributor was
approved by the Directors.
The Plan requires that, at least quarterly, the Board of Directors must
review a written report prepared by the Treasurer of the Company enumerating
the amounts expended and purposes therefor under the Plan. Rule 12b-1 also
requires that the selection and nomination of Directors who are not
"interested persons" of the Company be made by such Qualified Directors.
ADMINISTRATION, TRANSFER AGENCY, FUND ACCOUNTING AND CUSTODY SERVICES
ADMINISTRATION
Page 15
<PAGE>
PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank
Corp., serves as Administrator to the Company pursuant to an Administration
and Accounting Services Agreement dated February 27, 1998 (the
"Administration Agreement").
Pursuant to the Administration Agreement, PFPC performs administrative
and fund accounting services for the Company, and is responsible for certain
clerical, record keeping and bookkeeping services, except those performed by
the Adviser, or by Chase or BONY in their capacity as custodians of the
Company. The services provided by PFPC as Administrator include regulatory
compliance, assistance in the preparation and filing of post-effective
amendments to the Company's registration statement with the Commission,
preparation of annual, semi-annual and other reports to shareholders and the
Commission, filing of federal and state income tax returns, preparation of
financial and management reports, preparation of board meeting materials,
preparation and filing of blue sky registrations and monitoring compliance
with the amounts and conditions of each state's qualification. For the
administrative and fund accounting services PFPC provides to the Company,
PFPC is paid an annual fee calculated daily and paid monthly which will not
exceed .125% of average daily net assets. From time to time, the
Administrator may waive all or a portion of its fees.
From January 1, 1997 to June 1, 1998, BISYS Fund Services Limited
Partnership ("BISYS") served as the Company's administrator. Prior to
January 1, 1997, Furman Selz served as the Company's administrator. For the
fiscal year ended December 31, 1997, BISYS was entitled to fees of $1,622,785
for the High Yield Fund, $254,833 for the Emerging Markets Fund, $88,392 for
the Latin America Equity Fund, $44,828 for the New York Municipal Fund,
$3,373 for the California Municipal Fund, $709 for the National Municipal
Fund, $1,541 for the U.S. Government Securities Fund, and $8,613 for the
Mortgage Securities Fund. Of such fees, BISYS waived fees of $811,392 for the
High Yield Fund, $127,416 for the Emerging Markets Fund, $44,196 for the
Latin America Equity Fund, $36,410 for the New York Municipal Fund, $3,373
for the California Municipal Fund, $709 for the National Municipal Fund,
$1,541 for the U.S. Government Securities Fund, and $8,613 for the Mortgage
Securities Fund. For the fiscal year ended December 31, 1996, Furman Selz
was entitled to fees of $971,474 for the High Yield Fund, $126,556 for the
Emerging Markets Fund, $8,039 for the Latin America Equity Fund and $26,227
for the New York Municipal Fund. Of such fees, Furman Selz waived $485,738,
$63,278, $8,039 and $26,227 for the High Yield Fund, Emerging Markets Fund,
Latin America Equity Fund and New York Municipal Funds, respectively. For
the fiscal year ended December 31, 1995, Furman Selz was entitled to fees of
$536,814 for the High Yield Fund, $52,016 for the Emerging Markets Fund and
$8,793 for the New York Municipal Fund. Of such fees earned, Furman Selz
waived $268,407, $26,008 and $8,793 for the High Yield, the Emerging Markets
and the New York Municipal Funds, respectively. For the fiscal period ended
December 31, 1995, Furman Selz waived its entire fee of $8,793 for the New
York Municipal Fund.
TRANSFER AGENCY
PFPC serves as the Company's Transfer Agent and Dividend Disbursing
Agent pursuant to a Transfer Agency Agreement dated February 27, 1998 (the
"Transfer Agency Agreement"). Under the Transfer Agency Agreement, PFPC has
agreed, among other things, to: (i) process shareholder purchase and
redemption orders; (ii) issue periodic statements to shareholders; (iii)
process transfers, exchanges and dividend payments; and (iv) maintain all
shareholder records for each account in the Company. From January 1, 1997 to
June 1, 1998, BISYS Fund Services, Inc., an affiliate of BISYS, served as
the Company's transfer agent. Prior to January 1, 1997, Furman Selz served as
the Company's transfer agent.
CUSTODY
The Chase Manhattan Bank (the "Chase") serves as the Company's custodian
pursuant to custodian agreements with the Company dated February 7, 1994 with
respect to the Global Debt and Emerging Markets Funds, and February 8, 1995
with respect to the Global Convertible and Latin America Equity Funds (the
"Custodian Agreements"). Prior to June 27, 1996, Chase also served as the
custodian for the High Yield and New York Municipal Funds. Chase is located
at 4 MetroTech Center, 18th Floor, Brooklyn, New York 11245. The Bank of New
York ("BONY") serves as custodian of the assets of the High Yield, Total
Return, U.S. Government Securities, Mortgage Securities, National Municipal,
California Municipal and New York Municipal Funds. The principal business
address of BONY is 48 Wall Street, New York, New York 10286. Under the
Custodian Agreements, each Custodian has agreed to maintain a separate
account or accounts in the name of each applicable Fund; hold and disburse
portfolio securities on account of each Fund; collect and receive all income
and other payments and distributions on account of each Fund's portfolio
securities; and make periodic reports to the Company's Board of Directors
concerning the Funds' operations. Each is authorized under the Custodian
Agreements to
Page 16
<PAGE>
establish separate accounts for the Funds' foreign securities with
subcustodians, provided that the custodian remains responsible for the
performance of all of its duties under the Custodian Agreements.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Company's Board of Directors, the Adviser is primarily
responsible for the Company's portfolio decisions and the placing of the
Company's portfolio transactions. The High Yield, Emerging Markets and New York
Municipal Funds did not pay any brokerage commissions for the fiscal periods
ended December 31, 1996 and 1995. The Latin America Equity Fund paid brokerage
commissions of $61,192 for the fiscal period ended December 31, 1996. The High
Yield, Emerging Markets, U.S. Government Securities, California Municipal, New
York Municipal and National Municipal Funds did not pay any brokerage
commissions for the fiscal periods ended December 31, 1997. The Latin America
Equity Fund paid brokerage commissions of $467,811 for the fiscal period ended
December 31, 1997.
Fixed-income and certain short-term securities normally will be purchased
or sold from or to dealers serving as market makers for the securities at a net
price, which may include dealer spreads and underwriting commissions. Purchases
and sales of securities on a stock exchange are effected through brokers who
charge a commission. In the over-the-counter market, securities are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer. In placing orders, it is the policy of the Company to
obtain the best results taking into account the dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities involved. While the Adviser
generally seeks a competitive price in placing its orders, the Company may not
necessarily be paying the lowest price available.
Trading practices in certain emerging market and Latin American countries
are significantly different from those in the United States, and these
differences may have adverse consequences on the investment operations of the
Emerging Markets, Global Debt, Global Convertible, Total Return and Latin
America Equity Funds. Brokerage commissions and other transaction costs on the
securities exchanges of emerging market and Latin American countries are
generally higher than in the United States. In addition, securities settlements
and clearance procedures in emerging market countries are less developed and
less reliable than those in the United States and the Funds may be subject to
delays or other material difficulties. Delays in settlement could result in
temporary periods when assets of the Funds are uninvested and no return is
earned thereon. The inability of a Fund to make intended security purchases due
to settlement problems could cause such Fund to miss attractive investment
opportunities. The inability to dispose of a portfolio security due to
settlement problems could result either in losses to a Fund due to subsequent
declines in the value of such portfolio security or, if such Fund has entered
into a contract to sell the security, could result in possible liability to the
purchaser.
Factors relating to brokers in emerging market and Latin American countries
may also expose the Funds' to risks in connection with the execution of
portfolio transactions. There may be less government supervision and regulation
of securities exchanges and brokers in these countries than exists in the United
States. Brokers in these countries may not be as well capitalized as those in
the United States, so that they may be more susceptible to financial failure in
times of market, political, or economic stress, exposing the Funds to a risk of
loss in the event of such failure.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the
Commission. Affiliated persons of the Company, or affiliated persons of such
persons, may from time to time be selected to execute portfolio transactions for
the Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees or other remuneration received by other brokers in connection
with comparable transactions. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length agency
transaction.
Investment decisions for the Company are made independently from those for
other funds and accounts advised or managed by the Adviser. Such other funds and
accounts may also invest in the same securities as the Company. If those
Page 17
<PAGE>
funds or accounts are prepared to invest in, or desire to dispose of, the
same security at the same time as the Company, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure
may adversely affect the size of the position obtained for or disposed of by
the Company or the price paid or received by the Company. In addition,
because of different investment objectives, a particular security may be
purchased for one or more funds or accounts when one or more funds or
accounts are selling the same security. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Company
with those to be sold or purchased for other funds or accounts in order to
obtain best execution.
PURCHASE OF SHARES
For information pertaining to the manner in which shares of each class of
each Fund are offered to the public, see "Purchase of Shares" in the Prospectus.
The Company reserves the right, in its sole discretion, to (i) suspend the
offering of shares of its Funds, and (ii) reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interest of
the Company. The officers of the Company may, from time to time, waive the
minimum initial and subsequent investment requirements.
Page 18
<PAGE>
REDEMPTION OF SHARES
For information pertaining to the manner in which each class of each Fund
may be redeemed, see "Redemption of Shares" in the Prospectus. The Company may
suspend redemption privileges or postpone the date of payment (i) during any
period that the New York Stock Exchange (the "NYSE") or the bond market is
closed, or trading on the NYSE is restricted as determined by the Commission,
(ii) during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for a Fund to
dispose of securities owned by it, or fairly to determine the value of its
assets, and (iii) for such other periods as the Commission may permit.
Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of a Fund, such Fund may pay the
redemption price, in whole or in part, by a distribution in kind.
The Company has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part in investment securities or in cash, as the Board of
Directors may deem advisable; however, payment will be made wholly in cash
unless the Board of Directors believes that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Company. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Company's Prospectus under "Net Asset Value" and
redeeming shareholders would normally incur brokerage expenses if they converted
these securities to cash.
No charge is made by a Fund for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by a Fund.
PERFORMANCE CALCULATIONS
The Company may from time to time quote various performance figures to
illustrate the past performance of each class of shares of its Funds.
Performance quotations by investment companies are subject to rules adopted by
the Commission, which require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
Fund be accompanied by certain standardized performance information computed as
required by the Commission. An explanation of the Commission methods for
computing performance follows.
TOTAL RETURN
A Fund's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5 and 10 year periods (or, if shorter,
the period since inception of the Fund) that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes that all dividends and distributions are reinvested when paid. The
quotation assumes the amount was completely redeemed at the end of each 1, 5 and
10 year period (or, if shorter, the period since inception of the Fund) and the
deduction of all applicable Fund expenses on an annual basis. Average annual
total return is calculated according to the following formula:
n
P ( l + T ) = ERV
where: P = a hypothetical initial payment of $1,000.
T = the average annual total return.
n = the number of years.
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
Each Fund presents performance information for each class of shares
commencing with the Fund's inception (or the inception of the Partnership with
respect to the High Yield Fund). Performance information for each class of
shares may also reflect performance for time periods prior to the introduction
of such class, and the performance for such prior time periods will not reflect
any fees and expenses, payable by such class that were not borne by the Fund
prior to the introduction of such class.
Page 19
<PAGE>
All of the outstanding shares of the Funds were reclassified as "Select
Shares" as of April 29, 1996, and Funds began to offer a new class of shares,
"Advisor Shares." The percentages shown in the tables below are based on the
fees and expenses actually paid by each Fund for the periods presented, rather
than the fees and expenses currently payable by each class of shares, which in
certain cases are different (as indicated in the footnotes to the tables).
The following tables set forth the average annual total returns for each
class of shares of each of the High Yield Fund, Emerging Markets Fund, Latin
America Equity Fund, New York Municipal Fund, California Municipal Fund,
National Municipal Fund, U.S. Government Securities Fund, and Mortgage
Securities Fund for certain time periods ended December 31, 1997.
<TABLE>
HIGH YIELD FUND - SELECT SHARES
<S> <C>
One Year ................................. 12.09%
Five Years ............................... 13.01%
Ten Years ................................ 13.73%
</TABLE>
The High Yield Fund - Advisor Shares non-annualized total return for the
period August 14, 1997 (initial sale of Advisor Shares) through December 31,
1997 was 3.93%.
<TABLE>
Emerging Markets Fund - Select Shares *
<S> <C>
One Year ................................. 10.67%
Since Inception (March 8, 1994) .......... 14.12%
</TABLE>
- ----------
* As of December 31, 1997 there were no Advisor Shares outstanding.
<TABLE>
Latin America Equity Fund - Select Shares
<S> <C>
One Year ................................. 24.22%
Since Inception (February 13, 1996) ...... 25.50%
</TABLE>
The Latin America Equity Fund - Advisor Shares non-annualized total return
for the period June 23, 1997 (initial sale of Advisor Shares) through December
31, 1997 was (4.64%).
<TABLE>
New York Municipal Fund - Select Shares *
<S> <C>
One Year ................................. 7.84%
Since Inception (April 3, 1995) .......... 7.17%
</TABLE>
- ----------
* As of December 31, 1997 there were no Advisor Shares outstanding.
<TABLE>
California Municipal Fund - Select Shares *
<S> <C>
Since Inception (April 2, 1997) .......... 7.14% **
</TABLE>
- ----------
* As of December 31, 1997 there were no Advisor Shares outstanding.
** Non-annualized.
<TABLE>
National Municipal Fund - Select Shares *
<S> <C>
Since Inception (October 20, 1997) ....... 2.70% **
</TABLE>
- ----------
* As of December 31, 1997 there were no Advisor Shares outstanding.
** Non-annualized.
<TABLE>
U.S. Government Securities Fund - Select Shares *
<S> <C>
Since Inception (July 1, 1997) ........... 4.71% **
</TABLE>
- ----------
* As of December 31, 1997 there were no Advisor Shares outstanding.
** Non-annualized.
Page 20
<PAGE>
<TABLE>
Mortgage Securities Fund - Select Shares *
<S> <C>
Since Inception (July 1, 1997) ..................................5.10% **
</TABLE>
- ----------
* As of December 31, 1997 there were no Advisor Shares outstanding.
** Non-annualized.
As described in the Prospectus under the caption "Expense Information," the
High Yield Fund, Emerging Markets, Latin America Equity, New York Municipal
Fund, California Municipal, National Municipal, U.S. Government Securities, and
Mortgage Securities Funds have been and still are subject to certain fee
waivers. Absent such waivers, the returns shown above would be lower.
The Funds may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating aggregate total return can be expressed as follows:
Aggregate Total Return = ERV - 1
---
P
In addition to total return, each Fund may quote performance in terms of a
30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the Commission and can be expressed as follows:
6
YIELD = 2 [ ( a - b + 1 ) - 1 ]
-----
cd
where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of any
reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by a Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Undeclared earned income, computed in accordance
with generally accepted accounting principles, may be subtracted from the
maximum offering price calculation required pursuant to "d" above.
The 30-day yield for the Select Shares of the High Yield, Emerging Markets,
U.S. Government Securities, Mortgage Securities, California Municipal, New York
Municipal and National Municipal Funds for the period ended December 31, 1997,
was 8.55%, 10.25%, 5.71%, 6.01%, 4.28%, 4.05% and 3.84% respectively. The
30-day yield for the Advisor Shares of the High Yield Fund for the period ended
December 31, 1997, was 8.55%.
Each Fund may also advertise tax-equivalent yields which are computed by
dividing that portion of yield that is tax-exempt by one, minus a stated income
tax rate and adding the quotient to that portion, if any, of the yield that is
not tax-exempt.
Each Fund may also advertise its "risk adjusted return," which reflects the
total return of the Fund over time adjusted to reflect volatility of the Fund.
Page 21
<PAGE>
The performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc. or other independent services which monitor the
performance of investment companies, and may be quoted in advertising in
terms of their rankings in each applicable universe. In addition, the Company
may use performance data reported in financial and industry publications,
including BARRON'S, BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR,
MONEY, MORNINGSTAR, MUTUAL FUND VALUES, THE WALL STREET JOURNAL, THE NEW YORK
TIMES AND U.S.A. TODAY.
A Fund may include in advertising or sales literature discussions or
illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting),
investment management techniques, policies or investment suitability of a
Fund, economic and political conditions and the relationship between sectors
of the economy and the economy as a whole, the effects of inflation and
historical performance of various asset classes, including but not limited
to, stocks and bonds. From time to time advertisements, sales literature,
communications to shareholders or other materials may summarize the substance
of information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the Adviser as to current
market, economy, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. In addition, selected indices may be used to
illustrate historic performance of select asset classes.
ADDITIONAL INFORMATION CONCERNING DIVIDENDS, DISTRIBUTIONS AND TAXES
The following discussion is only a brief summary of certain additional
tax considerations affecting the Company, its Funds and its shareholders. No
attempt is made to present a detailed explanation of all federal, state and
local tax concerns, and the discussion set forth here and in the Prospectus
is not intended as a substitute for careful tax planning. Investors are urged
to consult their own tax advisers with specific questions relating to
federal, state or local taxes.
IN GENERAL
Each Fund intends to qualify as a regulated investment company (a
"RIC")under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code")and to continue to so qualify. Qualification as a RIC requires,
among other things, that each Fund: (a) derive at least 90% of its gross
income in each taxable year from dividends, interest, payments with respect
to securities loans; gains from the sale or other disposition of stocks or
securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stocks or securities; and (b) diversify its holdings so
that, at the end of each quarter of each taxable year, (i) at least 50% of
the market value of a Fund's assets is represented by cash, cash items, U.S.
government securities, securities of other RICs and other securities with
such other securities limited, for purposes of this calculation in respect of
any issuer, to an amount not greater than 5% of the value of a Fund's assets
and not greater than 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its total assets is invested in
the securities (other than U.S. government securities or the securities of
other RICs) of any one issuer.
Investors should consider the tax implications of buying shares just
prior to a distribution. Although the price of shares purchased at that time
may reflect the amount of the forthcoming distribution, those purchasing just
prior to a distribution will receive a distribution which will nevertheless
be taxable to them.
