<PAGE>
Registration Nos. 33-70116
811-8036
As filed via EDGAR with the Securities and Exchange Commission on February 26,
1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 15
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17
(Check appropriate box or boxes)
THE OFFITBANK INVESTMENT FUND, INC.
(Exact name of Registrant as specified in charter)
400 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 618-9510
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Stephen Brent Wells, Esq.
OFFITBANK
520 Madison Avenue
New York, New York 10022
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(Name and Address of Agent for Service)
with a copy to:
Carl Frischling, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
It is proposed that this filing will become effective:
/_/ immediately upon filing pursuant to paragraph (b)
/_/ on (date) pursuant to paragraph (b)
/_/ on (date) pursuant to paragraph (a)(i)
/X/ 60 days after filing pursuant to paragraph (a)(i)
/_/ 75 days after filing pursuant to paragraph (a)(ii)
/_/ on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
<PAGE>
THE OFFITBANK INVESTMENT FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A Item No. Location
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Part A Prospectus Caption
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Item 1. Cover Page Cover Page
Item 2. Synopsis Prospectus Summary
Item 3. Condensed Financial Not Applicable
Information
Item 4. General Description of Registrant Prospectus Summary; Investment
Objectives and Policies; Other
Investment Policies; Special
Risk Considerations; The
Transfer; Limiting Investment
Risks; Additional Information;
Appendix A; Appendix B
Item 5. Management of the Fund Management
Item 5A. Management's Discussion of Not Applicable
Fund Performance
Item 6. Capital Stock and Other Dividends and Distributions;
Securities Taxes; Additional Information;
Reports to Shareholders
Item 7. Purchase of Securities Purchase of M.S.D.&T. Shares
Item 8. Redemption or Repurchase Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
</TABLE>
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<TABLE>
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Statement of Additional
Part B Information Caption
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Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and Not Applicable
History
Item 13. Investment Objectives and Policies Additional Information on
Portfolio Instruments;
Additional Risk
Considerations; Investment
Limitations
Item 14. Management of the Registrant Management of the Fund
Item 15. Control Persons and Principal General Information
Holders of Securities
Item 16. Investment Advisory and Management of the Fund
Other Services
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices
Item 18. Capital Stock and Other General Information
Securities
Item 19. Purchase, Redemption and Management of the Fund;
Pricing of Securities Purchase of Shares;
Being Offered Redemption of Shares;
Item 20. Tax Status Additional Information
Concerning Dividends,
Distributions and Taxes
Item 21. Underwriters Distributor
Item 22. Calculation of Performance Performance Calculations
Data
Item 23. Financial Statements Not Applicable
</TABLE>
Part C
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Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
<PAGE>
M.S.D.&T. SHARES
OF THE OFFITBANK HIGH YIELD FUND
PROSPECTUS
__________, 1999
[LOGO] M.S.D.&T. High Yield Fund
The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end, management
investment company offering no-load, non-diversified investment portfolio. This
Prospectus relates exclusively to the M.S.D.&T. class of shares (the "M.S.D.&T.
Shares of the OFFITBANK High Yield Fund," (the "High Yield Fund" or "Fund")).
M.S.D.&T. Shares are being offered through Mercantile-Safe Deposit and Trust
Company and its affiliated and correspondent banks and affiliates of State
Street Bank and Trust Company.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated ______, 1999, as
it may be amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission (the "SEC") 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 FUND 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 SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
The OFFITBANK HIGH YIELD FUND'S primary investment objective is high current
income. Capital appreciation is a secondary objective.
THE FUND MAY INVEST IN HIGH YIELD, HIGH RISK DEBT SECURITIES WHICH ARE
CONSIDERED SPECULATIVE AND SUBJECT TO CERTAIN RISKS. SEE "INVESTMENT OBJECTIVES
AND POLICIES" AND "SPECIAL RISK CONSIDERATIONS". There can be no assurance that
the Fund's investment objectives will be achieved.
OFFITBANK serves as the Fund's investment adviser (the "Adviser"). The Adviser
is a New York State chartered trust company which currently manages in excess of
$10.2 billion in assets principally invested in global fixed income and equity
securities.
The address of the Company is 400 Bellevue Parkway, Wilmington, DE 19809. Yield
and other information regarding the Funds may be obtained by calling the Company
at 1-800-618-9510.
<PAGE>
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY...........................................................1
EXPENSE INFORMATION..........................................................4
INVESTMENT OBJECTIVES AND POLICIES...........................................6
OTHER INVESTMENT POLICIES....................................................8
SPECIAL RISK CONSIDERATIONS.................................................16
LIMITING INVESTMENT RISKS...................................................27
MANAGEMENT..................................................................28
DIVIDENDS AND DISTRIBUTIONS.................................................31
PURCHASE OF M.S.D.&T. SHARES................................................32
REDEMPTION OF SHARES........................................................34
NET ASSET VALUE.............................................................36
TAXES.......................................................................37
PERFORMANCE INFORMATION.....................................................39
THE TRANSFER................................................................40
ADDITIONAL INFORMATION......................................................40
REPORTS TO SHAREHOLDERS.....................................................41
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 FUND'S 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 FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
ii
<PAGE>
PROSPECTUS SUMMARY
WHAT IS THE FUND?
The High Yield Fund is a no-load, separate, non-diversified investment portfolio
of The OFFITBANK Investment Fund, Inc. (the "Company"), an open-end management
investment company incorporated in Maryland on September 8, 1993. This
Prospectus offers the M.S.D.&T. class of the High Yield Fund (the "M.S.D.&T.
Shares"). The Company is not authorized to engage in the business of banking.
WHAT ARE THE FUND'S 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.
WHO IS THE FUND'S INVESTMENT ADVISER?
OFFITBANK (the "Adviser"), a New York State chartered trust company, provides
investment advisory services to the Fund. 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 the Fund a monthly fee based upon the
average daily net assets 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. The investment advisory fee for the High Yield
Fund is higher than that paid by most investment companies, but is comparable to
that paid by other investment companies that have similar investment strategies.
See "Management".
HOW DO YOU PURCHASE AND REDEEM SHARES OF THE FUND?
M.S.D.&T. Shares of the High Yield Fund may be purchased through Mercantile
- - -Safe Deposit and Trust Company and its affiliated and correspondent banks and
affiliates of State Street Bank and Trust Company (collectively, the "Banks").
The minimum initial investment for M.S.D.&T. Shares is $25,000. The minimum for
subsequent investments for M.S.D.&T. Shares is $100.
The Company's officers are authorized to waive the minimum initial and
subsequent investment requirements. See "Purchase of Shares". The Fund has
adopted a Plan of Distribution which permits the reimbursement by the Fund of
distribution expenses with respect to the M.S.D.&T. Shares on an annual basis.
See "Management-Distributor".
1
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The 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. See "Redemption of Shares".
WHEN DOES THE FUND PAY DIVIDENDS AND MAKE DISTRIBUTIONS?
The High Yield Fund declares dividends daily and pays dividends monthly. See
"Dividends and Distributions".
WHAT ARE THE SPECIAL RISK CONSIDERATIONS FOR INVESTORS IN THE FUND?
SHARE PRICE FLUCTUATIONS. The 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 the 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 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. The 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".
2
<PAGE>
The 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 emerging markets because of the special risks associated with
investing in such markets. An investment in the High Yield Fund should be
considered speculative. Certain foreign countries may impose withholding taxes
on income earned and/or gains realized by the Fund in connection with
investments in such countries.
SOVEREIGN DEBT. The Fund 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 Fund will invest are widely considered to have a credit quality below
investment grade. As a result, such securities may be regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. The value
of a convertible security is a function of its "investment value" (determined by
its yield in comparison with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates and the yield of similar non-convertible
securities, with investment value declining as interest rates increase and
increasing as interest rates decline. The conversion value of a convertible
security is influenced by changes in the market price of the underlying common
stock. If, because of a low price of the underlying common stock, the conversion
value is low relative to the investment value, the price of the convertible
security is governed principally by its investment value. To the extent the
market price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible security will be increasingly influenced by
its conversion value, and the convertible security may sell at a premium over
its conversion value to the extent investors place value on the right to acquire
the underlying common stock while holding a fixed income security. If no capital
appreciation occurs on the underlying common stock, this premium may not be
fully recovered.
As a result of the conversion feature, the interest rate or dividend preference
on a convertible security, while generally offering a yield greater than that on
the underlying common stock, is generally less than it would be if the security
was not convertible. In addition, although the Adviser believes that convertible
securities available in the market generally contain provisions adequate to
protect the value of the securities from dilution, in the absence of adequate
anti-dilution provisions dilution in the value of the 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.
3
<PAGE>
HIGH YIELD, HIGH RISK DEBT SECURITIES. All or a substantial portion of the
securities purchased by the High Yield Fund may be high yield, high risk debt
securities. Investment by the Fund in such securities involves a high degree of
credit risk. Such investments are regarded as speculative by the major rating
agencies.
NON-DIVERSIFIED FUNDS. The Fund normally invests in a substantial number of
issuers; however, the 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 Fund should
consider the following factors: (1) the 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) the Fund may lend its investment securities, which entails a risk of loss
should the borrower fail financially; (3) the 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) the Fund may invest a portion of its
assets in various types of derivative instruments (which 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 the Fund could not close out
a position in such a derivative instrument when it would be most advantageous to
do so; and (5) the 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. See "Special Risk Considerations" for additional information
regarding certain risks associated with investment in the Fund.
EXPENSE INFORMATION
The following Expense Summary lists the costs and expenses that a shareholder
can expect to incur as an investor in M.S.D.&T. Shares of the Fund.
EXPENSE SUMMARY
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M.S.D.&T.
SHARES
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) .........................................................None
Sales Load Imposed on Reinvested Dividends...............................None
Redemption Fee...........................................................None
Exchange Fee.............................................................None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
</TABLE>
4
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M.S.D.&T.
SHARES
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HIGH YIELD FUND
Advisory Fee............................................................-%
Rule 12b-1 Fees (after waiver)**........................................-%
Other Expenses (after waivers)***.......................................-%
--
Total Fund Operating Expenses (after waivers)+.......................... %
</TABLE>
**The M.S.D.&T. Shares of the Fund are authorized to spend up to ____% 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 the Fund reflect current waivers of administration fees
and/or reimbursements by the Adviser of certain expenses. 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 for M.S.D.&T. Shares of the High Yield
Fund would be ___%.
+ Absent the voluntary waivers referred to above, the ratio of "Total Fund
Operating Expenses" to average net assets for the M.S.D.&T. Shares of the High
Yield Fund would be ___%.
