OFFIT INVESTMENT FUND INC, 497, 2000-05-01

OFFIT INVESTMENT FUND INC
497, 2000-05-01

Previous: AMERISTAR CASINOS INC, DEF 14A, 2000-05-01

Next: MACE SECURITY INTERNATIONAL INC, 10KSB/A, 2000-05-01

<PAGE>

MSD&T SHARES
OF THE OFFIT HIGH YIELD FUND

(THE "FUND")

LIKE ALL MUTUAL FUND SHARES, THESE FUND SHARES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR HAS THE
SEC DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. TO STATE
OTHERWISE IS A CRIMINAL OFFENSE.

PROSPECTUS

April 30, 2000

<PAGE>

THE OFFIT INVESTMENT FUND, INC.
MSD&T Shares of the OFFIT High Yield Fund

The OFFIT Investment Fund, Inc. (the "Company") is an open-end, management
investment company offering no-load, non-diversified investment portfolios
including the OFFIT High Yield Fund (the "Fund").

The Fund's primary investment objective is high current income. Capital
appreciation is a secondary objective.

MSD&T Shares are being offered through Mercantile-Safe Deposit and Trust Company
and its affiliated and correspondent banks.

The Fund may invest in high yield, high risk debt securities which are
considered speculative and subject to certain risks. See "Risks of Investing in
the Fund." There can be no assurance that the Fund's investment objectives will
be achieved.

2
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
A LOOK AT GOALS, STRATEGIES, FUND DESCRIPTION
RISKS, EXPENSES AND FINANCIAL Investment Objectives............................................4
HISTORY. Principal Investment Strategies..................................4
Principal Risk Factors...........................................4
Prior Performance................................................5
Fees and Expenses of the Fund....................................6
Financial Highlights.............................................7
Investment Objectives and Principal Strategies...................9
Additional Non-Principal Strategies.............................10
Risks of Investing in the Fund..................................11

DETAILS ON THE MANAGEMENT MANAGEMENT OF THE FUND
AND OPERATIONS OF THE FUND. Investment Adviser..............................................23
Service Provider Chart..........................................24

POLICIES AND INSTRUCTIONS FOR SHAREHOLDER INFORMATION
OPENING, MAINTAINING AND Pricing of Fund Shares..........................................25
CLOSING AN ACCOUNT IN THE FUND. Purchase of MSD&T Shares........................................25
Redemption of MSD&T Shares......................................26
Shareholder Services............................................27
Dividends and Distributions.....................................27
Taxes...........................................................27

DETAILS ON DISTRIBUTION DISTRIBUTION ARRANGEMENTS
ARRANGEMENTS AND SHAREHOLDER Multiple Class Structure........................................30
SERVICING PLAN Shareholder Servicing Plan......................................30

Appendix A: Ratings...........................................A-1
Appendix B: Hedging and Derivatives...........................B-1

FOR MORE INFORMATION................................see back cover
</TABLE>

3
<PAGE>

MSD&T SHARES OF THE OFFIT HIGH YIELD FUND

INVESTMENT OBJECTIVES

The Fund's primary investment objective is high current income. Capital
appreciation is a secondary objective.

PRINCIPAL INVESTMENT STRATEGIES

The Fund invests at least 65% of its total assets in U.S. corporate fixed income
securities that are rated below investment grade (i.e. high yield/high risk debt
securities), offering potential returns that are sufficiently high to justify
the greater investment risks. Securities offering the high yield that the Fund
seeks are generally found in mature cyclical or depressed industries and highly
leveraged companies. The Fund also invests in senior securities and securities
with an operating history of more than one year (though the Fund may invest in
the securities of issuers with a shorter operating history). The Fund may invest
in debt securities of any maturity and the interest rates on such securities may
be fixed or floating.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - All or a substantial portion of the securities purchased by the Fund are
lower rated or unrated debt securities (i.e., high yield, high risk debt
securities). High yield, high risk debt securities have a higher risk of
default in the payment of interest and principal than higher rated
securities and are subject to significant changes in price. Investment by
the Fund in such securities involves a high degree of credit risk and such
securities are regarded as speculative by the major rating agencies.

- - The Fund is subject to interest rate risk. Rising interest rates cause the
prices of debt securities to decrease and falling rates cause the prices of
debt securities to increase. Securities with longer maturities can be more
sensitive to interest rate changes. In effect, the longer the maturity of a
security, the greater the impact a change in interest rates could have on
the security's price.

- - The Fund is a "non-diversified" mutual fund. This permits the Fund to
invest most of its assets in securities issued by a small number of
companies. This makes the Fund more susceptible to the risks associated
with these particular companies, or to a single economic, political or
regulatory occurrence.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Fund" herein.

4
<PAGE>

PRIOR PERFORMANCE*

ANNUAL TOTAL RETURNS

The bar chart below shows the annual total returns for Select Shares of the Fund
for the last five calendar years. The bar chart provides some indication of the
risks of investing in the Fund by showing changes in the Fund's performance from
year to year. Past performance is not necessarily an indicator of how the Fund
will perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (March 2, 1994), the highest calendar quarter total return for
Select Shares of the Fund was 5.46% (quarter ended June 30, 1995) and the lowest
calendar quarter total return was (3.45%) (quarter ended September 30, 1998).

* Because MSD&T Shares commenced operations on November 1, 1999 and have less
than a full year of performance history, the returns noted above are for a
class of shares, the Select Shares, that is not offered in this prospectus.
The returns of the MSD&T Shares would, however, be substantially similar to
those of the Select Shares because both the MSD&T and Select Shares are
invested in the same portfolio of securities. The returns would differ only
to the extent that the MSD&T Shares have higher expenses than Select Shares
and your returns would therefore be lower.

AVERAGE ANNUAL TOTAL RETURNS - COMPARISON

The table below shows how the average annual total returns for Select Shares of
the Fund for the past one and five calendar years and since inception compare
with the Merrill Lynch All High Yield Bond Index (the "ML High Yield Index") for
the same periods. The table, like the bar chart, provides some indication of the
risks of investing in the Fund by showing how the Fund's average annual total
returns for one and five years and since inception compare with those of a broad
measure of market performance. Past performance is not necessarily an indicator
of how the Fund will perform in the future.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 YEAR 5 YEARS SINCE INCEPTION
------ ------- ---------------
<S> <C> <C> <C>
Select Shares** 1.10% 9.41% 7.95%

ML High Yield Index 1.57% 9.61% 7.81%
</TABLE>

5
<PAGE>

** Commenced operations on March 2, 1994.

FEES AND EXPENSES OF THE FUND

<TABLE>
<CAPTION>
MSD&T
Shares
------
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)

Maximum sales charge imposed on purchases None
Maximum deferred sales charge None
Maximum sales charge imposed on reinvested dividends None
Redemption Fee None
Exchange Fee None

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets,
shown as a percentage of average net assets)

Advisory fees................................................................... .70%
Distribution (Rule 12b-1) fees ................................................. None
Other expenses(1)............................................................... .45%
------
Total annual Fund operating expenses............................................ 1.15%
=====
</TABLE>

(1) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other charges.

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 in the Fund over the various time periods
indicated. The example assumes that:

- - you reinvested all dividends and distributions

- - the average annual total return was 5%

- - (except for the deduction of fees waived in the first year) the percentage
amounts charged in "Total annual Fund operating expenses" for MSD&T Shares
remain the same over the time periods

- - you redeemed all of your investment at the end of the time period.

6
<PAGE>

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MSD&T Shares $117 $365 $633 $1,398
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A REPRESENTATION OF
THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. Because the MSD&T Shares
commenced operations on November 1, 1999, and have less than a full year of
performance history, the financial highlights for the Select and Advisor Shares
of the Fund, which are not offered in this prospectus, are also included. This
information below reflects financial results for a single share of the Fund. The
total returns in the table represent the rate that a shareholder would have
earned (or lost) on an investment in the Fund (assuming reinvestment of all
dividends and distributions). The information for the year ended December 31,
1999 has been audited by PricewaterhouseCoopers LLP, whose unqualified report,
along with the Fund's financial statements, is included in the Company's Annual
Report dated December 31, 1999, which is available without charge upon request.
The financial statements for the Fund for years prior to December 31, 1999 were
audited by PricewaterhouseCoopers LLP, whose report expressed an unqualified
opinion on those statements.

7
<PAGE>

<TABLE>
<CAPTION>
SELECT SHARES
---------------------------------------------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD........ $ 9.91 $ 10.34 $ 10.15 $ 9.92 $ 9.25
---------- ---------- ---------- -------- --------
Net investment income..................... 0.90 0.88 0.87 0.89 0.90
Net realized and unrealized gain (loss)... (0.79) (0.43) 0.31 0.29 0.67
---------- ---------- ---------- -------- --------
Total income from investment operations... 0.11 0.45 1.18 1.18 1.57
---------- ---------- ---------- -------- --------
LESS DIVIDENDS AND DISTRIBUTION FROM:
Net investment income..................... (0.90) (0.88) (0.87) (0.89) (0.89)
Excess of net investment income........... (0.01) -- -- -- --
Net realized gains........................ -- -- (0.12) (0.06) (0.01)
---------- ---------- ---------- -------- --------
Total dividends and distributions........... (0.91) (0.88) (0.99) (0.95) (0.90)
---------- ---------- ---------- -------- --------
Net change in net asset value per share... (0.80) (0.43) 0.19 0.23 0.67
---------- ---------- ---------- -------- --------
NET ASSET VALUE, END OF PERIOD.............. $ 9.11 $ 9.91 $ 10.34 $ 10.15 $ 9.92
========== ========== ========== ======== ========
TOTAL RETURN(a)............................. 1.10% 4.49% 12.09% 12.46% 17.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $1,454,507 $1,739,622 $1,346,553 $851,720 $479,090
Ratios to average net assets:
Expenses.................................. 0.82% 0.84%*** 0.87%*** 0.98%*** 1.05%***
Net investment income..................... 8.91% 8.67% 8.46% 8.86% 9.38%
PORTFOLIO TURNOVER RATE..................... 42% 36% 47% 41% 34%
</TABLE>

<TABLE>
<CAPTION>
ADVISOR SHARES(d) MSD&T SHARES
-------------------------------------- -----------------
FOR THE PERIOD FOR THE PERIOD* FOR THE PERIOD**
ENDED ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1999
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.34 $10.37 $ 10.00(e)
------ ------ -------
Net investment income..................................... 0.60 0.32 0.19
Net realized and unrealized gain (loss)................... (0.43) 0.09 0.05
------ ------ -------
Total income from investment operations................... 0.17 0.41 0.24
------ ------ -------
LESS DIVIDENDS AND DISTRIBUTION FROM:
Net investment income..................................... (0.60) (0.32) (0.21)
Net realized gains........................................ -- (0.12) --
------ ------ -------
Total dividends and distributions........................... (0.60) (0.44) (0.21)
------ ------ -------
Net change in net asset value per share................... (0.43) (0.03) 0.03
------ ------ -------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.91 $10.34 $ 10.03
====== ====== =======
TOTAL RETURN(a)............................................. 0.67%(b) 3.93%(b) 2.38%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................. $ 7 $ 15 $14,737
Ratios to average net assets:
Expenses.................................................. 0.93%(c)*** 1.03%(c)*** 1.07%(c)
Net investment income..................................... 9.54%(c) 7.87%(c) 9.01%(c)
PORTFOLIO TURNOVER RATE..................................... 36% 47% 42%
</TABLE>

- ---------------

<TABLE>
<C> <S>
* Sales of Advisor Shares began on August 14, 1997.
** Sales of MSD&T Shares began on November 1, 1999.
*** During the period, certain fees were reduced and/or
reimbursed. If such fee reductions and/or reimbursements had
not occurred, the ratios would have been higher.
(a) Total return is based on the change in net asset value
during the period and assumes reinvestment of all dividends
and distributions.
(b) Not annualized.
(c) Annualized.
(d) As of December 31, 1999, and for substantially all of the
year then ended, there were no Advisor Shares outstanding.
(e) Initial offering price.
</TABLE>

- -------------

8
<PAGE>

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

The Fund's primary investment objective is high current income. 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 "seasoned" senior securities (as defined below) and
offer sufficiently high potential yields to justify the greater investment risk
or 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. 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 Fund seeks are generally found in mature cyclical or depressed
industries and highly leveraged companies. The Adviser attempts to identify
securities which have underlying fundamentals that are improving or are
sufficiently strong to sustain the issuer.

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 Fund, the
Adviser considers the following factors, among others: (i) the current yield,
the yield to maturity where appropriate, and the price of the security relative
to other securities of comparable quality and maturity; (ii) the balance sheet
and capital structure of the issuer; (iii) the market price of the security
relative to its face value; (iv) the rating, or absence of a rating, by Standard
& Poor's Ratings Group ("S&P"), Moody's Investors Services, Inc. ("Moody's") or
Duff & Phelps Credit Rating Co. ("D&P"); (v) the variety of issuers and
industries represented in the Fund's portfolio; and (vi) management of the
issuer. Industry trends and fundamental developments that may affect an issuer
are also analyzed, including factors such as liquidity, profitability and asset
quality. The Adviser is free to invest in high yield, high risk debt securities
of any maturity and duration and the interest rates on such securities may be
fixed or floating.

The Fund invests primarily in "seasoned" senior securities. The Fund defines a
"seasoned" security as any security whose issuer or predecessors have been
operating in their current form generally for more than one year, though the
Fund may invest in securities of issuers having less than one year of operation.
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 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

9
<PAGE>

the timely payment of interest and principal, than higher rated securities. See
"Risks of Investing in the Fund - High Yield, High Risk Debt Securities" below.

The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objective, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund may temporarily hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most 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 may
temporarily 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. The Adviser's choice to employ a temporary
defensive investment strategy may prevent the Fund from achieving its investment
objective.

ADDITIONAL NON-PRINCIPAL STRATEGIES

The Fund's secondary objective is capital appreciation. The Fund seeks to
achieve its objective by investing under normal circumstances, in fixed income
securities that are judged by the Adviser to be more creditworthy than generally
perceived in the marketplace or 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.
In addition, 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 judgement of the Adviser, to be improving.

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 and may be non-performing, in default or arrears. The
Adviser will obtain such securities in cases where it believes that capital
appreciation may be possible.

Although the 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 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 Fund's ability to
achieve its investment objectives. Dividends on shares attributable to interest
on municipal securities held by the 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.

10
<PAGE>

RISKS OF INVESTING IN THE FUND

GENERAL

The Fund's NAV 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, to varying degrees and
depending on the objectives and policies of the Fund, based on, among other
things, (i) interest rate movements and, for debt securities, their duration,
(ii) changes in the actual and perceived creditworthiness of the issuers of such
securities, (iii) changes in any applicable foreign currency exchange rates,
(iv) social, economic or political factors, (v) factors affecting the industry
in which the issuer operates, such as competition or technological advances, and
(vi) factors affecting the issuer directly, such as management changes or labor
relations. There is no assurance that the Fund will achieve its investment
objectives.

INTEREST RATE FLUCTUATIONS AND CREDIT RISK

The performance of the Fund depends in part on interest rate changes. As
interest rates increase, the value of the fixed income securities held by the
Fund tends to decrease. To the extent the Fund invests in securities with longer
maturities, the volatility of the Fund in response to changes in interest rates
can be expected to be greater than if the Fund had invested in comparable
securities with shorter maturities. The performance of the Fund will also depend
on the credit quality of its investments.

SECURITIES OF NON-U.S. ISSUERS

The Fund may invest all or some portion of its assets in securities of non-U.S.
issuers. You 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.

SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many countries in which the Fund will
invest, and the Latin American and other emerging market countries in
particular, may be subject to a substantially greater degree of social,
political and economic instability than is the case in the United States, Japan
and Western European countries. Such instability may result from, among other
things, some or all of the following: (i) authoritarian governments or military
involvement in political and economic decision-making, and changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies and terrorist activities; (iv) hostile relations with neighboring
countries; and (v) drug trafficking. Social, political and economic instability
could significantly disrupt the principal financial markets in which the Fund
invests and adversely affect the value of the Fund's assets.

11
<PAGE>

Individual foreign economies in general and those of Latin American and other
emerging market countries in particular, may differ favorably or unfavorably and
significantly from the U.S. economy in such respects as the rate of growth of
gross domestic product or gross national product, rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency, structural
unemployment and balance of payments position. Governments of many of these
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. In some cases, the government owns or
controls many companies, including some of the largest in the country.
Accordingly, government actions in the future could have a significant effect on
economic conditions in many countries, including Latin American and other
emerging market countries, which could affect private sector companies and the
Fund, and on market conditions, prices and yields of securities in the Fund's
portfolio. 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 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
Internal Revenue Code of 1986, as amended (the "Code"), in which case it would
become subject to U.S. federal income tax on all of its income and gains. See
"Taxes" below.

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

12
<PAGE>

value of the Fund's holdings of securities denominated in such currency and,
therefore, will cause an overall decline in the Fund's NAV 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 you 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.

EURO RISK. Upon the introduction of the European common currency, the euro, the
participating countries ceased to retain control of their respective monetary
policies and agreed to follow a single monetary policy established by the
European Central Bank. For participating countries, adopting the same monetary
policy, regardless of the conditions of their domestic economies, could have a
negative impact on their economies. Some of the economic criteria for the
participating countries include the following: a sustainable budget deficit less
than 3% of Gross Domestic Product (GDP), public debt less than 60% of GDP, low
inflation and interest rates and no currency devaluations within two years of
application. Some of the original participating countries do not yet meet these
standards, but are expected to be compliant before 2002. Countries joining later
may have to be in strict accord before entering the European Monetary Union, or
at least be well along the path to achieving them. So far, the transition seems
to be progressing smoothly, but there has been resistance to some of the more
stringent terms. Therefore, it is unclear whether complete economic and monetary
convergence will be attained as planned.

INFLATION. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and Latin
American and other emerging market countries in particular. In an attempt to
control inflation, wage and price controls have been imposed at times in certain
countries.

13
<PAGE>

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 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 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 experience rapid increases in
their money supplies 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 therefore no return is earned. 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 it would otherwise invest, and other banks that are eligible

14
<PAGE>

subcustodians may be recently organized or otherwise lack extensive operating
experience. At present, custody arrangements complying with the requirements of
the Securities and Exchange Commission ("SEC") 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 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 their respective 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

15
<PAGE>

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 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 NAV. 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 each
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. You should be aware, however, that they are
subject to certain limitations. 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.

16
<PAGE>

FIXED INCOME DEBT SECURITIES. The Fund may invest in fixed income debt
securities. Changes in market yields will affect the Fund's NAV 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 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 Funds may
invest have historically experienced, and may continue to experience, high rates
of inflation, high interest rates, exchange rate fluctuations, trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.

17
<PAGE>

receives payment for its exports in currencies other than dollars, its ability
to make debt payments denominated in dollars could be adversely affected. If a
foreign sovereign obligor cannot generate sufficient earnings from foreign trade
to service its external debt, it may need to depend on continuing loans and aid
from foreign governments, commercial banks and multilateral organizations, and
inflows of foreign investment. The commitment on the part of these foreign
governments, multilateral organizations and others to make such disbursements
may be conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.

As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the 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.

18
<PAGE>

CONVERTIBLE SECURITIES

GENERAL. The Fund may invest in convertible securities. Set forth below is
additional information concerning traditional convertible securities and
"synthetic" convertible securities.

Convertible securities are issued and traded in a number of securities markets.
For the past several years, the principal markets have been the United States,
the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. With respect to convertible securities denominated in a
currency different from that of the underlying equity securities, the conversion
price may be based on a fixed exchange rate established at the time the security
is issued. As a result, fluctuations in the exchange rate between the currency
in which the debt security is denominated and the currency in which the share
price is quoted will affect the value of the convertible security. The 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 its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.

Holders of convertible securities have a claim on the assets of the issuer prior
to the common stockholders but may be subordinated to similar non-convertible
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by 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

19
<PAGE>

option to the holder which entitles the holder to cause the security to be
redeemed by the issuer at a premium over the stated principal amount of the debt
security.

SYNTHETIC CONVERTIBLE SECURITIES. "Synthetic" convertible securities are created
by combining separate securities that possess the two principal characteristics
of a true convertible security, i.e., fixed income ("fixed income component")
and the right to acquire equity securities ("convertibility component"). The
fixed income component is achieved by investing in nonconvertible fixed income
securities such as nonconvertible bonds, preferred stocks and money market
instruments. The convertibility component is achieved by investing in warrants,
exchanges or NASDAQ-listed call options or stock index call options granting the
holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case of
stock index options.

A warrant is an instrument issued by a corporation that gives a holder the right
to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of the
security underlying the warrant may not exceed the exercise price of the warrant
and the warrant may expire without any value. See "Hedging and Derivatives"
below for a discussion of call options and stock index call options.

A synthetic convertible security differs from a traditional convertible security
in several respects. Unlike a traditional convertible security, which is a
single security having a unitary market value, a synthetic convertible security
is comprised of two or more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security is the sum of
the values of its fixed income component and its convertibility component. For
this reason, the values of a synthetic convertible security and a traditional
convertible security will respond differently to market fluctuations.

More flexibility is possible in the assembly of a synthetic convertible security
than in the purchase of a convertible security. Synthetic convertible securities
may be selected where the two components represent one issuer or are issued by a
single issuer, thus making the synthetic convertible security similar to a
traditional convertible security. Alternatively, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers which will be used when the Adviser believes that such a combination
would better promote 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.