Gain or loss, if any, on the sale or other disposition of shares of each
of the Funds will generally result in long-term capital gain or loss to
shareholders. Generally, a shareholder's gain or loss will be a long-term
gain or loss if the shares have been held for more than eighteen months, a
mid-term capital gain or loss if held for more than twelve months up to and
including eighteen months and otherwise as a short-term capital gain or loss.
However, if any shares on which an adjusted net long-term capital gain
distribution or a mid-term capital gain distribution has been received are
subsequently sold or redeemed and such shares have been held for six months
or less, any loss realized will be treated as either an adjusted net
long-term capital loss or a mid-term capital loss to the extent that it
offsets the corresponding adjusted net long-term capital gain distribution or
mid-term capital gain distribution. Moreover, any loss realized on a sale or
exchange of shares will be deferred to the extent that the shares disposed
of are replaced within a 61-day period beginning 30 days before and ending 30
days after the disposition of the shares, in which case the basis of the
shares acquired will be adjusted upward to reflect the deferred loss. The
maximum rate of tax on long-term capital gain of individuals derived with
respect to capital assets held for more than one year but less than eighteen
months is 28%, and with respect to capital assets held for more than eighteen
months is 20%. The maximum rate of tax on ordinary income of individuals is
39.6%.
Page 22
<PAGE>
Each Fund may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts
(including options, futures and forward contracts on foreign currencies) and
short sales. Such transactions will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
realized by the Fund (that is, may affect whether gains or losses are
ordinary or capital), accelerate recognition of income of the Fund and defer
recognition of certain of the Fund's losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. In
addition, these provisions (1) will require a Fund to "mark-to-market"
certain types of provisions in its portfolio (that is, treat them as if they
were closed out) and (2) may cause a Fund to recognize income without
receiving cash with which to pay dividends or make distributions in amounts
necessary to satisfy the 90% distribution requirement described in the
Prospectus and avoid the 4% excise tax described in the Prospectus. Each
Fund intends to monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when
it acquires any option, futures contract, forward contract or hedged
investment in order to mitigate the effect of these rules.
Each Fund may make investments that produce income that is not matched
by a corresponding cash distribution to the Fund, such as investments in
certain Brady Bonds or other obligations having original issue discount
(i.e., an amount equal to the excess of the stated redemption price of the
security at maturity over its issue price), or market discount (i.e., an
amount equal to the excess of the stated redemption price of the security
over the basis of such bond immediately after it was acquired) if the Fund
elects to accrue market discount on a current basis. Each Fund intends to
elect to accrue market discount on a current basis. In addition, income may
continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned
by a Fund and therefore would be subject to the distribution requirements of
the Code. Because such income may not be matched by a corresponding cash
distribution to a Fund, such Fund may be required to borrow money or dispose
of other securities to be able to make distributions to its investors. It is
expected that a portion of the dividends of net investment income received by
corporate shareholders from a Fund will qualify for the federal dividends
received deduction generally available to corporations. The dividends
received deduction for corporate shareholders maybe reduced if the securities
with respect to which dividends are received by a Fund are (1) considered to
be "debt-financed" (generally, acquired with borrowed funds), (2) held by a
Fund for less than 46 days (91 days in the case of certain preferred stock)
during the 90 day period beginning on the date which is 45 days before the
date on which such share becomes ex-dividend with respect to such dividend
(during the 180 day period beginning 90 days before such date in the case of
certain preferred stock) or (3) subject to certain forms of hedges or short
sales.
The tax treatment of certain securities in which each Fund may invest is
not free from doubt and it is possible that an Internal Revenue Service
("IRS")examination of the issuers of such securities or of the Fund could
result in adjustments to the income of a Fund. An upward adjustment by the
IRS to the income of a Fund may result in the failure of such Fund to satisfy
the 90% distribution requirement necessary for such Fund to maintain its
status as a RIC under the Code. In such event, a Fund may be able to make a
"deficiency dividend" distribution to its shareholders with respect to the
year under examination to satisfy this requirement. Such distribution will be
taxable as a dividend to the shareholders receiving the distribution (whether
or not a Fund has sufficient current or accumulated earnings and profits for
the year in which such distribution is made). A downward adjustment by the
IRS to the income of a Fund may cause a portion of the previously made
distribution with respect to the year under examination not to be treated as
a dividend. In such event, the portion of distributions to each shareholder
not treated as a dividend would be recharacterized as a return of capital and
reduce the shareholder's basis in the shares held at the time of the
previously made distributions. Accordingly, this reduction in basis could
cause a shareholder to recognize additional gain upon the sale of such
shareholder's shares.
Certain of a Fund's investments in structured products may, for federal
income tax purposes, constitute investments in shares of foreign
corporations. If a Fund purchases shares in certain foreign investment
entities, called" passive foreign investment companies" ("PFICs"), the Fund
will be subject to one of the following special tax regimes: (i) the Fund is
liable for U.S. federal income tax, and an additional charge in the nature of
interest, on a portion of any "excess distribution" from such foreign entity
or any gain from the disposition of such shares, even if the entire
distribution or gain is paid out by the Fund as a dividend to its
shareholders; (ii) if the Fund was able and elected to treat a PFIC as a
"qualified electing fund," the Fund would be required each year to include in
income, and distribute to shareholders in accordance with the distribution
requirements set forth above, the Fund's pro rata share of the ordinary
earnings and net capital gains of the PFIC, whether or not such earnings or
gains are distributed to the Fund or (iii) the Fund is entitled to
mark-to-market annually the shares of the PFIC, and is required to distribute
to shareholders any such mark-to-market gains in accordance with the
distribution requirements set forth above. Because of the expansive
definition of a PFIC, it is possible that a Fund
Page 23
<PAGE>
may invest a portion of its assets in PFICs. It is not anticipated, however,
that the portion of such Fund's assets invested in PFICs will be material.
Under the Code, gain or loss attributable to fluctuations in exchange
rates which occur between the time a Fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time a Fund actually collects such receivables or pays such
liabilities are treated as ordinary income or ordinary loss. Similarly, gains
or losses from the disposition of foreign currencies, from the disposition of
debt securities denominated in a foreign currency, or from the disposition of
a forward contract denominated in a foreign currency which are attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the asset and the date of disposition also are treated as
ordinary gain or loss. Such gain or loss, referred to under the Code as
"section 988" gain or loss, increase or decrease the amount of a Fund's net
investment income available to be distributed to its shareholders as ordinary
income, rather than increasing or decreasing the amount of a Fund's net
capital gain. Because section 988 loss reduce the amount of ordinary
dividends a Fund will be allowed to distribute for a taxable year, such
section 988 loss may result in all or a portion of prior dividends
distributions for such year being recharacterized as a non-taxable return of
capital to shareholders, rather than as an ordinary dividend, reducing each
shareholder's basis in his Fund shares. To the extent that such distributions
exceed such shareholder's basis, each distribution will be treated as a gain
from the sale of shares.
CALIFORNIA MUNICIPAL FUND, NEW YORK MUNICIPAL FUND AND NATIONAL MUNICIPAL FUND
The California Municipal Fund, New York Municipal Fund and National
Municipal Fund intend to qualify to pay "exempt-interest dividends," as that
term is defined in the Code, by holding at the end of each quarter of its
taxable year at least 50% of the value of its total assets in the form of
obligations described in section 103(a) of the Code. These Funds' policy is
to pay in each taxable year exempt-interest dividends equal to at least 90%
of each such Fund's interest from tax-exempt obligations net of certain
deductions. Except as discussed below, exempt-interest dividends will be
exempt from regular federal income tax.
Although exempt-interest dividends may be excluded from a shareholder's
gross income for federal income tax purposes, a portion of the
exempt-interest dividends may be a specific preference item for purposes of
determining the shareholder's liability (if any) under the federal individual
and corporate alternative minimum tax provisions of the Code. Exempt-interest
dividends will constitute a specific preference item for purposes of the
federal alternative minimum tax to the extent that such dividends are derived
from certain types of private activity bonds issued after August 7,1986. In
addition, all exempt-interest dividends will be a component of the "adjusted
current earnings" adjustment item for purposes of the federal corporate
alternative minimum tax. Moreover, the receipt of dividends from the Fund may
increase a foreign corporate shareholder's liability under the branch profits
tax, and may also affect the federal tax liability of certain Subchapter S
corporations and insurance companies. Furthermore, the receipt of
exempt-interest dividends may be a factor in determining the extent to which
as shareholder's Social Security benefits are taxable.
The exemption of interest income for regular federal income tax purposes
may not result in similar exemptions under the tax law of state and local
taxing Authorities. In general, a state exempts from state income tax only
interest earned on obligations issued by that state or its political
subdivisions and instrumentalities.
Interest on indebtedness incurred by a shareholder to purchase or carry
a Fund's shares is not deductible for federal income tax purposes if such
Fund distributes exempt-interest dividends during the shareholder's taxable
year.
BACKUP WITHHOLDING
The Funds may be required to withhold U.S. 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 (other
than exempt-interest dividends) if (i) the payee fails to furnish a Fund with
the payee's correct taxpayer identification number, (ii) the IRS notifies a
Fund that the payee 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 payee fails to certify that he or she is not
subject to backup withholding.
Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.
Page 24
<PAGE>
SHAREHOLDER SERVICES
The following supplements the information regarding shareholder services
set forth in the Company's Prospectus relating to the Funds:
EXCHANGE PRIVILEGE
Shares of each class of any Fund of the Company may be exchanged for
shares of the same class of any of the other Funds or any of the Company's
other portfolios provided that, with respect to Select Shares, a shareholder
exchanges shares with a value of at least $50,000. Exchange requests with
respect to Select Shares should be sent to The OFFITBANK Investment Fund,
Inc., 3435 Stelzer Road, Columbus, Ohio 43219. Any such exchange will be
based on the respective net asset values of the shares involved. There is no
sales commission or charge of any kind. Before making an exchange, a
shareholder should consider the investment objective of the Fund or portfolio
to be purchased. Exchange requests may be made either by mail or telephone.
Telephone exchanges (referred to as "expedited exchanges") will be accepted
only if the certificates for the shares to be exchanged are held by the
Company for the account of the shareholder and the registration of the two
accounts is identical. Requests for expedited exchanges received prior to
4:00 p.m. (New York time) will be processed as of the close of business on
the same day. Requests received after this time will be processed on the next
business day. Expedited exchanges may, upon 60 days' notice to shareholders,
also be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Directors to assure that such
exchanges do not disadvantage the Company and its shareholders. A Shareholder
who holds Advisor Shares should consult his/her Shareholder Servicing Agent
to determine the availability of and terms and conditions imposed on
exchanges with the other Funds and portfolios of the Company.
For federal income tax purposes, an exchange between Funds or portfolios
of the Company is a taxable event, and, accordingly, a capital gain or loss
may be realized. In a revenue ruling relating to circumstances similar to the
Company's, an exchange between a series of a fund was deemed to be a taxable
event. It is likely, therefore, that a capital gain or loss would be realized
on an exchange between Funds or portfolios; shareholders may want to consult
their tax advisers for further information in this regard. The exchange
privilege maybe modified or terminated at any time.
TRANSFER OF SHARES
Shareholders may transfer shares of the Company's Funds or other
portfolios to another person by written request to The OFFITBANK Investment
Fund, Inc. at the address noted above. The request should clearly identify
the account and number of shares to be transferred and include the signature
of all registered owners and all share certificates, if any, which are
subject to the transfer. The signature on the letter of request, the share
certificate or any stock power must be guaranteed in the same manner as
described under "Redemption of Shares" in the Prospectus. As in the case of
redemptions, the written request must be received in good order before any
transfer can be made.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in
the aggregate, and not by class, except where voting by class is required by
law. As used in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders
in connection with general matters affecting the Fund and all additional
investment portfolios, means the vote of the lesser of (i) 67% of the
Company's shares represented at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy or (ii) more than
50% of the Company's outstanding shares. The term "majority", when referring
to the approvals to be obtained from shareholders in connection with matters
affecting the Company, any other single Fund (e.g., approval of Advisory
Agreements) or any single class of a Fund, means the vote of the lesser of
(i) 67% of the shares of the Fund represented at a meeting if the holders of
more than 50% of the outstanding shares of the Fund, or of the class of
shares of the Fund, if a class vote is required, are present in person or by
proxy or (ii) more than 50% of the outstanding shares of the Fund or of the
class of shares of the Fund, if a class vote is required. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
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<PAGE>
Each share of each class of a Fund of the Company is entitled to such
dividends and distributions out of the income earned on the assets belonging
to that Fund as are declared in the discretion of the Company's Board of
Directors. In the event of the liquidation or dissolution of the Company,
shares of a class of a Fund are entitled to receive the assets allocable to
that class of shares of such Fund which are available for distribution, and a
proportionate distribution, based upon the relative net assets of the Funds,
of any general assets not belonging to a Fund which are available for
distribution. It is anticipated that expenses incurred by each class of
shares of each Fund will differ and, accordingly, that the dividends
distributed with respect to each class will differ.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid, non-assessable, fully transferable and redeemable
at the option of the holder.
CERTAIN OWNERS OF SHARES OF THE COMPANY
As of March 30, 1998, to the knowledge of the Administrator, the
Officers and the Directors of the Company, as a group, own less than 1% of
the outstanding voting shares of each Fund. As of March 30, 1998, the
following persons owned of record or beneficially 5% or more of the
outstanding shares of any class of shares of a Fund of the Company:
<TABLE>
<CAPTION>
Emerging Markets Fund (Select Shares) Shares Owned Percentage
- ------------------------------------- ------------- ----------
<S> <C> <C>
GAF Corporation Master Retirement Trust 1,362,954.325 5.94%
34 Exchange Place
Jersey City, New Jersey 07302
Mall Investment LP 2,589,588.629 11.28%
215 Keo Way
Des Moines, IA 50309
<CAPTION>
Latin America Equity Fund (Select Shares) Shares Owned Percentage
- ----------------------------------------- ------------- ----------
<S> <C> <C>
Stephen Knight Pond Revocable Trust 200,315.208 5.08%
900 Rockford Road
High Point, N.C. 27262
Noyce Marital Trust 226,129.330 5.73%
450 Sheridan Avenue
Palo Alto, CA 94304
The Noyce Foundation 231,424.435 5.86%
450 Sheridan Avenue
Palo Alto, CA 94304
Taube Family Trust 301,745.732 7.65%
1050 Ralston Avenue
Belmont, CA 94002
Lighthouse Inc. 344,844.397 8.74%
111 East 59th Street
New York, N.Y. 10022
<CAPTION>
Investment Grade Global Debt Fund (Select Shares) Shares Owned Percentage
- ------------------------------------------------- ------------- ----------
<S> <C> <C>
BISYS Fund Services 3,200 100%(1)
3435 Stelzer Road
Columbus, OH 43219
Page 26
<PAGE>
<CAPTION>
U.S. Government Securities Fund (Select Shares) Shares Owned Percentage
<S> <C> <C>
- ----------------------------------------------- ------------- ----------
Real Estate Board of New York, Inc. 56,995.758 5.70%
12 East 41st Street
New York, N.Y. 10017
Zenkel Foundation 67,610.907 6.76%
15 West 53 Street
New York, N.Y. 10019
City Parks Foundations, Inc. 78,224.458 7.82%
830 Fifth Avenue
New York, N.Y. 10021
Wien & Malkin 153,038.994 15.31%
60 East 42nd Street
New York, N.Y. 10165
Riverdale Country School, Inc. 316,689.168 31.67%(1)
5250 Fieldston Road
Bronx, N.Y. 10471
<CAPTION>
Mortgage Securities Fund (Select Shares) Shares Owned Percentage
- ---------------------------------------- ------------- ----------
<S> <C> <C>
Wise Metals Co. Inc. 138,557.300 7.24%
800 Central Avenue
Linthioum, Maryland 21090
Riverdale Country School, Inc. 147,311.012 7.69%
5250 Fieldston Road
Bronx, N.Y. 10471
City Parks Foundations, Inc. 154,270.101 8.06%
830 Fifth Avenue
New York, N. Y. 10021
Gladys Cole IRA Rollover 196,636.561 10.27%
1211 Avenue of Americas
New York, N.Y. 10036
Danielle Rich Trust 259,379.787 13.55%
36 South Charles Street
Baltimore, Maryland 21201
Ilona Rich Trust 259,379.787 13.55%
36 South Charles Street
Baltimore, Maryland 21201
<CAPTION>
California Municipal Fund (Select Shares) Shares Owned Percentage
- ----------------------------------------- ------------- ----------
<S> <C> <C>
Dennis Lavinthal 56,577.561 8.13%
14958 Venture Boulevard
Sherman Oaks, California 91403
Page 27
<PAGE>
Lisa Zenkel 70,849.951 10.18%
204 South Canyon View
Los Angeles, California 90049
Mathilde M. Notaras 95,419.847 13.71%
778 Sarbonne Road
Los Angeles, California 90077
John Calley and Margaret Calley 99,310.046 14.27%
350 Park Avenue
New York, New York 10022
Elisa Zaffaroni Trust 104,067.265 14.95%
950 Page Mill Road
Palo Alto, California 94304
OFFITBANK Capital 214,119.339 30.76%(1)
520 Madison Avenue
New York, NY 10022
<CAPTION>
New York Municipal Fund (Select Shares) Shares Owned Percentage
- --------------------------------------- ------------- ----------
<S> <C> <C>
Susan Halpern 264,918.887 5.68%
575 Madison Avenue
New York, N.Y. 10022
Lawrence Weinbach and Patricia Weinbach 412,506.692 8.84%
136 East 79th Street
New York, N.Y. 10021
OFFITBANK Capital 753,472.096 16.15%
520 Madison Avenue
New York, N.Y. 10022
<CAPTION>
National Municipal Fund (Select Shares) Shares Owned Percentage
- --------------------------------------- ------------- ----------
<S> <C> <C>
Nancy Zeckendorf 74,986.322 18.09%
502 Park Avenue
New York, N.Y. 10022
Eilhys England 126,839.870 30.60%(1)
260 Riversville Road
Greenwich, C.T. 06831
OFFITBANK CAPITAL 202,822.482 48.94%(1)
520 Madison Avenue
New York, N.Y. 10022
</TABLE>
- ------------------------------
(1) Accountholder may be deemed to have "control" as defined under the
Securities Act of 1933.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Company.