For additional information with respect to the expenses identified in the table
above, see "Management" in this Prospectus and "Management" and "Distributor" in
the Statement of Additional Information.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) a 5%
annual return and (2) redemption at the end of each time period:
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HIGH YIELD FUND
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M.S.D.&T.
SHARES
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1 year.................$-
3 years................$-
5 years................$-
10 years...............$-
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THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND RATE OF RETURN, AND ACTUAL EXPENSES MAY BE
5
<PAGE>
GREATER OR LESS THAN THOSE SHOWN. Moreover, while the example assumes a 5%
annual return, the 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 Fund's 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.
INVESTMENT OBJECTIVES AND POLICIES
The High Yield Fund's primary investment objective is high current income.
Capital appreciation is a secondary objective. The investment objective is
fundamental and may not be changed without the affirmative vote of a majority of
its outstanding shares. Of course, there can be no assurance that these
objectives will be achieved.
The 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)
6
<PAGE>
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".
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.
7
<PAGE>
OTHER INVESTMENT POLICIES
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. Such investments may be
denominated in foreign currencies. Thus, the 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
The 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 Fund may invest in
structured products which represent derived investment positions based on
relationships among different markets or asset classes.
The Fund may also invest in other types of structured products, including among
others, inverse floaters, spread trades and notes linked by a formula to the
price of an underlying instrument 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 Fund
anticipates it will invest may involve no credit enhancement, the credit risk of
those structured products generally would be equivalent to that of the
underlying instruments. Although the 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 the 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, the 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 the Fund invests may be deemed illiquid and subject to the 15%
limitation described below under "Illiquid Securities".
DEPOSITARY RECEIPTS AND DEPOSITARY SHARES
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The Fund may invest in American Depositary Receipts ("ADRs") or other similar
types of depositary receipts or other similar securities, such as American
Depositary Shares, European Depositary Shares and Global Depositary 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, the 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 the Fund, to the extent of its investment in
ADRs, will invest predominantly in ADRs sponsored by the underlying issuers. The
Fund, 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 Fund may invest in convertible securities. The convertible securities that
may be held 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 Fund has 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 the Fund is called for redemption, the 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
The Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a domestic or foreign entity and one or more
financial institutions
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("Lenders"). The majority of the Fund's 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 the Fund having a
contractual relationship only with the Lender, not with the borrower. The 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, the 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 the
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.
The Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and it is anticipated that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the 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 the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The 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,
the 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 Fund may invest from time to time in mortgage-related securities, consistent
with its 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 the Fund)
by various government, government-related and private organizations.
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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 the Fund's investment objectives and policies, consider
making investments in such new types of securities.
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities in accordance with its 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 the 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 Fund will not limit its 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 Fund's limitation on investment in illiquid securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities consistent with its investment
policies. The Fund may lend portfolio securities in an amount up to 30% of its
total assets to broker-dealers, major banks or other recognized domestic
institutional borrowers of securities. Such loans will be against collateral,
consisting of cash or securities which is equal at all times to at least 100% of
the value of the securities loaned. Such loans would involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the Adviser
to be of good standing and only when, in the Adviser's judgment, the income to
be earned from the loans justifies the attendant risks. The voting rights, if
any, associated with the loaned portfolio securities may pass to the borrower
with the lending of the securities. The Fund's Directors 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
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The 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 Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow by entering into reverse repurchase agreements. Pursuant to
such agreements, the 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 the 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
The Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The 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. The 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 the 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 the Fund's
commitments with respect to such contracts. If the party with which the 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
The Fund may invest in "Brady Bonds", which are debt securities issued or
guaranteed by foreign governments in exchange for existing external commercial
bank indebtedness under a plan announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989. To date, 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
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<PAGE>
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the over-the-counter secondary
market.
The Fund may invest in either collateralized or uncollateralized Brady Bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least six months of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds which have been issued to date are rated BB or
B by S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.
SHORT SALES
The Fund may make short sales of securities "against the box". A short sale is a
transaction in which the 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, the 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 Fund may 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 20% of the value of the Fund's total
assets (including the amount borrowed).
WHEN-ISSUED AND FORWARD COMMITMENT TRANSACTIONS
The 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 the Fund to purchase or sell particular securities at a set
price with payment and delivery taking place beyond the normal settlement date,
allow the 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 the 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 the 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 the Fund than those received in
each transaction.
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ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS
The Fund may invest in zero coupon securities and debt securities (including
convertible debt securities) acquired at a discount. The Fund will only purchase
such securities to the extent consistent with 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 Fund also may purchase
pay-in-kind bonds which pay all or a portion of their interest in the form of
debt or equity securities. The Fund will only purchase pay-in-kind bonds that
pay all or a portion of their interest in the form of debt 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 Fund is 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
Fund will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Fund 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
The Fund will not 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 the
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 Fund may purchase
securities that are not registered under the Securities Act of 1933, as amended,
but which can be sold to qualified institutional buyers in accordance with Rule
144A under that Act ("Rule 144A securities"). Rule 144A securities generally
must be sold to other qualified institutional buyers. If a particular investment
in Rule 144A securities is not determined to be liquid, that investment will be
included within the 15% limitation on investment in illiquid securities. The
ability to sell Rule 144A securities to qualified institutional buyers is a
recent development and it is not possible to predict how this market will
mature. The Fund may also invest in commercial obligations issued in reliance on
the so-called "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the federal securities
laws, and generally is sold to institutional investors such as the Fund who
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<PAGE>
agree that they are purchasing the paper for investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper normally is resold to other institutional
investors like the Fund through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus providing
liquidity. The Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. See "Additional Risk
Considerations-Illiquid Securities" in the Statement of Additional Information.
OTHER INVESTMENT COMPANIES
The Fund reserves the right to invest up to 10% of its total assets in the
securities of other unaffiliated investment companies. The 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. The Fund does not intend 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. The 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
The 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 the Fund's investment
objectives and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund 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 the Fund's investments may be made in the
United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the 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
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The Fund may use, as portfolio management strategies, cross currency hedges,
interest rate transactions, commodity futures contracts in the form of futures
contracts on securities, securities indices and foreign currencies, and related
options transactions. The 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.
Currently, at least one exchange trades futures contracts on an index of
long-term municipal bonds, and the Fund reserves 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, the Fund may buy and
sell interest rate futures contracts and options on interest rate futures
contracts. The Fund 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 Fund 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, such securities may at times be held only briefly. It is
anticipated that, under normal conditions, the Fund's portfolio turnover rate
will not exceed 75% in any one year. A high portfolio turnover rate (100% or
more) involves correspondingly greater brokerage commission expenses and/or
markups and markdowns, which will be borne directly by the Fund and indirectly
by the 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.
SPECIAL RISK CONSIDERATIONS
GENERAL
The 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 the Fund generally fluctuates 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 the Fund will achieve its investment
objectives.
SECURITIES OF NON-U.S. ISSUERS
The Fund may invest 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 the Fund, and investment
techniques in which it may engage involve risks, including those set forth
below.
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SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many countries in which the Fund will
invest, and the 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 Fund invests and adversely affect the value of
the Fund's assets.
Individual foreign economies in general 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,
which could affect private sector companies and the Fund, and on market
conditions, prices and yields of securities in the Fund's portfolios. There may
be the possibility of nationalization or expropriation of assets, or future
confiscatory levels of taxation affecting the Fund. In the event of
nationalization, expropriation or other confiscation, the 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 Fund 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 Fund. 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 Fund 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 Fund.
The Fund 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 the Fund of any
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restrictions on investments. If, because of restrictions on repatriation or
conversion, the 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 the 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 the 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 Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The 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 the
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 emerging
market countries in particular. In an attempt to control inflation, wage and
price controls have been imposed at times in certain countries.
MARKET CHARACTERISTICS; DIFFERENCES IN SECURITIES MARKETS. The securities
markets in many countries, and in 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 Fund. 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
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provisions may limit the Fund's 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 Fund's 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 Fund 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 Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the 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 Fund, to the
extent it invests outside the U.S., to maintain its 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
Fund, in which event the Fund 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 Fund may make investments,
there may be legal restrictions or limitations on the ability of the
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Fund to recover assets held in custody by subcustodians in the event of the
bankruptcy of the subcustodian.
GOVERNMENT SUPERVISION; LEGAL SYSTEMS. Disclosure and regulatory standards in
certain foreign countries, including Latin American and other emerging market
countries, are in many respects less stringent than U.S. standards. There may be
less government supervision and regulation of securities exchanges, listed
companies and brokers in these countries than exists in the United States.
Brokers in some countries may not be as well capitalized as those in the United
States, so that they may be more susceptible to financial failure in times of
market, political, or economic stress, exposing the Fund to a risk of loss. Less
information may be available to the Fund than with respect to investments in the
United States and, in certain of these countries, less information may be
available to the Fund 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 Fund may invest all or substantially all of its assets in high
yield, high risk debt securities. High yield, high risk debt securities are
those debt securities rated below investment grade and unrated securities of
comparable quality. They offer yields that fluctuate over time, but which
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks,
including greater price volatility and a greater risk of default in the timely
payment of principal and interest, than higher-rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which the Fund 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
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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
Fund with a commensurate effect on the value of their respective shares.
Therefore, an investment in the Fund should not be considered as a complete
investment program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on
the 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 the 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 the 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 the
Fund's ability to sell securities at their fair value. In addition, the Fund 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 the 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 DEBT SECURITIES. The Fund may invest in fixed income debt
securities. Changes in market yields will affect the 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 securities
generally increase or decrease more sharply than those of shorter
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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, the Fund may have to replace the called security with
a lower yielding security, resulting in a decreased rate of return for the Fund.
SOVEREIGN DEBT SECURITIES. The Fund may invest in sovereign debt securities.
Investing in sovereign debt securities will expose the Fund 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 Fund may
invest have historically experienced, and may continue to experience, high rates
of inflation, high interest rates, exchange rate fluctuations, trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings from foreign trade to service its external debt, it
may need to depend on continuing loans and aid from foreign governments,
commercial banks and
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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 Fund 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 Fund 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 Fund may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Securities of Non-U.S. Issuers", above.
CONVERTIBLE SECURITIES
GENERAL. The Fund may invest in convertible securities. Set forth below is
additional information concerning traditional convertible securities and
"synthetic" convertible securities.
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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 Fund may
enter into foreign currency hedging transactions in which they may seek to
reduce the impact of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent there are changes in interest rates or yields of similar non-convertible
securities, the investment value of the convertible security typically will
fluctuate. However, at the same time, the value of the convertible security will
be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock. If, because of a low price of the underlying common stock, the
conversion value is below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds it investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.