20
<PAGE>

SHORT SALES

Short sales by the Fund involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested. The Fund
is permitted to engage in short sales only with respect to securities related to
those in their portfolios. 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. The 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 the 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

21
<PAGE>

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 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.

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.

The Fund will not be obligated to pursue any of the Hedging and Derivatives
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 current economic
conditions, the Commodity Exchange Act, as amended, applicable rules and
regulations of the 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 SEC, the CFTC, the Code or
their investment objectives and policies, the Fund may utilize, without
limitation, Hedging and Derivatives. 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 appears in Appendix B.
Risks associated with Hedging and Derivatives are also described in Appendix B
to this Prospectus.

YEAR 2000

22
<PAGE>

of four digits to define years, has not been fully recognized. For example, it
is possible that Year 2000 or similar issues may affect the computer systems
used by the Company's service providers at month, quarter or year end. The
Company believes that any such problems are likely to be minor and correctable.

MANAGEMENT OF THE FUND

INVESTMENT ADVISER

The Fund receives investment advisory services from OFFITBANK, whose principal
address is 520 Madison Avenue, New York, New York 10022 (the "Adviser" or
"OFFITBANK"). OFFITBANK is a subsidiary of the Wachovia Corporation, a leading
bank holding company with Wachovia Bank, NA as its principal subsidiary.
OFFITBANK manages the Fund's business and investment activities, subject to the
authority of the Company's Board of Directors. OFFITBANK's principal business is
providing discretionary investment management services to high net worth
individuals and family groups, foundations, endowments and corporations.
OFFITBANK specializes in global fixed income asset management and offers its
clients a complete range of investments in the major capital markets of the
world. OFFITBANK currently manages approximately $10.7 billion in assets and
serves as investment adviser to twenty registered investment company portfolios.

Stephen T. Shapiro serves as the portfolio manager for the Fund. Mr. Shapiro is
a Managing Director of OFFITBANK and has managed the Fund since March 1994.

For the fiscal year ended December 31, 1999, OFFITBANK received advisory fees
equal to .70% of the Fund's average net assets, after waivers and
reimbursements.

MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY ("MERCANTILE") DOES NOT SERVE AS AN
INVESTMENT ADVISER TO THE FUND AND NEITHER MERCANTILE NOR THE BOARD OF DIRECTORS
OF M.S.D.&T. FUNDS, INC. IS RESPONSIBLE FOR SUPERVISING THE OPERATION OF THE
FUND.

The following chart shows the Fund's other service providers and includes their
addresses and principal activities.

23
<PAGE>

<TABLE>
<S><C>
---------------------------------------------
SHAREHOLDERS
---------------------------------------------

----------------------------------
MERCANTILE SAFE DEPOSIT
AND TRUST COMPANY
Distribution and SUNLIFE BUILDING
Shareholder 20 S. CHARLES ST., 5TH FLOOR
Services BALTIMORE, MD 21201
----------------------------------

--------------------------------------------------- ----------------------------------------------------
PRINCIPAL DISTRIBUTOR TRANSFER AGENT
OFFIT FUNDS DISTRIBUTOR, INC. PFPC INC.
3200 HORIZON DRIVE 400 BELLEVUE PARKWAY
KING OF PRUSSIA, PA 19406 WILMINGTON, DE 19809

Distributes the Fund's Shares. Handles shareholder services, including
recordkeeping and statements, distrubution
of dividends and processing of buy and sell
requests.
--------------------------------------------------- ----------------------------------------------------

Asset
Management

--------------------------------------------------- ----------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
OFFITBANK THE BANK OF NEW YORK
520 MADISON AVENUE ("BONY")
NEW YORK, NY 10022 90 WASHINGTON STREET
NEW YORK, NY 10286

Manages the Fund's business and BONY serves as custodian of the assets of the
investment activities. Fund. The custodian settles all portfolio trades
and collects most of the valuation data required
for calculating the Fund's net asset value
("NAV").
--------------------------------------------------- ----------------------------------------------------

Fund
Operations

---------------------------------------------------
ADMINISTRATOR AND
FUND ACCOUNTING AGENT
PFPC INC.
400 BELLEVUE PARKWAY
WILMINGTON, DE 19809

Provides facilities, equipment and personnel
to carry out administrative services related
to the Fund and calculates the Fund's NAV,
dividends and distributions.
---------------------------------------------------

---------------------------------------------
BOARD OF DIRECTORS
Supervises the Fund's Activities
---------------------------------------------
</TABLE>

24
<PAGE>

SHAREHOLDER INFORMATION

PRICING OF FUND SHARES

Shares of the Fund are priced at their net asset value ("NAV"). The NAV of the
Fund is calculated as follows:

Value of Assets Attributable to a Class
NAV = - VALUE OF LIABILITIES ATTRIBUTABLE TO THE SAME CLASS
---------------------------------------------------
Number of Outstanding Shares of the Class

The Fund's NAV is calculated once daily at 4:00 p.m. Eastern Time, Monday
through Friday on each day that the New York Stock Exchange (the "Exchange") is
open. The Fund will effect purchases or redemptions of Fund shares at the next
NAV calculated after receipt of your order or request in proper form.

Foreign and domestic equity securities held by the Fund are valued using the
closing price or the last sale price on the exchange or in the principal
over-the-counter market where they are traded. If the last sale price is
unavailable, the last available quote or last bid price is normally used. 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. If market quotations are unavailable or if an event occurs
after the close of an exchange that is expected to materially affect the value
of a security held by the Fund, securities and other assets will be valued at
fair value as determined in good faith by the Adviser according to procedures
adopted by the Company's Board of Directors.

If the Fund holds foreign equity securities, the calculation of the Fund's NAV
will not occur at the same time as the determination of the value of the foreign
equity securities in the Fund's portfolio, since these securities are traded on
foreign exchanges. Additionally, if the foreign equity securities held by the
Fund trade on days when the Fund does not price its shares, the NAV of the
Fund's shares may change when shareholders will not be able to purchase or
redeem the Fund's shares.

PURCHASE OF MSD&T SHARES

Clients of Mercantile and its affiliated and correspondent banks (the "Banks")
may purchase MSD&T Shares through their qualified accounts with the Banks and
should contact the Banks directly for appropriate purchase instructions.

Orders for purchases of MSD&T Shares will be executed at the NAV per share next
determined after an order has been transmitted to and accepted by the
Distributor. MSD&T Shares are subject to such investment minimums and other
terms and conditions as may be imposed by the Banks from time to time. The Banks
may offer additional services to their customers. For further information as to
how to purchase MSD&T Shares of the Fund, you should contact the Company's
Distributor.

OTHER PURCHASE INFORMATION

25
<PAGE>

The Company reserves the right, in its sole discretion, to suspend the offering
of shares of its 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 MSD&T SHARES

You must place all redemption orders for MSD&T Shares through the Banks in
accordance with instructions or limitations pertaining to your account with the
Banks. Redemption orders for MSD&T Shares are effected at the NAV next
determined after the order is received by the Distributor. While no redemption
fee is imposed by the Fund, the Banks may charge your account for redemption
services. You should contact the Banks or the Distributor for further
information regarding redemption of MSD&T Shares, including the availability of
wire or telephone redemption privileges, or whether you may elect to participate
in a systematic withdrawal plan.

OTHER REDEMPTION INFORMATION

Redemption proceeds for shares of the Company recently purchased by check may
not be distributed until payment for the purchase has been collected, which may
take up to fifteen days from the purchase date. Shareholders can avoid this
delay by utilizing the wire purchase option.

Redemption proceeds will ordinarily be paid within seven business days after a
redemption request is received by the Transfer Agent in proper form.

The Company may suspend the right of redemption or postpone the date at times
when the Exchange or the bond market is closed or under any emergency
circumstances as determined by the SEC.

If the Board of Directors determines that it would be detrimental to the best
interests of the remaining shareholders of the Company to make payment wholly or
partly in cash, the Company may pay the redemption proceeds in whole or in part
by a distribution in-kind of readily marketable securities held by 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.

26
<PAGE>

SHAREHOLDER SERVICES

EXCHANGE PRIVILEGE. A shareholder who holds MSD&T Shares should consult the
Banks to determine the availability of and terms and conditions imposed on
exchanges with the other Funds of the Company.

TRANSFER OF REGISTRATION. The registration of the Fund may be transferred by
writing to The OFFIT 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.

DIVIDENDS AND DISTRIBUTIONS

The Fund declares dividends of substantially all of its net investment income
daily and pays dividends monthly. The Fund distributes, at least annually,
substantially all net capital gains, if any. The Fund will inform shareholders
of the amount and nature of all such income or gains.

Dividends are paid in the form of additional shares of the same class of the
Fund, unless you have 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 Transfer Agent and will become effective with respect to
dividends paid after its receipt. Dividends that are otherwise taxable are
taxable to you whether received in cash or in additional shares of the Fund. 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 each
class will differ.

Shares purchased will begin earning dividends on the business day on which
federal funds are available in payment for such shares. Shares redeemed will
earn dividends through the date of redemption. Net investment income of the Fund
for a Saturday, Sunday or a holiday will be declared as a dividend on the prior
business day. If you who redeem all or a portion of the Fund's shares prior to a
dividend payment date, you will receive all dividends declared but unpaid on
those shares at the time of their redemption.

TAXES

The Fund intends to qualify for taxation as a "regulated investment company"
("RIC") under Subchapter M of the Code. If the Fund qualifies as a RIC it 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 (i) at
least 90% of its net investment income for such taxable year, and (ii) at least
90% of the excess of its tax-exempt interest income net of certain deductions
allocable to such income.

The Fund will be treated as a separate entity for federal income tax purposes,
and thus the provisions of the Code, applicable to RICs generally will be
applied to the Fund separately,

27
<PAGE>

rather than to the Company as a whole. In addition, net capital gain, net
investment income and operating expenses will be determined separately for the
Fund.

Dividends, either in cash or reinvested in shares, paid by the Fund from net
investment income will be taxable to you 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 you, distributions of net capital gain
which are designated by the Fund as "capital gain dividends" are taxable to you
as long-term capital gain. You will be notified annually by the Company as to
the 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. You may also be subject to state and local taxes on
such exchanges and redemptions.

Depending on your residence for tax purposes, distributions from the Fund may
also be subject to state and local taxes or withholding taxes. You should
consult with your own tax adviser 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, if you are a resident of one 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 you. 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, if you are a resident of one of these states,
distributions 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 you 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

28
<PAGE>

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. The Fund may make such an election
in a taxable year in which it is qualified to make the election. 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 you will be entitled (subject to
certain limitations) to credit the amount included in your income against your
U.S. tax liabilities, if any, or to deduct such amount from your 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, you
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 you elect 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 your taxable
income from foreign sources (but not in excess of your entire taxable income)
bears to your entire taxable income. For this purpose, the Fund expects that the
capital gain they distribute to shareholders, will generally not be treated as
foreign source taxable income. If the Fund makes this election, you will be
treated as receiving foreign source income in an amount equal to the sum of your
proportionate share of foreign income taxes paid by the Fund and the portion of
dividends paid by the Fund representing income earned from foreign sources. This
limitation must be applied separately to certain categories of income and the
related foreign taxes.

Ordinary income dividends paid by 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. If
you are a non-resident, you are urged to consult your own tax adviser 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) you
fail to furnish the Fund with your correct taxpayer identification number, (ii)
the Internal Revenue Service ("IRS") notifies the Fund that you have 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, you fail to certify
that you are not subject to backup withholding or that you are an exempt
recipient (such as a corporation).

-----------------

29
<PAGE>

Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide. You
should consult your tax adviser concerning a prospective investment in the Fund
and you should review the more detailed discussion of federal income tax
consideration in the Statement of Additional Information.

DISTRIBUTION ARRANGEMENTS

Shares of the Fund are sold on a continuous basis by OFFIT Funds Distributor,
Inc.

MULTIPLE CLASS STRUCTURE. In addition to MSD&T Shares, the Fund also offers
Select Shares and Advisor Shares through a separate prospectus. Select Shares
may be purchased from and redeemed through the Distributor. Advisor Shares must
be purchased or redeemed through a Shareholder Servicing Agent, which is a
financial institution that has entered into an agreement with the Company to
provide various shareholder services to the beneficial owners of Advisor Shares.
For more information on Select Shares and Advisor Shares, contact the Company at
1-800-618-9510. The major distinction between the share classes is the service
or distribution fee related to each class. MSD&T Shares must be purchased and
redeemed through Mercantile and its affiliated and correspondent banks (the
"Banks"), which are financial institutions that have entered into an agreement
with the Company to provide various shareholder services to the beneficial
owners of MSD&T Shares. Since the fees associated with the service or
distribution plan are paid out of the Fund's assets on an on-going basis, over
time shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by NASD Regulation, Inc.

<TABLE>
<CAPTION>
FEE PLAN: APPLIES TO: PLAN PURPOSE: FEES:
- --------- ----------- ------------- -----
<S> <C> <C> <C>
Shareholder Servicing Plan MSD&T Shares The Plan is intended to Payments may not exceed
compensate the Banks for 0.25% of the Fund's
shareholder services aggregate average daily
provided to clients of the net assets attributable to
Banks who own MSD&T Shares MSD&T Shares. Holders of
of the Fund. the Fund's MSD&T Shares
bear this expense.
</TABLE>

30
<PAGE>

APPENDIX A

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 IBCA ("Fitch") that are applicable to
certain obligations in which the Fund may invest.

COMMERCIAL PAPER RATINGS

A S&P commercial paper rating is a current opinion of the creditworthiness
of an obligor with respect to financial obligations 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 on the obligation 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 in higher
rating categories. 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
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the 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 that such payments
will be made during such grace period. The "D" rating will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.

LOCAL CURRENCY AND FOREIGN CURRENCY RISKS

County risk considerations are a standard part of S&P's analysis for credit
ratings on any issuer or issue. Currency of repayment is a key factor in this
analysis. An obligor's capacity to

A-1
<PAGE>

repay foreign obligations may be lower than its capacity to repay obligations in
its local currency due to the sovereign government's own relatively lower
capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific issues.
Foreign currency issuers ratings are also distinguished from local currency
issuer ratings to identify those instances where sovereign risks make them
different for the same issuer.

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:

"Prime-1" - Issuers (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.

"Prime-2" - Issuers (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

"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.

A-2
<PAGE>

"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 to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.

"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.

"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.

Fitch short-term ratings apply to debt obligations that have time horizons
of less than 12 months for most obligations, or up to three years for U.S.
public finance securities. The following summarizes the rating categories used
by Fitch for short-term obligations:

"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.

"F2" - Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.

"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
default is a real possibility and 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 S&P for corporate and
municipal debt:

A-3
<PAGE>

"AAA" - An obligation rated "AAA" has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

Obligations rated "BB," "B," "CCC," "CC" and "C" are 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" - An obligation rated "BB" is less vulnerable to nonpayment 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" - An obligation rated "B" is more vulnerable to nonpayment 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" - An obligation rated "CCC" is currently vulnerable to nonpayment,
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
nonpayment.

"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. 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 that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

A-4
<PAGE>

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.

"c" - The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.

"p" - The letter `p' indicates that the rating is provisional. A
provisional ratings assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.

* - Continuance of the ratings is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.

"r" - The `r' highlights derivative, hybrid, and certain other obligations
that S&P believes may experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples of such obligations are
securities with principal or interest return indexed to equities, commodities,
or currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an `r' symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.

N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy. Debt obligations if issuers outside
the United States and its territories are rated on the same basis as domestic
corporate and municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.

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 risk appear somewhat larger than the "Aaa" securities.

A-5
<PAGE>

"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 operating 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: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.

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 to be 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 in periods of greater 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.

A-6
<PAGE>

"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 credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly 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 credit 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 credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.

"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity.

"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. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business

A-7
<PAGE>

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. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-1000% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.

Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.

To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "CCC" may be modified by the addition of a plus (+)
or minus (-) sign to denote relative standing within these major rating
categories.

`NR' indicates the Fitch does not rate the issuer or issue in questions.

`Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.

RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for a potential downgrade, or "Evolving," if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.

A-8
<PAGE>

MUNICIPAL NOTE RATINGS

A S&P rating reflects the liquidity factors and market access risks unique
to notes due in three years or less. The following summarizes the ratings used
by S&P for municipal notes:

"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.

"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.

"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.

Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:

"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
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. Margins of
protection that are 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. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.

"SG" - This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.

Fitch and D&P use the short-term ratings described under Commercial Paper
Ratings for municipal notes.

A-9
<PAGE>

APPENDIX B

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"). The description of the Fund indicates which, if any, of these
types of transactions may be used by the Fund. The Fund may be unable or limited
in its ability to engage in Hedging and Derivatives by certain factors,
including current economic conditions.

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 Securities and Exchange Commission (the
"SEC"), the CFTC, the Code or its investment objectives and policies, a Fund may
utilize, without limitation, Hedging and Derivatives. See "Additional
Information Concerning Dividends, Distributions and 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."

B-1
<PAGE>

security, financial futures contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.

OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

The 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.

B-2
<PAGE>

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 the Fund 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 the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Thus, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be met.
The 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 SEC, OTC options
purchased by the 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 the 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, the 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 the 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 the 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.

The 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, the Fund may purchase and sell
put options on securities (whether or not it holds the securities in its
portfolio) and on

B-3
<PAGE>

securities indices, currencies and futures contracts. In selling put options,
the 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, the Fund may trade financial
futures contracts or purchase or sell put and call options on those contracts as
a hedge against anticipated interest rate, currency or market changes, for
duration management and for permissible non-hedging purposes. Futures contracts
are generally bought and sold on the commodities exchanges on which they are
listed with payment of initial and variation margin as described below. The sale
of a futures contract creates a firm obligation by the 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.

The 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 the 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 the Fund. If the 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.

The Fund will not 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."

B-4
<PAGE>

OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES

If and to the extent authorized to do so, the Fund may purchase and sell
call and put options on securities indices and other financial indices. In so
doing, the Fund can achieve many of the same objectives it would achieve through
the sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

CURRENCY TRANSACTIONS

If and to the extent authorized to do so, the 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." The Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.

Except as provided in this Prospectus, the 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 the 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. The Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or

B-5
<PAGE>

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.

The 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, the Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the 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 the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.

Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If the 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, the 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 the 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

The Fund may be authorized to enter into interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. The 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 the Fund anticipates purchasing
at a later date. The 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

B-6
<PAGE>

instruments providing the income the Fund may be obligated to pay. Interest rate
swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). A currency swap is an agreement to exchange cash flows on a notional
amount based on changes in the values of the reference indices. An index swap is
an agreement to exchange cash flows on a national principal amount based on
changes in the values of the reference index. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate. The purchase of an interest rate floor entitles the purchaser to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor to the extent that a specified index falls below
a predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling the floor to the extent that a specific index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return with a predetermined range of interest
rates or values.

Provided the contract so permits, the 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 Investment Company
Act of 1940, as amended and, thus, will not be treated as being subject to the
Fund's borrowing restrictions. The 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, the 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 the 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 the
Fund

B-7
<PAGE>

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 the 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, the 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. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.

RISK FACTORS

Hedging and Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of the Hedging and Derivatives could result in losses greater than
if they had not been used. Use of put and call options could result in losses to
the 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 the 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 the
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,
the Fund might not be able to close out a transaction without incurring
substantial losses. Although the 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 the 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 the

B-8
<PAGE>

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 the 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 the 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 the
Fund's net asset value, and possibly income, and the losses can be greater than
if Hedging and Derivatives had not been used.

RISKS OF HEDGING AND DERIVATIVES OUTSIDE THE UNITED STATES

When conducted outside the United States, Hedging and Derivatives may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and will be subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of positions taken as part of
non-U.S. Hedging and Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors; (2) lesser availability
of data on which to make trading decisions than in the United States; (3) delays
in the 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
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered,

B-9
<PAGE>

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 the
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 the 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 the
Fund will require the Fund to segregate liquid assets equal to the exercise
price. Except when the 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 the Fund's obligations or to segregate
liquid assets equal to the amount of the Fund's obligations.

OTC options entered into by the 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 the Fund will
not be required to do so. As a result, when the 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 the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.

In the case of a futures contract or an option on a futures contract, the
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. The 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 the 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. The 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. The 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

B-10
<PAGE>

of segregating assets if it holds a futures contracts or forward contract, the
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-11
<PAGE>

THE OFFIT INVESTMENT FUND, INC.

<TABLE>
- -------------------------------------------------------------------------------------------------
<S> <C>
OFFICERS AND DIRECTORS INVESTMENT ADVISER
Dr. Wallace Mathai-Davis OFFITBANK
CHAIRMAN OF THE BOARD, PRESIDENT AND 520 Madison Avenue
DIRECTOR New York, NY 10022-4213

Edward J. Landau DISTRIBUTOR
DIRECTOR OFFIT Funds Distributor, Inc.
3200 Horizon Drive
The Very Reverend James Parks Morton King of Prussia, PA 19406
DIRECTOR
SHAREHOLDER SERVICING AGENT
Stephen M. Peck Mercantile Safe Deposit and Trust Company
DIRECTOR SunLife Building
20 S. Charles Street, 5th Floor
Vincent M. Rella Baltimore, MD 21201
TREASURER
CUSTODIAN
Stephen Brent Wells The Bank of New York
SECRETARY 48 Wall Street
New York, NY 10286
Michael Kagan
ASSISTANT TREASURER LEGAL COUNSEL
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022

ADMINISTRATOR; TRANSFER AND DIVIDEND
DISBURSING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809

INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
</TABLE>

<PAGE>

FOR MORE INFORMATION

FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:

ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal years or half
years and, on an annual basis, a statement from portfolio management and the
auditor's report.