Price Waterhouse LLP is located at 1177 Avenue of the Americas, New York, New
York 10036.
Page 28
<PAGE>
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not
contain all the information included in the Registration Statement filed with
the Commission under the Securities Act of 1933 with respect to the
securities offered by the Prospectus. Certain portions of the Registration
Statement have been omitted from the Prospectus and this Statement of
Additional Information pursuant to the rules and regulations of the
Commission. The Registration Statement including the exhibits filed therewith
may be examined at the office of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to
the Registration Statement of which the Prospectus and this Statement of
Additional Information form a part, each such statement being qualified in
all respects by such reference.
FINANCIAL INFORMATION
The audited financial statements for the Company and the notes thereto
appearing in the most current fiscal year Annual Report to shareholders are
incorporated in this Statement of Additional Information by reference. No
other parts of the Annual Report are incorporated by reference herein. The
financial statements included in the Annual Report have been audited by the
Company's independent accountants, Price Waterhouse LLP, whose report thereon
dated February 16, 1998, is also incorporated herein by reference. Such
financial statements have been incorporated herein in reliance upon such
report given upon their authority as experts in accounting and auditing.
Additional copies of the Annual Report may be obtained at no charge by
telephoning the Company at the telephone number appearing on the front page
of this Statement of Additional Information.
Page 29
<PAGE>
APPENDIX A
SPECIAL FACTORS AFFECTING THE
CALIFORNIA MUNICIPAL FUND
OVERVIEW
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per share and the interest
income of, the OFFITBANK California Municipal Fund, or result in the default of
existing obligations, including obligations which may be held by the OFFITBANK
California Municipal Fund. The following section provides only a brief summary
of the complex factors affecting the financial condition of California, and is
based on information obtained from California, as publicly available prior to
the date of this Statement of Additional Information. The information contained
in such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local issuers
may be unrelated to the creditworthiness of California, and that there is no
obligation on the part of California to make payment on such local obligations
in the event of default in the absence of a specific guarantee or pledge
provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1994. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
ECONOMIC FACTORS. California's economy is the largest among the 50 states
and one of the largest in the world. The State's population of more than 32.8
million represents over 12% of the total United States population and grew by
26% in the 1980s, more than double the national rate. Population growth slowed
to less than 1% annually in 1994 and 1995, but rose to 1.9% in 1996. During the
early 1990's, net population growth in the State was due to births and foreign
immigration.
Total personal income in the State, at an estimated $810 billion in 1996,
accounts for almost 13% of all personal income in the nation. Total employment
is over 14 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s, with over 700,000 jobs
lost. The worst job losses were
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<PAGE>
led by declines in the aerospace and construction industries, and
significantly related to cuts in federal defense spending.
Since the start of 1994, the California economy has been in a steady
recovery in all parts of the State. The State Department of Finance has
reported strong net job growth, particularly in construction, high technology
and electronic manufacturing and services, wholesale and retail trade, exports,
entertainment and tourism. Prerecession job levels were reached in 1996, and
have been growing since then at faster than the national average rate.
Unemployment is down to half the rate of the recession peak, but still remains
higher than the national average. The Asian economic crisis is expected to have
some moderating effect on the State's economy, as exports to the region will be
reduced, but there are also expected to be some offsetting factors, and State
exports to other areas, like Latin America, have been growing rapidly.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
LIMITATION ON PROPERTY TAXES. Certain California Municipal Obligations may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full cash
value of the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except under new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court
in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
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<PAGE>
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was
imposed, extended or increased without voter approval after December 31, 1994
must be approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
APPROPRIATIONS LIMITS. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No
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<PAGE>
limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. State appropriations were more than $6 billion under the limit for
fiscal year 1997-98.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in
laws or the California Constitution may also affect the ability of the State or
local issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of
the public school system and public institutions of higher education. As of
February 1, 1998, the State had outstanding approximately $18.5 billion of
long-term general obligation bonds, plus $1.051 billion of general obligation
commercial paper which will be refunded by long-term bonds in the future, and
$6.4 billion of lease-purchase debt supported by the State General Fund. The
State also had about $8.7 billion of authorized and unissued long-term
general obligation bonds and
A-4
<PAGE>
lease-purchase debt. In FY 1996-97, debt service on general obligation bonds
and lease purchase debt was approximately 5.0% of General Fund revenues.
RECENT FINANCIAL RESULTS. The principal sources of General Fund
revenues in 1996-1997 were the California personal income tax (45% of total
revenues), the sales tax (34%) and bank and corporation taxes (12%). The
State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for
financial reporting purposes in the General Fund balance.
GENERAL. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Starting in mid-1990, the State has faced adverse economic, fiscal, and
budget conditions. The 1990-1994 economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs.
RECENT BUDGETS. As a result of the recession and these factors, among
others, the State experienced substantial revenue shortfalls, and greater than
anticipated social service costs, in the early 1990's. The State accumulated
and sustained a budget deficit in the budget reserve, the SFEU, approaching $2.8
billion at its peak at June 30, 1993. The Legislature and Governor agreed on a
number of different steps to respond to the adverse financial conditions and
produce Budget Acts in the Years 1991-92 to 1995-96 (although not all of these
actions were taken in each year):
- significant cuts in health and welfare program expenditures;
- transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in
mandates on local government;
- transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for schools;
- reduction in growth of support for higher education programs, coupled
with increases in student fees;
- revenue increases (particularly in the 1992-93 Fiscal Year budget),
most of which were for a short duration;
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- increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have produced
much less federal aid than the State Administration had requested);
and
- various one-time adjustment and accounting changes (some of which have
been challenged in court).
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the
restoration of positive financial results, with revenues equaling or
exceeding expenditures starting in FY 1992-93. As a result, the accumulated
budget deficit of about $2.8 billion was eliminated by June 30, 1997, when
the State showed a positive balance of about $408 million, on a budgetary
basis, in the SFEU.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the
annual budget, was to significantly reduce the State's cash resources
available to pay its ongoing obligations. The State's cash condition became
so serious that from late spring 1992 until 1995, the State had to rely on
issuance of short term notes which matured in a subsequent fiscal year to
finance its ongoing deficit, and pay current obligations. For a two-month
period in the summer of 1992, pending adoption of the annual Budget Act, the
State was forced to issue registered warrants (IOUs) to some of its
suppliers, employees and other creditors. The last of these deficit notes
was repaid in April, 1996.
The 1995-96 and 1996-97 Budget Acts reflected significantly improved
financial conditions, as the State's economy recovered and tax revenues
soared above projections. Over the two years, revenues averaged about $2
billion higher than initially estimated. Most of the additional revenues
were allocated to school funding, as required by Proposition 98, and to make
up shortfalls in federal aid for health and welfare costs and costs of
illegal aliens. The budgets for both these years showed strong increases in
funding for K-14 public education, including implementation of initiatives to
reduce class sizes for lower elementary grades to not more than 20 pupils.
Higher education funding also increased. Spending for health and welfare
programs was kept in check, as previously-implemented cuts in benefit levels
were retained.
The final results for FY 1996-97 showed General Fund revenues of $49.2
billion and expenditures of $48.9 billion. The improved revenues allowed the
repayment of the last of the recession-induced budget deficits; the SFEU had
a balance of $408 million on a budgetary basis ($281 million on a cash basis)
as of June 30, 1997, the first significant positive balance in the decade.
In 1996-97, the State implemented its regular cash flow borrowing program
with the issuance of $3.0 billion of Revenue Anticipation Notes which matured
on June 30, 1997, and did not require any external borrowing over the end of
the fiscal year.
Fiscal Year 1997-98 Budget. With continued strong economic recovery and
surging tax receipts, the State entered the 1997-98 Fiscal Year in the strongest
financial position in the decade. However, in May 1997, the California Supreme
Court ruled that the State had acted
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illegally in 1993 and 1994 by using a deferral of payments to the Public
Employees Retirement Fund to help balance earlier budgets. In response to
this court decision, the Governor ordered an immediate repayment to the
Retirement Fund of about $1.235 billion, which was made in late July, 1997,
and substantially "used up" the expected additional revenues for the fiscal
year.
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The Budget
Act assumes General Fund revenues and transfers of $52.5 billion, and contains
expenditures of $52.8 billion. As a result, the budget reserve (SFEU) is
reduced to an estimated $112 million at June 30, 1998. The Budget Act also
contains $14.4 billion of Special Fund expenditures. Following enactment of the
Budget Act, the State carried out its normal annual cash flow borrowing,
totaling $3.0 billion to mature June 30, 1998.
The 1997-98 Budget Act provides another year of rapidly increasing
funding for K-14 public education. Total General Fund support will reach
$5,150 per pupil, more than 20% higher than the recession-period levels which
were in effect as late as FY 1993-94. The $1.75 billion in new funding will
be spent on class size reduction and other initiatives, as well as fully
funding growth and cost of living increases. Support for higher education
units in the State also increased by about 6 percent. Because of the pension
payment, most other State programs were funded at levels consistent with
prior years, and several initiatives had to be dropped. These included
additional assistance to local governments, state employee raises, and
funding of a bond bank.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," to become effective January 1, 1998, will
emphasize programs to bring aid recipients into the workforce. As required
by federal law, new time limits will be placed on receipt of welfare aid.
Grant levels for 1997-98 remain at the reduced, prior years' levels.
Although, as noted, the 1997-98 Budget Act projects a budget reserve in
the SFEU of $112 million on June 30, 1998, the General Fund fund balance on
that date also reflects $1.25 billion of "loans" which the General Fund made
to local schools in the recession years, representing cash outlays above the
mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund
and from schools' entitlements. The 1997-98 Budget Act contained a $200
million appropriation from the General Fund toward this settlement.
Updated figures from the Department of Finance, released in early
January, 1998, project both revenues and expenditures will be higher in
1997-98 than estimated when the Budget Act was passed, reflecting continued
strong economic activity. The Department projects the budget reserve (SFEU)
at June 30, 1998 will be approximately $329 million.
PROPOSED 1998-99 FISCAL YEAR BUDGET
The Governor released his proposed FY 1998-99 Budget on January 9, 1998.
It projected General Fund revenues and transfers of $55.4 billion, an
increase of almost 5% over 1997-98.
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Revenue losses due to tax cuts enacted in late 1997 were expected to be
offset by higher capital gains realizations. The Governor proposed
expenditures of $55.4 billion, also an almost 5% increase from the prior
year. The Governor's Budget proposes significant additional funding for K-12
schools under Proposition 98, as well as additional funding for higher
education, with a proposed reduction of college student fees. State and
federal funds will be used in the new CalWORKS welfare program, with
projections of a fourth consecutive year or caseload decline. The Governor
has proposed a large capital expenditure program, focusing on schools and
universities, but also including corrections, environmental and general
government projects. These proposals would require approval of almost $10
billion of new general obligation bonds over the next six years. All of the
Governor's proposals will be reviewed by the Legislature as part of the
annual budget process.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from
mandated spending on education, a rising prison population, and social needs
of a growing population with many immigrants. These factors which limit
State spending growth also put pressure on local governments. There can be
no assurances that, if economic conditions weaken, or other factors
intercede, the State will not experience budget gaps in the future.
BOND RATING. The ratings on California's long-term general obligation
bonds were reduced in the early 1990's from "AAA" levels which had existed
prior to the recession. As of April 1998 California's general obligation
bonds were assigned ratings of "A+" from Standard & Poor's, "A1" from Moody's
and "AA-" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued
by local California issuers may be unrelated to creditworthiness of
obligations issued by the State of California, and that there is no
obligation on the part of the State to make payment on such local obligations
in the event of default.
LEGAL PROCEEDINGS. The State is involved in certain legal proceedings
(described in the State's recent financial statements) that, if decided
against the State, may require the State to make significant future
expenditures or may substantially impair revenues. Trial courts have
recently entered tentative decisions or injunctions which would overturn
several parts of the State's recent budget compromises. The matters covered
by these lawsuits include reductions in welfare payments and the use of
certain cigarette tax funds for health costs. All of these cases are subject
to further proceedings and appeals, and if California eventually loses, the
final remedies may not have to be implemented in one year.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number
of State agencies, instrumentalities and political subdivisions of the State
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and
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the credit quality of the securities issued by them may vary considerably
from the credit quality of obligations backed by the full faith and credit of
the State.
STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently,
the California Legislature enacted measures to provide for the redistribution
of the State's General Fund surplus to local agencies, the reallocation of
certain State revenues to local agencies and the assumption of certain
governmental functions by the State to assist municipal issuers to raise
revenues. Total local assistance from the State's General Fund was budgeted
at approximately 75% of General Fund expenditures in recent years, including
the effect of implementing reductions in certain aid programs. To reduce
State General Fund support for school districts, the 1992-93 and 1993-94
Budget Acts caused local governments to transfer $3.9 billion of property tax
revenues to school districts, representing loss of the post-Proposition 13
"bailout" aid. Local governments have in return received greater revenues
and greater flexibility to operate health and welfare programs. While the
Governor initially proposed to grant new aid to local governments from the
State's improved fiscal condition in 1997-98, the decision to repay the State
pension fund eliminated these moneys.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth, of
State assistance to local governments may continue to be reduced. Any such
reductions in State aid could compound the serious fiscal constraints already
experienced by many local governments, particularly counties. At least one
rural county (Butte) publicly announced that it might enter bankruptcy
proceedings in August 1990, although such plans were put off after the
Governor approved legislation to provide additional funds for the county.
Other counties have also indicated that their budgetary condition is
extremely grave. Los Angeles County, the largest in the State, was forced to
make significant cuts in services and personnel, particularly in the health
care system, in order to balance its budget in FY1996-96 and FY1996-97. Los
Angeles County's debt was downgraded by Moody's and S&P in the summer of
1995. Orange County, which emerged from Federal Bankruptcy Court protection
in June 1996, has significantly reduced county services and personnel, and
faces strict financial conditions following large investment fund losses in
1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in
August, 1997 in order to comply with the federal welfare reform law.
Generally, counties play a large role in the new system, and are given
substantial flexibility to develop and administer programs to bring aid
recipients into the workforce. Counties are also given financial incentives
if either at the county or statewide level, the "Welfare-to-Work" programs
exceed minimum targets; counties are also subject to financial penalties for
failure to meet such targets. Counties remain responsible to provide
"general assistance" for able-bodied indigents who are ineligible for other
welfare programs. The long-term financial impact of the new CalWORKs system
on local governments is still unknown.
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Legislation enacted in late 1997 provides for the State to take over
financial responsibility for funding trial courts throughout the State. This
is estimated to save counties and cities a total of over $350 million
annually.
ASSESSMENT BONDS. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or
a slowdown in real estate sales activity. In many cases, such bonds are
secured by land which is undeveloped at the time of issuance but anticipated
to be developed within a few years after issuance. In the event of such
reduction or slowdown, such development may not occur or may be delayed,
thereby increasing the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal liability of
the owners of the property assessed, the lien on the property is the only
security for the bonds. Moreover, in most cases the issuer of these bonds is
not required to make payments on the bonds in the event of delinquency in the
payment of assessments or taxes, except from amounts, if any, in a reserve
fund established for the bonds.
CALIFORNIA LONG TERM LEASE OBLIGATIONS. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject
to "abatement" in the event the facility being leased is unavailable for
beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to
the holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g., due to earthquake). In the event abatement occurs with respect to a
lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not
be paid when due. Litigation is brought from time to time which challenges
the constitutionality of such lease arrangements.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program),
including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds
are secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (e.g., because of a
major natural disaster such as an earthquake), the tax increment revenue may
be insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after
the enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.
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Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been
or may be introduced which would modify existing taxes or other
revenue-raising measures or which either would further limit or,
alternatively, would increase the abilities of state and local governments to
impose new taxes or increase existing taxes. It is not possible, at present,
to predict the extent to which any such legislation will be enacted. Nor is
it possible, at present, to determine the impact of any such legislation on
California Municipal Obligations in which the Fund may invest, future
allocations of state revenues to local governments or the abilities of state
or local governments to pay the interest on, or repay the principal of, such
California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars
in damages. The federal government provided more than $13 billion in aid for
both earthquakes, and neither event is expected to have any long-term
negative economic impact. Any California Municipal Obligation in the Fund
could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could
be constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the federal or State
government to appropriate sufficient funds within their respective budget
limitations.
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APPENDIX B
SPECIAL FACTORS AFFECTING
THE NEW YORK MUNICIPAL FUND
Some of the significant financial considerations relating to the
investments of the OFFITBANK New York Municipal Fund in New York municipal
securities are summarized below. The following information constitutes only a
brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New York municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in such offering statements has not been independently
verified.
NEW YORK STATE
NEW YORK STATE FINANCING ACTIVITIES. There are a number of methods by
which New York State (the "State") may incur debt. Under the State
Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term general obligation borrowing (i.e., borrowing for more
than one year) unless the borrowing is authorized in a specific amount for a
single work or purpose by the New York State Legislature (the "Legislature")
and approved by the voters. There is no limitation on the amount of long-term
general obligation debt that may be so authorized and subsequently incurred
by the State. With the exception of general obligation housing bonds (which
must be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments
that result in substantially level or declining debt service payments, within
40 years after issuance, beginning not more than one year after issuance of
such bonds.
The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes ("TRANs"), and (ii) in anticipation of the receipt
of proceeds from the sale of duly authorized but unissued bonds, by issuing
bond anticipation notes ("BANs"). TRANs must mature within one year from
their dates of issuance and may not be refunded or refinanced beyond such
period. BANS may only be issued for the purposes and within the amounts for
which bonds may be issued pursuant to voter authorizations. Such BANs must be
paid from the proceeds of the sale of bonds in anticipation of which they
were issued or from other sources within two years of the date of issuance
or, in the case of BANs for housing purposes, within five years of the date
of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State
Constitution provides for the State guarantee of the repayment of certain
borrowings for designated projects of the New York State Thruway Authority,
the Job Development Authority and the Port Authority of New York and New
Jersey. The State has never been called upon to make any direct payments
pursuant to such guarantees. The State-guaranteed bonds of the Port Authority
of New York and New Jersey were fully retired on December 31, 1996.