Holders of convertible securities have a claim on the assets of the issuer prior
to the common stockholders but may be subordinated to similar non-convertible
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the 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.
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SYNTHETIC CONVERTIBLE SECURITIES. "Synthetic" convertible securities are created
by combining separate securities that possess the two principal characteristics
of a true convertible security, i.e., fixed income ("fixed income component")
and the right to acquire equity securities ("convertibility component"). The
fixed income component is achieved by investing in nonconvertible fixed income
securities such as nonconvertible bonds, preferred stocks and money market
instruments. The convertibility component is achieved by investing in warrants,
exchanges or NASDAQ-listed call options or stock index call options granting the
holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case of
stock index options.
A warrant is an instrument issued by a corporation that gives a holder the right
to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of the
security underlying the warrant may not exceed the exercise price of the warrant
and the warrant may expire without any value. See "-Hedging and Derivatives"
below for a discussion of call options and stock index call options.
A synthetic convertible security differs from a traditional convertible security
in several respects. Unlike a traditional convertible security, which is a
single security having a unitary market value, a synthetic convertible security
is comprised of two or more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security is the sum of
the values of its fixed income component and its convertibility component. For
this reason, the values of a synthetic convertible security and a traditional
convertible security will respond differently to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible security
than in the purchase of a convertible security. Synthetic convertible securities
may be selected where the two components represent one issuer or are issued by a
single issuer, thus making the synthetic convertible security similar to a
traditional convertible security. Alternatively, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers which will be used when the Adviser believes that such a combination
would better promote the 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, the 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
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Short sales by the Fund involves 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 Fund
is permitted to engage in short sales only with respect securities related to
those in its portfolio. The Adviser therefore expects that if the price of the
securities the 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
The Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Each Fund,
however, intends to comply with the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended ("the "Code") for qualification as a
regulated investment company. Thus, the Fund may invest a greater proportion of
its assets in the securities of a smaller number of issuers and, as a result,
will be subject to greater risk of loss with respect to its portfolio
securities.
HEDGING AND DERIVATIVES
The Fund 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 the Fund,
or to seek to increase the Fund's income or gain. Limitations on the portion of
the Fund's assets that may be used in connection with the investment strategies
described below are set out in Appendix B to this Prospectus.
The 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").
The 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
the Fund resulting from securities markets or currency exchange rate
fluctuations, to protect the 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 the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The 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
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use of any authorized Hedging and Derivatives will be a function of numerous
variables, including market conditions. The ability of the 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
the Fund's securities. The Fund is not 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 the 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 the 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 the Fund segregate cash, U.S. government securities or other liquid
assets to the extent The 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 the Fund conducts Hedging and Derivatives outside the United
States, such transactions may be subject to political, economic and legal risks
that are distinct from domestic transactions. Such risks are similar to those
applicable to investment in foreign securities described under "Securities of
Non-U.S. Issuers" above.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may not invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided, that there
is no limitation with respect to investment in obligations issued or
guaranteed by the U.S. government, its agencies or
instrumentalities.
2. The Fund may not borrow money (except that they may enter into
reverse repurchase agreements) from banks except for temporary or
emergency purposes; PROVIDED, that (a) the amount of such borrowing
may not exceed 20% of the value of the Fund's total assets, and (b)
the Fund will not purchase portfolio securities while such
outstanding borrowing exceeds 5% of the value of the Fund's total
assets.
3. The Fund may not invest an amount equal to 15% or more of the
current value of their net assets in investments that are illiquid.
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The foregoing investment limitations and certain of those described in the
Statement of Additional Information under "Investment Limitations" are
fundamental policies of the Fund that may be changed only when permitted by law
and approved by the holders of a "majority" of the 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
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 the Fund (e.g., approval of investment advisory
contracts), 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 are present in person or by proxy, or (ii) more than 50% of
the outstanding shares of the 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 Fund is managed under the general direction and
supervision of the Company's Board of Directors. The Fund's day-to-day
operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK (the "Adviser") provides investment advisory services to the Fund
pursuant to an Investment Advisory Agreement with the Company (the "Advisory
Agreement"). Subject to such policies as the Company's Board of Directors may
determine, the Adviser makes investment decisions for the Fund. The Advisory
Agreement provides that, as compensation for services, the Adviser is entitled
to receive a monthly fee at the following annual rates based upon the average
daily net assets of the 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.
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 $10.2 billion in assets and serves as investment adviser to
twenty-one registered investment companies (or portfolios thereof). The
principal business address of the Adviser is 520 Madison Avenue, New York, New
York 10022.
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.
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ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT
PFPC Inc. ("PFPC" or 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 Bank of New York ("BONY") in its capacity as custodian 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 SEC, preparation of annual,
semi-annual and other reports to shareholders and the SEC, 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.
CUSTODIAN
The Bank of New York ("BONY") serves as custodian of the assets of the Fund. 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 the 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 M.S.D.&T. Shares, the Fund is authorized
to spend up to % of its net assets annually with respect to M.S.D.&T. 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 Fund and the
preparation,
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printing and distribution of prospectuses for the Fund 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 Fund under the Plan will generally be
used to finance the distribution of M.S.D.&T. Shares of the Fund. 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
M.S.D.&T. Shares. Shareholder administrative support services will be performed
by Shareholder Servicing Agents for their customers who beneficially own
M.S.D.&T. 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 Fund; transmitting, on behalf
of the Company, proxy statements, annual reports, updating prospectuses and
other communications from the Company to the shareholders of the Fund; 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 the
Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to % of
the average daily net asset value of M.S.D.&T. 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 the Fund's M.S.D.&T. Shares.
REGULATORY MATTERS
The Adviser is a trust company chartered under the New York Banking Law and is
supervised and examined thereunder by the New York Banking Department. The
Adviser 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.
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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. The Adviser believes that it may perform the services
described in this Prospectus with respect to the Company without violation of
such laws or regulations. The Adviser 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 Fund, it is expected that the Company's Board of
Directors would recommend to the 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 the Fund to the organizations retained to
provide services for the Fund may be waived from time to time in order to
increase the Fund's net investment income available for distribution to
shareholders.
Except as noted below, the Adviser and the Administrator 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 SEC;
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 the 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 Fund declares dividends of substantially all of its net investment income
daily and pay dividends monthly. The Fund distributes, at least annually,
substantially all net capital gains, if
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any, earned by the Fund. The Fund will inform shareholders of the amount and
nature of all such income or gains.
Dividends are paid in the form of additional M.S.D.&T. Shares unless the
shareholder of record has elected prior to the date of distribution to receive
payment in cash. Such election, or any revocation thereof, must be made in
writing to the Fund's transfer agent and will become effective with respect to
dividends paid after its receipt. Dividends that are otherwise taxable are
taxable to investors whether received in cash or in additional M.S.D.&T. Shares.
It is anticipated that expenses incurred by each class of shares of the Fund
will differ and, accordingly, that the dividends distributed with respect to the
M.S.D.&T. class will differ from other share classes of the Fund.
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 Fund
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 the 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 M.S.D.&T. SHARES
M.S.D.&T. Shares may be purchased at the net asset value per share next
determined after receipt of the purchase order. See "Net Asset Value". Customers
of Mercantile-Safe Deposit and Trust Company and its affiliated and
correspondent banks and customers of affiliates of State Street Bank and Trust
Company (the "Banks") may purchase M.S.D.&T. Shares through their qualified
accounts of the Banks and should contact the Banks directly for appropriate
purchase instructions.
INITIAL INVESTMENTS BY WIRE
Subject to acceptance by the Company, M.S.D.&T. Shares may be purchased by
wiring federal funds ($25,000 minimum) to PNC Bank (see minimum 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. 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)
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<PAGE>
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 ($25,000 minimum) payable to The OFFITBANK
Investment Fund, Inc.:
The OFFITBANK Investment Fund, Inc.
c/o PFPC Inc.
P.O. Box 8701
Wilmington, DE 19899
Subject to acceptance by the Company, payment for the purchase of M.S.D.&T.
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 additional investment
$100) by purchasing M.S.D.&T. Shares at net asset value by mailing a check to
the Company at the address noted under "Initial Investments by Mail" (payable to
The OFFITBANK Investment Fund, Inc.) or by wiring monies to the custodian bank
as outlined above. 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
M.S.D.&T. Shares 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 M.S.D.&T.
Shares 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 M.S.D.&T. Shares. The Company's
officers are authorized to waive the minimum initial and subsequent investment
requirements.
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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 M.S.D.&T.
Shares. The minimum investment for all such retirement plans is $25,000.
Investors desiring information regarding investments through IRAs should write
or telephone the Company at 1-800-618-9510.
OTHER PURCHASE INFORMATION
The Company reserves the right, in its sole discretion, to suspend the offering
of Shares of the Fund 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 the 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
M.S.D.&T. Shares may be redeemed by mail, or, if authorized, by telephone. No
charge is made for redemptions. The value of M.S.D.&T. 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 M.S.D.&T. Shares at the net asset value next
determined after the request is received in "good order". The net asset values
per share of the Fund is 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 19899.
Requests in "good order" must include the following documentation:
(a) the share certificates, if issued;
(b) a letter of instruction, if required, or a stock assignment
specifying the number of shares or dollar amount to be redeemed,
signed by all registered owners of the shares in the exact names in
which they are registered;
(c) any required signature guarantees (see "Signature Guarantees"
below); and
(d) other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations,
pension and profit sharing plans and other organizations.
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<PAGE>
SIGNATURE GUARANTEES
To protect shareholder accounts, the Fund and the transfer agent from fraud,
signature guarantees are required to enable the Fund to verify the identity of
the person who has authorized a redemption from an account. Signature guarantees
are required for: (1) redemptions where the proceeds are to be sent to someone
other than the registered shareholder(s) and the registered address; and (2)
share transfer requests. Signature guarantees may be obtained from certain
eligible financial institutions, including but not limited to, the following:
banks, trust companies, credit unions, securities brokers and dealers, savings
and loan associations and participants in the Securities Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP"). Shareholders
may contact the Company at 1-800-618-9510 for further details.
BY TELEPHONE
Provided the Telephone Redemption Option has been authorized, a redemption of
M.S.D.&T. 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. M.S.D.&T. 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 M.S.D.&T. Shares with a net asset value of $10,000 or more shares of
the 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 M.S.D.&T. 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.
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<PAGE>
FURTHER REDEMPTION INFORMATION
Redemption proceeds for shares of the Fund 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 Fund 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 the Fund in
lieu of cash in conformity with applicable rules of the SEC. Investors generally
will incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
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
19899. 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 the 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 the 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 the Fund by the total number of shares of the
Fund outstanding. Equity securities held by the Fund are valued at the last sale
price on the exchange or in the principal over-the-counter market in which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Debt
securities held by the 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-
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<PAGE>
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics.