STATEMENT OF ADDITIONAL INFORMATION (SAI): Contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.

Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:

MSD&T SHARES OF THE OFFIT HIGH YIELD FUND
P.O. BOX 8701
WILMINGTON, DELAWARE 19899
1-800-618-9510

Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C., 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at HTTP://WWW.SEC.GOV.

- --------------------------------------------------------------------------------
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:

1-800-618-9510
MONDAY THROUGH FRIDAY
8:30 A.M. TO 5:00 P.M. (EST)
- --------------------------------------------------------------------------------

The Company's Investment Company Act File number is 811-08036.
<PAGE><PAGE>
-------------------------------------------
OFFIT High Yield Fund
OFFIT Emerging Markets Bond Fund
OFFIT Latin America Equity Fund
OFFIT Total Return Fund
OFFIT U.S. Government Securities Fund
OFFIT Mortgage Securities Fund
OFFIT California Municipal Fund
OFFIT New York Municipal Fund
OFFIT National Municipal Fund
---------------------------

PROSPECTUS

APRIL 30, 2000

THE
OFFIT
INVESTMENT FUND, INC.

<PAGE>
PROSPECTUS
THE
OFFIT
INVESTMENT FUND, INC.
- ------------------------------------------------
INVESTMENT PORTFOLIOS:
OFFIT
HIGH YIELD FUND

OFFIT
EMERGING MARKETS BOND FUND

OFFIT
LATIN AMERICA EQUITY FUND

OFFIT
TOTAL RETURN FUND

OFFIT
U.S. GOVERNMENT SECURITIES FUND
OFFIT
MORTGAGE SECURITIES FUND
OFFIT
CALIFORNIA MUNICIPAL FUND
OFFIT
NEW YORK MUNICIPAL FUND
OFFIT
NATIONAL MUNICIPAL FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

The OFFIT Investment Fund, Inc. (the "Company") is an open-end, management
investment company offering nine separate, no-load, non-diversified investment
portfolios which each have a different investment objective. Each investment
portfolio ("Fund") of the Company offers two classes of shares, Select Shares
and Advisor Shares. The High Yield Fund also offers MSD&T Shares through a
separate prospectus. MSD&T Shares are offered through Mercantile -- Safe Deposit
and Trust Company and its affiliated and correspondent banks. For more
information on MSD&T Shares, contact the Company at 1-800-618-9510. The
investment objective of each Fund is as follows:

The OFFIT HIGH YIELD FUND'S primary investment objective is high current
income. Capital appreciation is a secondary objective.

The OFFIT EMERGING MARKETS BOND FUND'S (formerly, "The OFFIT EMERGING
MARKETS FUND") investment objective is to provide investors with a competitive
total return by focusing on current yield and opportunities for capital
appreciation.

The OFFIT LATIN AMERICA EQUITY FUND'S primary investment objective is
capital appreciation. Current income is a secondary objective.

The OFFIT TOTAL RETURN FUND'S investment objective is to maximize total
return from a combination of capital appreciation and current income.

The OFFIT U.S. GOVERNMENT SECURITIES FUND'S investment objective is to seek
current income.

The OFFIT MORTGAGE SECURITIES FUND'S investment objective is to maximize
total return from a combination of investment income and capital appreciation.

The OFFIT CALIFORNIA MUNICIPAL FUND'S investment objective is to maximize
total after-tax return for California residents, consistent with a prudent level
of credit risk.

The OFFIT NEW YORK MUNICIPAL FUND'S investment objective is to maximize
total after-tax return for New York residents, consistent with a prudent level
of credit risk.

The OFFIT NATIONAL MUNICIPAL FUND'S investment objective is to maximize
total after-tax return, consistent with a prudent level of credit risk.

Select Shares may be purchased from and redeemed through the Company's
distributor, OFFIT Funds Distributor, Inc. (the "Distributor"). Advisor Shares
must be purchased or redeemed through a Shareholder Servicing Agent, which is a
financial institution that has entered into an agreement with the Company to
provide various shareholder services to the beneficial owners of Advisor Shares.
Select Shares and Advisor Shares of each Fund may be exchanged for shares of the
same share class of any other Fund.

CERTAIN FUNDS MAY INVEST IN HIGH YIELD, HIGH RISK DEBT SECURITIES WHICH ARE
CONSIDERED SPECULATIVE AND SUBJECT TO CERTAIN RISKS. SEE "RISKS OF INVESTING IN
THE FUNDS." There can be no assurance that a Fund's investment objectives will
be achieved.

<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
------------------------------------------------------------
<S> <C>
A FUND-BY-FUND LOOK AT GOALS, FUND DESCRIPTION
STRATEGIES, RISKS, EXPENSES AND OFFIT High Yield Fund .................................. 3
FINANCIAL HISTORY. OFFIT Emerging Markets Bond Fund ....................... 9
OFFIT Latin America Equity Fund ........................ 15
OFFIT Total Return Fund ................................ 22
OFFIT U.S. Government Securities Fund .................. 26
OFFIT Mortgage Securities Fund ......................... 32
OFFIT California Municipal Fund ........................ 40
OFFIT New York Municipal Fund .......................... 45
OFFIT National Municipal Fund .......................... 49
Risks of Investing in the Funds ........................ 57

DETAILS ON THE MANAGEMENT MANAGEMENT OF THE FUNDS
AND OPERATIONS OF THE FUNDS. Investment Adviser ..................................... 69
Service Provider Chart ................................. 70

POLICIES AND INSTRUCTIONS FOR SHAREHOLDER INFORMATION
OPENING, MAINTAINING AND Pricing of Fund Shares ................................. 71
CLOSING AN ACCOUNT IN ANY OF Purchase of Fund Shares ................................ 71
THE FUNDS. Redemption of Fund Shares .............................. 73
Shareholder Services ................................... 74
Dividends and Distributions ............................ 75
Taxes .................................................. 75

DETAILS ON DISTRIBUTION AND DISTRIBUTION ARRANGEMENTS
OTHER SHAREHOLDER SERVICE PLANS. Multiple Class Structure .............................. 79
Rule 12b-1 Distribution Fees ........................... 79
Shareholder Servicing Fees ............................. 79

Appendix A: Ratings ................................... A-1
Appendix B: Hedging and Derivatives ................... B-1

FOR MORE INFORMATION ....................... see back cover
</TABLE>

2
- ---------------------------

<PAGE>

OFFIT HIGH YIELD FUND

INVESTMENT OBJECTIVES

The Fund's primary investment objective is high current income. Capital
appreciation is a secondary objective.

PRINCIPAL INVESTMENT STRATEGIES

The Fund invests at least 65% of its total assets in U.S. corporate fixed
income securities that are rated below investment grade (i.e. high yield/high
risk debt securities), offering potential returns that are sufficiently high to
justify the greater investment risks. Securities offering the high yield that
the Fund seeks are generally found in mature cyclical or depressed industries
and highly leveraged companies. The Fund also invests in senior securities and
securities with an operating history of more than one year (though the Fund may
invest in the securities of issuers with a shorter operating history). The Fund
may invest in debt securities of any maturity and the interest rates on such
securities may be fixed or floating.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - All or a substantial portion of the securities purchased by the Fund are
lower rated or unrated debt securities (i.e., high yield, high risk debt
securities). High yield, high risk debt securities have a higher risk of
default in the payment of interest and principal than higher rated securities
and are subject to significant changes in price. Investment by the Fund in
such securities involves a high degree of credit risk and such securities are
regarded as speculative by the major rating agencies.

- - The Fund is a "non-diversified" mutual fund. This permits the Fund to invest
most of its assets in securities issued by a small number of companies. This
makes the Fund more susceptible to the risks associated with these particular
companies, or to a single economic, political or regulatory occurrence.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

3
----------------------
<PAGE>

PRIOR PERFORMANCE

ANNUAL TOTAL RETURNS

The bar chart below shows the annual total returns for Select Shares of the
Fund for the last five calendar years. The bar chart provides some indication of
the risks of investing in the Fund by showing changes in the Fund's performance
from year to year. Past performance is not necessarily an indicator of how the
Fund will perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (March 2, 1994), the highest calendar quarter total return
for Select Shares of the Fund was 5.46% (quarter ended June 30, 1995) and the
lowest calendar quarter total return was (3.45%) (quarter ended September 30,
1998).

AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON

The table below shows how the Fund's average annual total returns for the
past one and five calendar years and since inception, with respect to Select
Shares, compare with the Merrill Lynch All High Yield Bond Index (the "ML High
Yield Index") for the same periods. As of the date of this prospectus, there
were no Advisor Shares outstanding. The table, like the bar chart, provides some
indication of the risks of investing in the Fund by showing how the Fund's
average annual total returns for one and five years and since inception compare
with those of a broad measure of market performance. Past performance is not
necessarily an indicator of how the Fund will perform in the future.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION
-------- -------- ---------------
<S> <C> <C> <C>
Select Shares*.............................................. 1.10% 9.41% 7.95%
ML High Yield Index......................................... 1.57% 9.61% 7.81%
</TABLE>

- --------------
* Commenced operations on March 2, 1994.

4
- ---------------------------
<PAGE>
FEES AND EXPENSES OF THE FUND

- --------------

(1) The Company's Shareholder Servicing Plan permits the Fund to pay fees to
Shareholder Servicing Agents at an annual rate of up to 0.25% of the average
daily net asset value of Advisor Shares of the Fund for which such
Shareholder Servicing Agents provide services for the benefit of customers.
Shareholder Servicing fees are included in the Fund's "Other expenses."

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(4) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other
charges for Select and Advisor Shares.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Shares............................................... $ 92 $287 $498 $1,108
Advisor Shares.............................................. $143 $443 $766 $1,680
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

5
----------------------

<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
Fund's financial performance for the periods presented. This information
reflects financial results for a single Select Share of the Fund. The total
returns in the table represent the rate that a shareholder would have earned (or
lost) on an investment in Select Shares of the Fund (assuming reinvestment of
all dividends and distributions). The information for the year ended December
31, 1999 has been audited by PricewaterhouseCoopers LLP, whose unqualified
report, along with the Fund's financial statements, is included in the Company's
Annual Report dated December 31, 1999, which is available without charge upon
request. The financial statements for the Fund for the periods prior to December
31, 1999 were audited by PricewaterhouseCoopers LLP, whose report expressed an
unqualified opinion on those statements.

SELECT SHARES
---------------------------------------------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $ 9.91 $ 10.34 $ 10.15 $ 9.92 $ 9.25
---------- ---------- ---------- -------- --------
Net investment income............. 0.90 0.88 0.87 0.89 0.90
Net realized and unrealized gain
(loss)........................... (0.79) (0.43) 0.31 0.29 0.67
---------- ---------- ---------- -------- --------
Total income from investment
operations..................... 0.11 0.45 1.18 1.18 1.57
---------- ---------- ---------- -------- --------
LESS DIVIDENDS AND DISTRIBUTION
FROM:
Net investment income............. (0.90) (0.88) (0.87) (0.89) (0.89)
Excess of net investment income... (0.01) -- -- -- --
Net realized gains................ -- -- (0.12) (0.06) (0.01)
---------- ---------- ---------- -------- --------
Total dividends and
distributions.................. (0.91) (0.88) (0.99) (0.95) (0.90)
---------- ---------- ---------- -------- --------
Net change in net asset value
per share...................... (0.80) (0.43) 0.19 0.23 0.67
---------- ---------- ---------- -------- --------
NET ASSET VALUE, END OF PERIOD...... $ 9.11 $ 9.91 $ 10.34 $ 10.15 $ 9.92
========== ========== ========== ======== ========
TOTAL RETURN(a)..................... 1.10% 4.49% 12.09% 12.46% 17.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)......................... $1,454,507 $1,739,622 $1,346,553 $851,720 $479,090
Ratios to average net assets:
Expenses........................ 0.82% 0.84%** 0.87%** 0.98%** 1.05%**
Net investment income........... 8.91% 8.67% 8.46% 8.86% 9.38%
PORTFOLIO TURNOVER RATE............. 42% 36% 47% 41% 34%

<CAPTION>
ADVISOR SHARES(d)
--------------------------------------
FOR THE FOR THE
PERIOD PERIOD*
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $ 10.34 $ 10.37
------- -------
Net investment income............. 0.60 0.32
Net realized and unrealized gain
(loss)........................... (0.43) 0.09
------- -------
Total income from investment
operations..................... 0.17 0.41
------- -------
LESS DIVIDENDS AND DISTRIBUTION
FROM:
Net investment income............. (0.60) (0.32)
Excess of net investment income... -- --
Net realized gains................ -- (0.12)
------- -------
Total dividends and
distributions.................. (0.60) (0.44)
------- -------
Net change in net asset value
per share...................... (0.43) (0.03)
------- -------
NET ASSET VALUE, END OF PERIOD...... $ 9.91 $ 10.34
======= =======
TOTAL RETURN(a)..................... 0.67%(b) 3.93%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)......................... $ 7 $ 15
Ratios to average net assets:
Expenses........................ 0.93%(c)** 1.03%(c)**
Net investment income........... 9.54%(c) 7.87%(c)
PORTFOLIO TURNOVER RATE............. 36% 47%
</TABLE>

- --------------------
* Sales of Advisor Shares began on August 14, 1997.

** During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) Not annualized.

(d) As of December 31, 1999, and for substantially all of the year then ended,
there were no Advisor Shares outstanding.

6
- ---------------------------

<PAGE>
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

The Fund's primary investment objective is high current income. 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 "seasoned" senior securities (as
defined below) and offer sufficiently high potential yields to justify the
greater investment risk or 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. 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 Fund seeks are generally found in mature cyclical or
depressed industries and highly leveraged companies. The Adviser attempts to
identify securities which have underlying fundamentals that are improving or are
sufficiently strong to sustain the issuer.

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 Fund,
the Adviser considers the following factors, among others: (i) the current
yield, the yield to maturity where appropriate, and the price of the security
relative to other securities of comparable quality and maturity; (ii) the
balance sheet and capital structure of the issuer; (iii) the market price of the
security relative to its face value; (iv) the rating, or absence of a rating, by
Standard & Poor's Ratings Group ("S&P"), Moody's Investors Services, Inc.
("Moody's") or Duff & Phelps Credit Rating Co. ("D&P"); (v) the variety of
issuers and industries represented in the Fund's portfolio; and (vi) management
of the issuer. Industry trends and fundamental developments that may affect an
issuer are also analyzed, including factors such as liquidity, profitability and
asset quality. The Adviser is free to invest in high yield, high risk debt
securities of any maturity and duration and the interest rates on such
securities may be fixed or floating.

The Fund invests primarily in "seasoned" senior securities. The Fund defines
a "seasoned" security as any security whose issuer or predecessors have been
operating in their current form generally for more than one year, though the
Fund may invest in securities of issuers having less than one year of operation.
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 Fund retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with the Fund's investment
objective, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund may temporarily hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most 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 may
temporarily 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. The Adviser's choice to employ a temporary
defensive investment strategy may prevent the Fund from achieving its investment
objective.

7
----------------------
<PAGE>
ADDITIONAL STRATEGIES

Although the 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 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 Fund's ability to
achieve its investment objectives. Dividends on shares attributable to interest
on municipal securities held by the 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.

8
- ---------------------------

<PAGE>

OFFIT EMERGING MARKETS BOND FUND

INVESTMENT OBJECTIVE

The Fund's investment objective is to provide investors with a competitive
total return by focusing on current yield and opportunities for capital
appreciation.

PRINCIPAL INVESTMENT STRATEGIES

The Fund invests primarily in corporate and sovereign debt securities of
emerging market countries. Under normal circumstances, the Fund will invest at
least 80% of its total assets in debt instruments denominated in any currency,
including U.S. dollars, but may invest up to 20% of its total assets in equity
securities. An emerging market country is a country that is considered to be an
emerging or developing country by the World Bank or the International Finance
Corporation, or is determined by the Adviser to have per capita gross domestic
product below $7,500 (in 1994 dollars). The Fund attempts to benefit from
investment opportunities deriving from long-term improvement in economic and
political conditions, and other positive developments and trends in emerging
markets countries. In addition, the Fund may invest in Brady Bonds, zero coupon
securities, pay-in-kind bonds and discount obligations. The Fund may invest in
debt securities of any maturity and the interest rates on such securities may be
fixed or floating.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - There is no limit on the amount of the Fund's total assets that may be
invested in non-U.S. dollar-denominated securities. International investing
is subject to special risks, including, but not limited to, currency exchange
rate volatility, political, social or economic instability, and differences
in taxation, auditing and other financial practices. These types of risks may
lead to greater losses in emerging markets.

- - Although the Fund will generally be invested in the issues of at least three
different countries, it may invest up to 25% of its total assets in the debt
obligations of any one country. Concentration in any one country intensifies
the international investing risks related to such country.

- - All or a substantial portion of the securities purchased by the Fund may be
lower rated or unrated debt securities (i.e., high yield, high risk debt
securities). High yield, high risk debt securities have a higher risk of
default in the payment of interest and principal and are subject to
significant changes in price. Investment by the Fund in such securities
involves a high degree of credit risk and such securities are regarded as
speculative by the major rating agencies.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund is a "non-diversified" mutual fund. This permits the Fund to invest
most of its assets in securities issued by a small number of companies. This
makes the Fund more susceptible to the risks associated with these particular
companies, or to a single economic, political or regulatory occurrence.

- - Since the Fund attempts to benefit from investment opportunities derived from
long-term improvement in economic and political conditions, and other
positive trends and developments in emerging market countries, it is intended
for long-term investors. You should consider your ability to buy and hold
this Fund for the long-term.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

9
----------------------
<PAGE>
PRIOR PERFORMANCE

ANNUAL TOTAL RETURNS

The bar chart below shows the annual total returns for Select Shares of the
Fund for the last five calendar years. The bar chart provides some indication of
the risks of investing in the Fund by showing changes in the Fund's performance
from year to year. Past performance is not necessarily an indicator of how the
Fund will perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (March 8, 1994), the highest calendar quarter total return
for Select Shares of the Fund was 17.07% (quarter ended December 31, 1998) and
the lowest calendar quarter total return was (25.92%) (quarter ended
September 30, 1998).

AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON

The table below shows how the Fund's average annual total returns for the
past one and five calendar years and since inception, with respect to Select
Shares, compare with the Lipper Analytical Emerging Market Debt Fund Objective
(the "Lipper Emerging Market Index") for the same periods. As of the date of
this prospectus, there were no Advisor Shares outstanding. The table, like the
bar chart, provides some indication of the risks of investing in the Fund by
showing how the Fund's average annual total returns for one and five years and
since inception compare with those of a broad measure of market performance.
Past performance is not necessarily an indicator of how the Fund will perform in
the future.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION
-------- -------- ---------------
<S> <C> <C> <C>
Select Shares*.............................................. 27.81% 14.23% 11.30%
Lipper Emerging Market Index................................ 24.40% 12.99% 8.75%
</TABLE>

- --------------
* Commenced operations on March 8, 1994.

10
- ---------------------------
<PAGE>

FEES AND EXPENSES OF THE FUND

- --------------
(1) The Company's Shareholder Servicing Plan permits the Fund to pay fees to
Shareholder Servicing Agents at an annual rate of up to 0.25% of the average
daily net asset value of Advisor Shares of the Fund for which such
Shareholder Servicing Agents provide services for the benefit of customers.
Shareholder Servicing fees are included in the Fund's "Other expenses."

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(4) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other
charges for Select and Advisor Shares.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Shares............................................... $112 $350 $606 $1,340
Advisor Shares.............................................. $163 $505 $871 $1,900
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

11
----------------------

<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
Fund's financial performance for the periods presented. This information
reflects financial results for a single Select Share of the Fund. The total
returns in the table represent the rate that a shareholder would have earned (or
lost) on an investment in Select Shares of the Fund (assuming reinvestment of
all dividends and distributions). The information for the year ended
December 31, 1999 has been audited by PricewaterhouseCoopers LLP, whose
unqualified report, along with the Fund's financial statements, is included in
the Company's Annual Report dated December 31, 1999, which is available without
charge upon request. The financial statements for the Fund for years prior to
December 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report
expressed an unqualified opinion on those statements.

Advisor Shares of the Fund had not commenced investment operations as of
December 31, 1999, therefore no financial highlights information is available
for such shares.

<TABLE>
<CAPTION>
SELECT SHARES(b)
-----------------------------------------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 8.20 $ 10.46 $ 11.03 $ 9.91 $ 8.84
-------- -------- -------- -------- -------
Net investment income........................... 1.06 0.99 1.15 1.00 0.90
Net realized and unrealized gain (loss)......... 1.09 (2.23) -- 1.55 1.07
-------- -------- -------- -------- -------
Total income (loss) from investment
operations................................... 2.15 (1.24) 1.15 2.55 1.97
-------- -------- -------- -------- -------
LESS DIVIDENDS AND DISTRIBUTION FROM:
Net investment income........................... (1.02) (0.97) (1.15) (1.00) (0.60)
Excess of net investment income................. -- -- (0.04) -- --
Net realized gains.............................. -- -- (0.53) (0.43) --
Excess of realized gains........................ -- (0.03) -- -- --
Return of capital............................... (0.02) (0.02) -- -- (0.30)
-------- -------- -------- -------- -------
Total dividends and distributions............. (1.04) (1.02) (1.72) (1.43) (0.90)
-------- -------- -------- -------- -------
Net change in net asset value per share....... 1.11 (2.26) (0.57) 1.12 1.07
-------- -------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD.................... $ 9.31 $ 8.20 $ 10.46 $ 11.03 $ 9.91
======== ======== ======== ======== =======
TOTAL RETURN(A)................................... 27.81% (11.92%) 10.67% 26.56% 23.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in thousands)...... $173,724 $148,908 $210,777 $116,144 $49,250
Ratios to average net assets:
Expenses*..................................... 1.08% 1.10% 1.29% 1.16% 1.50%
Net investment income......................... 12.27% 10.53% 9.49% 9.62% 9.97%
PORTFOLIO TURNOVER RATE........................... 74% 77% 179% 136% 60%
</TABLE>

- --------------------
* During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) As of December 31, 1999, there were no Advisor Shares outstanding.