State-guaranteed bonds issued by the Thruway Authority were fully retired on
July 1, 1995.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of
its outstanding bonds and notes in order to restructure and improve JDA's
capital structure. Due to concerns regarding the economic viability of its
programs, JDA's loan and loan guarantee activities had been suspended since
the Governor took office in 1995. As a result of the structural imbalances in
JDA's capital structure, and defaults in its loan portfolio and loan
guarantee program incurred between 1991 and 1996, JDA would have experienced
a debt service cash flow shortfall had it not completed its recent
refinancing. JDA anticipates that it will transact additional refinancings in
1999, 2000 and 2003 to complete its long-term plan of finance and further
alleviate cash flow imbalances which are likely to occur in future years. The
State does not anticipate that it will be called upon to make any payments
pursuant to the State
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guarantee in the 1997-98 fiscal year. JDA recently resumed its lending
activities under a revised set of lending programs and underwriting
guidelines.
Payments of debt service on State general obligation and
State-guaranteed bonds and notes are legally enforceable obligations of the
State.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual- obligation financing, which involve
obligations of public authorities or municipalities that are State-supported
but not general obligations of the State. Under these financing arrangements,
certain public authorities and municipalities have issued obligations to
finance the construction and rehabilitation of facilities or the acquisition
and rehabilitation of equipment and expect to meet their debt service
requirements through the receipt of rental or other contractual payments made
by the State. Although these financing arrangements involve a contractual
agreement by the State to make payments to a public authority, municipality
or other entity, the State's obligation to make such payments is generally
expressly made subject to appropriation by the Legislature and the actual
availability of money to the State for making the payments. The State has
also entered into a contractual-obligation financing arrangement with the New
York Local Government Assistance Corporation ("LGAC") to restructure the way
the State makes certain local aid payments.
The State also participates in the issuance of certificates of
participation ("COPs") in a pool of leases entered into by the State's Office
of General Services on behalf of several State departments and agencies
interested in acquiring operational equipment, or in certain cases, real
property. Legislation enacted in 1986 established restrictions upon and
centralized State control, through the Comptroller and the Director of the
Budget, over the issuance of COPs representing the State's contractual
obligation, subject to annual appropriation by the Legislature and
availability of money, to make installment or lease-purchase payments for the
State's acquisition of such equipment or real property.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or
contractual-obligation financing arrangements and has never been called upon
to make any direct payments pursuant to its guarantees although there can be
no assurance that such a default or call will not occur in the future.
The State also employs moral obligation financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and statutory provisions requiring the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. There has never been a default on
any moral obligation debt of any public authority although there can be no
assurance that such a default will not occur in the future.
The State anticipated that its capital programs would be financed, in
part, through borrowings by the State and public authorities in the 1997-98
fiscal year. The State expected to issue $605 million in general obligation
bonds (including $140 million for purposes of redeeming outstanding BANs) and
$140 million in general obligation commercial paper. The Legislature also
authorized the issuance of up to $311 million in COPs during the State's
1997-98 fiscal year for equipment purchases.
The proposed 1997-98 through 2002-2003 Capital Program and Financing
Plan was released with the 1998-99 Executive Budget on January 20, 1998. As
part of the Plan, changes were proposed to the State's 1997-98 borrowing
plan, including: delay of the issuance of Certificates of Participation
("COPs") to finance welfare information systems through 1998-99 to permit a
thorough assessment of needs; and the elimination of issuances for the CEFAP
to reflect the proposed conversion of that bond-financed program to
pay-as-you-go financing.
As a result of these changes, the State's 1997-98 borrowing plan now
reflects: $501 million in general obligation bonds (including $140 million
for the purposes of redeeming outstanding BANs) and $140 million in general
obligation paper; the issuance of $83 million in COPs for equipment
purchases; and approximately $1.8 billion in borrowings by public authorities
pursuant to lease-purchase and contractual-obligation financings for capital
programs of the State, including costs of issuance, reserve funds, and other
coasts, net of anticipated
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refundings and other adjustments for 1997-98 capital projects. The projection
of State borrowings for the 1997-98 fiscal year is subject to change as
market conditions, interest rates and other factors vary through the end of
the fiscal year.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $1.9 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for
1997-98 capital projects. Included therein are borrowings by (i) DASNY for
the State University of New York ("SUNY"), The City University of New York
("CUNY"), health facilities, and mental health facilities; (ii) the Thruway
Authority for the Dedicated Highway and Bridge Trust Fund and Consolidated
Highway Improvement Program; (iii) UDC (doing business as the Empire State
Development Corporation) for prison and youth facilities; (iv) the Housing
Finance Agency ("HFA") for housing programs; and (v) borrowings by the
Environmental Facilities Corporation ("EFC") and other authorities. In
addition, in the 1997 legislative session, the Legislature also approved two
new authorizations for lease-purchase and contractual obligation financings.
An aggregate $425 million was authorized for four public authorities (Thruway
Authority, DASNY, UDC and HFA) for the Community Enhancement Facility Program
for economic development purposes, including sports facilities, cultural
institutions, transportation, infrastructure and other community facility
projects. DASNY was also authorized to issue up to $40 million to finance the
expansion and improvement of facilities at the Albany County airport.
In addition to the arrangements described above, State law provides for
the creation of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities. The Municipal
Assistance Corporation for The City of New York ("MAC") was created to
provide financing assistance to New York City (the "City"). To enable MAC to
pay debt service on its obligations, MAC receives, subject to annual
appropriation by the Legislature, receipts from the 4% New York State Sales
Tax for the benefit of New York City, the State-imposed stock transfer tax
and, subject to certain prior liens, certain local assistance payments
otherwise payable to the City. The legislation creating MAC also includes a
moral obligation provision. Under its enabling legislation, MAC's authority
to issue bonds and notes (other than refunding bonds and notes) expired on
December 31, 1984. In 1995, the State created the Municipal Assistance
Corporation for the City of Troy ("Troy MAC"). The bonds issued by Troy MAC,
however, do not include moral obligation provisions.
THE 1997-1998 STATE FINANCIAL PLAN. The State's budget for the State's
1997-98 fiscal year, commencing on April 1, 1997 and ending on March 31,
1998, was enacted by the Legislature on August 4, 1997. The State Financial
Plan for the 1997-98 fiscal year (the "State Financial Plan") was formulated
on August 11, 1997 and was based on the State's budget as enacted by the
Legislature and signed into law by the Governor, as well as actual results
for the first quarter of the current fiscal year. The State Financial Plan is
updated in October and January. The State Financial Plan was projected to be
balanced on a cash basis; however there can be no assurance that the State
Financial Plan will continue to be in balance. Total General Fund receipts
and transfers from other funds were projected to be $35.09 billion, while
total General Fund disbursements and transfers to other funds were projected
to be $34.60 billion. After adjustments for comparability, the adopted
1997-98 budget projected a year-over-year increase in General Fund
disbursements of 5.2 percent. As compared to the Governor's proposed budget
as revised in February 1997, the State's adopted budget for 1997-98 increased
General Fund spending by $1.70 billion, primarily from increases for local
assistance ($1.3 billion). Resources used to fund these additional
expenditures included $540 million in increased revenues projected for
1997-98, increased resources produced in the 1996-1997 fiscal year that were
to be utilized in 1997-1998, reestimates of social service, fringe benefit
and other spending, and certain non-recurring resources.
The State Financial Plan included actions that would have an effect on
the budget outlook for State fiscal year 1997-98 and beyond. The State
Division of the Budget ("DOB") estimated that the 1997-98 State Financial
Plan contained actions that provide non-recurring resources or savings
totaling approximately $270 million. These included the use of $200 million
in federal reimbursement funds available from retroactive social service
claims approved by the federal government in April 1997. The balance is
composed of various other actions, primarily the transfer of unused special
revenue fund balances to the General Fund.
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The State closed projected budget gaps of $5.0 billion, $3.9 billion and
$2.3 billion for its 1995-96 through 1997-98 fiscal years, respectively. The
1998-99 gap was projected at $1.68 billion, in the outyear projections
submitted to the legislature in February 1997. As a result of changes made in
the enacted budget, that gap is now expected to be about the same or smaller
than the amount previously projected, after application of the $530 million
reserve for future needs. The expected gap is smaller than the three previous
budget gaps closed by the State.
The outyear projection will be impacted by a variety of factors. Certain
actions taken in the State's 1997-98 fiscal year, such as medicaid and
welfare reforms, are expected to provide recurring savings in future fiscal
years. Continued controls on State agency spending will also provide
recurring savings. The availability of $530 million in reserves created as a
part of the 1997-98 adopted budget and included in the State Financial Plan
is expected to benefit the 1998-99 fiscal year. Sustained growth in the
State's economy and continued declines in welfare case load and health care
costs would also produce additional savings in the State Financial Plan.
Finally, various federal actions, including the potential benefit effect on
State tax receipts from changes to the federal tax treatment of capital
gains, would potentially provide significant benefits to the State over the
next several years.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy,
actions of the federal government and other factors have created structural
budget gaps for the State. These gaps resulted from a significant disparity
between recurring revenues and the costs of maintaining or increasing the
level of support for State programs. To address a potential imbalance in any
given fiscal year, the State would be required to take actions to increase
receipts and/or reduce disbursements as it enacts the budget for that year,
and under the State Constitution, the Governor is required to propose a
balanced budget each year. There can be no assurance, however, that the
Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disbursements in future fiscal years.
Uncertainties with regard to the economy, as well as the outcome of
certain litigation now pending against the State, could produce adverse
effects on the State's projections of receipts and disbursements. For
example, changes to current levels of interest rates or deteriorating world
economic conditions could have an adverse effect on the State economy and
produce results in the current fiscal year that are worse than predicted.
Similarly, adverse judgments in legal proceedings against the State could
exceed amounts reserved in the 1997-98 Financial Plan for payment of such
judgments and produce additional unbudgeted costs to the State.
In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A delay in the adoption of the State's budget
beyond the statutory April 1 deadline could delay the projected receipt by
the City of State aid, and there can be no assurance that State budgets in
future fiscal years will be adopted by the April 1 statutory deadline.
The following discussion summarizes the State Financial Plan and recent
fiscal years with particular emphasis on the State's General Fund. Pursuant
to statute, the State updates the financial plan at least on a quarterly
basis. Due to changing economic conditions and information, public statements
or reports may be released by the Governor, members of the Legislature, and
their respective staffs, as well as others involved in the budget process
from time to time. Those statements or reports may contain predictions,
projections or other items of information relating to the State's financial
condition, including potential operating results for the current fiscal year
and projected baseline gaps for future fiscal years, that may vary materially
and adversely from the information provided herein.
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1997-98 fiscal year, the General Fund was expected
by the State to account for approximately 48 percent of total
governmental-funds disbursements and 71 percent of total State Funds
disbursements. General Fund moneys are also transferred to other funds,
primarily to support certain capital projects and debt service payments in
other fund types.
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The General Fund was projected to be balanced on a cash basis for the
1997-98 fiscal year; however there can be no assurance that the General Fund
will remain balanced for the entire fiscal year. Total receipts are projected
to be $35.09 billion, an increase of $2 billion over total receipts in the
prior fiscal year. Total General Fund disbursements are projected to be
$34.60 billion, an increase of $2.05 billion over the total amount disbursed
and transferred in the prior fiscal year.
In addition to the General Fund, the State Financial Plan includes
Special Revenue Funds, Capital Projects Funds and Debt Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type was expected to comprise more than 42
percent of total governmental funds receipts and disbursements in the 1997-98
fiscal year, about three-quarters of that activity relates to
Federally-funded programs.
Projected receipts in this fund type totaled $28.22 billion, an increase
of $2.51 billion over the prior year. Projected disbursements in this fund
type totaled $28.45 billion, an increase of $2.43 billion over 1996-97
levels. Disbursements from Federal funds, primarily the Federal share of
Medicaid and other social services programs, were projected to total $21.19
billion in the 1997-98 fiscal year. Remaining projected spending of $7.26
billion primarily reflects aid to SUNY supported by tuition and dormitory
fees, education aid funded from lottery receipts, operating aid payments to
the Metropolitan Transportation Authority (the "MTA") funded from the
proceeds of dedicated transportation taxes, and costs of a variety of
self-supporting programs which deliver services financed by user fees.
Capital Projects Funds account for the financial resources used for the
acquisition, construction, or rehabilitation of major State capital
facilities and for capital assistance grants to certain local governments or
public authorities. This fund type consists of the Capital Projects Fund,
which is supported by tax dollars transferred from the General Fund, and
various other capital funds established to distinguish specific capital
construction purposes supported by other revenues. In the 1997-98 fiscal
year, activity in these funds was expected to comprise 5 percent of total
governmental receipts and disbursements.
Total receipts in this fund type were projected at $3.30 billion. Bond
and note proceeds were expected to provide $605 million in other financing
sources. Disbursements from this fund type were projected to be $3.70
billion, a decrease of $154 million (4.3 percent) over prior-year levels. The
Dedicated Highway and Bridge Trust Fund is the single largest dedicated fund,
comprising an estimated $982 million (27 percent) of the activity in this
fund type. Total spending for capital projects would be financed through a
combination of sources: federal grants (29 percent), public authority bond
proceeds (31 percent), general obligation bond proceeds (15 percent), and
pay-as-you-go revenues (25 percent).
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund was expected to comprise 4 percent of total governmental fund receipts
and disbursements in the 1997-98 fiscal year. Receipts in these funds in
excess of debt service requirements are transferred to the General Fund and
Special Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund,
which is supported primarily by tax dollars transferred from the General
Fund, and other funds established to accumulate moneys for the payment of
debt service. In the 1997-98 fiscal year, total disbursements in this fund
type were projected at $3.17 billion, an increase of $64 million or 25
percent, most of which is explained by increases in the General Fund
transfer. The projected transfer from the General Fund of $2.07 billion was
expected to finance 65 percent of these payments.
PRIOR FISCAL YEARS. A narrative description of cash-basis results in
the General Fund is presented below for the prior three fiscal years.
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New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
TRANs. A national recession, followed by the lingering economic slowdown in
the New York and regional economy, resulted in repeated shortfalls in
receipts and three budget deficits during those years. During its last five
fiscal years, however, the State has recorded balanced budgets on a cash
basis, with positive fund balances as described below. There can be no
assurance, however, that such trends will continue.
FISCAL YEAR 1996-97. The State ended its 1996-97 fiscal year on March
31, 1997 in balance on a cash basis, with a General Fund cash surplus as
reported by DOB of approximately $1.4 billion. The cash surplus was derived
primarily from higher-than-expected revenues and lower-than-expected spending
for social services programs. The Governor in his Executive Budget applied
$1.05 billion of the cash surplus amount to finance the 1997-98 Financial
Plan, and the additional $373 million is available for use in financing the
1997-98 Financial Plan when enacted by the State Legislature.
The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can be used in the
event of any future General Fund deficit, as provided under the State
Constitution and State Finance Law. In addition, $41 million remains on
deposit in the CRF. This fund assists the State in financing any
extraordinary litigation costs during the fiscal year. The remaining $75
million reflects amounts on deposit in the Community Projects Fund. This fund
was created to fund certain legislative initiatives. The General Fund closing
fund balance does not include $1.86 billion in the tax refund reserve
account, of which $521 million was made available as a result of the Local
Government Assistance Corporation ("LGAC") financing program and was required
to be on deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the
previous fiscal year (excluding deposits into the tax refund reserve
account). General Fund disbursements and transfers to other funds totaled
$32.90 billion for the 1996-97 fiscal year, an increase of 0.7 percent from
the 1995-96 fiscal year.
FISCAL YEAR 1995-96. The State ended its 1995-96 fiscal year on March
31, 1996 with a General Fund cash surplus. The DOB reported that revenues
exceeded projections by $270 million, while spending for social service
programs was lower than forecast by $120 million and all other spending was
lower by $55 million. From the resulting benefit of $445 million, a $65
million voluntary deposit was made into the TSRF, and $380 million was used
to reduce 1996-97 Financial Plan liabilities by accelerating 1996-97
payments, deferring 1995-96 revenues, and making a deposit to the tax refund
reserve account.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9
million deposit to the Revenue Accumulation Fund. The closing fund balance
includes $237 million on deposit in the TSRF, to be used in the event of any
future General Fund deficit as provided under the State Constitution and
State Finance Law. In addition, $41 million is on deposit in the CRF. The CRF
was established in State fiscal year 1993-94 to assist the State in financing
the costs of extraordinary litigation. The remaining $9 million reflects
amounts on deposit in the Revenue Accumulation Fund. This fund was created to
hold certain tax receipts temporarily before their deposit to other accounts.
In addition, $678 million was on deposit in the tax refund reserve account,
of which $521 million was necessary to complete the restructuring of the
State's cash flow under the LGAC program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions
enacted and effective in both 1994 and 1995. General Fund disbursements
totaled $32.68 billion for the 1995-96 fiscal year, a decrease of 2.2 percent
from 1994-95 levels. Mid-year spending reductions, taken as part of a
management review undertaken in October at the direction of the Governor,
yielded savings from Medicaid utilization controls, office space
consolidation, overtime and contractual expense reductions, and statewide
productivity improvements achieved by State agencies.
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FISCAL YEAR 1994-95. The State ended its 1994-95 fiscal year with the
General Fund in balance. The $241 million decline in the fund balance
reflects the planned use of $264 million from the CRF, partially offset by
the required deposit of $23 million to the TSRF. In addition, $278 million
was on deposit in the tax refund reserve account, $250 million of which was
deposited to continue the process of restructuring the State's cash flow as
part of the LGAC program. The closing fund balance of $158 million reflects
$157 million in the TSRF and $1 million in the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9 percent
from 1993-94 levels. General Fund disbursements totaled $33.40 billion for
the 1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal
year. The increase in disbursements was primarily the result of one-time
litigation costs for the State, funded by the use of the CRF, offset by $188
million in spending reductions initiated in January 1995 to avert a potential
gap in the 1994-95 State Financial Plan. These actions included savings from
a hiring freeze, halting the development of certain services, and the
suspension of non-essential capital projects.