TAXES
The Fund intends to qualify for taxation as a "regulated investment company"
("RIC") under Subchapter M of the Code. If so qualified, the Fund will not be
subject to federal income taxes with respect to its 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 the 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 at least 90%
of its net investment income for such taxable year.
The 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 of the Company 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 of the Company. Dividends, either in the form of cash or reinvested in
shares, paid by the Fund from net investment income will be taxable to
shareholders as ordinary income.
Whether paid in cash or additional shares of the Fund, and regardless of the
length of time the shares in the Fund have been owned by the shareholder,
distributions of net capital gain which are designated by the 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 the Fund. Such dividends and distributions
may also be subject to state and local taxes.
Exchanges and redemptions of shares in the 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 the 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 the 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
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<PAGE>
derived from the Fund's investment in certain types of U.S. government
securities may not be entitled to the exemptions from state and local taxes that
would be available if the shareholders had purchased U.S. government securities
directly. The exemption from state and local income taxes does not preclude
states from asserting other taxes on the ownership of U.S. government
securities.
The 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, the
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 the Fund (and received by the
shareholders) on December 31 of the year declared.
The Fund may be subject to certain taxes imposed by foreign countries with
respect to dividends, capital gain and other income. If the Fund qualifies as a
RIC, if certain distribution requirements are satisfied and if more than 50% in
value of the 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, the 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. For any
year that the Fund makes such an election, an amount equal to the foreign income
taxes paid by the Fund that can be treated as income taxes under U.S. income tax
principles will be included in your income 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.
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Ordinary income dividends paid by the 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 and gains realized on the
sale of shares of the Fund 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.
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number, (ii) the Internal Revenue Service ("IRS") notifies the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (iii)
when required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding.
Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide.
Investors should consult their tax advisers concerning a prospective investment
in the Fund.
PERFORMANCE INFORMATION
From time to time the Fund may advertise certain information about its
performance. The Fund may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the SEC's formula. For the Fund, however,
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 Fund may make
available information as to its respective "yield" and "effective yield" over a
thirty-day period, as calculated in accordance with the SEC's prescribed
formula. The "effective yield" assumes that the income earned by an investment
in a Fund is reinvested, and will therefore be slightly higher than the yield
because of the compounding effect of this assumed reinvestment. Total return and
yield quotations are computed separately for each class of shares of the Fund.
The Fund presents performance information commencing with the inception of the
Partnership. Performance information for the M.S.D.&T. Shares may also reflect
performance for time periods prior to the introduction of such class, and the
performance for such prior time periods will not reflect any fees and expenses
payable by such class that were not borne by the Fund prior to the introduction
of such class.
The performance of the Fund 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
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<PAGE>
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 Fund 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.
THE FUND'S PERFORMANCE INFORMATION IS HISTORICAL, WILL FLUCTUATE AND SHOULD NOT
BE CONSIDERED AS REPRESENTATIVE OF FUTURE RESULTS. The SEC's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information.
THE TRANSFER
On March 1, 1994, the High Yield Fund exchanged its shares (now Select Shares)
for portfolio securities of The Senior Securities Fund, L.P. (the
"Partnership"), a Delaware limited partnership, after which the Partnership
dissolved and distributed shares of the High Yield Fund received pro rata to its
partners. Following this transfer (the "Transfer"), partners of the Partnership
who participated in the Transfer constituted all of the shareholders of the High
Yield Fund, except for shares representing seed capital contributed to the Fund
by the Distributor. No gain or loss was recognized by the Partnership or the
participating partners upon the Transfer. As stated above, the investment
performance of the High Yield Fund may include the performance of the
Partnership. The investment objective and policies of the High Yield Fund are in
all material respects equivalent to those of the Partnership. While the High
Yield Fund is managed in a manner that is in all material respects equivalent to
the management of the Partnership, the Fund is subject to certain restrictions
on its investment activities under the 1940 Act and the Code to which the
Partnership was not subject. Had the Partnership been registered under the 1940
Act and subject to the provisions of the Code, its investment performance may
have been adversely affected. Operating expenses incurred by the High Yield Fund
may be higher than expenses that would have been incurred by the Partnership had
it continued to operate as a private investment partnership. Past performance of
the High Yield Fund (including the performance of the Partnership) should not be
interpreted as indicative of the High Yield Fund's future performance.
ADDITIONAL INFORMATION
ORGANIZATION AND CAPITAL STOCK
The Company was incorporated under the laws of the State of Maryland on
September 8, 1993. The Company operates as an open-end investment company and is
not authorized to engage in the business of banking. The authorized capital
stock of the Company consists of 10,000,000,000 shares having a par value of
$.001 per share. The Company's Articles of Incorporation, together with Articles
Supplementary, currently authorize the issuance of eight classes of shares,
corresponding to shares of OFFITBANK High Yield Fund, OFFITBANK Emerging Markets
40
<PAGE>
Fund, OFFITBANK Investment Grade Global Debt Fund, OFFITBANK Global Convertible
Fund, OFFITBANK Latin America Equity Fund, OFFITBANK Total Return Fund,
OFFITBANK U.S. Government Securities Fund, OFFITBANK Mortgage Securities Fund,
OFFITBANK National Municipal Fund, OFFITBANK California Municipal Fund and
OFFITBANK New York Municipal Fund. Effective May 1, 1996, all of the outstanding
shares of each of the Funds then in existence were reclassified as "Select
Shares" and each Fund began offering a new class of shares, designated as
"Advisor Shares." Effective _____, 1999 the High Yield Fund began offering a new
class of shares designated as "M.S.D.&T. 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
Kramer Levin Naftalis & Frankel LLP, New York, New York, serves as counsel to
the Company.
REPORTS TO SHAREHOLDERS
The Fund sends shareholders semi-annual and audited annual reports, each of
which include listings of investment securities held by the Fund at the end of
the period covered. In an effort to reduce the Fund's printing and mailing
costs, the Fund 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 the 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
Fund's transfer agent.
41
<PAGE>
APPENDIX A
RATINGS
The following is a description of certain ratings of Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, 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:
A-1
<PAGE>
"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.
"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.
A-2
<PAGE>
"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:
"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-3
<PAGE>
"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
A-4
<PAGE>
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.
"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.
A-5
<PAGE>
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.
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.
A-6
<PAGE>
"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.
A-7
<PAGE>
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.
"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.
A-8
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENT
HEDGING AND DERIVATIVES
The 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").
A detailed discussion of Hedging and Derivatives follows below. The Fund
will not be obligated, however, to pursue any of such strategies and the Fund
makes no representation as to the availability of these techniques at this time
or at any time in the future. In addition, the 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
B-1
<PAGE>
such as the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to the options. The discussion
below uses the OCC as an example, but is also applicable to other similar
financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's inability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the 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
B-2
<PAGE>
make a cash settlement payment due in accordance with the terms of that option,
the Fund will lose any premium it paid for the option as well as any anticipated
benefit of the transaction. Thus, the Adviser must assess the creditworthiness
of each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be met. A Fund will enter into OTC option transactions only with
U.S. government securities dealers recognized by the Federal Reserve Bank of New
York as "primary dealers", or broker-dealers, domestic or foreign banks, or
other financial institutions that are deemed creditworthy by the Adviser. In the
absence of a change in the current position of the staff of the Commission, OTC
options purchased by a Fund and the amount of the Fund's obligation pursuant to
an OTC option sold by the Fund (the cost of the sell-back plus the in-the-money
amount, if any) or the value of the assets held to cover such options will be
deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
If and to the extent authorized to do so, a Fund may purchase and sell
call options on securities and on Eurodollar instruments that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered", that is, the Fund must own the securities subject to the call, must
own an offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though a Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose the Fund during the term of the option
to possible loss of opportunity to realize appreciation in the market price of
the underlying security or instrument and may require the Fund to hold a
security or instrument that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments
and indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
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
B-3
<PAGE>
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.
B-4
<PAGE>
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments comprising the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
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.
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<PAGE>
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors". If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts".
COMBINED TRANSACTIONS
If and to the extent authorized to do so, a Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Derivatives, as part of a single or combined strategy when, in the judgment
of the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions will normally be
entered into by a Fund based on the Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase the risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may be authorized to enter into interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. A Fund will
enter into these transactions primarily to seek to preserve a 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 notional 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.
B-6
<PAGE>
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.
The 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 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
B-7
<PAGE>
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
B-8
<PAGE>
When conducted outside the United States, Hedging and Derivatives may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and will be subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of positions taken as part of
non-U.S. Hedging and Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of data on which to make trading decisions than in the United States, (3) delays
in a Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lower trading volume and liquidity.
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.
B-9
<PAGE>
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-10
<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
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
CUSTODIAN
The Bank of New York
48 Wall Street
New York, NY 10286
LEGAL COUNSEL
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10017-3909
ADMINISTRATOR; TRANSFER AND DIVIDEND
DISBURSING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
B-11
<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
B-12
<PAGE>
(This page intentionally left blank.)
The OFFITBANK Investment Fund, Inc.
400 Bellevue Parkway, Wilmington, DE 19809
(800) 618-9510
B-13
<PAGE>
THE M.S.D.&T. SHARES
OF THE OFFITBANK HIGH YIELD FUND
400 Bellevue Parkway
Wilmington, DE 19809
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
__________, 1999
The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end,
management investment company. This Statement of Additional Information relates
exclusively to the M.S.D.&T. class (the "M.S.D.&T. Shares") of the M.S.D.&T.
High Yield Fund (the "High Yield Fund" or "Fund"). This Statement of Additional
Information sets forth information about the Company applicable to the Fund.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the M.S.D.&T.
Shares' Prospectus dated (__________), 1999 (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>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Additional Information on Portfolio Instruments.......................... 3
Additional Risk Considerations........................................... 7
Investment Limitations................................................... 8
Management of the Fund................................................... 10
Distributor ............................................................. 12
Administration, Transfer Agency, Fund Accounting and Custody Services.... 13
Portfolio Transactions................................................... 13
Purchase of Shares....................................................... 14
Redemption of Shares..................................................... 14
Performance Calculations................................................. 15
Additional Information Concerning Dividends, Distributions and Taxes..... 17
Shareholder Services..................................................... 22
General Information ..................................................... 23
</TABLE>
2
<PAGE>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
The following information relates to or supplements the description of the
Fund's investment policies contained in the Prospectus.