12
- ---------------------------

<PAGE>
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

The investment objective of the Fund is to provide a competitive total
investment return by focusing on current yield and opportunities for capital
appreciation. The Fund seeks to achieve its objective by investing primarily in
corporate and sovereign debt instruments of emerging market countries. Under
normal circumstances, the Fund will invest at least 80% of its total assets in
debt instruments. As used in this Prospectus, an "emerging market country" is
any country that is considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (the "World Bank") or the
International Finance Corporation, or is determined by the Adviser to have per
capita gross domestic product below $7,500 (in 1994 dollars). Under normal
circumstances, the Fund will be invested in at least three different countries.
Subject to the restriction that the Fund will not invest 25% or more of its
total assets in obligations issued by any one country, its agencies,
instrumentalities or political subdivisions, there is no limit on the amount the
Fund may invest in issuers located in any one country, or in securities
denominated in the currency of any one country, in order to take advantage of
what the Adviser believes to be favorable yields, currency exchange conditions
or total investment return potential. The Fund's investments may be denominated
in any currency, including U.S. dollars.

The Fund seeks to achieve a competitive U.S. dollar total investment return
while reducing volatility. The Fund attempts to benefit from investment
opportunities deriving from long-term improving economic and political
conditions, and other positive trends and developments in emerging market
countries. Accordingly, the Fund is intended for long-term investors and should
not be considered as a vehicle for trading purposes. The continuation of a
long-term international trend encouraging greater market orientation and
economic growth may result in local or international political, economic or
financial developments that could benefit the capital markets in emerging market
countries.

An "emerging market country" debt instrument or equity security, as used in
this Prospectus, means an instrument or security (i) of an issuer organized or
with more than 50% of its business activities in such emerging market country,
(ii) denominated in such country's currency or with a primary trading market in
such emerging market country, (iii) of a company which derives at least 50% of
its gross revenues from goods produced, sales made, services performed or
investments in such emerging market country, or (iv) issued or guaranteed by the
government of such emerging market country, its agencies, political subdivisions
or instrumentalities, or the central bank of such country. Determinations as to
eligibility will be made by the Adviser based on publicly available information
and inquiries made to companies. See "Risks of Investing in the Funds --
Securities of Non-U.S. Issuers" and "Risks of Investing in the Funds -- High
Yield, High Risk Debt Securities."

Through credit analysis, the Adviser seeks to protect principal and to
minimize market and individual credit risk, as well as to identify opportunities
for capital appreciation. In selecting particular debt instruments for the Fund,
the Adviser intends to consider factors such as liquidity, price volatility, tax
implications, interest rate sensitivity, foreign currency exchange risks,
counterparty risks and technical market considerations. The Adviser is free to
invest in debt instruments of any maturity and duration and interest rates on
such securities may be fixed or floating. Debt instruments in which the Fund may
invest will not be required to meet a minimum rating standard and a substantial
amount of such instruments are expected to be non-investment grade securities
(i.e., rated BB or lower by S&P or D&P, or Ba or lower by Moody's, or if
unrated, of comparable quality as determined by the Adviser). See Appendix A to
this Prospectus for a description of ratings of S&P, Moody's and D&P.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of interest and principal, than higher rated securities. Some of such
investments may be non-performing securities or securities in default when
purchased. See "Risks of Investing in the Funds -- High Yield, High Risk Debt
Securities."

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. Brady Bonds may be collateralized or uncollateralized
and are issued in various currencies (primarily the U.S. dollar) and are
actively traded in the over-the-counter secondary market.

13
----------------------
<PAGE>

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 equal to at least one year's rolling interest payments based on
the applicable interest rate at that time and then adjusted at regular intervals
thereafter.

The Fund may invest in zero coupon securities and debt securities acquired
at a discount. A substantial portion of the Fund's sovereign debt securities may
be acquired at a discount. 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 may also purchase pay-in-kind bonds. Pay-in-kind bonds pay
all or a portion of their interest in the form of debt or equity securities. The
Fund may receive payments from pay-in-kind bonds in the form of both debt and
equity securities provided that such equity securities do not cause the Fund to
exceed its respective investment limitation in equity securities. Zero coupon
securities and pay-in-kind bonds may be issued by a wide variety of corporate
and governmental issuers.

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 may temporarily hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its 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 may
temporarily 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. The Adviser's choice to employ a temporary
defensive investment strategy may prevent the Fund from achieving its investment
objective.

ADDITIONAL STRATEGIES

The Fund may invest up to 20% of its total assets in common stocks,
preferred stocks, detachable warrants and other equity securities that may or
may not be listed or traded on a recognized securities exchange. The Fund
intends that such investments in equity securities often will be related to the
Fund's investments in debt instruments, such as those equity securities received
upon the exercise of convertible debt instruments or attached warrants, or those
equity securities acquired pursuant to investment opportunities derived from the
Fund's activities in emerging market debt markets. The equity securities
purchased by the Fund may include American Depository Receipts, European
Depository Receipts and interests in investment companies.

14
- ---------------------------

<PAGE>

OFFIT LATIN AMERICA EQUITY FUND

INVESTMENT OBJECTIVES

The Fund's primary investment objective is capital appreciation. Current
income is a secondary objective.

PRINCIPAL INVESTMENT STRATEGIES

The Fund invests, under normal circumstances, at least 80% of its total
assets in equity securities (including depository receipts and depository
shares) of Latin American issuers (as defined in this Prospectus). The Fund
employs a "top down" equity strategy pursuant to which it analyzes broad
economic trends and selects investments that it believes will benefit from those
trends. Stock selection is designed to identify companies in high growth
industries that are attractively valued based on their future earnings
potential.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - The Fund is not limited with respect to the proportion of its total assets
that may be invested in the securities of issuers located in any one Latin
American country. Concentration in any one country intensifies the
international investing risks related to such country.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund is a "non-diversified" mutual fund. This permits the Fund to invest
most of its assets in securities issued by a small number of companies. This
makes the Fund more susceptible to the risks associated with these particular
companies, or to a single economic, political or regulatory occurrence.

- - Since the Fund attempts to benefit from investment opportunities resulting
from long-term improvement in economic and political conditions, and other
positive trends and developments in Latin American countries, it is intended
for long-term investors. You should consider your ability to buy and hold
this Fund for the long-term.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

15
----------------------
<PAGE>
PRIOR PERFORMANCE

ANNUAL TOTAL RETURNS

The bar chart below shows the annual total returns for Select Shares of the
Fund for the last three calendar years. The bar chart provides some indication
of the risks of investing in the Fund by showing changes in the Fund's
performance from year to year. Past performance is not necessarily an indicator
of how the Fund will perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (February 13, 1996), the highest calendar quarter total
return for Select Shares of the Fund was 43.77% (quarter ended December 31,
1999) and the lowest calendar quarter total return was (36.11%) (quarter ended
September 30, 1998).

AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON

The table below shows how the Fund's average annual total returns for the
past calendar year and since inception compare with the ING Barings Emerging
Markets -- Latin America Equity Index (the "Barings Index") for the same
periods. As of the date of this prospectus, there were no Advisor Shares
outstanding. The table, like the bar chart, provides some indication of the
risks of investing in the Fund by showing how the Fund's average annual total
returns for one year and since inception compare with that of a broad measure of
market performance. Past performance is not necessarily an indicator of how the
Fund will perform in the future.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
-------- ---------------
<S> <C> <C>
Select Shares*.............................................. 52.76% 5.67%
Barings Index............................................... 54.60% 7.86%
</TABLE>

- --------------
* Commenced operations on February 13, 1996.

16
- ---------------------------
<PAGE>
FEES AND EXPENSES OF THE FUND

- --------------

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(4) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other
charges for Select and Advisor Shares.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Shares............................................... $178 $551 $ 949 $2,062
Advisor Shares.............................................. $228 $703 $1,205 $2,585
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

17
----------------------

<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
Fund's financial performance for the periods presented. This information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). The information for the year ended December 31, 1999 has been
audited by PricewaterhouseCoopers LLP, whose unqualified report, along with the
Fund's financial statements, is included in the Company's Annual Report dated
December 31, 1999, which is available without charge upon request. The financial
statements for the Fund for years prior to December 31, 1999 were audited by
PricewaterhouseCoopers LLP, whose report expressed an unqualified opinion on
those statements.

<TABLE>
<CAPTION>
SELECT SHARES(d)
------------------------------------------------------------- ADVISOR
FOR THE SHARES
PERIOD FROM -------------
FEBRUARY 13, FOR THE
FOR THE YEAR FOR THE YEAR FOR THE YEAR 1996* PERIOD**
ENDED ENDED ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD............ $ 7.34 $ 14.13 $ 11.66 $ 10.00(e) $ 15.11
------- ------- ------- ------- -------
Net investment income (loss).................. 0.09 0.27 0.09 0.20 (0.21)
Net realized and unrealized gain (loss)....... 3.78 (6.82) 2.74 2.11 (0.50)
------- ------- ------- ------- -------
Total income (loss) from investment
operations................................. 3.87 (6.55) 2.83 2.31 (0.71)
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTION FROM:
Net investment income (loss).................. (0.09) (0.23) (0.09) (0.20) (0.01)
Excess of net investment income............... (0.04) -- (0.02) -- --
Net realized gains............................ -- (0.01) (0.25) (0.45) (0.25)
------- ------- ------- ------- -------
Total dividends and distributions........... (0.13) (0.24) (0.36) (0.65) (0.26)
------- ------- ------- ------- -------
Net change in net asset value per share..... 3.74 (6.79) 2.47 1.66 (0.97)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD.................. $ 11.08 $ 7.34 $ 14.13 $ 11.66 $ 14.14
======= ======= ======= ======= =======
TOTAL RETURN(a)................................. 52.76% (46.96%) 24.22% 23.36%(b) (4.64%)(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in thousands).... $23,945 $16,356 $55,034 $13,308 $ 18
Ratios to average net assets:
Expenses***................................. 1.28% 1.97% 1.60% 2.00%(c) 1.73%(c)
Net Investment Income (loss)................ 1.42% 2.53% 0.26% 1.97%(c) (0.73%)(c)
PORTFOLIO TURNOVER RATE......................... 63% 53% 98% 133% 98%
</TABLE>

- --------------------
* Commencement of operations.

** Sale of Advisor Shares began on June 23, 1997.

*** During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) Not annualized.

(d) As of December 31, 1999 there were no Advisor Shares outstanding.

(e) Initial offering price.

18
- ---------------------------

<PAGE>
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

The Fund's investment objective is capital appreciation. The Fund will seek
to achieve its objective by investing, under normal market conditions, at least
80% of its total assets in equity securities of Latin American issuers, as
defined below.

The Fund is actively managed to seek to benefit from investment
opportunities derived from long-term improvement in economic and political
conditions and other positive trends and developments in Latin American
countries. The Fund's equity strategy is "top down" oriented seeking to invest
in those countries that offer the best economic growth perspectives. Stock
selection is designed to identify companies in high growth industries that are
attractively valued based on their future earnings potential. Accordingly, the
Fund is intended for long-term investors and should not be considered as a
vehicle for trading purposes. The Adviser believes that the continuation of a
long-term international trend encouraging greater market orientation and
economic growth may result in local or international political, economic or
financial developments that could benefit the capital markets in Latin American
countries.

For purposes of this Prospectus, Latin American issuers are: (i) companies
organized under the laws of a Latin American country; (ii) companies whose
securities are principally traded in Latin American countries; (iii)
subsidiaries of companies described in clause (i) or (ii) above that issue debt
securities guaranteed by, or securities payable with (or convertible into) the
stock of, companies described in clause (i) or (ii); (iv) companies that derive
at least 50% of their revenues from either goods produced or services performed
in Latin America or sales made in Latin America; and (v) the government of any
Latin American country and its agencies and instrumentalities and any public
sector entity fully or partly owned by any such government, agency or
instrumentality. For purposes of this Prospectus, "Latin America" currently
consists of the countries of Argentina, the Bahamas, Barbados, Belize, Bolivia,
Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El
Salvador, French Guiana, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico,
the Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad
and Tobago, Uruguay and Venezuela.

The Fund may invest in American Depository Receipts ("ADRs") or other
similar types of receipts or other similar securities, such as American
Depository Shares and Global Depository Shares, convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. Generally, ADRs in registered form are designed for use
in U.S. securities markets. As a result of the absence of established securities
markets and publicly owned corporations in certain foreign countries as well as
restrictions on direct investment by foreign entities, 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 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.

The Fund's assets will be allocated among the countries in Latin America in
accordance with the Adviser's judgment as to where the best investment
opportunities exist. The Fund is not limited with respect to the proportion of
its total assets that may be invested in the securities of issuers located in
any one Latin American country.

In selecting equity investments for the Fund, the Adviser seeks to identify
and invest in companies it believes offer potential for long-term capital
appreciation. In evaluating prospective investments, the Adviser will utilize
internal financial, economic and credit analysis resources as well as
information obtained from other sources. In selecting industries and companies
for investment, the Adviser will consider factors such as overall growth
prospects, competitive position in domestic and export markets, technology,
research and development, productivity, labor costs, raw material costs and
sources, profit margins, return on investment, capital resources, government
regulation and management.

19
----------------------
<PAGE>
The Fund retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with the Fund's investment
objective, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund may temporarily hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most 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 may
temporarily 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. The Adviser's choice to employ a temporary
defensive investment strategy may prevent the Fund from achieving its investment
objective.

ADDITIONAL STRATEGIES

The Fund may invest in certain state-sponsored programs. For example, the
governments of some Latin American countries, to varying degrees, have been
engaged in programs of selling part or all of their stakes in government-owned
or government-controlled enterprises ("privatizations"). The Adviser believes
that privatizations may offer investors opportunities for significant capital
appreciation and intends to invest assets of the Fund in privatizations in
appropriate circumstances. The ability of foreign persons, such as the Fund, to
participate in privatizations in certain Latin American countries may be limited
by local law, or the terms on which the Fund may be permitted to participate may
be less advantageous than those for local investors. There can be no assurance
that privatization programs will continue or be successful.

The Fund seeks to provide current income as a secondary objective. Up to 20%
of the total assets of the Fund may be invested at any one time in debt
securities (including convertible debt securities, Brady Bonds and Pay-in-kind
bonds) of Latin American issuers. In selecting particular debt securities for
the Fund, the Adviser intends to consider factors such as liquidity, price
volatility, tax implications, interest rate sensitivity, foreign currency
exchange risks, counterparty risks and technical market considerations. The
Adviser is free to invest in debt instruments of any maturity and duration and
interest rates on such securities may be fixed or floating. All or a substantial
amount of the debt securities in which the Fund may invest will be high yield,
high risk debt securities which are unrated and comparable in quality to debt
securities rated below investment grade (i.e., rated BB or lower by S&P and D&P,
or Ba or lower by Moody's, or if unrated, of comparable quality as determined by
the Adviser). See Appendix A to this Prospectus for a description of ratings of
S&P, Moody's and D&P. Investments in high yield, high risk debt securities are
considered to be speculative and involve comparatively greater risks, including
price volatility and the risk of default in the timely payment of interest and
principal, than investment grade securities or securities of comparable value.
Such investments may be non-performing securities or securities in default when
purchased. See "Risks of Investing in the Funds-High Yield, High Risk Debt
Securities."

The Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a
portion of their interest in the form of debt or equity securities. The Fund may
receive payments from pay-in-kind bonds in the form

20
- ---------------------------
<PAGE>
of both debt and equity securities provided that such debt securities do not
cause the Fund to exceed its respective investment limitation in debt
securities. The pay-in-kind bonds may be issued by a wide variety of corporate
and governmental issuers.

Pay-in-kind bonds 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 Pay-in-kind bonds 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 in 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."

21
----------------------

<PAGE>

OFFIT TOTAL RETURN FUND

INVESTMENT OBJECTIVE

The Fund's investment objective is to maximize total return from a
combination of capital appreciation and current income.

PRINCIPAL INVESTMENT STRATEGIES

The Fund seeks to achieve its investment objective by investing primarily in
a portfolio of fixed-income securities of varying maturities and by giving the
Adviser broad discretion to invest the Fund's assets among certain segments of
the fixed-income market that the Adviser believes will best contribute to
achieving the Fund's objective. The Adviser may invest the Fund's assets based
on the Adviser's analysis of current economic and market conditions and the
relative risks and opportunities present in the following market segments: U.S.
Government Securities, foreign sovereign and supranational debt obligations,
including obligations of emerging market and developing countries, and debt
instruments, convertible securities and preferred stocks of domestic and foreign
corporations, including high yield securities. Portfolio holdings will be
concentrated from time to time in areas of the fixed income markets which the
Adviser believes to be relatively undervalued. The Fund may pursue the
investment objective through investing directly in the markets and securities
described in this Prospectus, or indirectly through investing in the other OFFIT
Funds offered in this Prospectus.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - Under normal market conditions, the Fund will be invested in a variety of
markets and instruments. However, the Fund may invest without limitation in
any of the securities and markets in which it is authorized to invest, and
the Fund's portfolio holdings will be concentrated, from time to time, in
areas or securities which the Adviser believes to be relatively undervalued.
Concentration in any area or security intensifies the risks to the Fund
related to such area or security.

- - The Fund may invest without limitation in lower rated or unrated debt
securities (i.e., high yield, high risk debt securities). High yield, high
risk debt securities have a higher risk of default in the payment of interest
and principal and are subject to significant changes in price. Investment by
the Fund in such securities involves a high degree of credit risk and such
securities are regarded as speculative by the major rating agencies.

- - The Fund may invest without limitation in international securities.
International investing is subject to special risks, including, but not
limited to, currency exchange rate volatility, political, social or economic
instability, and differences in taxation, auditing and other financial
practices. These types of risks are intensified in emerging markets.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund is a "non-diversified" mutual fund. This permits the Fund to invest
most of its assets in securities issued by a small number of companies. This
makes the Fund more susceptible to the risks associated with these particular
companies, or to a single economic, political or regulatory occurrence.

- - In managing the Fund's assets, the Adviser may invest without limitation in
other OFFIT Funds. To the extent such a strategy is used, the Fund will be
subject to the risks related to such Funds.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

PRIOR PERFORMANCE

No prior performance is available as the Fund has not had a full year of
investment operations.

22
- ---------------------------
<PAGE>
FEES AND EXPENSES OF THE FUND

Fund investors pay various expenses, either directly or indirectly. The
purpose of the following table and example is to describe the fees and expenses
that you may pay if you buy and hold shares of the Fund. To the extent that the
Fund invests in other OFFIT Funds, investors will be exposed to the fees of
those underlying funds.

<TABLE>
<CAPTION>
SELECT ADVISOR
SHARES SHARES(1)
-------- ---------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment,
Maximum sales charge imposed on purchases................... None None
Maximum deferred sales charge............................... None None
Maximum sales charge imposed on reinvested dividends........ None None
180 day redemption fee (as a percentage of amount
redeemed)................................................. None 1.50%(2)
180 day exchange fee (as a percentage of amount
exchanged)................................................ None 1.50%(2)
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Advisory fees............................................... 0.50% 0.50%
Distribution (Rule 12b-1) fees (before waiver)(3)........... None 0.25%
Other expenses(4)........................................... 1.45% 1.70%
---- ----
Total annual Fund operating expenses (before
waivers/reimbursements)................................. 1.95% 2.45%
Fee waivers(5).............................................. 1.15% 1.15%
---- ----
Net expenses................................................ 0.80% 1.30%
==== ====
</TABLE>

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(4) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other
charges for Select and Advisor Shares.

(5) These fees have been waived by the Adviser and/or Administrator as part of a
contractual arrangement with the Company.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
-------- --------
<S> <C> <C>
Select Shares............................................... $198 $612
Advisor Shares.............................................. $248 $764
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

23
----------------------

<PAGE>
FINANCIAL HIGHLIGHTS

The OFFIT Total Return Fund had not commenced investment operations as of
December 31, 1999, therefore no financial highlights information is available.

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

The investment objective of the Fund is to maximize total return from a
combination of capital appreciation and current income. The Fund will seek to
achieve its objective by investing primarily in a portfolio of fixed-income
securities of varying maturities and by giving OFFITBANK (the "Adviser") broad
discretion to invest the Fund's assets among certain segments of the
fixed-income market that the Adviser believes will best contribute to achieving
the Fund's objective. At any point in time, the Adviser will invest the Fund's
assets based on the Adviser's analysis of current economic and market conditions
and the relative risks and opportunities present in the following market
segments: securities of the U.S. Government, its agencies and instrumentalities,
mortgage-backed and asset-backed securities, foreign sovereign and multi-
national debt obligations, including obligations of emerging market and
developing countries, debt instruments, convertible securities and preferred
stocks of domestic and foreign corporations, including high yield securities,
and local-currency denominated fixed income securities of issuers located in
developed and emerging markets. The Fund may also invest in the securities of
the other investment portfolios of the Company or investment companies managed
by the Adviser. The Fund may invest directly in the markets and securities
described in this prospectus, or indirectly through investing in the other OFFIT
Funds offered in this Prospectus (the "underlying funds"). In allocating Fund
assets among different investments, the Adviser will attempt to diversify its
portfolio by investing directly in the various securities noted above. In order
to increase its diversification of assets, the Adviser may invest portions of
Fund assets in underlying funds that invest in the securities that the Adviser
believes will allow the Fund to achieve its objective. To the extent that the
Fund invests in the underlying funds, you will be exposed to the fees of those
underlying funds. The investment objective of the Fund may not be changed except
by a vote of a majority of the Fund's outstanding voting securities, as defined
in the Investment Company Act of 1940, as amended (the "1940 Act").