OTHER FUNDS. Activity in the three other governmental funds has
remained relatively stable over the last three fiscal years, with
federally-funded programs comprising approximately two-thirds of these funds.
The most significant change in the structure of these funds has been the
redirection of a portion of transportation-related revenues from the General
Fund to two new dedicated funds in the Special Revenue and Capital Projects
fund types. These revenues are used to support the capital programs of the
Department of Transportation and the MTA.
In the Special Revenue Funds, disbursements increased from $24.38
billion to $26.02 billion over the last three years, primarily as a result of
increased costs for the federal share of Medicaid. Other activity reflected
dedication of taxes to a new fund for mass transportation, new lottery games,
and new fees for criminal justice programs.
Disbursements in the Capital Projects Funds declined from $3.62 billion
to $3.54 billion over the last three years, as spending for miscellaneous
capital programs decreased, partially offset by increases for mental hygiene,
health and environmental programs. The composition of this fund type's
receipts also changed as the dedicated transportation taxes began to be
deposited, general obligation bond proceeds declined substantially, federal
grants remained stable, and reimbursements from public authority bonds
(primarily transportation related) increased. The increase in the negative
fund balance in 1994-95 resulted from delays in reimbursements caused by
delays in the timing of public authority bond sales.
Activity in the Debt Service Funds reflected increased use of bonds
during the three-year period for improvements to the State's capital
facilities and the continued implementation of the LGAC fiscal reform
program. The increases were moderated by the refunding savings achieved by
the State over the last several years using strict present value savings
criteria. The growth in LGAC debt service was offset by reduced short-term
borrowing costs reflected in the General Fund.
STATE FINANCIAL PLAN CONSIDERATIONS. The economic and financial
condition of the State may be affected by various financial, social, economic
and political factors. These factors can be very complex, may vary from
fiscal year to fiscal year, and are frequently the result of actions taken
not only by the State and its agencies and instrumentalities, but also by
entities, such as the federal government, that are not under the control of
the State. For example, various proposals relating to federal tax and
spending policies that are currently being publicly discussed and debated
could, if enacted, have a significant impact on the State's financial
condition in the current and future fiscal years. Because of the uncertainty
and unpredictability of the changes, their impact cannot, as a practical
matter, be included in the assumptions underlying the State's projections at
this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of
State and national economic forecasts prepared by commercial forecasting
services and other public and private forecasters. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. Many uncertainties exist in
forecasts of both the national and State economies, including consumer
attitudes toward spending, the extent
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of corporate and governmental restructuring, federal fiscal and monetary
policies, the level of interest rates, and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience results in the current
fiscal year that are worse than predicted, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are
based on the State tax structure in effect during the fiscal year and on
assumptions relating to basic economic factors and their historical
relationships to State tax receipts. In preparing projections of State
receipts, economic forecasts relating to personal income, wages, consumption,
profits and employment have been particularly important. The projection of
receipts from most tax or revenue sources is generally made by estimating the
change in yield of such tax or revenue source caused by economic and other
factors, rather than by estimating the total yield of such tax or revenue
source from its estimated tax base. The forecasting methodology, however,
ensures that State fiscal year estimates for taxes that are based on a
computation of annual liability, such as the business and personal income
taxes, are consistent with estimates of total liability under such taxes.
Projections of total State disbursements are based on assumptions
relating to economic and demographic factors, levels of disbursements for
various services provided by local governments (where the cost is partially
reimbursed by the State), and the results of various administrative and
statutory mechanisms in controlling disbursements for State operations.
Factors that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the
policies of the federal government, and changes in the demand for and use of
State services.
The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which
they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth in this Annual
Information Statement. In the past, the State has taken management actions
and made use of internal sources to address potential State Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy,
actions of the federal government and other factors, have created structural
budget gaps for the State. These gaps resulted from a significant disparity
between recurring revenues and the costs of maintaining or increasing the
level of support for State programs. To address a potential imbalance in any
given fiscal year, the State would be required to take actions to increase
receipts and/or reduce disbursements as it enacts the budget for that year,
and under the State Constitution, the Governor is required to propose a
balanced budget each year. There can be no assurance, however, that the
Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disbursements in future fiscal years.
The State Financial Plan was based upon a July 1997 projection by DOB of
national and State economic activity. The information below summarizes the
national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1997-98 Financial Plan.
On August 22, 1996 the President signed the Personal Responsibility and
Work Opportunity Reconciliation Act of 1996 (the "1996 Welfare Act"). This
new law made significant changes to welfare and other benefit programs. Major
changes included conversion of AFDC into the TANF block grant to states, new
work requirements and durational limits on recipients of TANF, and limits on
assistance provided to immigrants. City expenditures as a result of welfare
reform are estimated in the Financial Plan at $49 million in fiscal year
1998, $45 million in fiscal year 1999, $38 million in fiscal year 2000 and
$44 million in fiscal year 2001. In addition, the City's naturalization
initiative, CITIZENSHIP NYC, will assist immigrants made ineligible under
Federal law to regain eligibility for benefits, by helping them through the
application process for citizenship. The Financial Plan assumes that 75% of
those immigrants who otherwise would have lost benefits will become citizens,
resulting in projected savings to the City in public assistance expenditures
of $6 million in fiscal year 1999, $24 million in fiscal year 2000 and $25
million in fiscal year 2001. Federal legislation enacted August 5, 1997,
reinstated eligibility for even more immigrants currently on the rolls than
projected. The outyear estimates
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made by OMB are preliminary and depend on a variety of factors, which are
impossible to predict, including the implementation of workfare and child
care programs modified by newly enacted State law, the impact of possible
litigation challenging the law, and the impact of adverse economic
developments on welfare and other benefit programs. In accordance with the
Federal welfare reform law, the Governor submitted a State plan to the
Federal government and such plan was deemed complete as of December 2, 1996.
New York State's welfare reform, bringing the State into compliance with the
1996 Welfare Act and making changes to the Home Relief program, was signed
into law on August 20, 1997. The Governor submitted an amended State plan to
the Federal government, reflecting these changes, on September 20, 1997.
Implementation of the changes at the State level will in part determine the
possible costs or savings to the City. it is expected that OMB's preliminary
estimates of potential costs will change, based on new policies to be
developed by the State and City with respect to benefits no longer funded as
Federal entitlements.
The Governor is required to submit a balanced budget to the State
Legislature and has indicated that he will close any potential imbalance in
the State Financial Plan primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. It is expected by the State DOB that the State Financial Plan
will reflect a continuing strategy of substantially reduced State spending,
including agency consolidations, reductions in the State work force, and
efficiency and productivity initiatives. The division of the Budget intends
to update the State Financial Plan and provide an update to the Annual
Information Statement upon release of the 1997-98 Executive Budget.
U.S. ECONOMY. The national economy has resumed a more robust rate of
growth after a "soft landing" in 1995, with approximately 14 million jobs
added nationally since early 1992. The State economy has continued to
expand, but growth remains somewhat slower than in the nation. Although the
State has added approximately 300,000 jobs since late 1992, employment growth
in the State has bee hindered during recent years by significant cutbacks in
the computer and instrument manufacturing, utility, defense, and banking
industries. Government downsizing has also moderated these job gains.
DOB forecasts that national economic growth will continue in 1998 and
1999, it is expected to be substantially slower than is was in 1997. Real
Gross Domestic Product ("GDP") is projected to increase 2.6 percent in 1998,
which is a full percentage point lower than the estimated 1997 growth rate.
In 1999, the GDP is expected to fall to 2.0 percent. The growth of nominal
GDP is projected to decline from 5.8 percent in 1997 to 4.8 percent in 1998
and to 4.3 percent in 1999. The inflation rate is expected to drop to 2.2
percent in 1998, before rising to 2.5 percent in 1999. The annual rate of
job growth is expected to be 2.3 percent in 1998, equaling the strong growth
rate experienced in 1997. In 1999, however, employment growth is forecast to
slow markedly to 1.3 percent. Growth in personal income and wages is expected
to slow in 1998 and 1999.
NEW YORK ECONOMY. The DOB forecast of the State's economy projects
continued moderate growth in 1998 and 1999 for employment, wages, and
personal income. The growth is projected to lesson, however, during the
course of the two years. Personal income is estimated to by 5.4 percent in
1997, 4.8 percent in 1998, and 4.3 percent in 1999. Increases in 1998 year
end bonus payments are projected to be modest, a substantial change from the
rate of increase of recent years. Overall employment is expected to continue
at a modest rate, reflecting the slowing growth in the national economy,
continued spending restraint in government, and restructuring in the health,
social service, and banking sectors.
Current forecasts for continued growth, and any resultant impact on the
State's financial plans, contain some uncertainties. Stronger-than-expected
gains in employment could lead to a significant improvement in consumer
spending. Investments could also remain robust. Conversely, hints of
accelerating inflation or fears of excessively rapid economic growth could
create upward pressures on interest rates. In addition, the State economic
forecast could over- or underestimate the level of future bonus payments or
inflation growth, resulting in forecasted average wage growth that could
differ significantly form actual growth. Similarly, the State forecast could
fail to correctly account for declines in banking employment and the
direction of employment change that is likely to accompany telecommunications
and energy deregulation.
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New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse,
with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small
share of the nation's farming and mining activity. The State's location and
its excellent air transport facilities and natural harbors have made it an
important link in international commerce. Travel and tourism constitute an
important part of the economy. Like the rest of the nation, New York has a
declining proportion of its work force engaged in manufacturing, and an
increasing proportion engaged in service industries. The following
paragraphs summarize the state of major sectors of the New York economy:
SERVICES: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related
services, such as information processing, law and accounting, is the
State's leading economic sector. The services sector accounts for more
than three of every ten nonagricultural jobs in New York and has a
noticeably higher proportion of total jobs than does the rest of the
nation.
MANUFACTURING: Manufacturing employment continues to decline in
importance in New York, as in most other states, and New York's economy is
less reliant on this sector than is the nation. The principal
manufacturing industries in recent years produced printing and publishing
materials, instruments and related products, machinery, apparel and
finished fabric products, electronic and other electric equipment, food and
related products, chemicals and allied products, and fabricated metal
products.
TRADE: Wholesale and retail trade is the second largest sector in
terms of nonagricultural jobs in New York but is considerably smaller when
measured by income share. Trade consists of wholesale businesses and
retail businesses, such as department stores and eating and drinking
establishments.
FINANCE, INSURANCE AND REAL ESTATE: New York City is the nation's
leading center of banking and finance and, as a result, this is a far more
important sector in the State than in the nation as a whole. Although this
sector accounts for under one-tenth of all nonagricultural jobs in the
State, it contributes over one-sixth of all non-farm labor and proprietors'
income.
AGRICULTURE: Farming is an important part of the economy of large
regions of the State, although it constitutes a very minor part of total
State output. Principal agricultural products of the State include milk
and dairy products, greenhouse and nursery products, apples and other
fruits, and fresh vegetables. New York ranks among the nation's leaders in
the production of these commodities.
GOVERNMENT: Federal, State and local government together are the
third largest sector in terms of nonagricultural jobs, with the bulk of the
employment accounted for by local governments. Public education is the
source of nearly one-half of total state and local government employment.
Relative to the nation, the State has a smaller share of manufacturing
and construction and a larger share of service-related industries. The
State's finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more
affected during a recession that is concentrated in the service-producing
sector.
In the calendar years 1987 through 1996, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during
the 1990-91 recession and post-recession period, the economy of the State,
and that of the rest of the Northeast, was more heavily damaged than that of
the nation as a whole and has been slower to recover. The total employment
growth rate in the State has been below the national average since 1987. The
unemployment rate in the State dipped below the national rate in the second
half of 1981 and remained lower until 1991; since then, it has been higher.
According to data published by the US Bureau of Economic Analysis, total
personal income in the State has risen more slowly than the national average
since 1988.
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State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied
substantially. Because the City is a regional employment center for a
multi-state region, State personal income measured on a residence basis
understates the relative importance of the State to the national economy and
the size of the base to which State taxation applies.
FINANCIAL PLAN UPDATES. The State is required to issue Financial Plan
updates to the cash-basis State Financial Plan in July, October, and January,
respectively. These quarterly updates reflect analysis of actual receipts
and disbursements for each respective period and revised estimates of
receipts and disbursements for the then current fiscal year. The First
Quarter Update was incorporated into the cash-basis State Financial Plan of
August 15, 1997 (the "August Financial Plan").
THE MID-YEAR UPDATE. The State issued its first update to the
cash-basis 1997-98 State Financial Plan (the "Mid-Year Update") on October
30, 1997. No revisions were made to the estimates of receipts and
disbursements based on the current economic forecasts for both the nation and
the State. The Mid-Year Update continues to reflect a balanced 1997-98 State
Financial Plan, with a projected General Fund reserve for future needs of
$530 million. This projected surplus is now considered to be at the low end
of the range of possible outcomes for the 1997-98 fiscal year.
The forecast of the State economy also remains unchanged from the one
formulated with the August Financial Plan. Steady growth was projected to
continue through the second half of 1997. Personal income was projected to
increase by 6.1 percent in 1997 and 4.5 percent in 1998, reflecting projected
wage growth fueled in part by financial sector bonus payments. The forecast
projected employment increases of 1.4 percent in 1997 and 1.0 percent in 1998.
The projected 1997-98 closing fund balance in the General Fund of $927
million reflects a reserve for future needs of $530 million, a balance of
$332 million in the Tax Stabilization Reserve Fund (following a payment of
$15 million during the current fiscal year) and a balance of $65 million in
the Contingency Reserve Fund (following a deposit of $24 million during the
current fiscal year). These two reserves remain available to help offset
potential risks to the Financial Plan. Based upon experience to date, it is
likely that the closing fund balance will be larger, providing additional
resources for the 1998-99 fiscal year.
All governmental funds receipts and disbursements are also unchanged.
The projected closing fund balance for all governmental funds remains $1.43
billion. The annual increase in spending for all governmental funds remains
approximately 7 percent. Total projected receipts in all governmental funds
(excluding transfers) are approximately $67.31 billion. All funds
disbursements (excluding transfers) are $67.37 billion. Total net other
financing sources across all governmental funds are projected at $505 million.
On September 11, 1997, the State Comptroller released a report entitled
"The 1997-98 Budget: Fiscal Review and Analysis" in which he identified
several risks to the State Financial Plan and estimated that the State faces
a potential imbalance in receipts and disbursements of approximately $1.5
billion for the State's 1998-99 fiscal year and approximately $3.4 billion
for the State's 1999-00 fiscal year. The 1998-99 fiscal year estimate by the
State Comptroller is within the range discussed by the Division of the Budget
in the section entitled "Outyear Projections of Receipts and Disbursements"
in the Annual Information Statement of August 15, 1997. Any increase in the
1997-98 reserve for future needs would reduce this imbalance further and,
based upon results to date, such an outcome is considered possible. In
addition, the Comptroller identified risks in future years from an economic
slowdown and from spending and revenue actions enacted as a part of the
1997-98 budget that will add pressure to future budget balance. The Governor
is required to submit a balanced budget each year to the State Legislature.
On August 11, 1997 President Clinton exercised his line item veto powers
to cancel a provision in the Federal Balanced Budget Act of 1997 that would
have deemed New York State's health care provider taxes to be approved by the
federal government. New York and several other states have used hospital
rate assessments and other provider tax mechanisms to finance various
Medicaid and health insurance programs since the early 1980s. The State's
process of taxation and redistribution of health care dollars was sanctioned
by federal legislation in
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1987 and 1991. However, the federal Health Care Financing Administration
(HCFA) regulations governing the use of provider taxes require the State to
seek waivers from HCFA that would grant explicit approval of the provider
taxing system now in place. The State filed the majority of these waivers
with HCFA in 1995 but has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was
intended to rectify the uncertainty created by continued inaction on the
State's waiver requests. A federal disallowance of the State's provider tax
system could jeopardize up to $2.6 billion in Medicaid reimbursement received
through December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-98 Financial Plan does not anticipate
any provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the
HCFA regulations governing such taxes. The Governor has stated that this
proposal does not appear to address all of the State's concerns, and
negotiations are ongoing between the State and HCFA. In addition, the City of
New York and other affected parties in the health care industry have filed a
lawsuit challenging the constitutionality of the President's line item veto.
On July 31, 1997, the New York State Tax Appeals Tribunal delivered a
decision involving the computation of itemized deductions and personal income
taxes of certain high income taxpayers. By law, the State cannot appeal the
Tribunal's decision. The decision will lower income tax liability
attributable to such taxpayers for the 1997 and earlier open tax years, as
well as on a prospective basis.
THE JANUARY UPDATE. The State revised its 1997-98 Financial Plan on
January 20, 1998 (the "January Update"), in conjunction with the release of
its Executive Budget Forecast for the 1998-99 fiscal year. The State
predicted that the 1997-98 General Fund Financial Plan would continue to be
balanced, with a projected cash surplus of $1.83 billion, an increase of
$1.32 billion form the State's Mid-Year Update. The General Fund closing
balance is projected to be $465 million at the end of the 1997-98 fiscal
year, a decline of $462 million from the Mid-Year Update. This decline
reflects the application of $530 million in undesignated reserve and
additional surplus money projected in the January Update to pay for certain
one-time accelerated payments.
Personal income tax collections for 1997-98 are projected at $18.5
billion, a $363 million decrease from the Mid-Year Update. Business tax
receipts are projected to increase by $158 million, for a total of $4.98
billion. User tax estimates increased $52 million to $7.06 billion. Other
tax receipts are projected to increase by $103 million over the Mid-Year
Update to total $1.09 billion for the fiscal year.
The State projected that disbursements would increase by $565 million
over the Mid-Year Update. The State attributed the majority of the increase
to a one-time dispersement of a $561 million pre-payment of expenditures
previously scheduled for 1998-99. Outside of this accelerated payment the
projected General Fund spending for the 1997-98 year remained essentially
unchanged from the Mid-Year Update.