Repurchase Agreements
The 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 Fund will enter into repurchase agreements only with dealers,
domestic banks or recognized financial institutions which, in the opinion of
OFFITBANK (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
The 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 Fund
enters into reverse repurchase agreements as described in the Prospectus, it
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 Fund under the
Investment Company Act of 1940, as amended (the "1940 Act").
Asset-Backed Securities
The Fund 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 services to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities. If
the letter of credit is exhausted, holders of asset-backed securities may also
experience delays in payments or losses if the full amounts due on underlying
sales contracts are not realized. Because asset-backed securities are relatively
new, the market experience in these securities is limited and the market's
ability to sustain liquidity through all phases of the market cycle has not been
tested.
3
<PAGE>
Credit Support. Asset-backed securities often contain elements of credit
support to lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying asset. Liquidity protection ensures that
the pass through of payments due on the installment sales contracts and
installment loans which comprise the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The Funds will not pay any additional fees for
such credit support. However, the existence of credit support may increase the
market price of the security.
Depositary Receipts
The Fund may hold equity securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), American Depositary Shares ("ADSs") and
European Depositary 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 Depositary
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 the Fund in connection with other
securities or separately, and provide the Fund with the right to purchase at a
later date other securities of the issuer. Warrants or rights acquired by the
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
Fund and may be changed by the Company's Board of Directors without shareholder
approval.
Borrowing
The Fund's 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 Fund may cause greater fluctuation in the
value of its shares than would be the case if the Fund did not borrow. In the
event that the Fund employs leverage, it would be subject to certain additional
risks. Use of leverage creates an opportunity for greater growth of capital but
would exaggerate any increases or decreases in the Fund's net asset value. When
the income and gains on securities purchased with the proceeds of borrowings
exceed the costs of such borrowings, the Fund's earnings or net asset values
will increase faster than otherwise would be the case; conversely, if such
income and gains fail to exceed such costs, the Fund's earnings or net asset
value would decline faster than would otherwise be the case.
Forward Foreign Currency Exchange Contracts
The Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The 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 the 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 the
Fund's portfolio securities denominated in such foreign currency. Conversely,
when the Fund believes that the U.S. dollar may suffer a substantial decline
against foreign currency, it
4
<PAGE>
may enter into a forward purchase contract to buy that foreign currency for a
fixed dollar amount ("position hedge"). In this situation, the Fund may, in the
alternative, enter into a forward contract to sell a different foreign currency
for a fixed U.S. dollar amount where the 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"). The 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 the Fund's commitments under forward contracts
entered into with respect to position hedges, cross-hedges and transaction
hedges, to the extent it does not already own the security subject to the
transaction hedge. If the value of the securities placed in the 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 the Fund's
commitments with respect to such contracts. As an alternative to maintaining all
or part of the separate account, the Fund may purchase a call option permitting
the 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 the Fund
may purchase a put option permitting the 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 the Fund than if it had not entered
into such contracts. If the party with which the 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, the 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, the Fund will not invest more
than 25% of its net assets in securities issued or guaranteed by the U.S.
government or by its agencies or instrumentalities. Such securities in general
include a wide variety of U.S. Treasury obligations consisting of bills, notes
and bonds, which principally differ only in their interest rates, maturities and
times of issuance. Securities issued or guaranteed by U.S. government agencies
and instrumentalities are debt securities issued by agencies or
instrumentalities established or sponsored by the U.S. government.
In addition to the U.S. Treasury obligations described above, the Fund may
invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(e.g., obligations of the
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Federal Home Loan Mortgage Corporation). In the case of obligations not backed
by the full faith and credit of the U.S. Treasury, the agency issuing or
guaranteeing the obligation is principally responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and
that have been established or sponsored by the U.S. government include, in
addition to those identified above, the Bank for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
Bank Obligations
As stated in the Prospectus, bank obligations that may be purchased by the
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 Fund does 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 the
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 the 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 the 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.
6
<PAGE>
Municipal Leases, Certificates of Participation and Other Participation
Interests
The Fund may purchase participations in Municipal Securities as defined
herein held by a commercial bank or other financial institution. Such
participations provide the Fund with the right to a pro rata undivided interest
in the underlying Municipal Securities. In addition, such participations
generally provide the Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of the Fund's participation interest in
the underlying Municipal Security, plus accrued interest. The 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.
The term "Municipal Securities" includes 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 the
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.
ADDITIONAL RISK CONSIDERATIONS
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities.
See "Limiting Investment Risks" in the Prospectus. The sale of restricted or
illiquid securities require more time and result in higher brokerage charges or
dealer discounts and other selling expenses than the sale of securities eligible
for trading on securities exchanges or in the over-the-counter markets.
Restricted securities often sell at a price lower than similar securities that
are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933 and commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, are liquid or illiquid. The Board has
delegated the function of making day to day determinations of liquidity to the
Adviser, pursuant to guidelines reviewed by the Board. The Adviser takes into
account a number of factors in reaching liquidity decisions, including, but not
limited to: (i) the frequency of trading in the security; (ii) the number of
dealers who make quotes for the security; (iii) the number of dealers who have
undertaken to make a market in the security; (iv) the number of other potential
purchasers; and (v) the nature of the security and how trading is effected
(e.g., the time needed to sell the security, how offers are solicited and the
mechanics of transfer). The Adviser will monitor the liquidity of securities in
the Fund's portfolio and report periodically on such decisions to the Board of
Directors.
Non-U.S. Withholding Taxes
The 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".
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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 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, the Fund may not:
1. purchase or sell commodities or commodity contracts, except that the
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 the 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
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<PAGE>
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 the
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 the 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 the
Fund pursuant to a merger or plan of reorganization;
6. purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary
for the clearance of transactions, and except for initial and
variation margin payments in connection with the use of options,
futures contracts, options thereon or forward currency contracts;
the Fund may also make deposits of margin in connection with futures
and forward contracts and options thereon);
7. sell securities short (except for short positions in a futures
contract or forward contract or short sales against the box and
except in connection with hedging and derivatives);
8. invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases;
9. 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;]
10. invest in stock or bond futures and/or options on futures unless (i)
not more than 5% of the 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%;
11. purchase or retain securities of an issuer if those officers or
Directors of the Company 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
12. 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.
13. invest for the purpose of exercising control over management of any
company;
14. invest in puts, call, straddles or spreads, except as described in
(9) above;
Investment restrictions (1) through (6) described above and those set forth in
the Prospectus under "Limiting Investment Risks" are fundamental policies of the
Fund which may be changed only when permitted by law and approved by the holders
of a majority of the Fund's outstanding voting securities, as described under
"General
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<PAGE>
Information -- Capital Stock". Restrictions (7) through (14) are nonfundamental
policies of the Fund, and may be changed by a vote of the Company's Board of
Directors.
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.
Position(s) Held With Principal Occupation(s) Past 5
Name, Address and Age the Fund Years
- - --------------------- --------------------- ------------------------------
Morris W. Offit* Chairman of the Board, President and Director,
OFFITBANK President, OFFITBANK (investment adviser)
520 Madison Avenue and Director (1983-present); two additional
New York, NY 10022 Chairman of the Board,
Age: 62 Years President and Director; and
one additional Director
position with the OFFITBANK
Fund Complex.
Edward J. Landau Director Of Counsel, Wolf, Block Schorr
Wolf, Block Scorr and and Solis-Cohen, LLP
Solis-Cohen LLP (2/1/98-present); Member,
250 Park Avenue Lowenthal, Landau, Fischer &
New York, NY 10177 Bring, P.C. (1960-1/31/98);
Age: 71 Years Director, Revlon Group Inc.,
Revlon Consumer Products Inc.;
Pittsburgh Annealing Box and
Clad Metals Inc.; one
additional Director position
with the OFFITBANK Fund
Complex.
The Very Reverend James Director President, Interfaith Center
Parks Morton of New York (1/1/98- present);
Interfaith Center of formerly Dean of Cathedral of
New York St. John the Divine
570 Lexington Avenue (1972-1996); one additional
New York, New York 10022 Director position with the
Age: 74 Years OFFITBANK Fund Complex.
Dr. Wallace Secretary and Treasurer Managing Director, OFFITBANK
Mathai-Davis (investment adviser)
OFFITBANK (1986-present); one additional
520 Madison Avenue Officer position with the
New York, NY 10022 OFFITBANK Fund Complex.
Age: 54 Years
Stephen Brent Wells Assistant Treasurer Managing Director, OFFITBANK
OFFITBANK (investment adviser) (1994 to
52 Madison Avenue present); one additional
New York, NY 10022 Officer position with the
Age: 54 Years OFFITBANK Fund Complex.
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<PAGE>
Position(s) Held With Principal Occupation(s) Past 5
Name, Address and Age the Fund Years
- - --------------------- --------------------- ------------------------------
Vincent M. Rella Assistant Treasurer Controller, OFFITBANK
OFFITBANK (investment adviser) (1986 to
5230 Madison Avenue present); one additional
New York, NY 10022 Officer position with the
Age: 46 Years OFFITBANK Fund Complex.
Stephen M. Wynne Assistant Treasurer Chairman of PFPC Trustee &
PFPC Inc. Custodial Services Ltd.
400 Bellevue Parkway (1995-present); Executive Vice
Wilmington, DE 19809 President and Chief Accounting
Age: 44 Years Officer (1993-present) and
Senior Vice President and
Chief Accounting Officer
(1991-1993) of PFPC Inc.;
Executive Vice President
(1993-1995) of PFPC
International; one additional
Officer position with the
OFFITBANK Fund Complex.
David D. Marky Assistant Treasurer Vice-President and Director of
PFPC Inc. Accounting (1996-present) of
103 Bellevue Parkway PFPC Inc.; Assistant Vice
Wilmington, DE 19809 President and Accounting
Age: 33 Years Conversion Manager
(1992-present) of PFPC Inc;
one additional Officer
position with the OFFITBANK
Fund Complex.
Gary M. Gardner Assistant Secretary Chief Counsel (1994-present)
PFPC Inc. of PFPC Inc.; Associate
400 Bellevue Parkway General Counsel (1992-1994) of
Wilmington, DE 19809 The Boston Company, Inc.; one
Age: 47 Years additional Officer position
with the OFFITBANK Fund
Complex.
David C. Lebisky Assistant Secretary Administrative Officer
PFPC Inc. (1996-present) of PFPC Inc.;
400 Bellevue Parkway Legal Assistant (1994-1996)
Wilmington, DE 19809 with the law firm of Drinker
Age: 27 years Biddle & Reath; BA Candidate
(1990-1994) LaSalle
University; one additional
Officer position with the
OFFITBANK Fund Complex.