In evaluating proposed investments for the Fund, the Adviser will seek to
enhance the total return on the Fund's portfolio through the active management
of: (1) portfolio duration; (2) allocation of investments among the various
sectors of the fixed income market; (3) yield curve positioning; and (4)
currency exposure. The Adviser will seek to maximize the Fund's total return in
terms of U.S. dollars. The Adviser intends to base its investment decisions for
the Fund on the continual evaluation of various factors, including: (1) the
supply and demand for capital in various capital markets; (2) the shape of the
global yield curve; (3) "bottom up" credit analysis of particular issuers, which
involves research focused on individual issuers rather than on broad economic
trends; (4) relative value between and within global capital markets; and (5)
yield spreads among domestic high grade, non-dollar and high yield sectors.
Portfolio holdings will be concentrated in areas of the fixed income market
which the Adviser believes to be relatively undervalued. In evaluating markets,
the Adviser will consider such factors as the condition and growth potential of
various economies and securities markets, currency and taxation factors
(including the applicability and rate of withholding taxes) and other pertinent
financial, social, national and political factors. There can be no assurance
that the Fund will achieve its investment objective.

The "total return" sought by the Fund will consist of interest from
underlying securities, capital appreciation reflected in increases in the value
of portfolio securities or from the purchase and sale of securities, and use of
futures and options, or gains from favorable changes in foreign currency
exchange rates. Under normal market conditions, the Fund will invest its assets
in a variety of markets and instruments, including securities of other
investment companies, securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, investment grade fixed income securities
(including asset-backed and mortgage backed securities), high yield securities
and international fixed income securities.

The Fund may invest in any country where the Adviser sees potential for
total return. In making international fixed income securities investments, the
Adviser may consider, among other things, the relative growth and inflation
rates of different countries. The Adviser may also consider expected changes in
foreign

24
- ---------------------------
<PAGE>

currency exchange rates, including the prospects for central bank intervention,
in determining the anticipated returns of securities denominated in foreign
currencies. The Adviser may further evaluate, among other things, foreign yield
curves and regulatory and political factors, including the fiscal and monetary
policies of such countries.

The Fund expects to primarily invest in income-producing securities,
together with certain futures, options and foreign currency contracts and other
investments described below. The Fund may also invest in lower quality fixed
income securities. Investments in these high yield, high risk debt securities
are considered to be speculative and involve comparatively greater risks,
including price volatility and the risk of default in the timely payment of
interest and principal, than investment grade securities or securities of
comparable value. Some of these high yield, high risk investments may be
non-performing when purchased. See "Risks of Investing in the Funds-High Yield,
High Risk Debt Securities."

The Fund has established no rating criteria for the debt securities in which
it may invest and such securities may not be rated at all for creditworthiness.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price and risk of default than
securities in higher rating categories. See "Risks of Investing in the
Funds-High Yield, High Risk Debt Securities." In purchasing such securities, the
Fund will rely on the Adviser's judgment, analysis and experience in evaluating
the creditworthiness of an issuer of such securities. The Adviser will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Adviser
believes will be in default. See Appendix A to this Prospectus for a description
of ratings of Standard & Poor's Ratings Group, Moody's Investors Services, Inc.
and Duff & Phelps Credit Ratings Co.

The Fund retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with the Fund's investment
objective, 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 its 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. The Adviser's choice to employ a temporary
defensive investment strategy may prevent the Fund from achieving its investment
objective.

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.

25
----------------------

<PAGE>

OFFIT U.S. GOVERNMENT SECURITIES FUND

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek current income.

PRINCIPAL INVESTMENT STRATEGIES

The Fund seeks to achieve its investment objective through the active
management of portfolio duration and sector allocation and by investing, under
normal circumstances, at least 80% of its total assets in U.S. Government
Securities (as defined in this Prospectus). In addition, the Fund may invest up
to 20% of its total assets in other fixed income securities rated AAA by
Standard & Poor's Rating Group or Duff & Phelps Credit Rating Co., or Aaa by
Moody's Investors Services, Inc., or securities deemed to be of comparable
quality by the Adviser, including: debt obligations issued or guaranteed by
foreign national, provincial, state, municipal or other governments with taxing
authority or by the agencies or instrumentalities of Australia, Canada, Denmark,
France, Germany, Japan, New Zealand and the United Kingdom; debt obligations of
supranational entities; non-U.S. dollar denominated debt obligations of the U.S.
Government; and corporate obligations including asset-backed securities.
Investment decisions are based on a continual evaluation of the supply and
demand for capital, the current and future shape of the yield curve, underlying
trends in the direction of interest rates and relative value among market
sectors. The Fund is not limited with regard to the maturities of the securities
in which it may invest.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund is a "non-diversified" mutual fund. This permits the Fund to invest
most of its assets in the securities of a small number of issuers. This makes
the Fund more susceptible to the risks associated with these particular
issuers, or to a single economic, political or regulatory occurrence.

- - The Fund is subject to prepayment risk, which is the risk that a debt
security may be paid off and proceeds must be reinvested earlier than
anticipated. Depending on market conditions, the new investments may or may
not carry the same interest rates.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

26
- ---------------------------
<PAGE>
PRIOR PERFORMANCE

ANNUAL TOTAL RETURN

The bar chart below shows the annual total return for Select Shares of the
Fund for the last two calendar years. The bar chart provides some indication of
the risks of investing in the Fund by showing changes in the Fund's performance
over time. Past performance is not necessarily an indicator of how the Fund will
perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (July 1, 1997), the highest calendar quarter total return
for Select Shares of the Fund was 6.26% (quarter ended September 30, 1998) and
the lowest calendar quarter total return was (1.52%) (quarter ended March 31,
1999).

AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON

The table below shows how the Fund's average annual total returns for the
past calendar year and since inception, with respect to Select Shares, compare
with the Merrill Lynch 5 Year U.S. Treasury Index (the "ML Treasury Index") for
the same periods. No prior performance is available for Advisor Shares of the
Fund as Advisor Shares have not yet commenced investment operations. The table
provides some indication of the risks of investing in the Fund by showing how
the Fund's average annual total returns for one year and since inception compare
with that of a broad measure of market performance. Past performance is not
necessarily an indicator of how the Fund will perform in the future.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
-------- ---------------
<S> <C> <C>
Select Shares*.............................................. (1.95%) 4.91%
ML Treasury Index........................................... (2.54%) 4.88%
</TABLE>

- --------------
* Commenced operations on July 1, 1997.

27
----------------------
<PAGE>
FEES AND EXPENSES OF THE FUND

<TABLE>
<CAPTION>
SELECT ADVISOR
SHARES SHARES(1)
-------- ---------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment,
shown as a percentage of average net assets)
Maximum sales charge imposed on purchases................... None None
Maximum deferred sales charge............................... None None
Maximum sales charge imposed on reinvested dividends........ None None
180 day redemption fee (as a percentage of amount
redeemed).................................................. None 1.50%(2)
180 day exchange fee (as a percentage of amount
exchanged)................................................. None 1.50%(2)
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Advisory fees............................................... 0.35% 0.35%
Distribution (Rule 12b-1) fees (before waiver)(3)........... None 0.25%
Other expenses(4)........................................... 0.35% 0.60%
---- ----
Total annual Fund operating expenses (before
waivers/reimbursements)................................ 0.70% 1.20%
Fee waivers(5).............................................. 0.20% 0.20%
---- ----
Net expenses................................................ 0.50% 1.00%
==== ====
</TABLE>

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(4) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other
charges for Select and Advisor Shares. Since Advisor Shares of the Fund have
not yet commenced investment operations, the amount set forth above for
"Other expenses" for Advisor Shares is an estimate.

(5) These fees have been waived by the Adviser and/or Administrator as part of a
contractual arrangement with the Company.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Shares............................................... $ 72 $224 $390 $ 871
Advisor Shares.............................................. $122 $381 $660 $1,455
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

28
- ---------------------------

<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
Fund's financial performance for the periods presented. This information
reflects financial results for a single Select Share of the Fund. The total
returns in the table represent the rate that a shareholder would have earned (or
lost) on an investment in Select Shares of the Fund (assuming reinvestment of
all dividends and distributions). The information for the year ended
December 31, 1999 has been audited by PricewaterhouseCoopers LLP, whose
unqualified report, along with the Fund's financial statements, is included in
the Company's Annual Report dated December 31, 1999, which is available without
charge upon request. The financial statements for the Fund for the periods prior
to December 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report
expressed an unqualified opinion on those statements.

Advisor Shares of the Fund had not commenced operations as of December 31,
1999, therefore no financial highlights information is available for such
shares.

<TABLE>
<CAPTION>
SELECT SHARES(d)
---------------------------------------------
FOR THE
PERIOD FROM
FOR THE YEAR FOR THE YEAR JULY 1, 1997*
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.46 $ 10.17 $10.00(e)
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... 0.49 0.50 0.27
Net realized and unrealized gain (loss)................... (0.69) 0.48 0.19
------- ------- ------
Total income (loss) from investment operations.......... (0.20) 0.98 0.46
------- ------- ------
Less dividends and distribution from:
Net investment income..................................... (0.49) (0.50) (0.27)
Excess of net investment income........................... -- -- (0.01)
Net realized gains........................................ (0.01) (0.19) (0.01)
------- ------- ------
Total dividends and distributions....................... (0.50) (0.69) (0.29)
------- ------- ------
Net change in net asset value per share................. (0.70) 0.29 0.17
------- ------- ------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.76 $ 10.46 $10.17
======= ======= ======
TOTAL RETURN(a)............................................. (1.95%) 9.82% 4.71%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in thousands)................ $42,422 $39,359 $3,955
Ratios to average net assets:
Expenses**.............................................. 0.50% 0.50% 0.50%(c)
Net investment income................................... 4.85% 4.59% 5.32%(c)
PORTFOLIO TURNOVER RATE..................................... 225% 423% 153%
</TABLE>

- --------------------

* Commencement of operations.

** During the period, certain fees were reduced and/ or reimbursed. If such fee
reductions and/ or reimbursements had not occurred, the ratio would have
been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) Not annualized.

(d) As of December 31, 1999 there were no Advisor Shares outstanding.

(e) Initial offering price.

29
----------------------
<PAGE>
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

The Fund's investment objective is to seek current income. The Fund seeks to
achieve its objective by investing, under normal circumstances, at least 80% of
its total assets in U.S. Government Securities (as defined below). In addition,
the Fund may invest up to 20% of its total assets in sovereign obligations of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom, and in other fixed income securities as described below. Any Fund
investments denominated in any foreign currency will be hedged against
fluctuations in value versus the U.S. dollar.

Obligations of the U.S. Government in which the Fund may invest are in two
broad categories and include the following: (i) direct obligations of the U.S.
Treasury, which differ only in their interest rates, maturities and times of
issuance, including U.S. Treasury Bills (maturities of one year or less), U.S.
Treasury Notes (maturities of one to ten years), and U.S. Treasury Bonds
(generally, maturities greater than ten years); and (ii) obligations, including
mortgage-backed securities, issued or guaranteed by agencies or
instrumentalities of the U.S. Government which are supported by: (a) the full
faith and credit of the U.S. Government (e.g., Government National Mortgage
Association ("GNMA") Certificates); (b) the right of the issuer to borrow an
amount limited to a specific amount of credit from the U.S. Government; (c) the
credit of the instrumentality (e.g., bonds issued by the Federal National
Mortgage Association ("FNMA")); or (d) the discretionary authority of the U.S.
Government to purchase certain obligations of U.S. Government agencies or
instrumentalities (collectively, "U.S. Government Securities").

The agencies and instrumentalities that issue U.S. Government Securities
include, among others, Federal Land Banks, Farmers Home Administration, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Farm Credit
Banks, Student Loan Marketing Association and U.S. Maritime Administration.

Securities issued by the U.S. Government differ with respect to maturity and
mode of payment. The modes of payment are coupon paying and capital
appreciation. Coupon paying bonds and notes pay a periodic interest payment,
usually semi-annually, and a final principal payment at maturity. Capital
appreciation bonds and Treasury bills accrue a daily amount of interest income,
and pay a stated face amount at maturity. Most U.S. Government capital
appreciation bonds were created as a result of the separation of coupon paying
bonds into distinct securities representing the periodic coupon payments and the
final principal payments. This is referred to as "stripping." The separate
securities representing a specific payment to be made by the U.S. Government on
a specific date are also called "zero coupon bonds." Current federal tax law
requires the Fund to accrue as income daily a portion of the original issue
discount at which each zero coupon bond was purchased. See "Non-Primary
Investment Strategies and Related Risks-Zero Coupon Securities, Pay-in-Kind
Bonds and Discount Obligations" in the Statement of Additional Information.

At any given time, there is a relationship between the yield of a particular
U.S. Government Security and its maturity. This is called the "yield curve."
Since U.S. Government Securities are assumed to have relatively low credit
risks, the main determinant of yield differential between individual securities
is maturity. When the yield curve is such that longer maturities correspond to
higher yields, the yield curve has a positive slope and is referred to as a
"normal" yield curve. At certain times shorter maturities have high yields and
the yield curve is said to be "inverted." Even when the yield curve is "normal"
(i.e., has a positive slope), the relationship between yield and maturity for
some U.S. Government stripped securities is such that yields increase with
maturity up to some point, and then after peaking, decline so that the longest
maturities are not the highest yielding.

U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of principal if held to maturity. Any
guarantee of the securities in the Fund, however, does not guarantee the net
asset value of the shares of the Fund. Normally, the value of the Fund's
investments varies inversely with changes in interest rates. For example, as
interest rates rise, the value of the Fund's investments will tend to decline
and as interest rates fall, the value of the Fund's investments will tend to
increase. The magnitude of these fluctuations generally will be greater when the
average maturity of the Fund's portfolio securities is longer.

From time to time, a significant portion of the Fund's assets may be
invested in mortgage-related (including mortgage-backed) securities,
representing participation interests in pools of fixed rate and

30
- ---------------------------
<PAGE>
adjustable rate residential mortgage loans issued or guaranteed by agencies or
instrumentalities of the U.S. Government. As described below with respect to the
Mortgage Securities Fund, mortgaged-backed securities generally provide monthly
payments which are, in effect, a "pass through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans. The yield on mortgage-backed securities is based
on the prepayment rates experienced over the life of the security, which tend to
increase during periods of falling interest rates. The Fund may also invest in
collateralized mortgage obligations ("CMOs"), which are debt obligations
collateralized by mortgage loans or mortgage pass-through certificates. Only
CMOs issued or guaranteed by agencies or instrumentalities of the U.S.
Government will be included for purposes of the Fund's policy of investing 80%
of its assets in U.S. Government Securities. For a further description of CMOs,
see the Mortgage Securities Fund below.

The Fund is not limited to the maturities of the securities in which it may
invest. Debt securities with longer maturities generally tend to produce higher
yields and are subject to greater market fluctuation as a result of changes in
interest rates than debt securities with shorter maturities.

The Adviser seeks an enhanced fixed income return through the active
management of portfolio duration and sector allocation. Investment decisions are
based on a continual evaluation of the supply and demand for capital, the
current and future shape of the yield curve, underlying trends in the direction
of interest rates and relative value among market sectors. The selection of
individual investments reflects the Adviser's view of relative value within and
among market sectors. The Adviser manages duration and maturity to take
advantage of interest rates and yield curve trends.

Up to 20% of the Fund's total assets may be allocated to other fixed income
securities, each of which will be rated AAA by S&P or D&P, or Aaa by Moody's or
will be deemed of comparable quality by the Adviser, including: debt obligations
issued or guaranteed by foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom; debt obligations of supranational entities; non-U.S. dollar denominated
debt obligations of the U.S. Government; and corporate obligations including
asset-backed securities. Any Fund investment denominated in a foreign currency
will be hedged against fluctuations in value versus the U.S. dollar.

The obligations of foreign governmental entities and supranational issuers
have various kinds of government support. Obligations of foreign governmental
entities include obligations issued or guaranteed by national, provincial, state
or other governments with taxing power or by their agencies. These obligations
may or may not be supported by the full faith and credit of a foreign
government. Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions, if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income.

The Fund retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with the Fund's investment
objective, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund may temporarily hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most 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 may
temporarily 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. The Adviser's choice to employ a temporary
defensive investment strategy may prevent the Fund from achieving its investment
objective.

31
----------------------
<PAGE>

OFFIT MORTGAGE SECURITIES FUND

INVESTMENT OBJECTIVE

The Fund's investment objective is to maximize total return from a
combination of investment income and capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

The Fund seeks to achieve its investment objective by investing at least 80%
of its total assets in a portfolio of investment grade or comparable
mortgage-related securities issued by U.S. entities. The Fund will invest
primarily in mortgage-related securities representing interests in residential
property, adjustable rate and derivative multiclass mortgage securities and
collateralized mortgage obligations issued by U.S. entities. Up to 20% of the
Fund's assets may be invested in investment grade or comparable fixed income
securities of U.S. and non-U.S. issuers, including mortgage related securities
of issuers in Canada, the United Kingdom, Denmark or other countries which may
develop mortgage securities markets in the future. The Fund is not limited with
regard to the maturities of the securities in which it may invest.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - A substantial portion of the securities purchased by the Fund may be
mortgage-backed and/or asset-backed securities, the value of which may be
highly sensitive to interest rate changes.

- - Under normal circumstances at least 80% of the Fund's net assets will be
invested in mortgage related securities issued by U.S. entities, which are
inversely affected by changes in interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods of
increasing interest rates).

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - Stripped mortgage securities or derivative multiclass mortgage securities
have greater volatility than other types of mortgage securities and are
extremely sensitive to changes in interest rates and prepayments.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

32
- ---------------------------
<PAGE>
PRIOR PERFORMANCE

ANNUAL TOTAL RETURN

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (July 1, 1997), the highest calendar quarter total return
for Select Shares of the Fund was 2.95% (quarter ended September 30, 1998) and
the lowest calendar quarter total return was (1.21%) (quarter ended June 30,
1999).

AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON

The table below shows how the Fund's average annual total returns for the
past calendar year and since inception, with respect to Select Shares, compare
with the Merrill Lynch Mortgage Master Index (the "ML Master Index") for the
same periods. No prior performance is available for Advisor Shares of the Fund
as Advisor Shares have not yet commenced investment operations. The table
provides some indication of the risks of investing in the Fund by showing how
the Fund's average annual total returns for one year and since inception compare
with that of a broad measure of market performance. Past performance is not
necessarily an indicator of how the Fund will perform in the future.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
-------- ---------------
<S> <C> <C>
Select Shares*.............................................. 0.23% 4.99%
ML Master Index............................................. 1.61% 5.52%
</TABLE>

- --------------
* Commenced operations on July 1, 1997.

33
----------------------
<PAGE>
FEES AND EXPENSES OF THE FUND

<TABLE>
<CAPTION>
SELECT ADVISOR
SHARES SHARES(1)
-------- ---------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum deferred sales charge............................... None None
Maximum sales charge imposed on reinvested dividends........ None None
180 day redemption fee (as a percentage of amount
redeemed).................................................. None 1.50%(2)
180 day exchange fee (as a percentage of amount
exchanged)................................................. None 1.50%(2)
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Advisory fees............................................... 0.35% 0.35%
Distribution (Rule 12b-1) fees (before waiver)(3)........... None 0.25%
Other expenses(4)........................................... 0.31% 0.56%
---- ----
Total annual Fund operating expenses (before
waivers/reimbursements)................................ 0.66% 1.16%
Fee waivers(5).............................................. 0.16% 0.16%
---- ----
Net expenses................................................ 0.50% 1.00%
==== ====
</TABLE>

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(5) These fees have been waived by the Adviser and/or Administrator as part of a
contractual arrangement with the Company.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Shares............................................... $ 67 $211 $368 $ 822
Advisor Shares.............................................. $118 $368 $638 $1,409
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

34
- ---------------------------

<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
Fund's financial performance for the periods presented. This information
reflects financial results for a single Select Share of the Fund. The total
returns in the table represent the rate that a shareholder would have earned (or
lost) on an investment in Select Shares of the Fund (assuming reinvestment of
all dividends and distributions). The information for the year ended
December 31, 1999 has been audited by PricewaterhouseCoopers LLP, whose
unqualified report, along with the Fund's financial statements, is included in
the Company's Annual Report dated December 31, 1999, which is available without
charge upon request. The financial statements for the Fund for the periods prior
to December 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report
expressed an unqualified opinion on those statements.

Advisor Shares of the Fund had not commenced operations as of December 31,
1999, therefore no financial highlights information is available for such
shares.