THE 1998-99 EXECUTIVE BUDGET. The Governor presented the 1998-99
Executive Budget (the "Executive Budget") to the Legislature on January 20,
1998. The Executive Budget contains financial projections for the State's
1997-98 through 2000-01 fiscal years, detailed estimates of receipts, and a
proposed Capital Program and Financing Plan. The State expects that the
Governor will prepare amendments to the Executive Budget as permitted under
applicable law and that these amendments will be reflected in a revised
financial plan. There can be no assurance that the Legislature will enact
into law the Executive Budget as proposed by the Governor or that the State's
budget projections will not differ materially or adversely from projections
set forth in any of its updates.
Under the Executive Budget, the 1998-99 Financial Plan is projected to
be balanced on a cash basis in the General Fund. Total General Fund receipts
(including transfers from other funds) are projected to be $36.22 billion, an
increase of $1.02 billion over the estimated 1997-98 level. The State
General Fund tax base is projected to increase approximately six percent
during 1998-99, after adjusting for tax law and administrative changes.
Personal income tax collections in the General Fund are projected to increase
to $19.82 billion, a $1.32
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billion increase over 1997-98. User tax collections and fee receipts are
projected to reach $7.2 billion, an increase of $144 million over the
previous year. Business tax receipts are projected to decline in 1998-99
from $4.98 to $4.96 billion largely due to scheduled tax reductions.
Receipts from other taxes are also projected to decline form $1.79 billion to
$1.01 billion in 1998-99. Miscellaneous receipts are projected to decline
from $1.57 billion in 1997-98 to $1.4 billion in the 1998-99 fiscal year.
General Fund distributions, including transfers to other funds, are
projected to be $36.18 billion in 1998-99, an increase of $1.02 billion over
projected expenditures (including prepayments) for the 1997-98 fiscal year.
The Executive Budget proposes a year-to-year growth in General Fund spending
of 2.89 percent, a growth in State Funds spending of 8.5 percent, and an
increase in All Government Funds spending of 7.6 percent. Dispersements from
the category of Grants to Local Governments (which constitute 67.9 percent of
all General Fund spending) are projected to increase by $931 million to
$24.55 billion in 1998-99, or 3.9 percent above 1997-98. Support of State
operations is projected to increase by $524 million to $6.73 billion, or 8.4
percent higher than 1997-98. Total spending in General State charges is
projected to decline slightly in 1998-99 to $2.23 billion. Transfers in
support of debt services are projected to grow 5.8 percent in 1998-99, from
$2.03 billion to $2.15 billion.
The Division of Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1998-99 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic, and political
factors. These factors can be very complex, can vary from fiscal year to
fiscal year, and are frequently the result of actions taken not only by the
State but by entities, such as the federal government, that are outside the
State's control. Because of the uncertainty and unpredictability of changes
in these factors, their impact cannot be fully included in the assumptions
underlying the State's projections. For example, there can be no assurance
that the Legislature will enact the Governor's proposals or the State's
actions will be sufficient to preserve budgetary balance or align recurring
receipts and disbursements in either 1998-99 or future fiscal years.
Uncertainties with regard to the economy present the largest potential
risk to future budget balance in New York State. The risk includes whether
the financial market changes or broader economic "correction" occurs during
the period and is heightened by the relatively lengthy expansions in the
market that are currently underway. The securities industry is more
important to the New York economy than the national economy and a significant
deterioration in stock market performance could ultimately produce adverse
changes in wage and employment levels. Additionally, a normal "forecast
error" of one percentage point in the expected growth rate could cumulatively
raise or lower receipts by over $1 billion by the last year of the 1998-2001
projection period. On the other hand, the national or State economy may
continue to perform better than projected, which could produce beneficial
results in State receipts.
RATINGS AGENCIES. On August 28, 1997, Standard & Poor's ("S&P")
revised its ratings on the State's general obligation bonds to A from A-,
and, in addition, revised its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. S&P rated the State's
general obligation bonds AA- from August 1987 to March 1990 and A+ from
November 1982 to August 1987. In March 1990, S&P lowered its rating of all
of the State's general obligation bonds from AA- to A. On January 13, 1992,
S&P lowered its rating on the State's general obligation bonds from A to A-,
and, in addition, reduced its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On April 26, 1993 S&P
revised the rating outlook assessment to stable. On February 14, 1994, S&P
revised its outlook on the State's general obligation bonds to positive and,
on August 5, 1996, confirmed its A- rating.
On February 10, 1997, Moody's confirmed its A2 rating on the State's
general obligation long-term indebtedness. On June 6, 1990, Moody's changed
its ratings on all of the State's outstanding general obligation bonds from
A1 to A, the rating having been A1 since May 27, 1986. On November 12, 1990,
Moody's confirmed the A rating. On January 6, 1992, Moody's reduced its
ratings on outstanding limited-liability State lease purchase and contractual
obligations from A to Baa1.
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AUTHORITIES. The fiscal stability of the State is related in part to the
fiscal stability of its public authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the
State itself, and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. The State's access
to the public credit markets could be impaired, and the market price of its
outstanding debt may be materially adversely affected, if any of its public
authorities were to default on their respective obligations. As of September
30, 1996 there were 17 public authorities that had outstanding debt of $100
million or more each, and the aggregate outstanding debt, including refunding
bonds, of all state public authorities was $75.4 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authority operating expenses and debt service costs
are generally paid by revenues generated by the projects financed or
operated, such as tolls charged for the use of highways, bridges or tunnels,
rentals charged for housing units, and charges for occupancy at medical care
facilities.
In addition, State legislation authorizes several financing techniques
for public authorities. Also, there are statutory arrangements providing for
State local assistance payments otherwise payable to localities to be made
under certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements, if local assistance payments are so diverted, the affected
localities could seek additional State assistance.
Some authorities also receive monies from State appropriations to pay
for the operating costs of certain of their programs. As described below, the
MTA receives the bulk of this money in order to carry out mass transit and
commuter services.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State HFA, the New York State Urban Development Corporation and certain other
Authorities have in the past required and continue to require substantial
amounts of assistance from the State to meet debt service costs or to pay
operating expenses. Further assistance, possibly in increasing amounts, may
be required for these, or other, Authorities in the future. In addition,
certain other statutory arrangements provide for State local assistance
payments otherwise payable to localities to be made under certain
circumstances to certain Authorities. The State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could seek
additional State funds.
METROPOLITAN TRANSPORTATION AUTHORITY. The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus
lines in the New York Metropolitan area through MTA's subsidiaries, the Long
Island Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line
on Staten Island. Through its affiliated agency, the Triborough Bridge and
Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll
bridges and tunnels. Because fare revenues are not sufficient to finance the
mass transit portion of these operations, the MTA has depended, and will
continue to depend for operating support upon a system of State, local
government and TBTA support, and, to the extent available, Federal operating
assistance, including loans, grants and operating subsidies. If current
revenue projections are not realized and/or operating expenses exceed current
projections, the TA or commuter railroads may be required to seek additional
State assistance, raise fares or take other actions.
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Since 1980, the State has enacted several taxes--including a surcharge
on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation
Region served by the MTA and a special one-quarter of 1 percent regional
sales and use tax-- that provide revenues for mass transit purposes,
including assistance to the MTA. In addition, since 1987, State law has
required that the proceeds of a one quarter of 1% mortgage recording tax paid
on certain mortgages in the Metropolitan Transportation Region be deposited
in a special MTA fund for operating or capital expenses. Further, in 1993 the
State dedicated a portion of the State petroleum business tax to fund
operating or capital assistance to the MTA. For the 1997-98 fiscal year,
total State assistance to the MTA is projected to total approximately $1.2
billion, an increase of $76 million over the 1996-97 fiscal year.
State legislation accompanying the 1996-97 adopted State budget
authorized the MTA, TBTA and TA to issue an aggregate of $6.5 billion in
bonds to finance a portion of a new $12.17 billion MTA capital plan for the
1995 through 1999 calendar years (the "1995-99 Capital Program"). In July
1997, the Capital Program Review Board approved the 1995-99 Capital Program.
This plan supersedes the overlapping portion of the MTA's 1992-96 Capital
Program. This is the fourth capital plan since the Legislature authorized
procedures for the adoption, approval and amendment of MTA capital programs
and is designed to upgrade the performance of the MTA's transportation
systems by investing in new rolling stock, maintaining replacement schedules
for existing assets and bringing the MTA system into a state of good repair.
The 1995-99 Capital Program assumes the issuance of an estimated $5.1 billion
in bonds under this $6.5 billion aggregate bonding authority. The remainder
of the plan is projected to be financed through assistance from the State,
the federal government, and the City of New York, and from various other
revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions
for future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1995-99
Capital Program is delayed or reduced, ridership and fare revenues may
decline, which could, among other things, impair the MTA's ability to meet
its operating expenses without additional assistance.
LOCALITIES. Certain localities outside the City have experienced
financial problems and have requested and received additional State
assistance during the last several State fiscal years. The potential impact
on the State of any future requests by localities for additional assistance
is not included in the projections of the State's receipts and disbursements
for the State's 1997-98 fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by
the State in 1984. That Board is charged with oversight of the fiscal affairs
of Yonkers. Future actions taken by the State to assist Yonkers could result
in increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the
City of Troy in 1994. The Supervisory Board's powers were increased in 1995,
when Troy MAC was created to help Troy avoid default on certain obligations.
The legislation creating Troy MAC prohibits the City of Troy from seeking
federal bankruptcy protection while Troy MAC bonds are outstanding.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations
targeted for distressed cities.
MUNICIPAL INDEBTEDNESS. Municipalities and school districts have engaged
in substantial short-term and long-term borrowings. In 1995, the total
indebtedness of all localities in the State other than the City was
approximately $19.0 billion. A small portion (approximately $102.3 million)
of that indebtedness represented borrowing to finance budgetary deficits and
was issued pursuant to State enabling legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of
those local government units other than the City authorized by State law to
issue debt to finance deficits during the period that such deficit
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financing is outstanding. Eighteen localities had outstanding indebtedness
for deficit financing at the close of their fiscal year ending in 1995.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential
problems of declining urban population, increasing expenditures and other
economic trends could adversely affect certain localities and require
increasing State assistance in the future.
LITIGATION. Certain litigation pending against the State or its officers
or employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve:
(i) employee welfare benefit plans where plaintiffs are seeking a declaratory
judgment nullifying on the ground of federal preemption provisions of Section
2807-c of the Public Health Law and implementing regulations which impose a
bad debt and charity care allowance on all hospital bills and a 13 percent
surcharge on inpatient bills paid by employee welfare benefit plans; (ii)
several challenges to provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology; (iii) the validity
of agreements and treaties by which various Indian tribes transferred title
to the State of certain land in central and upstate New York; (iv) challenges
to the practice of using patients' Social Security benefits for the costs of
care of patients of State Office of Mental Health facilities; (v) an action
against State and City officials alleging that the present level of shelter
allowance for public assistance recipients is inadequate under statutory
standards to maintain proper housing; (vi) alleged responsibility of State
officials to assist in remedying racial segregation in the City of Yonkers;
(vii) alleged responsibility of the State Department of Environmental
Conservation for a plaintiff's inability to complete construction of a
cogeneration facility in a timely fashion and the damages suffered thereby;
(viii) challenges to the promulgation of the State's proposed procedure to
determine the eligibility for and nature of home care services for Medicaid
recipients; (ix) a challenge to the constitutionality of petroleum business
tax assessments authorized by Tax Law SS 301; (x) an action for reimbursement
from the State for certain costs arising out of the provision of preschool
services and programs for children with handicapping conditions, pursuant to
Sections 4410 (10) and (11) of the Education Law; (xi) a challenge to the
constitutionality of the Clean Water/Clean Air Bond Act of 1996 and its
implementing regulations; (xii) two challenges to regulations promulgated by
the Superintendent of Insurance that established excess medical malpractice
premium rates for the 1986-87 through 1996-97 fiscal years; and (xiii) an
action to compel the State to enforce sales and excise taxes imposed on
tobacco products and motor fuel sold to non-Indian customers on Indian
reservations.
Adverse developments in the proceedings described above or the
initiation of new proceedings could affect the ability of the State to
maintain balanced 1997-98 and 1998-99 State Financial Plans. In its Notes to
its General Purpose Financial Statements for the fiscal year ended March 31,
1997, the State reports its estimated liability for awards and anticipated
unfavorable judgments at $364 million. There can be no assurance that an
adverse decision in any of the above cited proceedings would not exceed the
amount that the 1997-98 and 1998-99 State Financial Plans reserve for the
payment of judgments and, therefore, could affect the ability of the State to
maintain balanced plans.
NEW YORK CITY
The fiscal health of the State may also be particularly affected by the
fiscal health of the City, which continues to require significant financial
assistance from the State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. The State could
also be affected by the ability of the City to market its securities
successfully in the public credit markets. The City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAAP standards. Current law requires the
City to prepare four-year annual financial plans, which are reviewed and
revised on a quarterly basis and includes capital, revenue, and expense
projections and outlines proposed gap-
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closing for the years with projected budget gaps. An annual financial report
for its most recent completed fiscal year is prepared at the end of October
of each year.
In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among these actions, the
State established the Municipal Assistance Corporation for the City of New
York ("MAC") to provide financing assistance to the City. The State also
enacted the New York State Financial Emergency Act for The City of New York
(the "Financial Emergency Act") which, among other things, established the
New York State Financial Control Board (the "Control Board") to oversee the
City's financial affairs. The State also established the Office of the State
Deputy Comptroller for the City of New York ("OSDC") to assist the Control
Board in exercising its powers and responsibilities and a "Control Period"
from 1975 to 1986 during which the City was subject to certain
statutorily-prescribed fiscal-monitoring arrangements. Although the Control
Board terminated the Control Period in 1986 when certain statutory conditions
were met, thus suspending certain Control Board powers, the Control Board,
MAC and OSDC continue to exercise various fiscal-monitoring functions over
the City, and upon the occurrence or "substantial likelihood and imminence"
of the occurrence of certain events, including, but not limited to a City
operating budget deficit of more than $100 million, the Control Board is
required by law to reimpose a Control Period.
Currently, the City and its "Covered Organizations" (i.e., those which
receive or may receive money from the City directly, indirectly or
contingently) operate under a four-year financial plan (the "City Financial
Plan"), which the City prepares annually and updates periodically and which
includes the City's capital revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The
City's projections set forth in the City Financial Plan are based on various
assumptions and contingencies, some of which are uncertain and may not
materialize. Unforeseen developments and changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions,
are subject to various uncertainties. If, for example, expected federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided
for in the City's financial plan or if other uncertainties materialize that
reduce expected revenues or increase projected expenditures, then, to avoid
operating deficits, the City may be required to implement additional actions,
including increases in taxes and reductions in essential City services. The
City might also seek additional assistance from the State. Unforeseen
developments and changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's financial plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements for, and financial plan compliance by, the City and its Covered
Organizations. According to recent staff reports, while economic recovery in
New York City has been slower than in other regions of the country, a surge
in Wall Street profitability resulted in increased tax revenues and generated
a substantial surplus for the City in fiscal year 1996-97. Although several
sectors of the City's economy have expanded recently, especially tourism and
business and professional services, City tax revenues remain heavily
dependent on the continued profitability of the securities industries and the
course of the national economy. These reports have also indicated that recent
City budgets have been balanced in part through the use of non-recurring
resources; that the City Financial Plan tends to rely on actions outside its
direct control; that the City has not yet brought its long-term expenditure
growth in line with recurring revenue growth; and that the City is therefore
likely to continue to face substantial gaps between forecast revenues and
expenditures in future years that must be closed with reduced expenditures
and/or increased revenues. In addition to these monitoring agencies, the
Independent Budget Office ("IBO") has been established pursuant to the City
Charter to provide analysis to elected officials and the public on relevant
fiscal and budgetary issues affecting the City.
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THE 1998-2002 FINANCIAL PLAN. On January 29, 1998, the City published the
Financial Plan for the 1998 through 2002 fiscal years, which relates to the City
and certain entities which receive funds from the City. The Financial Plan is a
modification to the four-year financial plan submitted to the Control Board on
June 10, 1997 (the "June Financial Plan").
The 1998-2002 Financial Plan reflects actual receipts, expenditure, and
changes in forecast revenues and disbursements since the June Financial Plan.
The 1998-2002 Financial Plan projects revenues and expenditures for the 1998 and
1999 fiscal years to be balanced in accordance with GAAP. Gaps are projected,
however, of $1.8 billion, $2.0 billion, and $1.9 billion for the 2000, 2001, and
2002 years, respectively. Changes since the June Financial Plan include: (i) an
increase in projected tax revenue in 1998 ($841 million), 1999 ($738 million),
2000 ($808 million), and ($802 million), including an increase in sales tax
revenues resulting from the state adopting a smaller than expected sales tax
reduction; (ii) a reduction in assumed State aid of $283 million in the 1998
fiscal year and between $134-142 million in each year from 1999-2001; (iii) a
reduction in the projected debt service expenditures totaling $164 million, $291
million, $127 million, and $145 million in the 1998 through 2001 fiscal years,
respectively; (iv) an increase in Board of Education (the "BOE") spending of $70
million, $182 million, $59 million, and $61 million in the 1998 through 2001
fiscal years, respectively; and (v) an increase in expenditures totaling $71
million in the 1998 fiscal year and between $214 million and $273 million in
each of the 1999 and 2001 fiscal years, reflecting additional spending for the
City's proposed drug initiative and other agency spending. The 1998-2002
Financial Plan also includes a proposed discretionary transfer in the 1998
fiscal year of an additional $920 million in debt service due in the 1999 fiscal
year, and a proposed discretionary transfer in the 1999 fiscal year of $210
million of debt service due in fiscal year 2000, included in the Budget
Stabilization Account for 1998 and 1999 fiscal years, respectively, raising the
total in the Budget Stabilization Account for the 1998 fiscal year to $1.2
billion.