* "Interested person" of the Fund as defined in the 1940 Act.
Investment Adviser
The Company has retained OFFITBANK, a New York State chartered trust
company, to act as its investment adviser (the "Adviser") with respect to the
Fund. The advisory agreement (the "Advisory Agreement") between the Adviser and
the Company provide that the Adviser shall manage the operations of the Fund,
subject to policy established by the Board of Directors of the Company. Pursuant
to the Advisory Agreement, the Adviser manages the Fund's investment portfolio,
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.
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<PAGE>
For its services under the Advisory Agreement, the Adviser receives from
the 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 the Fund's average daily net assets. The Adviser may
waive all or part of its fee from time to time in order to increase the Fund's
net investment income available for distribution to shareholders. The Fund 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 years ended December 31, 1997 and 1998, the Adviser
earned fees of $7,832,049 and $_____, respectively for the OFFITBANK High Yield
Fund.
The Fund's Advisory Agreement was approved by its sole shareholder at the
time, Furman Selz LLC ("Furman Selz"), on December 29, 1993. The Advisory
Agreement was most recently re-approved by the Company's Board of Directors on
__________. Unless sooner terminated, the Advisory Agreement will continue in
effect until February 7, 1999 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 the Fund, and, in either case, by a
majority of the directors who are not parties to the contract or "interested
persons" (as defined in the 1940 Act) of any party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement may be terminated by the
Company or the Adviser on 60 days' written notice, and will terminate
immediately in the event of its assignment.
DISTRIBUTOR
OFFIT Funds Distributor, Inc. (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.
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ADMINISTRATION, TRANSFER AGENCY, FUND ACCOUNTING AND CUSTODY SERVICES
Administration
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 the Bank of New York ("BONY") in its capacity as custodian 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. [Add figures for
fiscal year 1998.] 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 Fund of which BISYS waived $811,392. For the
fiscal year ended December 31, 1996, Furman Selz was entitled to fees of
$971,474 for the Fund, of which Furman Selz waived $485,738.
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 Bank of New York ("BONY") serves as custodian of the Fund's assets.
The principal business address of BONY is 48 Wall Street, New York, New York
10286. Under the Custodian Agreement, the Custodian has agreed to maintain a
separate account or accounts in the name of the Fund; hold and disburse
portfolio securities on the Fund's account; collect and receive all income and
other payments and distributions on account of the Fund's portfolio securities;
and make periodic reports to the Company's Board of Directors concerning the
Funds' operations. BONY is authorized under the Custodian Agreement to establish
separate accounts for the Fund's foreign securities with subcustodians, provided
that the custodian remains responsible for the performance of all of its duties
under the Custodian Agreement.
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 Fund's portfolio decisions and the placing of the Fund's
portfolio transactions. The Fund did not pay any brokerage commissions for the
fiscal periods ended December 31, 1998, 1997 and 1996.
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Fixed-income and certain short-term securities normally will be purchased
or sold from or to dealers serving as market makers for the securities at a net
price, which may include dealer spreads and underwriting commissions. Purchases
and sales of securities on a stock exchange are effected through brokers who
charge a commission. In the over-the-counter market, securities are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer. In placing orders, it is the policy of the Company to
obtain the best results taking into account the dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities involved. While the Adviser
generally seeks a competitive price in placing its orders, the Company may not
necessarily be paying the lowest price available.
Under the 1940 Act, persons affiliated with the Company are prohibited
from dealing with the Company as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the Commission. Affiliated persons of the Company, or affiliated persons of such
persons, may from time to time be selected to execute portfolio transactions for
the Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees or other remuneration received by other brokers in connection
with comparable transactions. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length agency
transaction.
Investment decisions for the Company are made independently from those for
other funds and accounts advised or managed by the Adviser. Such other funds and
accounts may also invest in the same securities as the Company. If those funds
or accounts are prepared to invest in, or desire to dispose of, the same
security at the same time as the Company, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Company or the price paid or received by the Company. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security. To the extent permitted by law, the 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 M.S.D.&T. Shares of the
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 the Fund, and (ii) reject purchase orders when, in the judgment of
management, such suspension or rejection is in the best interest of the Company.
The officers of the Company may, from time to time, waive the minimum initial
and subsequent investment requirements.
REDEMPTION OF SHARES
For information pertaining to the manner in which M.S.D.&T. Shares of the
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 SEC, (ii)
during any period when an emergency exists as defined by the rules of the SEC as
a result of which it is not reasonably practicable for the 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 SEC 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 SEC 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 the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in
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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 the 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 the 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 the Fund. Performance
quotations by investment companies are subject to rules adopted by the SEC,
which require the use of standardized performance quotations or, alternatively,
that every non-standardized performance quotation furnished by the Fund be
accompanied by certain standardized performance information computed as required
by the SEC. An explanation of the SEC methods for computing performance follows.
Total Return
The Fund's average annual total return is determined by finding the
average annual compounded rates of return over 1, 5 and 10 year periods (or, if
shorter, the period since inception of the Fund) that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes that all dividends and distributions are reinvested when paid. The
quotation assumes the amount was completely redeemed at the end of each 1, 5 and
10 year period (or, if shorter, the period since inception of the Fund) and the
deduction of all applicable Fund expenses on an annual basis. Average annual
total return is calculated according to the following formula:
P (( l + T ) ^ n) = 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.
The Fund presents performance information for each class of shares
commencing with the inception of the Partnership. 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.
As described in the Prospectus under the caption "Expense Information,"
the Fund has been and still is subject to certain fee waivers. Absent such
waivers, the Fund's returns would be lower.
The Fund 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/P) - 1
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In addition to total return, the 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 SEC and can be expressed as follows:
YIELD = 2 [((((a - b) / cd) + 1 ) ^ 6) - 1]
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 the 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 the 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 Fund may also advertise tax-equivalent yields which are computed by
dividing that portion of yield that is tax-exempt by one, minus a stated income
tax rate and adding the quotient to that portion, if any, of the yield that is
not tax-exempt.
The Fund may also advertise its "risk adjusted return," which reflects the
total return of the Fund over time adjusted to reflect volatility of the Fund.
The performance of the 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.
The 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 the 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 the 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 the Fund. In
addition, selected indices may be used to illustrate historic performance of
select asset classes.
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ADDITIONAL INFORMATION CONCERNING DIVIDENDS, DISTRIBUTIONS AND TAXES
Information set forth in the Prospectus and this SAI is only a summary of
certain key tax considerations generally affecting purchasers of shares of the
Fund. The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt has been made to present a complete explanation of the
federal, state and local tax treatment of the Fund or the implications to
shareholders, and the discussions here and in the Fund's Prospectus are not
intended as substitutes for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this SAI is based on tax law in effect on the
date of the Prospectus and this SAI; such laws and regulations may be changed by
legislative, judicial, or administrative action, sometimes with retroactive
effect.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends, and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains for the
taxable year and will therefore count toward satisfaction of the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies (the "Income Requirement").
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. In addition, gain will be recognized as a
result of certain constructive sales, including short sales "against the box."
However, gain recognized on the disposition of a debt obligation (including
municipal obligations) purchased by the Fund at a market discount (generally, at
a price less than its principal amount) will be treated as ordinary income to
the extent of the portion of the market discount which accrued while the Fund
held the debt obligation. In addition, under the rules of Code Section 988, gain
or loss recognized on the disposition of a debt obligation denominated in a
foreign currency or an option with respect thereto (but only to the extent
attributable to changes in foreign currency exchange rates), and gain or loss
recognized on the disposition of a foreign currency forward contract, futures
contract, option or similar financial instrument, or of foreign currency itself,
except for regulated futures contracts or non-equity options subject to Code
Section 1256 (unless a Fund elects otherwise), generally will be treated as
ordinary income or loss.
Further, the Code also treats as ordinary income a portion of the capital
gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of Section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of such gain that is treated as ordinary income generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the applicable federal rate, reduced
by the sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code Section 263(g). However, if the Fund has a built-in loss with respect to a
position that becomes a part of a conversion transaction, the character of such
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loss will be preserved upon a subsequent disposition or termination of the
position. No authority exists that indicates that the character of the income
treated as ordinary under this rule will not pass through to the Fund's
shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected (as applicable,
depending on the type of the Fund involved) if (1) the asset is used to close a
"short sale" (which includes for certain purposes the acquisition of a put
option) or is substantially identical to another asset so used, (2) the asset is
otherwise held by the Fund as part of a "straddle" (which term generally
excludes a situation where the asset is stock and Fund grants a qualified
covered call option (which, among other things, must not be deep-in-the-money)
with respect thereto), or (3) the asset is stock and the Fund grants an
in-the-money qualified covered call option with respect thereto. In addition,
the Fund may be required to defer the recognition of a loss on the disposition
of an asset held as part of a straddle to the extent of any unrecognized gain on
the offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss.
Transactions that may be engaged in by the Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction, or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with any other gain or loss that was recognized
previously upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such Section 1256 Contracts) generally is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. The
Fund, however, may elect not to have this special tax treatment apply to Section
1256 Contracts that are part of a "mixed straddle" with other investments of the
Fund that are not Section 1256 Contracts.
The Fund may enter into notional principal contracts, including interest
rate swaps, caps, floors, and collars. Treasury Regulations provide, in general,
that the net income or net deduction from a notional principal contract for a
taxable year is included in or deducted from gross income for that taxable year.
The net income or deduction from a notional principal contract for a taxable
year equals the total of all of the periodic payments (generally, payments that
are payable or receivable at fixed periodic intervals of one year or less during
the entire term of the contract) that are recognized from that contract for the
taxable year and all of the non-periodic payments (including premiums for caps,
floors, and collars) that are recognized from that contract for the taxable
year. No portion of a payment by a party to a notional principal contract is
recognized prior to the first year to which any portion of a payment by the
counterparty relates. A periodic payment is recognized ratably over the period
to which it relates. In general, a non-periodic payment must be recognized over
the term of the notional principal contract in a manner that reflects the
economic substance of the contract. A non-periodic payment that relates to an
interest rate swap, cap, floor, or collar is recognized over the term of the
contract by allocating it in accordance with the values of a series of
cash-settled forward or option contracts that reflect the specified index and
notional principal amount upon which the notional principal contract is based
(or, in the case of a swap, under an alternative method contained in the
proposed regulations and, in the case of a cap or floor, under an alternative
method which the IRS may provide in a revenue procedure).
The Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the Fund invests in a PFIC, it has three
separate options. First, it may elect to treat the PFIC as a qualified electing
fund (a "QEF"), in which event the Fund will each year have ordinary income
equal to its pro rata share of the PFIC's ordinary earnings for the year and
long-term capital gain equal to its pro rata share of the PFIC's net capital
gain for the year, regardless of whether the Fund receives distributions of any
such ordinary earnings or capital gains from the PFIC. Second, the Fund that
invests in stock of a PFIC may make a mark-to-market election with respect to
such stock. Pursuant to such election, the Fund will include as ordinary income
any excess of the fair market value of such stock at the close of any taxable
year over the Fund's adjusted tax basis in the stock. If the adjusted tax basis
of the PFIC stock exceeds the fair market value of the stock at the end of a
given taxable year, such excess will be deductible as ordinary loss in an amount
equal to the lesser of the amount of such excess or the
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net mark-to-market gains on the stock that the Fund included in income in
previous years. The Fund's holding period with respect to its PFIC stock subject
to the election will commence on the first day of the next taxable year. If the
Fund makes the mark-to-market election in the first taxable year it holds PFIC
stock, it will not incur the tax described below under the third option.
Finally, if the Fund does not elect to treat the PFIC as a QEF and does
not make a mark-to-market election, then, in general, (1) any gain recognized by
the Fund upon the sale or other disposition of its interest in the PFIC or any
excess distribution received by the Fund from the PFIC will be allocated ratably
over the Fund's holding period of its interest in the PFIC stock, (2) the
portion of such gain or excess distribution so allocated to the year in which
the gain is recognized or the excess distribution is received shall be included
in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year, plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received, at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Fund to its shareholders of the portions of such gain or excess distribution
so allocated to prior years (net of the tax payable by the Fund thereon) will
again be taxable to the shareholders as an ordinary income dividend.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss (including, to
the extent provided in Treasury Regulations, losses recognized pursuant to the
PFIC mark-to-market election) incurred after October 31 as if it had been
incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (provided that, with
respect to each issuer, the Fund has not invested more than 5% of the value of
the Fund's total assets in securities of each such issuer and the Fund does not
hold more than 10% of the outstanding voting securities of each such issuer),
and no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses. Generally, an option (call or put) with respect to a security is
treated as issued by the issuer of the security, not the issuer of the option.
For purposes of asset diversification testing, obligations issued or guaranteed
by certain agencies or instrumentalities of the U.S. Government, such as the
Federal Agricultural Mortgage Corporation, the Farm Credit System Financial
Assistance Corporation, a Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Government National
Mortgage Corporation, and the Student Loan Marketing Association, are treated as
U.S. Government securities.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
its ordinary taxable income for the calendar year and 98% of its capital gain
net income for the one-year period ended on October 31 of such calendar year
(or, at the election of a regulated investment company having a taxable year
ending November 30 or December 31, for its taxable year (a "taxable year
election")). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated
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investment company is treated as having distributed any amount on which it is
subject to income tax for any taxable year ending in such calendar year.
For purposes of calculating the excise tax, a regulated investment
company: (1) reduces its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year and (2)
excludes foreign currency gains and losses and ordinary gains or losses arising
as a result of a PFIC mark-to-market election (or upon the actual disposition of
the PFIC stock subject to such election) incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining the company's
ordinary taxable income for the succeeding calendar year). Each Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and capital gain net income prior to the end of each calendar year to
avoid liability for the excise tax. However, investors should note that a Fund
may in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but generally will not qualify for the 70% dividends-received
deduction for corporate shareholders.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his or her shares or
whether such gain was recognized by the Fund prior to the date on which the
shareholder acquired his shares.
Conversely, if the Fund elects to retain its net capital gain, the Fund
will be subject to tax thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If the Fund elects to retain its
net capital gain, it is expected that the Fund also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of his pro rata share of such gain, with the result that
each shareholder will be required to report his pro rata share of such gain on
his tax return as long-term capital gain, will receive a refundable tax credit
for his pro rata share of tax paid by the Fund on the gain, and will increase
the tax basis for his shares by an amount equal to the deemed distribution less
the tax credit.
Investment income that may be received by the Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of, or exemption from, taxes on such income.
It is impossible to determine the effective rate of foreign tax in advance since
the amount of the Fund's assets to be invested in various countries is not
known: If more than 50% of the value of the Fund's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, the
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign taxes paid by the Fund. If the Fund so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the Fund, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
Fund representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credit rules.
Distributions by the Fund that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the
20
<PAGE>
shares received, determined as of the reinvestment date. In addition, if the net
asset value at the time a shareholder purchases shares of the Fund reflects
undistributed net investment income, recognized net capital gain, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by the Fund
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has failed
to provide a correct taxpayer identification number, (2) who is subject to
backup withholding for failure to report the receipt of interest or dividend
income properly, or (3) who has failed to certify to the Fund that it is not
subject to backup withholding or is an "exempt recipient" (such as a
corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of a Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares. For
this purpose, the special holding period rules of Code Section 246(c)(3) and (4)
generally will apply in determining the holding period of shares. Capital losses
in any year are deductible only to the extent of capital gains plus, in the case
of a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the Fund,
(2) disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to such foreign shareholder will be subject to U.S. withholding tax at the rate
of 30% (or lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder may be subject to U.S. withholding tax
at the rate of 30% (or lower applicable treaty rate) on the gross income
resulting from the Fund's election to treat any foreign taxes paid by it as paid
by its shareholders, but may not be allowed a deduction against such gross
income or a credit against the U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
paid. Such a foreign shareholder generally would be exempt from U.S. federal
income tax on gains realized on the sale of shares of the Fund and capital gain
dividends, and amounts retained by the Fund that are designated as undistributed
capital gains.
21
<PAGE>
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
Effect of Future Legislation, Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends, and capital gain dividends from regulated investment
companies may differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in the Fund.
SHAREHOLDER SERVICES
The following supplements the information regarding shareholder services
set forth in the Company's Prospectus relating to the Fund:
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.
22
<PAGE>
Transfer of Shares
Shareholders may transfer shares of the Fund to another person by written
request to The OFFITBANK Investment Fund, Inc. at the address noted above. The
request should clearly identify the account and number of shares to be
transferred and include the signature of all registered owners and all share
certificates, if any, which are subject to the transfer. The signature on the
letter of request, the share certificate or any stock power must be guaranteed
in the same manner as described under "Redemption of Shares" in the Prospectus.
As in the case of redemptions, the written request must be received in good
order before any transfer can be made.
GENERAL INFORMATION
Capital Stock
All shares of the Company have equal voting rights and will be voted in
the aggregate, and not by class, except where voting by class is required by
law. As used in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Fund and all additional investment
portfolios, means the vote of the lesser of (i) 67% of the Company's shares
represented at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy or (ii) more than 50% of the Company's
outstanding shares. The term "majority", when referring to the approvals to be
obtained from shareholders in connection with matters affecting the Company, any
other single Fund (e.g., approval of Advisory Agreements) or any single class of
a Fund, means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund, or of the class of shares of the Fund, if a class vote is
required, are present in person or by proxy or (ii) more than 50% of the
outstanding shares of the Fund or of the class of shares of the Fund, if a class
vote is required. Shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held.
Each share of each class of a Fund of the Company is entitled to such
dividends and distributions out of the income earned on the assets belonging to
that Fund as are declared in the discretion of the Company's Board of Directors.
In the event of the liquidation or dissolution of the Company, shares of a class
of a Fund are entitled to receive the assets allocable to that class of shares
of such Fund which are available for distribution, and a proportionate
distribution, based upon the relative net assets of the Funds, of any general
assets not belonging to a Fund which are available for distribution. It is
anticipated that expenses incurred by each class of shares of each Fund will
differ and, accordingly, that the dividends distributed with respect to each
class will differ.
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 __________, 1999, 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 the Fund. As of __________, 1999, the following
persons owned of record or beneficially 5% or more of the outstanding shares of
any class of shares of the Fund:
Independent Accountants
PricewaterhouseCoopers LLP serves as the independent accountants for the
Company. PricewaterhouseCoopers LLP is located at 1177 Avenue of the Americas,
New York, New York 10036.
Other Information
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Commission under the Securities Act of 1933 with respect to the securities
offered by the Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and
23
<PAGE>
this Statement of Additional Information pursuant to the rules and regulations
of the Commission. The Registration Statement including the exhibits filed
therewith may be examined at the office of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
24
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
None.
(b) EXHIBITS:
Exhibit
Number Description
------ -----------
1(a) Registrant's Articles of Incorporation.(1)
1(b) Registrant's Amended and Restated Articles of
Incorporation.(3)
1(c) Registrant's Form of Articles Supplementary.(5)
1(d) Registrant's Form of Articles Supplementary. (8)
2(a) Registrant's By-Laws.(1)
2(b) Registrant's Amended and Restated By-Laws.(3)
3 None.
4(a) Form of Stock Certificate for shares of Class A stock.(3)
4(b) Form of Stock Certificate for shares of Class B stock.(5)
4(c) Form of Stock Certificate for shares of Class C stock.(3)
4(e) Form of Stock Certificate for shares of Class E stock.(5)
4(f) Form of Stock Certificate for shares of Class F stock.(5)
4(g) Form of Stock Certificate for shares of Class G stock.(5)
4(h) Form of Stock Certificate for shares of Class H stock.(5)
4(i) Form of Stock Certificate for shares of Class I stock.(8)
4(j) Form of Stock Certificate for shares of Class J stock.(8)
4(k) Form of Stock Certificate for shares of Class K stock.(8)
5(a) Form of Advisory Agreement between Registrant and OFFITBANK
with respect to the High Yield, Global Debt and Emerging
Markets Funds.(3)
5(b) Form of Advisory Agreement between the Registrant and
OFFITBANK with respect to the Global Convertible, Latin
America Equity, National Municipal, California Municipal and
New York Municipal Funds.(5)
5(c) Agreement to Advisory Agreement between the Registrant and
OFFITBANK reflecting the change in name of the Latin America
Equity, to Latin America Total Return Fund.(6)
5(d) Form of Advisory Agreement between Registrant and OFFITBANK
U.S. Government Securities Fund, OFFITBANK Mortgage Securities
Fund and OFFITBANK Total Return Fund.(8)
6(a) Form of Supplement to the Distribution Agreement between
Registrant and OFFIT Funds Distributor, Inc. with respect to
the Global Convertible, Latin America Equity, National
Municipal, California Municipal and New York Municipal
Funds.(5)
C-1
<PAGE>
6(b) Amendment to the Distribution Agreement between Registrant and
OFFIT Funds Distributor, Inc. reflecting the change in name of
the Latin America Equity Fund to Latin America Total Return
Fund.(6)
6(c) Amendment to the Distribution Agreement in connection with the
reclassification of existing shares of each Fund as "Select
Shares" as of the close of business May 1, 1996, and the
creation of Advisor Shares.(7)
6(d) Form of Distribution Agreement between Registrant and OFFIT
Funds Distributor, Inc.(8)
7 None.
8(a) Form of Custodian Agreement between Registrant and The Chase
Manhattan Bank, N.A. (the "Custodian") with respect to the
High Yield, Global Debt and Emerging Markets Funds.(3)
8(b) Form of Custodian Agreement between Registrant and the
Custodian with respect to the Global Convertible, Latin
America Equity, National Municipal, California Municipal and
New York Municipal Funds.(5)
8(c) Form of Custodian Agreement between Registrant and The Bank of
New York.(9)
8(d) Form of Amendment to the Custodian Agreement between
Registrant and The Bank of New York with respect to the
Emerging Markets Fund.(10)
9(a) Form of Shareholder Servicing Agreement between the Registrant
and Shareholder Servicing Agents.(7)
9(b) Form of Fund Administration Agreement between Registrant and
BISYS Fund Services.(8)
9(c) Form of Administration and Accounting Services Agreement
between Registrant and PFPC Inc.(12)
9(d) Form of Transfer Agency Agreement between Registrant and BISYS
Fund Services.(8)
9(e) Form of Transfer Agency Agreement between Registrant and PFPC
Inc.(12)
9(f) Form of Fund Accounting Agreement between Registrant and BISYS
Fund Services.(8)
10 Opinion and Consent of Piper & Marbury.(3)
11(a) None.