<TABLE>
<CAPTION>
SELECT SHARES(d)
---------------------------------------------
FOR THE
PERIOD FROM
FOR THE YEAR FOR THE YEAR JULY 1, 1997*
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.28 $ 10.17 $ 10.00(e)
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... 0.59 0.58 0.29
Net realized and unrealized gain (loss)................... (0.57) 0.14 0.22
------- ------- -------
Total income from investment operations................. 0.02 0.72 0.51
------- ------- -------
LESS DIVIDENDS AND DISTRIBUTION FROM:
Net investment income..................................... (0.59) (0.58) (0.29)
Excess of net investment income........................... -- (0.01) (0.01)
Net realized gains........................................ -- (0.02) (0.04)
------- ------- -------
Total Dividends and Distributions....................... (0.59) (0.61) (0.34)
------- ------- -------
Net change in net asset value per share................. (0.57) 0.11 0.17
------- ------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.71 $ 10.28 $ 10.17
======= ======= =======
TOTAL RETURN(A)............................................. 0.23% 7.26% 5.10%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in thousands)................ $62,309 $54,461 $17,037
Ratios to average net assets:
Expenses**.............................................. 0.50% 0.50% 0.50%(c)
Net investment income................................... 5.92% 5.72% 5.77%(c)
PORTFOLIO TURNOVER RATE..................................... 29% 78% 81%
</TABLE>

- --------------------
* Commencement of operations.

** During the period, certain fees were reduced and/ or reimbursed. If such fee
reductions and/ or reimbursements had not occurred, the ratio would have
been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) Not annualized.

(d) As of December 31, 1999 there were no Advisor Shares outstanding.

(e) Initial offering price.

35
----------------------

<PAGE>
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

The investment objective of the Fund is to maximize total return from a
combination of current income and capital appreciation. The Fund seeks to
achieve its investment objective by investing at least 80% of the value of its
assets in a portfolio of investment grade or comparable mortgage-related
securities.

Mortgage-related securities are securities that, directly or indirectly,
represent participations in, or are secured by and payable from, loans secured
by residential or commercial property. Mortgage-related securities include
mortgage pass-through securities, adjustable rate mortgage securities, CMOs and
stripped mortgage-backed securities. These mortgage-related securities include
derivative mortgage securities.

The Fund's primary emphasis will be on mortgage-related securities
representing interests in residential property. Residential mortgage-related
securities in the U.S. fall into three categories: (i) those issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
such as GNMA, FNMA and Federal Home Loan Mortgage Corporation ("FHLMC");
(ii) those issued by non-governmental issuers that represent interests in, or
are collateralized by, mortgage-related securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities; and (iii) those
issued by non-governmental issuers that represent an interest in, or are
collateralized by, whole mortgage loans or mortgage-related securities without a
government guarantee but usually with over-collateralization or some other form
of private credit enhancement. Non-governmental issuers referred to in (ii) and
(iii) above include originators of and investors in mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks, investment
banks and special purpose subsidiaries of the foregoing.

The residential mortgage pass-through securities in which the Fund will
invest provide for the pass-through to investors of their pro-rata share of
monthly payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans. The Fund invests
both in U.S. Government pass-through securities issued by GNMA, FNMA and FHLMC,
and in pass-through securities issued by non-governmental issuers. Each of GNMA,
FNMA and FHLMC guarantee timely distributions of interest to certificate
holders. GNMA and FNMA guarantee timely distributions of scheduled principal.
FHLMC generally guarantees only ultimate collection of principal of the
underlying mortgage loans.

The Fund may also invest in adjustable rate mortgage securities ("ARMS").
ARMS are pass-through mortgage securities collateralized by residential
mortgages with interest rates that are adjusted from time to time. The
adjustments usually are determined in accordance with a predetermined interest
rate index and may be subject to certain limits. While the values of ARMS, like
other debt securities, generally vary inversely with changes in market interest
rates (increasing in value during periods of declining interest rates and
decreasing in value during periods of increasing interest rates), the values of
ARMS should generally be more resistant to price swings than other debt
securities because the interest rates of ARMS move with market interest rates.
The adjustable rate feature of ARMS will not, however, eliminate fluctuations in
the prices of ARMS, particularly during periods of extreme fluctuations in
interest rates. Also, since many adjustable rate mortgages only reset on an
annual basis, it can be expected that the prices of ARMS will fluctuate to the
extent that changes in prevailing interest rates are not immediately reflected
in the interest rates payable on the underlying adjustable rate mortgages.

The Fund may invest in CMOs issued by U.S. entities. CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. CMOs may be collateralized by GNMA, FNMA or Freddie Mac
Certificates, but also may be collateralized by whole loans or private
pass-throughs (such collateral collectively hereinafter referred to as "Mortgage
Assets"). Multiclass pass-through securities are interests in a trust composed
of Mortgage Assets. Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities. Payments of principal
and of interest on the Mortgage Assets, and any reinvestment income thereon,
provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.

36
- ---------------------------
<PAGE>
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specified
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. The Fund has no present intention to invest in CMO
residuals.

The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payment of principal provided that,
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. Because of these features, PAC
Bonds generally are less subject to the risks of prepayment than are other types
of mortgage-related securities.

The Fund may purchase stripped mortgage securities which are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid and to such extent, together with any other
illiquid investments, will be subject to the Fund's applicable restriction on
investments in illiquid securities.

Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage securities that are purchased at a substantial premium or discount
generally are extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on such securities' yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup its initial investment in these
securities even if the securities have received the highest rating by a
nationally recognized statistical rating organization.

In addition to the stripped mortgage securities described above, the Fund
may invest in similar securities such as Super POs and Levered IOs which are
more volatile than POs and IOs. Risks associated with instruments such as Super
POs are similar in nature to those risks related to investments in POs. Risks
connected with Levered IOs are similar in nature to those associated with IOs.
The Fund may also invest in other similar instruments developed in the future
that are deemed consistent with its investment objective, policies and
restrictions. POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of cash to the
Fund.

37
----------------------
<PAGE>
Up to 20% of the Fund's total assets may be allocated to other fixed income
securities, each of which will be rated investment grade by S&P, Moody's or D&P
will be deemed of comparable quality by the Adviser, including: mortgage related
securities of issuers in Canada, Denmark, the United Kingdom or other countries
which may develop mortgage securities markets in the future; debt obligations
issued or guaranteed by foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom; debt obligations of supranational entities; non-U.S. dollar denominated
debt obligations of the U.S. Government; and corporate obligations including
asset-backed securities. Any Fund investment denominated in a foreign currency
will be hedged against fluctuations in value versus the U.S. dollar.

The Fund retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with the Fund's investment
objective, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund may temporarily hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most 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 may
temporarily 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. The Adviser's choice to employ a temporary
defensive investment strategy may prevent the Fund from achieving its investment
objective.

ADDITIONAL STRATEGIES

The Fund may also invest in commercial mortgage-related securities, which
are generally multi-class debt or pass-through securities backed by a mortgage
loan or pool of mortgage loans secured by commercial property, such as
industrial and warehouse properties, office buildings, retail space and shopping
malls, multifamily properties and cooperative apartments, hotels and motels,
nursing homes, hospitals and senior living centers. The commercial loans
underlying these securities are generally not amortizing or not fully
amortizing. At their maturity date, repayment of the remaining principal balance
or "balloon" is due and is repaid through the attainment of an additional loan
or the sale of the property. Unlike most single family residential mortgages,
commercial real property loans often contain provisions which substantially
reduce the likelihood that such securities will be prepaid.

The market for commercial mortgage-related securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential mortgage-related
securities. Many of the risks of investing in commercial mortgage-related
securities reflect the risks of investing in real estate securing the underlying
mortgage loans. These risks reflect the effect of local and other economic
conditions such as real estate markets, the ability of tenants to make loan
payments, and the ability of a property to attract and retain tenants.
Commercial mortgage-related securities may be less liquid and exhibit greater
price volatility than other types of mortgage-related securities.

Mortgage-related securities issued by private issuers in the U.S. may entail
greater risk than mortgage-related securities that are guaranteed by the U.S.
Government, its agencies or instrumentalities. Privately-issued mortgage
securities are issued by private originators of, or investors in, mortgage
loans, including mortgage bankers, commercial banks, investment banks, savings
and loan associations and special purpose subsidiaries of the foregoing. Since
privately-issued mortgage certificates are not guaranteed by an entity having
the credit status of GNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations

38
- ---------------------------
<PAGE>
on at least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches.

The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.

Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments of, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.

39
----------------------

<PAGE>

OFFIT CALIFORNIA MUNICIPAL FUND

INVESTMENT OBJECTIVE

The Fund's investment objective is to maximize total after-tax return for
California residents, consistent with a prudent level of credit risk.

PRINCIPAL INVESTMENT STRATEGIES

The Fund invests, under normal circumstances, at least 65% of its total
assets in a portfolio of municipal obligations, the interest from which is
exempt from California State and local personal income taxes, and at least 80%
of its total assets in obligations the interest on which is exempt from regular
federal income taxes. In addition, at least 80% of the Fund's total assets will
be invested in investment grade securities and at least 50% of the Fund's total
assets will be invested in "high quality" securities (as defined in this
Prospectus). The Fund may invest up to 20% of its total assets in non-municipal
obligations and all or a portion of the Fund's dividends may be subject to the
federal alternative minimum tax. The Fund seeks to increase income and preserve
or enhance total return by actively managing the average maturity of the Fund's
investments in light of market conditions and trends. The Fund's dollar weighted
average maturity is not expected to exceed ten years.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - To the extent that the Fund deviates from its principal investment
strategies, either as a result of the unavailability of suitable tax-exempt
obligations or for other defensive purposes, its investment objective may not
be achieved.

- - Because the Fund invests primarily in obligations issued by a single state
(California) and such state's various subdivisions, it is more susceptible to
factors adversely affecting issuers of such obligations than a comparable
municipal securities fund that is not so concentrated.

- - The Fund is subject to income risk, which is the possibility that the Fund's
dividends (income) will decline due to falling interest rates.

- - The Fund is subject to credit risk, which is the risk that the issuer of a
security will fail to repay interest and principal in a timely manner.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund may invest up to 20% of its total assets at the time of purchase
(but never more than 35% of its total net assets) in lower rated or unrated
debt securities (i.e., high yield, high risk debt securities). High yield,
high risk debt securities have a higher risk of default in the payment of
interest and principal and are subject to significant changes in price.
Investment by the Fund in such securities involves a high degree of credit
risk and such securities are regarded as speculative by the major rating
agencies.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

40
- ---------------------------
<PAGE>
PRIOR PERFORMANCE

ANNUAL TOTAL RETURN

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (April 2, 1997), the highest calendar quarter total return
for Select Shares of the Fund was 3.43% (quarter ended September 30, 1998) and
the lowest calendar quarter total return was (1.91%) (quarter ended June 30,
1999)

AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON

The table below shows how the Fund's average annual total returns for the
past calendar year and since inception, with respect to Select Shares, compare
with the Lehman Brothers 5 Year Municipal Bond Index (the "Lehman Index") for
the same periods. No prior performance is available for Advisor Shares of the
Fund as Advisor Shares have not yet commenced investment operations. The table
provides some indication of the risks of investing in the Fund by showing how
the Fund's average annual total returns for one year and since inception compare
with that of a broad measure of market performance. Past performance is not
necessarily an indicator of how the Fund will perform in the future.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
-------- ---------------
<S> <C> <C>
Select Shares*.............................................. (0.77%) 4.49%
Lehman Index................................................ 0.74% 4.70%
</TABLE>

- --------------
* Commenced operations on April 2, 1997.

41
----------------------
<PAGE>
FEES AND EXPENSES OF THE FUND

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Advisory fees............................................... 0.35% 0.35%
Distribution (Rule 12b-1) fees (before waiver)(3)........... None 0.25%
Other expenses(4)........................................... 0.73% 0.98%
---- ----
Total annual Fund operating expenses (before
waivers/reimbursements)................................ 1.08% 1.58%
Fee waivers(5).............................................. 0.58% 0.58%
---- ----
Net expenses................................................ 0.50% 1.00%
==== ====
</TABLE>

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(5) These fees have been waived by the Adviser and/or Administrator as part of a
contractual arrangement with the Company.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- you redeemed all of your investment at the end of the time period.

42
- ---------------------------
<PAGE>
Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Shares............................................... $110 $343 $595 $1,317
Advisor Shares.............................................. $161 $499 $860 $1,878
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

43
----------------------
<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
Fund's financial performance for the periods presented. This information
reflects financial results for a single Select Share of the Fund. The total
returns in the table represent the rate that a shareholder would have earned (or
lost) on an investment in Select Shares of the Fund (assuming reinvestment of
all dividends and distributions). The information for the year ended
December 31, 1999 has been audited by PricewaterhouseCoopers LLP, whose
unqualified report, along with the Fund's financial statements, is included in
the Company's Annual Report dated December 31, 1999, which is available without
charge upon request. The financial statements for the Fund for the periods prior
to December 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report
expressed an unqualified opinion on those statements.

Advisor Shares of the Fund had not commenced investment operations as of
December 31, 1999, therefore no financial highlights information is available
for such shares.

<TABLE>
<CAPTION>
SELECT SHARES(d)
--------------------------------------------
FOR THE
PERIOD FROM
APRIL 2,
FOR THE YEAR FOR THE YEAR 1997*
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.54 $ 10.37 $10.00(e)
------- ------- ------
Net investment income..................................... 0.40 0.40 0.33
Net realized and unrealized gain (loss)................... (0.48) 0.22 0.38
------- ------- ------
Total income (loss) from investment operations.......... (0.08) 0.62 0.71
------- ------- ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income..................................... (0.40) (0.40) (0.33)
Excess of net investment income........................... -- (0.01) --
Net realized gains........................................ -- (0.04) (0.01)
------- ------- ------
Total dividends and distributions....................... (0.40) (0.45) (0.34)
------- ------- ------
Net change in net asset value per share................. (0.48) 0.17 0.37
------- ------- ------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.06 $ 10.54 $10.37
======= ======= ======
TOTAL RETURN(A)............................................. (0.77%) 6.14% 7.14%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in thousands)................ $13,645 $11,066 $4,792
Ratios to average net assets:
Expenses**.............................................. 0.50% 0.50% 0.50%(c)
Net investment income................................... 3.91% 3.87% 4.15%(c)
PORTFOLIO TURNOVER RATE..................................... 20% 51% 41%
</TABLE>

- --------------------
* Commencement of operations.

** During the period, certain fees were reduced and/ or reimbursed. If such fee
reductions and/ or reimbursements had not occurred, the ratio would have
been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) Not annualized.

(d) As of December 31, 1999, there were no Advisor Shares outstanding.

(e) Initial offering price.

The accompanying notes are an integral part of the financial statements.

44
- ---------------------------
<PAGE>

OFFIT NEW YORK MUNICIPAL FUND

INVESTMENT OBJECTIVE

The Fund's investment objective is to maximize total after-tax return for
New York residents, consistent with a prudent level of credit risk.

PRINCIPAL INVESTMENT STRATEGIES

The Fund invests, under normal circumstances, at least 65% of its total
assets in a portfolio of municipal obligations, the interest from which is
exempt from New York State, New York City and City of Yonkers personal income
taxes and at least 80% of its total assets in obligations, the interest from
which is exempt from regular federal income taxes. In addition, at least 80% of
the Fund's total assets will be invested in investment grade securities and at
least 50% of the Fund's total assets will be invested in "high quality"
securities. The Fund may invest up to 20% of its total assets in non-municipal
obligations and all or a portion of the Fund's dividends may be subject to the
federal alternative minimum tax. The Fund's dollar weighted average maturity is
not expected to exceed ten years.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - Because the Fund invests primarily in obligations issued by a single state
(New York) and such state's various subdivisions, it is more susceptible to
factors adversely affecting issuers of such obligations than a comparable
municipal securities fund that is not so concentrated.

- - The Fund is subject to income risk, which is the possibility that the Fund's
dividends (income) will decline due to falling interest rates.

- - The Fund is subject to credit risk, which is the risk that the issuer of a
security will fail to repay interest and principal in a timely manner.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

45
----------------------
<PAGE>
PRIOR PERFORMANCE

ANNUAL TOTAL RETURNS

The bar chart below shows the annual total returns for Select Shares of the
Fund for the last four calendar years. The bar chart provides some indication of
the risks of investing in the Fund by showing changes in the Fund's performance
from year to year. Past performance is not necessarily an indicator of how the
Fund will perform in the future.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (April 3, 1995), the highest calendar quarter total return
for Select Shares of the Fund was 2.94% (quarter ended September 30, 1998) and
the lowest calendar quarter total return was (1.80%) (quarter ended June 30,
1999).

AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON

The table below shows how the Fund's average annual total returns for the
past calendar year and since inception, with respect to Select Shares, compare
with the Lehman Brothers 5 Year Municipal Bond Index (the "Lehman Index") for
the same periods. No prior performance is available for Advisor Shares of the
Fund as Advisor Shares have not yet commenced investment operations. The table,
like the bar chart, provides some indication of the risks of investing in the
Fund by showing how the Fund's average annual total returns for one year and
since inception compare with that of a broad measure of market performance. Past
performance is not necessarily an indicator of how the Fund will perform in the
future.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
-------- ---------------
<S> <C> <C>
Select Shares*.............................................. (0.65%) 5.23%
Lehman Index................................................ 0.74% 5.14%
</TABLE>

- --------------
* Commenced operations on April 3, 1995.

46
- ---------------------------
<PAGE>
FEES AND EXPENSES OF THE FUND

<TABLE>
<CAPTION>
SELECT ADVISOR
SHARES SHARES(1)
-------- ---------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum sales charge imposed on purchases................... None None
Maximum deferred sales charge............................... None None
Maximum sales charge imposed on reinvested dividends........ None None
180 day redemption fee (as a percentage of amount
redeemed).................................................. None 1.50%(2)
180 day exchange fee (as a percentage of amount
exchanged)................................................. None 1.50%(2)
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Advisory fees............................................... 0.35% 0.35%
Distribution (Rule 12b-1) fees (before waiver)(3)........... None 0.25%
Other expenses(4)........................................... 0.29% 0.54%
---- ----
Total annual Fund operating expenses (before
waivers/reimbursements)................................ 0.64% 1.14%
Fee waivers(5).............................................. 0.14% 0.14%
---- ----
Net expenses................................................ 0.50% 1.00%
==== ====
</TABLE>

- --------------

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(5) These fees have been waived by the Adviser and/or Administrator as part of a
contractual arrangement with the Company.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Shares............................................... $ 65 $205 $357 $ 798
Advisor Shares.............................................. $116 $362 $628 $1,386
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

47
----------------------
<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
Fund's financial performance for the periods presented. This information
reflects financial results for a single Select Share of the Fund. The total
returns in the table represent the rate that a shareholder would have earned (or
lost) on an investment in Select Shares of the Fund (assuming reinvestment of
all dividends and distributions). The information for the year ended
December 31, 1999 has been audited by PricewaterhouseCoopers LLP, whose
unqualified report, along with the Fund's financial statements, is included in
the Company's Annual Report dated December 31, 1999, which is available without
charge upon request. The financial statements for the Fund for years prior to
December 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report
expressed an unqualified opinion on those statements.

Advisor Shares of the Fund had not commenced investment operations as of
December 31, 1999, therefore no financial highlights information is available
for such shares.

<TABLE>
<CAPTION>
SELECT SHARES(d)
-----------------------------------------------------------------------------
FOR THE
PERIOD FROM
APRIL 3,
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR 1995*
ENDED ENDED ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.82 $ 10.69 $ 10.40 $ 10.47 $ 10.00(e)
------- ------- ------- ------- -------
Net investment income........................... 0.43 0.44 0.46 0.44 0.33
Net realized and unrealized gain (loss)......... (0.50) 0.19 0.34 (0.06) 0.47
------- ------- ------- ------- -------
Total income (loss) from investment
operations................................... (0.07) 0.63 0.80 0.38 0.80
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income........................... (0.43) (0.44) (0.46) (0.44) (0.32)
Net realized gains.............................. -- (0.06) (0.05) (0.01) (0.01)
------- ------- ------- ------- -------
Total dividends and distributions............. (0.43) (0.50) (0.51) (0.45) (0.33)
------- ------- ------- ------- -------
Net change in net asset value per share....... (0.50) 0.13 0.29 (0.07) 0.47
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD.................... $ 10.32 $ 10.82 $ 10.69 $ 10.40 $ 10.47
======= ======= ======= ======= =======
TOTAL RETURN(A)................................... (0.65%) 6.03% 7.84% 3.72% 8.13%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in thousands)...... $68,228 $67,793 $42,046 $20,158 $12,516
Ratios to average net assets:
Expenses**.................................... 0.50% 0.50% 0.50% 0.55% 0.54%(c)
Net investment income......................... 4.09% 4.08% 4.22% 4.28% 4.20%(c)
PORTFOLIO TURNOVER RATE........................... 93% 132% 144% 33% 35%
</TABLE>

- ------------------
* Commencement of operations.

** During the period, certain fees were reduced and/or reimbursed. If such fee
reductions and/or reimbursements had not occurred, the ratios would have
been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) Not annualized.

(d) As of December 31, 1999 there were no Advisor Shares outstanding.

(e) Initial offering price.

48
- ---------------------------

<PAGE>

OFFIT NATIONAL MUNICIPAL FUND

INVESTMENT OBJECTIVE

The Fund's investment objective is to maximize total after-tax return,
consistent with a prudent level of credit risk.