Additionally, the 1998-2002 Financial Plan sets forth gap-closing actions
to eliminate a previously projected budget gap for the 1999 fiscal year and to
reduce projected gaps for fiscal years 2000 through 2002. Gap-closing actions
for 1998 through 2002 fiscal years include: (i) additional agency actions
totaling $122 million, $429 million, $354 million, $303 million, and $311
million in fiscal years 1998 through 2002, respectively; (ii) assumed additional
Federal aid of $250 million in each of fiscal years 1999 through 2002, which
could include funds to be distributed from the tobacco settlement, increased
Medicaid assistance, unrestricted Federal revenue sharing aid or increased funds
for school construction; and (iii) assumed additional State aid of $200 million
in each of fiscal years 1999 through 2002, including an increase in revenue
sharing payments and reimbursement of inmate costs proposed by the City. The
gap-closing actions are partially offset by proposed new tax reduction programs
totalling $237 million, $537 million, $610 million, and $774 million in fiscal
years 1999 through 2002, respectively.
The City's projected budget gap for the 2001 and 2002 fiscal years does not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 2000 budget are not taken into account in projecting budget gaps for
the 2001 and 2002 fiscal years.
Although the City has maintained balanced budgets in each of its last
seventeen fiscal years and is projected to achieve a balanced operating results
for the 1998 fiscal year, thee can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases, or expenditure reductions. Additional tax increases and
reductions in essential City services could also adversely affect the City's
economic base.
ASSUMPTIONS. The Financial Plan assumes (i) approval by the Governor and
the State Legislature of the extension of the 14% personal income tax surcharge,
which is scheduled to expire on December 31, 1999 and the extension of which is
projected to provide revenue of $168 million, $507 million, and $530 million in
the 2000, 2001, and 2002 fiscal years, respectively, and of the extension of the
12.5% personal income tax surcharge, which is scheduled to expire on
December 31, 1998 the extension of which is projected to provide revenue of $187
million, $531 million and $554 million, and $579 million in the 1999 through
2002 fiscal years,
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respectively; (ii) collection of the projected rent payments for the City's
airports, totaling $365 million, $175 million, $170 million, and $70 million
in the 1999 through 2002 fiscal years, respectively, which may depend on the
successful completion of negotiations with the Port Authority or the
enforcement of the City's rights under the existing leases through pending
legal actions; and (iii) State approval of the repeal of the Wicks law
relating to contracting requirements for City construction projects and the
additional State funding assumed in the Financial Plan, and State and Federal
approval of the State and Federal gap-closing actions proposed by the City in
the Financial Plan. It is expected that the Financial Plan will engender
public debate which will continue through the time the budget is scheduled to
be adopted in June 1998, and that there will be alternative proposals to
reduce taxes (including the 12.5% personal income tax surcharge) and increase
in spending. Accordingly, the Financial Plan may be changed by the time the
budget for the 1999 fiscal year is adopted. Moreover, the Financial Plan
provides no additional wage increases for City employees after their
contracts expire in fiscal years 2000 and 2001. In addition, the economic and
financial condition of the City may be affected by various financial, social,
economic and political factors which could have a material effect on the City.
The City's Financial Plan is based on numerous additional assumptions,
including the condition of the City's and the region's economy and a modest
employment recovery and the concomitant receipt of economically sensitive tax
revenues in the amounts projected. The Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors, the
extent, if any, to which wage increases for City employees exceed the annual
wage costs assumed for the 1998 through 2002 fiscal years; continuation of
projected interest earnings assumptions for pension fund assets and current
assumptions with respect to wages for City employees affecting the City's
required pension fund contributions; the willingness and ability of the State,
in the context of the State's current financial condition, to provide the aid
contemplated by the City Financial Plan and to take various other actions to
assist the City; the ability of HHC, BOE and other such agencies to maintain
balanced budgets; the willingness of the Federal government to provide the
amount of Federal aid contemplated in the City Financial Plan; the impact on the
City revenues and expenditures of Federal and State welfare reform and any
future legislation affecting Medicare or other entitlement programs; adoption of
the City's budgets by the City Council in substantially the forms submitted by
the Mayor; the ability of the City to implement proposed reductions in City
personnel and other cost reduction initiatives, and the success with which the
City controls expenditures; the impact of conditions in the real estate market
on real estate tax revenues; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.
The Governor presented his 1998-1999 Executive Budget to the Legislature on
January 20, 1998. In recent years, however, the State has failed to adopt a
budget prior to the beginning of the fiscal year. A prolonged delay in the
adoption of the State's budget beyond the statutory April 1 deadline without
interim appropriations could delay the projected receipt of State aid, and there
can be no assurance that State budgets in future fiscal years will be adopted by
the April 1 statutory deadline.
CITY EMPLOYEES. Substantially all of the City's full-time employees are
members of labor unions. The Financial Emergency Act requires that all
collective bargaining agreements entered into by the City and the Covered
Organizations be consistent with the City's current financial plan, except for
certain awards arrived at through impasse procedures. During a Control Period,
and subject to the foregoing exception, the Control Board would be required to
disapprove collective bargaining agreements that are inconsistent with the
City's current financial plan.
Under applicable law, the City may not make unilateral changes in wages,
hours or working conditions under any of the following circumstances: (i) during
the period of negotiations between the City and a union representing municipal
employees concerning a collective bargaining agreement; (ii) if an impasse panel
is appointed, then during the period commencing on the date on which such panel
is appointed and ending sixty days thereafter or thirty days after it submits
its report, whichever is sooner, subject to extension under certain
circumstances to permit completion of panel proceedings; or (iii) during the
pendency of an appeal to the Board of Collective Bargaining. Although State law
prohibits strikes by municipal employees, strikes and work stoppages by
employees of the City and the Covered Organizations have occurred.
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The 1998-2002 Financial Plan projects that the authorized number of
City-funded employees whose salaries are paid directly from City funds, as
opposed to federal or State funds or water and sewer funds, will decrease from
an estimated level of 204,685 on June 30, 1998 to an estimated level of 203,987
by June 30, 2002, before implementation of the gap closing program outlined in
the City Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. The City has reached settlements with unions representing
approximately 86% of the City's work force. The City Financial Plan reflects the
costs of the settlements and assumes similar increases for all other City-funded
employees. The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement.
The City's pension expenditures for the 1998 fiscal year are expected to
approximate $1.5 billion. In each of fiscal years 1999 through 2002, these
expenditures are expected to approximate $1.4 billion, $1.4 billion, $1.4
billion, and $1.3 billion, respectively. Certain of the systems may provide
pension benefits of 50% to 55% of "final pay" after 20 to 25 years of service
without additional benefits for subsequent years of service. For the 1997 fiscal
year, the City's total annual pension costs, including the City's pension costs
not associated with the five major actuarial systems, plus Federal Social
Security tax payments by the City for the year, were approximately 19.04% of
total payroll costs. In addition, contributions are also made by certain
component units of the City and government units directly to the three cost
sharing multiple employer actuarial systems. The State Constitution provides
that pension rights of public employees are contractual and shall not be
diminished or impaired.
REPORTS ON THE CITY FINANCIAL PLAN. From time to time, the Control Board
staff, MAC, OSDC, the City Comptroller and others issue reports and make public
statements regarding the City's financial condition, commenting on, among other
matters, the City's financial plans, projected revenues and expenditures and
actions by the City to eliminate projected operating deficits. Some of these
reports and statements have warned that the City may have underestimated certain
expenditures and overestimated certain revenues and have suggested that the City
may not have adequately provided for future contingencies. Certain of these
reports have analyzed the City's future economic and social conditions and have
questioned whether the City has the capacity to generate sufficient revenues in
the future to meet the costs of its expenditure increases and to provide
necessary services. It is reasonable to expect that reports and statements will
continue to be issued and to engender public comment, and it is expected that
the staff of the Control Board will issue a report on the 1998-2002 Financial
Plan in the near future.
On February 26, 1998, the City Comptroller issued a report on the 1998
fiscal year and the preliminary budget for the 1999 fiscal year, as reflected in
the 1997-2001 Financial Plan. With respect to the 1998 fiscal year, the report
identified a possible surplus of between $71 million and $293 million above the
level projected in the City's plan. The report stated that the additional
surplus reflects the possibility of the receipt of an additional $225 million of
tax revenues, and that the size of the possible surplus depends primarily on
whether the sale of the New York Coliseum for $200 million is completed. With
respect to the 1999 fiscal year, the report identified a possible gap of $153
million or a possible surplus of $269 million, depending upon whether the State
approves the extension of 12.5% personal income tax surcharge and the amount of
surplus for the 1998 fiscal year available for debt service in the 1999 fiscal
year.
The potential risks identified in the City Comptroller's report for the
1999 fiscal year include: (i) assumed payments from the Port Authority relating
to the City's claims for back rentals and an increase in future rentals, part of
which are the subject of the arbitration, totaling $335 million; (ii) State
approval of the 12.5% personal income tax surcharge beyond December 1, 1998,
which would generate $188 million in the 1999 fiscal year and which the Speaker
of the City Counsel has opposed; and (iii) the receipt of an additional $450
million of State and Federal aid assumed in the financial plan. The potential
risks are offset by potential additional resources for the 1999 fiscal year,
including the potential for an additional $150 million of State educational aid,
$150 million of additional debt service savings, $176 million in tax revenues if
the proposed sales tax reduction on clothing is not approved, $294 million of
higher than projected tax revenues and the availability in the 1999 fiscal year
of an additional $71 million to $293 million surplus from the 1998 fiscal year.
The report also noted
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that the City Comptroller will begin writing off outstanding education-aid
receivables that are 10 years past due, which are estimated to be
approximately $4 million in the 1998 fiscal year and $39 million in the 1999
fiscal year, and which total $914 million for fiscal years 1989 through 1997.
In addition, the report noted that City-funded expenditures for the 1998
fiscal year are expected to exceed the ceiling established in the May 1996
agreement between the City and MAC, which would permit MAC to recover from
the City in the 1999 fiscal year an amount equal to such excess spending, up
to $125 million. Finally, the report noted that, while the City is in a
relatively strong financial position, its reliance on State and Federal aid
to close its budget gap for the 1999 fiscal year raises concerns, and that
the City's spending will again be under pressure in the event of an economic
downturn. The City Comptroller also noted (in a separate report on the City's
capital debt) that debt burden measures, such as annual debt service as a
percentage of tax revenues, debt per capita, and debt assessed value of real
property, are approaching historically high post-fiscal crises levels, which
calls for restraint in the City's capital program, while the City's
infrastructure requires additional resources.
Also on February 26, 1998, the staff of OSDC issued a report on the
Financial Plan. With respect to the 1998 fiscal year, the OSCD report noted
that the City's revenues could be $200 million greater than projected in the
Financial Plan. While noting a potential delay in the receipt of proceeds
from the sale of the New York Coliseum, the report projects that it is not
likely that those resources will be needed in the 1998 fiscal year. The
report projected potential budget gaps of $462 million, $2.6 billion, $2.7
billion, and $2.3 billion for the 1999 through 2002 fiscal years,
respectively, which include the gaps projected in the Financial Plan for
fiscal years 2000 through 2002 and the additional net risks identified in the
report totaling $762 million, $1.012 billion, $913 million, and $774 million
for the 1999 through 2002 fiscal years, respectively, which are reduced by
the potential for greater than forecast revenues and lower than forecast
pension costs for fiscal years 2000 through 2002. The largest risks
identified in the report relate to (i) the receipt of projected Port
Authority lease payments which are the subject of arbitration and lease
negotiations; (ii) City gap-closing proposals for additional State and
Federal assistance; and (iii) State approval of a three-year extension of the
City's 12.5% personal income tax surcharge. Additional risks identified in
the report include unfunded expenditures for project READ totaling $125
million for each of the 2000 through 2002 fiscal years and the potential for
additional funding needs for the City's labor reserve, which total $104
million in the 1999 fiscal year and exceed $200 million in each of the 2000
through 2002 years, to pay for collective bargaining increases for the
Covered Organizations, which the Plan assumes the Covered Organizations will
pay instead of the City. The report noted that these risks could be reduced
if the Tax Reduction Program proposed in the Financial Plan is not approved
by the City Counsel and the State. The report also noted that: (i) HHC faces
potential budget gaps starting in the 1999 fiscal year and reflecting the
expected loss of revenues associated with the implementation of Medicaid
mandatory managed care; (ii) the Financial Plan assumes that the State will
extend the 14% personal income tax surcharge; (iii) the City faces potential
liability for State education aid owed from prior years which the City could
be required to write off if a plan is not reached to fund these claims; and
(iv) the City might be required to reimburse MAC up to $125 million on the
1999 fiscal year if the City spending limits set forth in the May 1996
agreement with MAC are exceeded in the 1998 fiscal year. However, the report
noted that actual fiscal year 1998 spending will not be determined until
October 1998, and in the interim, City and MAC officials are discussing
solutions to the reimbursement problem.
The OSDC report noted also that, while the City's financial outlook has
improved because of actions taken by the City, Federal, and State governments
and record securities industry performance, the staff remained concerned
about the City's dependence on the securities industry and whether the City
will be able to sustain a relatively high level of spending. The report noted
that City-funded spending is projected to grow by 7.2% in fiscal year 1998
and by 4.5% in fiscal year 1999, while revenues are projected to grow by only
1.8% in fiscal year 1999. Moreover, the report noted that while the budget
gaps for fiscal years 2000 through 2002 have been reduced, they are still
large by historical standards, and the budget makes no provisions for wage
increases after the expiration of current contacts, which, at the projected
inflation rate, would increase costs by $375 million in fiscal year 2001 and
by $725 million in fiscal year 2002. Finally, the report noted that the Asian
financial and economic crises could intensify and create greater impact on
financial markets in the U.S. economy than currently anticipated, or that the
Federal Reserve Board could raise interest rates, which could adversely
affect the financial markets and the City's financial condition.
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On January 13, 1998, the IBO released a report setting forth its forecast
for the City's revenues and expenditures for the 1998 through 2001 fiscal years,
assuming continuation of current spending policies and tax laws. In the report,
the IBO forecasts that the City will end the 1998 fiscal year with a surplus of
$120 million, in addition to $514 million in the Budget Stabilization Account.
Additionally, the report forecasts that the City will face gaps of $1.4 billion,
$2.6 billion, and $2.8 billion in the 1999 through 2001 fiscal years,
respectively, resulting from 4.8% annual growth in spending form 1998 through
2001, compared with 2.2% annual revenue growth. The report noted that slow
revenue growth is attributable to a variety of factors, including a gradual
deceleration in economic growth through the first half of calendar year 1999,
the impact of recently enacted tax cuts and constraints on increases in the real
property tax, as well as uncertain back rent payments from the Port Authority,
while future costs for existing programs will increase to reflect inflation and
scheduled pay increases for the City employees during the term of existing labor
agreements. The report also noted that debt service and education spending will
increase rapidly, while spending for social services rise more slowly due to
lower projected caseloads.
Finally, the report noted that the new welfare law's most significant
fiscal impact is likely to occur in the years 2002 and beyond, reflecting the
full impact of the lifetime limit on welfare participation which only begins to
be felt in 2002 when the first recipients reach the five-year limit and are
assumed to be covered by Home Relief. In addition, the report noted that, given
the constitutional requirement to care for the needy, the 1996 Welfare Act might
well prompt a migration of benefit-seekers into the City, thereby increasing
City welfare expenditures in the long run. The report concluded that the impact
of the 1996 Welfare Act on the City will ultimately depend on the decisions of
State and City officials, the performance of the local economy and the behavior
of thousands of individuals in response to the new system.
PREVIOUS REPORTS. On September 18, 1997, the City Comptroller issued a
report commenting on developments with respect to the 1998 fiscal year. The
report noted that the City's adopted budget, which is reflected in the City
Financial Plan, had assumed additional State resources of $612 million in the
1998 fiscal year, and that the approved State budget provided resources of only
$216 million for gap-closing purposes. The report further noted that, while the
City will receive $322 million more in education aid in the 1998 fiscal year
than assumed in the City's adopted budget, it is unlikely that the funding will
be entirely available for gap-closing purposes. In addition, the report noted
that the City's financial statements currently contain approximately $643
million in uncollected State education aid receivables from prior years as a
result of the failure of the State to appropriate funds to pay these claims, and
that the staff of BOE has indicated that an additional $302 million in prior
year claims is available for accrual. The report stated that the City
Comptroller maintains the position that no further accrual of prior year aid
will take place, including $75 million in aid assumed in the City's adopted
budget for the 1998 fiscal year, unless the State makes significant progress to
retire the outstanding prior year receivables. On October 28, 1997, the City
Comptroller issued a subsequent report commenting on recent developments. With
respect to the 1997 fiscal year, the report noted that the City ended the 1997
fiscal year with an operating surplus of $1.367 billion, before certain
expenditures and discretionary transfers, of which $1.362 billion was used for
expenditures due in the 1998 fiscal year. With respect to tax revenues for the
1998 fiscal year, the report noted that total tax revenues in the first quarter
of the 1998 fiscal year were $244.3 million above projections in the City
Financial Plan, excluding audit collections which were $31.2 million less than
projected. The report stated that the increased tax revenues included $110.3
million of greater than projected general property tax receipts, which resulted,
in part, from a prepayment discount program, and increased revenues from the
personal income, banking corporation, general corporation and unincorporated
business taxes. The report noted that Wall Street profits exceeded expectations
in the first half of the 1997 calendar year. However, the report noted that the
stock market in the last two weeks of October has declined as a result of
currency turmoil in Southeast Asia. The report noted that, while tax revenues in
the 1998 fiscal year should not be significantly affected by the recent stock
market decline, since there is a lag between activity on Wall Street and City
tax revenues, if the current stock market decline persists, tax revenue
forecasts for subsequent years will have to be revised downward. The report
noted that the City was not affected by the October 1987 stock market crash
until the 1990 fiscal year, when revenues from the City's business and real
estate taxes fell by 20% over the 1989 fiscal year. The report also noted that
expenditures for short-term and long-term debt issued during the first half of
the 1998 fiscal year are estimated to be between approximately $53.9 million and
$58.8 million below levels anticipated in the City's adopted budget for the 1998
fiscal year,
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approximately $20 million below anticipated levels in the 1999 fiscal year
and approximately $30 million below anticipated levels in each of fiscal
years 2000 and 2001 due to less borrowing and lower interest rates than
assumed.