11(b) Powers of Attorney for Messrs. Landau and Morton.(2)
12 None.
13(a) Form of Share Purchase Agreement between Registrant and Furman
Selz Incorporated with respect to the High Yield, Global Debt
and Emerging Markets Funds.(3)
13(b) Form of Share Purchase Agreement between Registrant and Furman
Selz Incorporated with respect to the Global Convertible,
Latin America Equity, National Municipal, California Municipal
and New York Municipal Funds.(5)
13(c) Form of Share Purchase Agreement between the Registrant and
OFFIT Funds Distributor with respect to U.S. Government
Securities Fund, Mortgage Securities Fund and Total Return
Fund.(8)
14 None.
15(a) Form of Plan Distribution.(2)
15(b) Amendment to Plan of Distribution.(7)
16(a) Schedule of computation for the High Yield, Emerging Markets
and New York Municipal Funds.(6)
16(b) Schedule of computation for the Latin America Total Return
Fund.(9)
16(c) Schedule of computation for the California Municipal Fund.(10)
16(d) Schedule of computation for the U.S. Government Securities
Fund and Mortgage Securities Fund.(11)
16(e) Schedule of computation for the National Municipal Fund.(12)
C-2
<PAGE>
18 Form of Amended Multiclass Plan Pursuant to Rule 18f-3.(7)
27 None.
- - ----------------------------
(1) Exhibit is incorporated herein by reference to the Registrant's
Registration Statement on Form N-1A, filed October 8, 1993, Registration
Nos. 33-70116 and 811-8036 (the "Registration Statement").
(2) Exhibit is incorporated herein by reference to Pre-Effective Amendment No.
1, filed November 24, 1993 to the Registration Statement.
(3) Exhibit is incorporated herein by reference to Pre-Effective Amendment No.
2, filed January 31 1994, to the Registration Statement.
(4) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 2, filed on August 26, 1994, to the Registration Statement.
(5) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 3, filed on November 25, 1994, to the Registration Statement.
(6) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 6, filed on February 29, 1996, to the Registration Statement.
(7) Exhibit is incorporated herein by reference to Post-Effective Amendment
No.7, filed on April 27, 1996, to the Registration Statement.
(8) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 10, filed on February 14, 1997.
(9) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 11, filed on April 30, 1997.
(10) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 12, filed on August 29, 1997.
(11) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 13, filed on January 29, 1998.
(12) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 14, filed on April 17, 1998.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class at January 31, 1999
-------------- -------------------
<S> <C>
Select Shares of OFFITBANK High Yield Fund,
par value $.001 per share .................................1439
Advisor Shares of OFFITBANK High Yield Fund,
par value $.001 per share ....................................0
Select Shares of OFFITBANK Emerging Markets Fund,
par value $.001 per share...................................239
</TABLE>
C-3
<PAGE>
<TABLE>
<S> <C>
Advisor Shares of OFFITBANK Emerging Markets Fund,
par value $.001 per share ....................................0
Select Shares of OFFITBANK Latin America Equity Fund,
par value $.001 per share....................................78
Advisor of OFFITBANK Latin America Equity Fund,
par value $.001 per share ....................................0
Select Shares of OFFITBANK Investment Grade Global Debt Fund,
par value $.001 per share ....................................0
Advisor Shares of OFFITBANK Investment Grade Global Debt Fund,
par value $.001 per share ....................................0
Select Shares of OFFITBANK Global Convertible Fund,
par value $.001 per share ....................................0
Advisor Shares of OFFITBANK Global Convertible Fund,
par value $.001 per share.....................................0
Select Shares of OFFITBANK U.S. Government Fund,
par value $.001 per share ...................................53
Advisor Shares of OFFITBANK U.S. Government Fund,
par value $.001 per share ....................................0
Select Shares of OFFITBANK Mortgage Securities Fund,
par value $.001 per share ...................................62
Advisor Shares of OFFITBANK Mortgage Securities Fund,
par value $.001 per share.....................................0
Select Shares of OFFITBANK California Municipal Fund,
par value $.001 per share ...................................18
Advisor Shares of OFFITBANK California Municipal Fund,
par value $.001 per share.....................................0
Select Shares of OFFITBANK New York Municipal Fund,
par value $.001 per share ...................................95
Advisor Shares of OFFITBANK New York Municipal Fund,
par value $.001 per share.................................... 0
Select Shares of OFFITBANK National Municipal Fund,
par value $.001 per share....................................19
</TABLE>
C-4
<PAGE>
<TABLE>
<S> <C>
Advisor Shares of OFFITBANK National Municipal Fund,
par value $.001 per share ....................................0
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VII of Registrant's Articles of Incorporation
(Exhibit 1 hereto), Article IV of Registrant's By-Laws (Exhibit 2 hereto) and
Paragraph V of the Form of Distribution Agreement between Registrant and OFFIT
Funds Distributor, Inc. (Exhibit 6(d) hereto).
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, Registrant understands that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a director, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser provides a wide range of asset management services to individuals,
institutions and retirement benefit plans.
To the knowledge of Registrant, none of the Directors or executive officers of
the Adviser except those described below, are or have been, at any time during
the past two years, engaged in any other business, profession, vocation or
employment of a substantial nature.
Principal Occupation or
Other Employment of a
Position with Substantial Nature
Name OFFITBANK During the Past Two Years
- - ---- --------- -------------------------
H. Furlong Baldwin Director Chairman of the Board,
Mercantile Safe Deposit & Mercantile Bankshares
Trust Co.
Two Hopkins Plaza
Baltimore, MD 21201
Morris, W. Offit, C.F.A. Director Chairman of the Board
OFFITBANK OFFITBANK
520 Madison Avenue
New York, N.Y. 10022
Marchese Alessandro Director Private Investor
di Montezemolo
200 Murray Place
Southampton, N.Y. 11969
C-5
<PAGE>
Principal Occupation or
Other Employment of a
Position with Substantial Nature
Name OFFITBANK During the Past Two Years
- - ---- --------- -------------------------
David I. Margolis Director Chairman of the
Coltec Industries Inc. Executive Committee,
430 Park Avenue Coltec Industries Inc.
New York, N.Y. 10022
Harvey M. Meyerhoff Director Chairman of the Board,
Magna Holdings, Inc. Magna Holdings, Inc.
25 South Charles Street
Suite 2100
Baltimore, M.D. 21201
George Randolph Packard Director U.S. - Japan Foundation
U.S. - Japan Foundation
145 East 32nd Street,
12th Floor
New York, NY 10016
Edward V. Regan Director President, The Jerome
45 Rockefeller Plaza Levy Economics Institute
32nd Floor of Bard College
New York, N.Y. 10017
B. Lance Sauerteig Director Private Investor
130 Edgehill Road
New Haven, CT 06511
Ricardo Steinbruch Director
Grupo Vichuna
Rua Itacolomi 412
Higilenopolis
Sao Paolo, S.P. Brazil
01239-020
ITEM 29. PRINCIPAL UNDERWRITER.
(a) Not applicable.
(b) The information required by Item 29(b) with respect to each
director, officer or partner of OFFIT Funds Distributor, Inc. is
incorporated by reference to Schedule A on Form BD filed by OFFIT
Funds Distributor, Inc. pursuant to the Securities Exchange Act of
1934 (SEC File No. 8-46960)
(c) Not applicable.
C-6
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "1940
Act"), and the rules thereunder will be maintained at the offices of:
(1) The OFFITBANK Investment Fund, Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(records relating to the Company)
(2) OFFITBANK
520 Madison Avenue
New York, New York 10022
(advisory records)
(3) OFFIT Funds Distributor, Inc.
Four Falls Corporate Center
West Conshohocken, PA 19428-2961
(records of principal underwriter)
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Registrant undertakes to call a meeting of shareholders for the purpose of
voting upon the question of removal of one or more of Registrant's
directors when requested in writing to do so by the holders of at least
10% of Registrant's outstanding shares of common stock and, in conjunction
with such meeting, to assist in communications with other shareholders in
this regard, as provided under Section 16(c) of the 1940 Act.
(b) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's annual report to shareholders,
upon request and without charge.
(c) Registrant hereby undertakes to file a post-effective amendment, using
financial statements which need not be audited, within four to six months
from the start of operations of the Total Return Fund, Global Debt Fund
and Global Convertible Fund.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 26th day
of February, 1999.
THE OFFITBANK INVESTMENT FUND, INC.
By: /s/ Morris W. Offit
----------------------------------
Morris W. Offit, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the 26th day of February, 1999.
SIGNATURE TITLE
- - --------- -----
/s/ Morris W. Offit * Director, Chairman of
- - -------------------------------------- the Board and President
Morris W. Offit
(Principal Executive Director)
Edward J. Landau * Director
- - --------------------------------------
Edward J. Landau
The Very Reverend James Parks Morton * Director
- - --------------------------------------
The Very Reverend James Parks Morton
/s/ Wallace Mathai-Davis Treasurer and Secretary
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Wallace Mathai-Davis
/s/ Morris W. Offit
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Attorney-in-fact
*Pursuant to Power of Attorney filed with Pre-Effective Amendment No. 1 dated
November 24, 1993.
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