PRINCIPAL INVESTMENT STRATEGIES

The Fund invests, under normal circumstances, at least 80% of its total
assets in a portfolio of municipal obligations, the interest from which is
exempt from regular federal income taxes. In addition, at least 80% of the
Fund's total assets will be invested in investment grade securities and at least
50% of the Fund's total assets will be invested in "high quality" securities (as
defined in this Prospectus). The Fund may invest up to 20% of its total assets
in taxable obligations and all or a portion of the Fund's dividends may be
subject to the federal alternative minimum tax. The Fund's dollar weighted
average maturity is not expected to exceed ten years.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

- - The Fund is subject to income risk, which is the possibility that the Fund's
dividends (income) will decline due to falling interest rates.

- - The Fund is subject to credit risk, which is the risk that the issuer of a
security will fail to repay interest and principal in a timely manner.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Funds" herein.

49
----------------------
<PAGE>
PRIOR PERFORMANCE

ANNUAL TOTAL RETURN

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Since inception (October 20, 1997), the highest calendar quarter total
return for Select Shares of the Fund was 3.17% (quarter ended September 30,
1998) and the lowest calendar quarter total return was (1.76%) (quarter ended
June 30, 1999).

AVERAGE ANNUAL TOTAL RETURNS -- COMPARISON

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS
-----------------------------
1 YEAR SINCE INCEPTION
-------- ---------------
<S> <C> <C>
Select Shares*.............................................. 0.14% 4.41%
Lehman Index................................................ 0.74% 3.77%
</TABLE>

- --------------
* Commenced operations on October 20, 1997.

50
- ---------------------------
<PAGE>
FEES AND EXPENSES OF THE FUND

<TABLE>
<CAPTION>
SELECT ADVISOR
SHARES SHARES(1)
-------- ---------
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment
Maximum sales charge imposed on purchases................... None None
Maximum deferred sales charge............................... None None
Maximum sales charge imposed on reinvested dividends........ None None
180 day redemption fee (as a percentage of amount
redeemed).................................................. None 1.50%(2)
180 day exchange fee (as a percentage of amount
exchanged)................................................. None 1.50%(2)
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets, shown as a percentage of average net
assets)
Advisory fees............................................... 0.35% 0.35%
Distribution (Rule 12b-1) fees (before waiver)(3)........... None 0.25%
Other expenses(4)........................................... 0.50% 0.75%
---- ----
Total annual Fund operating expenses (before
waivers/reimbursements).................................... 0.85% 1.35%
Fee waivers(5).............................................. 0.35% 0.35%
---- ----
Net expenses................................................ 0.50% 1.00%
==== ====
</TABLE>

(2) You will be charged a 1.50% fee if you redeem or exchange Advisor Shares of
the Fund within 180 days of purchase.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are currently being
waived. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(5) These fees have been waived by the Adviser and/or Administrator as part of a
contractual arrangement with the Company.

EXAMPLE

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay if you invested $10,000 in the Fund over the various time
periods indicated. The example assumes that:

- you reinvested all dividends and distributions

- the average annual total return was 5%

- the percentage amounts charged in "Total annual Fund operating expenses"
in the "Gross Expenses" columns for Select and Advisor Shares remain the
same over the time periods

- you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Shares............................................... $ 87 $271 $471 $1,049
Advisor Shares.............................................. $137 $428 $739 $1,624
</TABLE>

THE ABOVE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A
REPRESENTATION OF THE FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.

51
----------------------
<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
Fund's financial performance for the periods presented. This information
reflects financial results for a single Select Share of the Fund. The total
returns in the table represent the rate that a shareholder would have earned (or
lost) on an investment in Select Shares of the Fund (assuming reinvestment of
all dividends and distributions). The information for the year ended
December 31, 1999 has been audited by PricewaterhouseCoopers LLP, whose
unqualified report, along with the Fund's financial statements, is included in
the Company's Annual Report dated December 31, 1999, which is available without
charge upon request. The financial statements for the Fund for the period prior
to December 31, 1999 were audited by PricewaterhouseCoopers LLP, whose report
expressed an unqualified opinion on those statements.

Advisor Shares of the Fund had not commenced investment operations as of
December 31, 1999, therefore no financial highlights information is available
for such shares.

<TABLE>
<CAPTION>
SELECT SHARES(d)
--------------------------------------------
FOR THE
PERIOD FROM
OCTOBER 20,
FOR THE YEAR FOR THE YEAR 1997*
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.43 $ 10.19 $10.00(e)
------- ------- ------
Net investment income....................................... 0.41 0.40 0.08
Net realized and unrealized gain (loss)................... (0.39) 0.29 0.19
------- ------- ------
Total income from investment operations................. 0.02 0.69 0.27
------- ------- ------
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income..................................... (0.41) (0.40) (0.08)
Net realized gains........................................ -- (0.05) --
------- ------- ------
Total Dividends and Distributions:...................... (0.41) (0.45) (0.08)
------- ------- ------
Net change in net asset value per share................. (0.39) 0.24 0.19
------- ------- ------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.04 $ 10.43 $10.19
======= ======= ======
TOTAL RETURN(a)............................................. 0.14% 6.91% 2.70%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in thousands)................ $19,044 $29,735 $2,805
Ratios to average net assets:
Expenses**.............................................. 0.50% 0.50% 0.50%(c)
Net investment income................................... 3.96% 3.90% 3.95%(c)
PORTFOLIO TURNOVER RATE..................................... 299% 226% 46%
</TABLE>

- --------------------

* Commencement of operations.

** During the period, certain fees were reduced and/ or reimbursed. If such fee
reductions and/ or reimbursements had not occurred, the ratio would have
been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) Not annualized.

(d) As of December 31, 1999, there were no Advisor Shares outstanding.

(e) Initial offering price.

52
- ---------------------------

<PAGE>
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES OF THE CALIFORNIA,
NEW YORK, AND NATIONAL MUNICIPAL FUNDS

The California Municipal Fund's investment objective is to maximize total
after-tax return for California residents, consistent with a prudent level of
credit risk. The California Municipal Fund intends to invest, under normal
market conditions, at least 65% of its total assets in a portfolio of municipal
obligations, the interest from which is exempt from California State and local
personal income taxes ("California Municipal Securities") and at least 80% of
its total assets in obligations the interest on which is exempt from regular
federal income taxes. California Municipal Securities are securities issued by
the State of California and its various political subdivisions along with its
agencies and instrumentalities and their various political subdivisions, and by
possessions and territories of the United States, such as Puerto Rico, the
Virgin Islands and Guam and their various political subdivisions. All or a
portion of the Fund's dividends may be subject to the federal alternative
minimum tax.

The New York Municipal Fund's investment objective is to maximize total
after-tax return for New York residents, consistent with a prudent level of
credit risk. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 65% of its total assets in a portfolio
of municipal obligations, the interest on which is exempt from New York State,
New York City and City of Yonkers personal income taxes ("New York Municipal
Securities") and at least 80% of its total assets in obligations the interest on
which is exempt from regular federal income taxes. New York Municipal Securities
are securities issued by the State of New York and its various political
subdivisions along with its agencies and instrumentalities and their various
political subdivisions, and by possessions and territories of the United States,
such as Puerto Rico, the Virgin Islands and Guam and their various political
subdivisions. All or a portion of the Fund's dividends may be subject to federal
alternative minimum tax. "Municipal Securities" as used in this Prospectus shall
be used as a general reference to California and New York Municipal Securities.

The National Municipal Fund's investment objective is to maximize total
after-tax return, consistent with a prudent level of credit risk. The Fund seeks
to achieve its investment objective by investing, under normal market
conditions, at least 80% of its total assets in a portfolio of municipal
obligations, the interest from which is exempt from regular federal income taxes
("Municipal Securities"). Municipal Securities are securities issued by states
and their various political subdivisions along with agencies and
instrumentalities of states and their various political subdivisions and by
possessions and territories of the United States, such as Puerto Rico, the
Virgin Islands and Guam and their various political subdivisions. All or a
portion of the Fund's dividends may be subject to federal alternative minimum
tax. See "Taxes". (Unless specifically referring to California Municipal
Securities or New York Municipal Securities (as these terms are defined below),
the term "Municipal Securities" shall be used as a general reference to
Municipal, California Municipal and New York Municipal Securities.)

Each such Fund intends that, under normal market conditions, at least 50% of
its total assets will be invested in "high quality" securities. For purposes of
this Prospectus, high quality securities are those which are rated AA or better
by S&P or by Fitch Investors Service, Inc. ("Fitch"), or Aa or better by Moody's
or, if unrated, are determined by the Adviser to be of comparable quality, at
the time of investment. Furthermore, under normal market conditions, at least
80% of each Fund's total assets will be invested in securities that are rated
investment grade or better, or, if unrated, are determined by the Adviser to be
of comparable quality, at the time of investment. Therefore, a Fund may invest
up to 20% of its total assets in securities that are rated below investment
grade, or which are unrated and determined by the Adviser to be of quality
comparable to non-investment grade, at the time of investment. A Fund may retain
in its portfolio any security whose rating (or quality as determined by the
Adviser if such security is unrated) is downgraded after its acquisition by the
Fund if the Adviser considers the retention of such security advisable. At no
time, however, will more than 35% of a Fund's net assets consist of securities
rated below investment grade or unrated securities determined by the Adviser to
be of comparable quality. Investments in high yield, high risk debt securities
involve comparatively greater risks, including price volatility and the risk of
default in the timely payment of principal and interest, than higher rated
securities. See "Risks of Investing in the Funds-High Yield, High Risk Debt
Securities."

53
----------------------
<PAGE>
Investment grade ratings in the case of municipal bonds are the four highest
rating categories assigned by Moody's, S&P or Fitch, or determined by the
Adviser to be of comparable quality. The four highest rating categories
currently assigned by Moody's to municipal bonds are "Aaa", "Aa", "A" and "Baa";
the four highest rating categories assigned by S&P and Fitch to municipal bonds
are "AAA", "AA", "A" and "BBB". A more complete description of the debt security
ratings categories assigned by Moody's, S&P and Fitch is included in Appendix A
to this Prospectus.

Although municipal obligations rated in the fourth highest rating category
by Moody's (i.e., "Baa") or S&P or Fitch (i.e., "BBB") are considered investment
grade, they may be subject to greater risks than other higher rated investment
grade securities. Municipal obligations rated "Baa" by Moody's, for example, are
considered medium grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well. Municipal
obligations rated "BBB" by S&P and Fitch are regarded as having an adequate
capacity to pay principal and interest. Obligations rated BBB by Fitch are
deemed to be subject to an increased likelihood that their rating will fall
below investment grade than higher rated bonds.

Each such Fund's dollar-weighted average maturity is not expected to exceed
ten years. Each Fund seeks to increase income and preserve or enhance total
return by actively managing the average Fund maturity in light of market
conditions and trends. Length of maturity influences sensitivity to interest
rate changes, with the value of longer-maturity securities being generally more
volatile than that of shorter-term securities. A Fund also may seek to hedge all
or part of its assets against changes in securities prices by buying or selling
interest rate futures contracts and options. The average portfolio maturity and
duration, however, may be shortened from time to time depending on market
conditions.

MUNICIPAL SECURITIES. Municipal Securities are debt obligations issued by
or on behalf of states, cities, municipalities and other public authorities. The
two principal classifications of Municipal Securities that may be held by each
such Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of a facility being
financed. Revenue securities may include private activity bonds. Such bonds may
be issued by or on behalf of public authorities to finance various privately
operated facilities and are not payable from the unrestricted revenues of the
issuer. As a result, the credit quality of private activity bonds is frequently
related directly to the credit standing of private corporations or other
entities. In addition, the interest on private activity bonds issued after
August 7, 1986 is subject to the federal alternative minimum tax. The Funds will
not be restricted with respect to the proportion of their assets that may be
invested in private activity obligations. Accordingly, the Funds may not be a
suitable investment vehicle for individuals or corporations that are subject to
the federal alternative minimum tax.

Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from regular federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance. Neither the
Funds nor the Adviser will review the proceedings relating to the issuance of
municipal obligations or the basis for such opinions.

The types of Municipal Securities in which each such Fund may invest include
the following:

MUNICIPAL BONDS. Municipal bonds are debt obligations that are typically
issued to obtain funds for various public purposes, such as construction of
public facilities (e.g., airports, highways, bridges and schools). Municipal
bonds at the time of issuance are generally long-term securities with maturities
of as much as twenty years or more, but may have remaining maturities of shorter
duration at the time of purchase by the Funds Municipal bonds that may be
purchased by the Funds include, but are not limited to:

MORAL OBLIGATION SECURITIES. Moral obligation securities are normally
issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is
a moral commitment but not a legal obligation of the state or municipality
that created that issuer.

PRE-REFUNDED MUNICIPAL SECURITIES. The principal of and interest on
pre-refunded Municipal Securities are no longer paid from the original
revenue source for such securities. Instead, the source of

54
- ---------------------------
<PAGE>
such payments is typically an escrow fund consisting of U.S. Government
securities. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded Municipal
Securities.

INSURED BONDS. Insured Municipal Securities are those for which
scheduled payments of interest and principal are guaranteed by a private
(non-governmental) insurance company. The insurance entitles a Fund to
receive only the face or par value of the securities held by such Fund. The
insurance does not guarantee the market value of the Municipal Securities or
the value of the shares of a Fund.

RESOURCE RECOVERY BONDS. Resource recovery bonds may be general
obligations of the issuing municipality or supported by project revenues or
corporate or bank guarantees. The viability of the resource recovery
project, environmental protection regulations and project operator tax
incentives may affect the value and credit quality of resource recovery
bonds.

MUNICIPAL NOTES. Municipal notes are issued to meet the short-term funding
requirements of local, regional and state governments. Municipal notes generally
have maturities at the time of issuance of three years or less. Municipal notes
are generally secured by the anticipated revenues from taxes, grants or bond
financing. Municipal notes that may be purchased by the Funds include, but are
not limited to:

TAX ANTICIPATION NOTES. Tax anticipation notes ("TANs") are sold as
interim financing in anticipation of collection of taxes. An uncertainty in
a municipal issuer's capacity to raise taxes as a result of such factors as
a decline in its tax base or a rise in delinquencies could adversely affect
the issuer's ability to meet its obligations on outstanding TANs.

BOND ANTICIPATION NOTES. Bond anticipation notes ("BANs") are sold as
interim financing in anticipation of a bond sale. The ability of a municipal
issuer to retire its BANs is primarily dependent on the issuer's adequate
access to the longer term municipal bond market and the likelihood that the
proceeds of such bond sales will be used to pay the principal of, and
interest on, BANs.

REVENUE ANTICIPATION NOTES. Revenue anticipation notes ("RANs") are
sold as interim financing in anticipation of receipt of other revenues. A
decline in the receipt of certain revenues, such as anticipated revenues
from another level of government, could adversely affect an issuer's ability
to meet its obligations on outstanding RANs.

TANS, BANS AND RANS MAY BE GENERAL OBLIGATIONS OF THE ISSUER.

FLOATING OR VARIABLE RATE OBLIGATIONS. Floating or variable rate
obligations bear interest at rates that are not fixed, but vary with changes in
specified market rates or indices, such as the prime rate, and at specified
intervals. Certain of the floating or variable rate obligations that may be
purchased by the Funds may carry a demand feature that would permit the holder
to tender them back to the issuer at par value prior to maturity. Such
obligations include variable rate master demand notes, which are unsecured
instruments issued pursuant to an agreement between the issuer and the holder
that permit the interest rate thereunder to vary and provide for periodic
adjustments in the interest rate. The Adviser will monitor on an ongoing basis
the ability of an issuer of a demand instrument to pay principal and interest on
demand.

CUSTODIAL RECEIPTS OR CERTIFICATES. Custodial receipts or certificates are
undivided interests in underlying securities issued by a bank, insurance company
or other financial institution which possesses such underlying securities. The
issuer of the custodial receipts or certificates typically deposits the
underlying securities in an irrevocable trust or custodial account with a
custodian bank. The Funds may purchase participation certificates that represent
interests in obligations that may otherwise be purchased by the Funds. A Fund's
undivided interest in the underlying obligations is the proportion that the
Fund's interest bears to the total principal amount of such obligations. Certain
of such participation certificates, sometimes called tender option bonds, may
carry a demand feature that would permit the holder to tender them back to the
issuer or to a third party prior to maturity.

MUNICIPAL LEASE OBLIGATIONS. Municipal lease obligations are entered into
by a State or a political subdivision to finance the acquisition or construction
of equipment, land or facilities. Municipal lease obligations do not constitute
general obligations of the issuer and the interest on a municipal lease
obligation may become taxable if the lease is assigned. If the governmental user
does not appropriate sufficient funds

55
----------------------
<PAGE>
for the following year's lease payments, the lease will terminate, with the
possibility of default on the lease obligations and loss to the Funds.
Disposition of the property in the event of foreclosure may prove difficult. The
Funds may purchase unrated municipal lease obligations. In such case, the
Company's Board of Directors will be responsible for determining the credit
quality of such leases on an ongoing basis, including the assessment of the
likelihood that the lease will not be canceled. These securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional securities.

VARIABLE RATE AUCTION SECURITIES AND INVERSE FLOATERS. Variable rate
auction securities and inverse floaters are instruments created when an issuer
or dealer separates the principal portion of a long-term, fixed-rate municipal
bond into two long-term, variable rate instruments. The interest rate on the
variable rate auction portion reflects short-term interest rates, while the
interest rate on the inverse floater portion is typically higher than the rate
available on the original fixed-rate bond. Changes in the interest rate paid on
the portion of the issue relative to short-term interest rates inversely affect
the interest rate paid on the latter portion of the issue. The latter portion
therefore is subject to greater price volatility than the original fixed-rate
bond. Since the market for these instruments is new, the holder of one portion
may have difficulty finding a ready purchaser. Depending on market availability,
the two portions may be recombined to form a fixed-rate municipal bond.

MUNICIPAL COMMERCIAL PAPER. Municipal commercial paper that may be
purchased by the Funds includes short-term obligations of a state, regional or
local governmental entity. Such paper is likely to be issued to meet seasonal
working capital needs of a municipality or as interim construction financing.
Municipal commercial paper, which may be unsecured, may be backed by a letter of
credit lending agreement, note repurchase agreement or other credit facility
agreement offered by banks or other institutions.

From time to time, each such Fund may invest 25% or more of its assets in
any obligations whose debt service is paid from revenues of similar projects
(such as utilities or hospitals) or whose issuers share the same geographic
location. As a result, a Fund may be more susceptible to a single economic,
political or regulatory development than would a portfolio of securities with a
greater variety of issuers. These developments include proposed legislation or
pending court decisions affecting the financing of such projects and market
factors affecting the demand for their services or products.

In California, municipal bonds may also be secured by property taxes in
specially created districts (Mello-Roos bonds or Special Assessment bonds), tax
allocations based on increased property tax assessments over a specified period,
frequently for redevelopment projects, or specified redevelopment area sales tax
allocations.

Because the California Municipal and New York Municipal Funds will invest
primarily in obligations issued by a single state (i.e., California and New
York, respectively) and such state's counties, municipalities and other public
authorities and their agencies and instrumentalities and their various political
subdivisions, they are more susceptible to factors adversely affecting issuers
of such obligations than a comparable municipal securities fund that is not so
concentrated. See "Risks of Investing in the Funds-Municipal Securities" in this
Prospectus, and "Appendix A: Special Factors Affecting the California Municipal
Fund" and "Appendix B: Special Factors Affecting the New York Municipal Fund" in
the Statement of Additional Information for further information.

OTHER PERMITTED INVESTMENTS. Each such Fund may invest up to 35% of its
assets in taxable obligations, including taxable high-quality short-term money
market instruments in the following circumstances: (a) when, in the opinion of
the Adviser, the inclusion of taxable securities will enhance the expected
after-tax return of a Fund; (b) pending investment of the proceeds of sales of
shares of a Fund or sales of portfolio securities; (c) pending settlement of
purchases of portfolio securities; or (d) to maintain liquidity for the purpose
of meeting anticipated redemptions or exchanges.

Each Fund may invest in the following taxable high-quality short-term money
market instruments: (i) obligations of the U.S. Government and its agencies and
instrumentalities ("U.S. Government Securities"); (ii) commercial paper of
issuers rated, at the time of purchase, "A-1" by S&P, "P-1" by Moody's, or "F-1"
or better by Fitch or which if unrated, in the opinion of the Adviser, are of
comparable quality;

56
- ---------------------------
<PAGE>
(iii) certificates of deposit, bankers' acceptances or time deposits of any bank
whose long-term debt obligations have been rated "AAA" by S&P or "Aaa" by
Moody's; and (iv) repurchase agreements with respect to such obligations.

In addition, the California Municipal and New York Municipal Funds may,
during seasonal variations or other shortages in the supply of suitable
California or New York Municipal Securities, as the case may be, invest more
than 35% of its total assets in Municipal Securities issued by other states,
their agencies or instrumentalities the interest on which is exempt from federal
income tax, but not California or New York State and local personal income
taxes, as the case may be, if, in the opinion of the Adviser, adverse conditions
prevail in the market for California Municipal Securities or New York Municipal
Securities (including conditions under which such obligations are unavailable
for investment).

Each Fund may, for temporary defensive purposes, invest without limitation
in taxable, high quality short term money market instruments if, in the opinion
of the Adviser, adverse conditions prevail in the markets for municipal
securities (including conditions under which such obligations are unavailable
for investment). Any net interest income derived from taxable securities and
distributed by a Fund will be taxable as ordinary income when distributed. In
addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Funds may temporarily 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.

To the extent that the Funds deviate from their investment policies as a
result of the unavailability of suitable obligations or for other defensive
purposes, their investment objectives may not be achieved.