On August 25, 1997, the IBO issued a report relating to recent developments
regarding welfare reform. The report noted that Federal legislation adopted in
August 1997, modified certain aspects of the 1996 Welfare Act, by reducing SSI
eligibility restrictions for certain legal aliens residing in the country as of
August 22, 1996, resulting in the continuation of Federal benefits, by providing
funding to the states to move welfare recipients from public assistance and into
jobs and by providing continued Medicaid Coverage for those children who lose
SSI due to stricter eligibility criteria. In addition, the report noted that the
State had enacted the Welfare Reform Act of 1997 which, among other things,
requires the City to achieve work quotas and other work requirements and
requires all able-bodied recipients to work after receiving assistance for two
years. The report noted that this provision could require the City to spend
substantial funds over the next several years for workfare and day care in
addition to the funding reflected in the City Financial Plan. The report also
noted that the State Welfare Reform Act of 1997 established a Food Assistance
Program designed to replace Federal food stamp benefits for certain classes of
legal aliens denied eligibility for such benefits by the 1996 Welfare Act. The
report noted that if the City elects to participate in the Food Assistance
Program, it will be responsible for 50% of the costs for the elderly and
disabled. The IBO has stated that it will release an updated report to provide a
detailed analysis of these developments and their likely impact on the City.
On July 16, 1997, the City Comptroller issued a report on the City
Financial Plan. With respect to the 1998 fiscal year, the report identified a
possible $112 million surplus or a possible total net budget gap of up to $440
million, depending primarily on whether the tax reduction program proposed in
the City Financial Plan is implemented and the 14% personal income tax surcharge
is extended beyond December 31, 1997. The risks identified in the report for the
1998 fiscal year include (i) $178 million related to BOE, resulting primarily
from unidentified expenditure reductions and prior year State aid receivables;
(ii) State aid totaling $115 million which is assumed in the City Financial Plan
but not provided for in the Governor's Executive Budget; (iii) State approval of
the extension of the 14% personal income tax surcharge beyond December 31, 1997,
which would generate $169 million in the 1998 fiscal year; (iv) City proposals
for State aid totaling $271 million, including the acceleration of $142 million
of State revenue sharing payments from the 1999 fiscal year to the 1998 fiscal
year, which are subject to approval by the Governor and/or the State
Legislature; and (v) the assumed sale of the Coliseum for $200 million, which
may be delayed. The report noted that these risks could be partially offset by
between $597 million and $765 million in potentially available resources,
including $200 million of higher projected tax revenues, $150 million of
possible additional State education aid and the possibility that the proposed
sales tax reduction will not be enacted, which would result in $157 million of
additional tax revenues in the 1998 fiscal year. With respect to the 1998 fiscal
year, the report stated that the City has budgeted $200 million in the General
Reserve and included in the City Financial Plan a $300 million surplus to be
used in the 1999 fiscal year, making the potential $440 million budget gap
manageable. However, the report also expressed concern as to the sustainability
of profits in the securities industry.
With respect to the 1999 and subsequent fiscal years, the report identified
total net budget gaps of between $1.9 billion and $2.8 billion, $2.6 billion and
$4.0 billion, and $2.4 billion and $3.8 billion for the 1999 through 2001 fiscal
years, respectively, which include the gaps set forth in the City Financial
Plan. The potential risks and potential available resources identified in the
report for the 1999 through 2001 fiscal years include most of the risks and
resources identified for the 1998 fiscal year, except that the additional risks
for the 1999 through 2001 fiscal years include (i) assumed payments from the
Port Authority relating to the City's claim for back rentals and an increase in
future rentals, part of which are the subject of arbitration, totaling $350
million, $140 million and $135 million in the 1999-2001 fiscal years,
respectively; and (ii) State approval of the extension of the 12.5% personal
income tax surcharge beyond December 31, 1998, which would generate $190
million, $527 million and $554 million in the 1999 through 2001 fiscal years,
respectively.
On July 15, 1997, the staff of the Control Board issued a report commenting
on the City Financial Plan. The report stated that, while the City should end
the 1998 fiscal year with its budget in balance, the City Financial Plan still
contains large gaps beginning in the 1999 fiscal year, reflecting revenues which
are not projected to grow during the Financial Plan Period and expenditures
which are projected to grow at about the
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rate of inflation. The report identified net risks totaling $485 million,
$930 million, $1.2 billion and $1.4 billion for 1998 through 2001 fiscal
years, respectively, in addition to the gaps projected in the City Financial
Plan for fiscal years 1999 through 2001. The principal risks identified in
the report included (i) potential tax revenues shortfalls totaling $150
million, $300 million and $400 million for the 1999 through 2001 fiscal
years, respectively, based on historical average trends; (ii) BOE's
structural gap, uncertain State funding of BOE and implementation by BOE of
various unspecified actions, totaling $163 million, $209 million, $218
million and $218 million in the 1998 through 2001 fiscal years, respectively;
(iii) the proposed sale of certain assets in the 1998 fiscal year totaling
$248 million, which could be delayed; (iv) assumed additional State actions
totaling $271 million, $121 million, $125 million and $129 million in the
1998 through 2001 fiscal years, respectively; (v) revenues from the extension
of the 12.5% personal income tax surcharge beyond December 31, 1998, totaling
$188 million, $527 million and $554 million in the 1999 through 2001 fiscal
years, respectively, which requires State legislation; and (vi) the receipt
of $350 million, $140 million and $135 million from the Port Authority in the
1999 through 2001 fiscal years, respectively, which is the subject of
arbitration. Taking into account the risks identified in the report and the
gaps projected in the City Financial Plan, the report projected a gap of $485
million for the 1998 fiscal year, which could be offset by available
reserves, and gaps $2.7 billion, $4.1 billion and $4.0 billion for the 1999
through 2001 fiscal years, respectively. The report also noted that (i) if
the securities industry or economy slows down to a greater extent than
projected, the City could face sudden and unpredictable changes to its
forecast; (ii) the City's entitlement reduction assumptions require a decline
of historic proportions in the number of eligible welfare recipients; (iii)
the City has not yet shown how the City's projected debt service, which would
consume 20% of tax revenues by the 1999 fiscal year, can be accommodated on a
recurring basis; (iv) the City is deferring recommended capital maintenance;
and (v) continuing growth in enrollment at BOE has helped create projected
gaps of over $100 million annually at BOE. However, the report noted that if
proposed tax reductions are not approved, additional revenue will be
realized, ranging from $272 million in the 1998 fiscal year to $481 million
in the 2001 fiscal year.
On July 2, 1997, the staff of the OSDC issued a report on the City
Financial Plan. The report projected a potential surplus for the 1998 fiscal
year of $190 million, due primarily to the potential for greater than forecast
tax revenues, and projected budget gaps for the 1999 through 2001 fiscal years
which are slightly less than the gaps set forth in the City Financial Plan for
such years. The report also identified risks of $518 million, $1.1 billion, $1.3
billion and $1.4 billion for the 1998 through 2001 fiscal years, respectively.
The additional risks identified in the report relate to: (i) the receipt of Port
Authority lease payments totaling $350 million, $140 million and $135 million in
the 1999 through 2001 fiscal years, respectively; (ii) City proposals for State
aid totaling $271 million, $121 million, $125 million and $129 million in the
1998 through 2001 fiscal years, respectively, including the acceleration of $142
million of State revenue sharing payments from the 1999 fiscal year to the 1998
fiscal year, which are subject to approval by the Governor and/or the State
Legislature; (iii) the receipt of $200 million in the 1998 fiscal year in
connection with the proposed sale of the New York Coliseum; (iv) the receipt of
$47 million in the 1998 fiscal year from the sale of certain other assets; (v)
uncertain State education aid and expenditure reductions relating to BOE
totaling $325 million in each of the 1999 through 2001 fiscal years; (vi) State
approval of a three-year extension to the City's 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998 and which would
generate revenues of $230 million, $525 million and $550 million in the 1999
through 2001 fiscal years, respectively; and (vii) the potential for additional
funding needs for the City's labor reserve totaling $104 million, $225 million
and $231 million in the 1999 through 2001 fiscal years, respectively, to pay for
collective bargaining increases for the Covered Organizations, which the City
Financial Plan assumes will be paid for by the Covered Organizations, rather
than the City. The report also noted that the City Financial Plan assumes that
the State will extend the 14% personal income tax that is scheduled to expire in
December 1997, which would generate revenues of $200 million in the 1998 fiscal
year and $500 million annually in subsequent fiscal years, and that the City
Financial Plan makes no provision for wage increases after the expiration of
current contracts in fiscal year 2000, which would add $430 million to the 2001
fiscal year budget gap if employees receive wage increases at the projected rate
of inflation. The report noted that the City Financial Plan includes an annual
General Reserve of $200 million and sets aside an additional $300 million in the
1998 fiscal year to reduce the budget gap for the 1999 fiscal year if such funds
are not needed in the 1998 fiscal year. With respect to the gap-closing program
for the 1999 through 2001 fiscal years, the report noted that the City has
broadly outlined a program that relies heavily on unspecified agency
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actions, savings from reinvention and other unspecified initiatives and
uncertain State aid and entitlement program reductions which depend on the
cooperation of others.
The report concluded that while 1997 was an unexpectedly good fiscal year
for City revenues, the City projects that the rate of spending for the 1998
fiscal year will grow substantially faster than the rate of revenues, reflecting
increasing costs for labor, debt service, Medicaid and education, and that the
gaps for the subsequent fiscal years continue to present a daunting challenge.
With respect to the economy, the report noted that the major risks to the City's
economic and revenue forecasts continue to relate to the pace of both the
national economy and activity on Wall Street, that the potential exists for a
national recession over the next four years, and that Wall Street volatility can
have a negative effect, as was apparent in 1994 when the Federal Reserve
repeatedly raised interest rates and the profits of securities firms fell. Other
concerns identified in the report include: (i) $76 million in retroactive claims
for State education aid included in the City Financial Plan for the 1998 fiscal
year which may not be realized; (ii) a potential risk of $698 million in State
education aid owed to the City by the State for prior years, all or a portion of
which the City could be forced to write-off if further delays occur in the State
agreeing to fund these claims; and (iii) the potential adverse impact on HHC
over the long-term of the planned expansion of managed care which emphasizes
out-patient services with fixed monthly fees, uncertainty covering projected
savings from a proposal that most Medicaid recipients be required to enroll in
managed care, which is subject to approval by the Federal Government, and the
possibility that the recent Federal budget agreement could substantially reduce
aid to hospitals which serve a large number of medically indigent patients.
On May 27, 1997, the IBO released a report analyzing the financial plan
published on May 8, 1997 (the "May Financial Plan"). In its report, the IBO
estimated gaps of $27 million, $91 million, $2.1 billion, $2.9 billion and $2.9
billion for the 1997 through 2001 fiscal years, respectively, which include the
gaps set forth in the May Financial Plan for fiscal years 1999 through 2001. The
gaps estimated in the IBO report reflect (i) uncertainty concerning the size and
timing of projected airport rents of $270 million and $215 million in the 1998
and 1999 fiscal years, respectively, which are the subject of an ongoing dispute
between the Port Authority and the City; and (ii) additional funding needs for
the City's labor reserve totaling $104 million, $224 million and $231 million in
the 1999 through 2001 fiscal years, respectively, to pay for collective
bargaining increases for the Covered Organizations, which the May Financial Plan
assumes will be paid for by the Covered Organizations, rather than the City.
These reduced revenues and increased expenditures identified in the IBO report
are substantially offset by tax revenue forecasts which exceed those in the May
Financial Plan. However, the report noted that the May Financial Plan assumes
continued strong revenue growth and that, in the event of an economic downturn,
the City will be required to increase taxes in a slow economy or reduce spending
when it is most needed. With respect to the tax reductions proposed in the May
Financial Plan, the IBO stated that the principal question is whether the City
will be able to afford the tax reductions. In addition, the report discussed
various issues with implications for the City's 1998 budget. These issues
include the reliance in the budget on a number of State legislative actions,
including (i) $294 million from legislation the City has requested to increase
State aid; (ii) $128 million in savings attributable to both a larger City share
of Federal welfare grant funds and State reforms to Medicaid; and (iii) $115
million to restore expenditure reductions proposed in the Governor's Executive
Budget. The report also noted that the City's claim for $900 million of State
reimbursement of prior year education expenditures remains unresolved, that
proposals affecting the MTA, including proposals to eliminate two-fare zones for
bus and subway riders, will result in a significant reduction in revenues for
the MTA, and that the implementation of changes in the City's computer system,
resulting from the inability of the current computer system to recognize the
year 2000, could cost the City up to $150 million to $200 million over the next
three years. In a subsequent report released on June 16, 1997, the IBO noted
that in the City Financial Plan the City had deferred to fiscal years 1999
through 2001 the assumed receipt of back airport rents, and that the tax revenue
forecasts for the 1998 fiscal year in the City Financial Plan are closer than
the forecasts in the May Financial Plan to the IBO's forecast of City tax
revenues in its May report.
On October 31, 1996, the IBO released a report assessing the costs that
could be incurred by the City in response to the 1996 Welfare Act, which, among
other things, replaces the AFDC entitlement program with TANF, imposes a
five-year time limit on TANF assistance, requires 50% of states' TANF caseload
to be employed by 2002, and restricts assistance to legal aliens. The report
noted that if the requirement that all recipients work after two years of
receiving benefits is enforced, these additional costs could be substantial
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starting in 1999, reflecting costs for worker training and supervision of new
workers and increased child care costs. The report further noted that, if
economic performance weakened, resulting in an increased number of public
assistance cases, potential costs to the City could substantially increase.
States are required to develop plans during 1997 to implement the new law. The
report noted that decisions to be made by the State which will have a
significant impact on the City budget include the allocation of block grant
funds between the State and New York local governments such as the City and the
division between the State and its local governments of welfare costs not funded
by the Federal government.
SEASONAL FINANCING. The City since 1981 has fully satisfied its seasonal
financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. The City has issued $1.075
billion of short-term obligations for the fiscal year 1998 to finance the City's
projected cash flow needs for the 1998 fiscal year. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. Seasonal financing requirements
for the 1996 fiscal year increased to $2.4 billion from $2.2 billion and $1.75
billion in the 1995 and 1994 fiscal years, respectively. Seasonal financing
requirements were $1.4 billion in the 1993 fiscal year. The delay in the
adoption of the State's budget in certain past fiscal years has required the
City to issue short-term notes in amounts exceeding those expected early in such
fiscal years.
LITIGATION. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the City Financial Plan. The City is a party to
numerous lawsuits and is the subject of numerous claims and investigations. The
City has estimated that its potential future liability on account of outstanding
claims against it as of June 30, 1997 amounted to approximately $3.5 billion.
This estimate was made by categorizing the various claims and applying a
statistical model, based primarily on actual settlements by type of claim during
the preceding ten fiscal years, and by supplementing the estimated liability
with information supplied by the City's Corporation Counsel.
RATINGS AGENCIES. On February 3, 1998, S&P raised its credit outlook for
New York City's outstanding general obligation bonds from stable to positive but
maintained its BBB-plus rating. The City has held this rating since July 10,
1995, when S&P lowered its rating from A-to BBB+ and removed City bonds from
CreditWatch. S&P stated that "structural budgetary balance remains elusive
because of persistent softness in the City's economy, highlighted by weak job
growth and a growing dependence on the historically volatile financial services
sector." Other factors identified by S&P's in lowering its rating on City bonds
included a trend of using one-time measures, including debt refinancings, to
close projected budget gaps, dependence on unratified labor savings to help
balance the City Financial Plan, optimistic projections of additional federal
and State aid or mandate relief, a history of cash flow difficulties caused by
State budget delays and continued high debt levels. In 1975, S&P suspended its
A rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P. On July
2, 1985, S&P revised its rating of City bonds upward to BBB+ and on November 19,
1987, to A-. On July 10, 1995, S&P revised its rating of City bonds downward to
BBB+, as discussed above. On November 25, 1996, S&P issued a report which
stated that, if the City reached its debt limit without the ability to issue
bonds through other means, it would cause a deterioration in the City's
infrastructure and significant cutbacks in the capital plan which would
eventually impact the City's economy and revenues, and could have eventual
negative credit implications.
On February 24, 1998 Moody's raised its rating for City general obligation
bonds from Baa1 to A3, based on improvement in its financial condition and
economy. Previously, on July 17, 1997, Moody's had changed its outlook on City
bonds to positive from stable. On March 1, 1996, Moody's stated that the rating
for the City's Baa1 general obligation bonds remains under review for a possible
downgrade pending the outcome of the adoption of the City's budget for the 1997
fiscal year and in light of the status of the debate on public assistance and
Medicaid reform; the enactment of a State budget, upon which major assumptions
regarding State aid are dependent, which may be extensively delayed; and the
seasoning of the City's economy with regard to its strength and direction in the
face of a potential national economic slowdown. Moody's ratings of City bonds
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were revised in November 1981 from B (in effect since 1977) to Ba1, in November
1983 to Baa, in December 1985 to Baa1, in May 1988 to A and again in February
1991 to Baa1.
On February 3, 1998, Fitch Investors Service, Inc. ("Fitch") its rating of
City general obligation bonds at A-, which it has maintained since July 15,
1993. On February 28, 1996, Fitch placed the City's general obligation bonds on
FitchAlert with negative implications. On November 5, 1996, Fitch removed the
City's general obligation bonds from FitchAlert although Fitch stated that the
outlook remains negative. Since then Fitch has revised the outlook to stable.
There is no assurance that such ratings will continue for any given period of
time or that they will not be revised downward or withdrawn entirely. Any such
downward revision or withdrawal could have an adverse effect on the market
prices of the City's general obligation bonds.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat" tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state and
local income taxes, could have a severe impact on funding methods under which
municipalities operate. With respect to property taxes, the report noted that
the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest deduction
would result in a significant reduction in affordability and, thus, in the
demand for, and the valuation of, real estate. The report noted that rapid
losses in property valuations would be felt by many municipalities, hurting
their revenue raising abilities. In addition, the report noted that the loss of
the current deduction for real property and state and local income taxes from
Federal income tax liability would make rate increases more difficult and
increase pressures to lower existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of municipal bond
interest is worth less to investors. Finally, the report noted that tax
anticipation notes issued in anticipation of property taxes could be hurt by the
imposition of a flat tax, if uncertainty is introduced with regard to their
repayment revenues, until property values fully reflect the loss of mortgage and
property tax deductions.
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