RISKS OF INVESTING IN THE FUNDS

GENERAL

Each Fund's NAV will fluctuate, reflecting fluctuations in the market value
of its portfolio positions and its net currency exposure. The value of the
securities held by each Fund generally fluctuates, to varying degrees and
depending on the objectives and policies of the Fund, based on, among other
things, (i) interest rate movements and, for debt securities, their duration,
(ii) changes in the actual and perceived creditworthiness of the issuers of such
securities, (iii) changes in any applicable foreign currency exchange rates,
(iv) social, economic or political factors, (v) factors affecting the industry
in which the issuer operates, such as competition or technological advances, and
(vi) factors affecting the issuer directly, such as management changes or labor
relations. There is no assurance that any Fund will achieve its investment
objectives.

INTEREST RATE FLUCTUATIONS AND CREDIT RISK

The performance of the Funds depends in part on interest rate changes. As
interest rates increase, the value of the fixed income securities held by a Fund
tends to decrease. This effect will be more pronounced with respect to
investments by a Fund in mortgage-related securities, the value of which are
more sensitive to interest rate changes. To the extent a Fund invests in
securities with longer maturities, the volatility of the Fund in response to
changes in interest rates can be expected to be greater than if the Fund had
invested in comparable securities with shorter maturities. The performance of
the Funds will also depend on the credit quality of their investments.

SECURITIES OF NON-U.S. ISSUERS

Each of the Funds (other than the Municipal Funds) may invest all or some
portion of its assets in securities of non-U.S. issuers. You should recognize
that investing in securities of non-U.S. issuers involves certain risks and
special considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. issuers. Further, certain
investments of these Funds, and investment techniques in which they may engage
involve risks, including those set forth below. There is generally no limit on
the amount that the Emerging Markets Bond or Total Return Funds may invest in
issuers located in any one country, or in securities denominated in the currency
of any one country. Therefore, to the extent the Fund concentrates its
investments in only a few countries, it may be more susceptible to factors
adversely affecting particular countries than comparable funds that are not so
concentrated.

57
----------------------
<PAGE>

SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many countries in which the High
Yield, Emerging Markets Bond, Latin America Equity and Total Return Funds will
invest, and the Latin American and other emerging market countries in
particular, may be subject to a substantially greater degree of social,
political and economic instability than is the case in the United States, Japan
and Western European countries. Such instability may result from, among other
things, some or all of the following: (i) authoritarian governments or military
involvement in political and economic decision-making, and changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies and terrorist activities; (iv) hostile relations with neighboring
countries; and (v) drug trafficking. Social, political and economic instability
could significantly disrupt the principal financial markets in which the Funds
invest and adversely affect the value of the Funds' assets.

Individual foreign economies in general and those of Latin American and
other emerging market countries in particular, may differ favorably or
unfavorably and significantly from the U.S. economy in such respects as the rate
of growth of gross domestic product or gross national product, rate of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, structural unemployment and balance of payments position.
Governments of many of these countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In some cases,
the government owns or controls many companies, including some of the largest in
the country. Accordingly, government actions in the future could have a
significant effect on economic conditions in many countries, including Latin
American and other emerging market countries, which could affect private sector
companies and the Funds, and on market conditions, prices and yields of
securities in the Funds' portfolios. There may be the possibility of
nationalization or expropriation of assets, or future confiscatory levels of
taxation affecting the Funds. In the event of nationalization, expropriation or
other confiscation, a Fund may not be fairly compensated for its loss and could
lose its entire investment in the country involved.

INVESTMENT AND REPATRIATION RESTRICTIONS. Investment by the Funds in
non-U.S. issuers may be restricted or controlled to varying degrees. These
restrictions may limit or preclude investment in certain of such issuers or
countries and may increase the costs and expenses of the Funds. For example,
certain countries require governmental approval prior to investments by foreign
persons in the country or in a particular company or industry sector or limit
investment by foreign persons to only a specific class of securities of a
company which may have less advantageous terms (including price) than securities
of the company available for purchase by nationals. Certain countries may also
restrict or prohibit investment opportunities in issuers or industries deemed
important to national interests. As a result of investment restrictions the
Funds may, in certain countries, such as Mexico, invest through intermediary
vehicles or trusts. In addition, the repatriation of both investment income and
capital from some of these countries requires governmental approval and if there
is a deterioration in a country's balance of payments or for other reasons, a
country may impose temporary restrictions on foreign capital remittances abroad.
Even where there is no outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects of the operation of the
Funds.

The Funds could be adversely affected by delays in, or a refusal to grant
any required governmental approval for repatriation of capital, as well as by
the application to a Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, a Fund was unable to distribute
substantially all of its net investment income and net capital gain within
applicable time periods, the Fund could be subject to U.S. federal income and
excise taxes which would not otherwise be incurred and may cease to qualify for
the favorable tax treatment afforded to regulated investment companies under
Internal Revenue Code of 1986, as amended (the "Code"), in which case it would
become subject to U.S. federal income tax on all of its income and gains. See
"Taxes" below.

CURRENCY FLUCTUATIONS. To the extent that a Fund invests in the securities
of non-U.S. issuers which are denominated in foreign currencies, the strength or
weakness of the U.S. dollar against such foreign currencies will account for
part of the Fund's investment performance. A decline in the value of any
particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of each Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's NAV and any net
investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.

58
- ---------------------------
<PAGE>
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the United States, and other economic and financial conditions affecting the
world economy.

Although the Funds value their assets daily in terms of U.S. dollars, the
Funds do not intend to convert their holdings of foreign currencies into U.S.
dollars on a daily basis. A Fund will do so from time to time, and you should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.

EURO RISK. Upon the introduction of the European common currency, the euro,
the participating countries ceased to retain control of their respective
monetary policies and agreed to follow a single monetary policy established by
the European Central Bank. For participating countries, adopting the same
monetary policy, regardless of the conditions of their domestic economies, could
have a negative impact on their economies. Some of the economic criteria for the
participating countries include the following: a sustainable budget deficit less
than 3% of Gross Domestic Product (GDP), public debt less than 60% of GDP, low
inflation and interest rates and no currency devaluations within two years of
application. Some of the original participating countries do not yet meet these
standards, but are expected to be compliant before 2002. Countries joining later
may have to be in strict accord before entering the European Monetary Union, or
at least be well along the path to achieving them. So far, the transition seems
to be progressing smoothly, but there has been resistance to some of the more
stringent terms. Therefore, it is unclear whether complete economic and monetary
convergence will be attained as planned.

MARKET CHARACTERISTICS; DIFFERENCES IN SECURITIES MARKETS. The securities
markets in many countries, and in Latin American and other emerging market
countries in particular, generally have substantially less volume than the New
York Stock Exchange, and equity securities of most companies listed on such
markets may be less liquid and more volatile than equity securities of U.S.
companies of comparable size. Some of the stock exchanges outside of the United
States and in Latin American and other emerging market countries, to the extent
that established securities markets even exist, are in the earlier stages of
their development. A high proportion of the shares of many foreign companies may
be held by a limited number of persons, which may limit the number of shares
available for investment by the Funds. A limited number of issuers in most, if
not all, of these securities markets may represent a disproportionately large
percentage of market capitalization and trading volume. In addition, the
application of certain 1940 Act provisions may limit the Funds' ability to
invest in certain non-U.S. issuers and to participate in public offerings in
these countries. The limited liquidity of certain non-U.S. securities markets
may also affect the Funds' ability to acquire or dispose of securities at the
price and time it wishes to do so.

59
----------------------
<PAGE>
securities for speculative purposes, the equity securities traded in any such
country may trade at price-earning multiples higher than those of comparable
companies trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.

Trading practices in certain foreign securities markets are also
significantly different from those in the United States. Brokerage commissions
and other transaction costs on the securities exchanges in many countries are
generally higher than in the United States. In addition, securities settlements
and clearance procedures in certain countries, and, in Latin American and other
emerging market countries in particular, are less developed and less reliable
than those in the United States and the Funds may be subject to delays or other
material difficulties and could experience a loss if a counterparty defaults.
Delays in settlement could result in temporary periods when assets of the Funds
are uninvested and therefore no return is earned. The inability of a Fund to
make intended security purchases due to settlement problems could cause such
Fund to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to a
Fund due to subsequent declines in the value of such portfolio security or, if
such Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.

NON-U.S. SUBCUSTODIANS. Rules adopted under the 1940 Act permit the Funds,
to the extent they invest outside the U.S., to maintain their non-U.S.
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in non-U.S. countries may not be eligible
subcustodians for the Funds, in which event the Funds may be precluded from
purchasing securities in which they would otherwise invest, and other banks that
are eligible subcustodians may be recently organized or otherwise lack extensive
operating experience. At present, custody arrangements complying with the
requirements of the Securities and Exchange Commission ("SEC") are available in
each of the countries in which the Adviser intends to invest. In certain
countries in which the Funds may make investments, there may be legal
restrictions or limitations on the ability of the Funds to recover assets held
in custody by subcustodians in the event of the bankruptcy of the subcustodian.

GOVERNMENT SUPERVISION; LEGAL SYSTEMS. Disclosure and regulatory standards
in certain foreign countries, including Latin American and other emerging market
countries, are in many respects less stringent than U.S. standards. There may be
less government supervision and regulation of securities exchanges, listed
companies and brokers in these countries than exists in the United States.
Brokers in some countries may not be as well capitalized as those in the United
States, so that they may be more susceptible to financial failure in times of
market, political, or economic stress, exposing the Funds to a risk of loss.
Less information may be available to the Funds than with respect to investments
in the United States and, in certain of these countries, less information may be
available to the Funds than to local market participants. In addition, existing
laws and regulations are often inconsistently applied. Foreign investors may be
adversely affected by new laws and regulations, changes to existing laws and
regulations and preemption of local laws and regulations by national laws. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.

60
- ---------------------------
<PAGE>

FOREIGN TAXES. A Fund's investment income from foreign issuers may be
subject to non-U.S. withholding taxes, thereby reducing that Fund's net
investment income. For more information about tax risks related to the Funds,
see "Taxes" below and "Additional Information Concerning Dividends,
Distributions and Taxes" in the Statement of Additional Information.

HIGH YIELD, HIGH RISK DEBT SECURITIES

GENERAL. The High Yield, Emerging Markets Bond and Total Return Funds may
invest all or substantially all of their respective assets and the Latin America
Equity and the Municipal Funds may invest up to 20% of their total assets, in
high yield, high risk debt securities. High yield, high risk debt securities are
those debt securities rated below investment grade and unrated securities of
comparable quality. They offer yields that fluctuate over time, but which
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks,
including greater price volatility and a greater risk of default in the timely
payment of principal and interest, than higher-rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which the Funds may invest may have, or be
considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's, S&P or D&P (i.e., rated C
by Moody's or D by S&P or D&P). Under rating agency guidelines, these securities
are considered to have extremely poor prospects of ever attaining investment
grade standing, to have a current identifiable vulnerability to default, to be
unlikely to have the capacity to pay interest and repay principal when due in
the event of adverse business, financial or economic conditions, and/or to be in
default or not current in the payment of interest or principal. Such securities
are considered speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. Unrated
securities deemed comparable to these lower- and lowest-rated securities will
have similar characteristics. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by the
Funds with a commensurate effect on the value of their respective shares.
Therefore, an investment in the Funds should not be considered as a complete
investment program for all investors.

The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for higher-
rated securities and the secondary markets could contract under adverse market
or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on a
Fund's ability to dispose of particular portfolio investments and may limit its
ability to obtain accurate market quotations for purposes of valuing securities
and calculating NAV. If a Fund is not able to obtain precise or accurate market
quotations for a particular security, it will become more difficult for the
Company's Board of Directors to value such Fund's portfolio securities and the
Company's Directors may have to use a greater degree of judgment in making such
valuations. Furthermore, adverse publicity and investor perceptions about
lower-rated securities, whether or not based on fundamental analysis, may tend
to decrease the market value and liquidity of such lower-rated securities. Less
liquid secondary markets may also affect each Fund's ability to sell securities
at their fair value. In addition, each of the Funds may invest up to 15% of its
net assets, measured at the time of investment, in illiquid securities, which
may be more difficult to value and to sell at fair value. If the secondary
markets for high yield, high risk debt securities contract due to adverse
economic conditions or for other reasons, certain previously liquid securities
in a Fund's portfolio may become illiquid and the proportion of the Fund's
assets invested in illiquid securities may increase.

The ratings of fixed income securities by Moody's, S&P and D&P are a
generally accepted barometer of credit risk. You should be aware, however, that
they are subject to certain limitations. 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.

61
----------------------
<PAGE>
FIXED INCOME DEBT SECURITIES. Each of the Funds (other than the Municipal
Funds) may invest in fixed income debt securities. Changes in market yields will
affect a Fund's NAV 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 term securities in response to interest rate changes, particularly if
such securities were purchased at a discount. While the market values of
securities rated below investment grade and comparable unrated securities tend
to react less to fluctuations in interest rate levels than do those of
higher-rated securities, the market values of certain of these securities also
tend to be more sensitive to individual issuer developments and changes in
economic conditions than higher-rated securities. In addition, such securities
generally present a higher degree of credit risk. Corporate issuers of
securities valued below investment grade and comparable unrated securities are
often highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default in payment of interest or
principal by such issuers is significantly greater than with investment grade
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.

Many fixed income securities, contain call or buy-back features which permit
the issuer of the security to call or repurchase it. Such securities may present
risks based on payment expectations. If an issuer exercises such a "call option"
and redeems the security, a Fund may have to replace the called security with a
lower yielding security, resulting in a decreased rate of return for such Fund.

SOVEREIGN DEBT SECURITIES. Each of the Funds (other than the Municipal
Funds) may invest in sovereign debt securities. Investing in sovereign debt
securities will expose the Funds to the direct or indirect consequences of
political, social or economic changes in the countries, including developing or
emerging countries such as those in Latin America, that issue the securities.
The ability and willingness of sovereign obligors in developing and emerging
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country. Emerging
and developing countries such as those in which the Funds may invest have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations, trade difficulties
and extreme poverty and unemployment. Many of these countries are also
characterized by political uncertainty or instability. Additional factors which
may influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.

The ability of a foreign sovereign obligor to make timely and ultimate
payments on its external debt obligations will also be strongly influenced by
the obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings from foreign trade to service its external debt, it
may need to depend on continuing loans and aid from foreign governments,
commercial banks and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates.

62
- ---------------------------
<PAGE>
The ability to service external debt will also depend on the level of the
relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.

As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Funds may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.

Sovereign obligors in developing and emerging countries, including those in
Latin America, are among the world's largest debtors to commercial banks, other
governments, international financial organizations and other financial
institutions. These obligors have in the past experienced substantial
difficulties in servicing their external debt obligations, which led to defaults
on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds, and obtaining new credit to finance interest payments. Holders of
certain foreign sovereign debt securities may be requested to participate in the
restructuring of such obligations and to extend further loans to their issuers.
There can be no assurance that the Brady Bonds and other foreign sovereign debt
securities in which the Funds may invest will not be subject to similar defaults
or restructuring arrangements which may adversely affect the value of such
investments. Furthermore, certain participants in the secondary market for such
debt may be directly involved in negotiating the terms of these arrangements and
may therefore have access to information not available to other market
participants.

In addition to high yield foreign sovereign debt securities, the Funds may
also invest in foreign corporate securities. For a discussion of such securities
and their associated risks, see "Securities of Non-U.S. Issuers", above.

MORTGAGE SECURITIES

The investment characteristics of mortgage-related securities differ from
traditional debt securities. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. The major differences typically include more frequent
interest and principal payments, usually monthly, the adjustability of interest
rates, and the possibility that prepayments of principal may be made at any
time. Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors. During periods of
declining interest rates, prepayment rates can be expected to accelerate. Under
certain interest rate and prepayment rate scenarios, the Mortgage Securities
Fund may fail to recoup fully its investment in mortgage-backed securities (and
incur capital losses) notwithstanding a direct or indirect governmental or
agency guarantee. In general, changes in the rate of prepayments on a
mortgage-related security will change that security's market value and its yield
to maturity. When interest rates fall, high prepayments could force the Mortgage
Securities Fund to reinvest principal at a time when investment opportunities
are not attractive. Thus, mortgage-backed securities may not be an effective
means for the Mortgage Securities Fund to lock in long-term interest rates.
Conversely, during periods when interest rates rise, slow prepayments could
cause the average life of the security to lengthen and the value to decline more
than anticipated. However, during periods of rising interest rates, principal
repayments by mortgage-backed securities allows the Mortgage Securities Fund to
reinvest at increased interest rates.

63
----------------------
<PAGE>

types of credit enhancement. Such credit support falls into two categories:
(1) liquidity protection; and (2) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the pass-through of payments due on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches.

MUNICIPAL SECURITIES

CONCENTRATION. Because the California Municipal and New York Municipal
Funds will invest primarily in obligations issued by the States of California
and New York, respectively, and their agencies, instrumentalities and various
political subdivisions, these Funds are more susceptible to factors adversely
affecting issuers of such obligations than comparable municipal securities funds
that are not so concentrated.

CALIFORNIA ISSUERS. California is experiencing significant financial
difficulties, which have reduced its credit standing. The ratings of certain
related debt of other issuers for which California has an outstanding lease
purchase, guarantee or other contractual obligation (such as state-insured
hospital bonds) are generally linked directly to California's rating. Should the
financial condition of California deteriorate further, its credit ratings could
be further reduced, the market value and marketability of all outstanding notes
and bonds issued by California, its public authorities or local governments
could be adversely affected, and the income derived by the California Municipal
Fund and its ability to preserve capital and liquidity could be adversely
affected. See "Appendix A: Special Factors Affecting the California Municipal
Fund" in the Statement of Additional Information for further information.

NEW YORK ISSUERS. New York State, New York City and other issuers of New
York Municipal Securities have, at various times in the past, encountered
financial difficulties. A continuation or recurrence of the financial
difficulties previously experienced by the issuers of New York Municipal
Securities could result in defaults or declines in the market values of those
issuers' existing obligations and, possibly, in the obligations of other issuers
of New York Municipal Securities and the income derived by the Fund and its
ability to preserve capital and liquidity could be adversely affected. See
"Appendix B: Special Factors Affecting the New York Municipal Fund" in the
Statement of Additional Information for further information.

LIQUIDITY. The Adviser believes that, in general, the secondary market for
municipal obligations is less liquid than that for most taxable fixed income
securities. Consequently, the ability of each Fund to buy and sell municipal
obligations may, at any particular time and with respect to any particular
securities, be limited. The amount of information about the financial condition
of an issuer of municipal obligations may not be as extensive as information
about corporations whose securities are publicly traded. Obligations of issuers
of

64
- ---------------------------
<PAGE>
municipal obligations may be subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the U.S.
Bankruptcy Code and applicable state laws, which could limit the ability of the
Funds to recover payments of principal or interest on such securities.

CALLABLE SECURITIES. Certain tax exempt securities which may be held by
each such Fund may permit the issuer at its option to "call," or redeem, its
securities. If an issuer were to redeem tax exempt securities held by a Fund
during a time of declining interest rates, the Fund may realize a capital loss
on its investment if the security was purchased at a premium and may not be able
to reinvest the proceeds in tax exempt securities providing as high a level of
investment return as the securities redeemed. For additional considerations
relating to the Funds' investments in tax-exempt securities, including investing
in municipal leases, see "Non-Primary Investment Strategies and Related Risks"
in the Statement of Additional Information.

TAXES. All or a portion of each Municipal Fund's dividends may be subject
to alternative minimum tax and the National Municipal Fund's dividends may be
subject to state or local taxation. In addition, each of these Funds may invest
up to 20% of their respective assets in non-municipal obligations. Certain
provisions in the Code relating to the issuance of municipal obligations impose
restrictions on the volume of municipal obligations qualifying for federal tax
exemption. One effect of these provisions could be to increase the cost of the
tax exempt securities available for purchase by the Funds and thus reduce
available yield. Legislative proposals that may further restrict or eliminate
the federal income tax exemption for interest on municipal obligations may be
introduced in the future. See "Taxes" below.

CONVERTIBLE SECURITIES

GENERAL. Each Fund (other than the U.S. Government Securities Fund, the
Mortgage Securities Fund and the Municipal Funds) may invest in convertible
securities. Set forth below is additional information concerning traditional
convertible securities and "synthetic" convertible securities.

Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. With respect to convertible securities denominated in a
currency different from that of the underlying equity securities, the conversion
price may be based on a fixed exchange rate established at the time the security
is issued. As a result, fluctuations in the exchange rate between the currency
in which the debt security is denominated and the currency in which the share
price is quoted will affect the value of the convertible security. The Funds may
enter into foreign currency hedging transactions in which they may seek to
reduce the impact of such fluctuations.

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.

65
----------------------
<PAGE>
Holders of convertible securities have a claim on the assets of the issuer
prior to the common stockholders but may be subordinated to similar
non-convertible debt securities of the same issuer. A convertible security may
be subject to redemption at the option of the issuer at a price established in
the charter provision, indenture or other governing instrument pursuant to which
the convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security.

SYNTHETIC CONVERTIBLE SECURITIES. "Synthetic" convertible securities are
created by combining separate securities that possess the two principal
characteristics of a true convertible security, i.e., fixed income ("fixed
income component") and the right to acquire equity securities ("convertibility
component"). The fixed income component is achieved by investing in
nonconvertible fixed income securities such as nonconvertible bonds, preferred
stocks and money market instruments. The convertibility component is achieved by
investing in warrants, exchanges or NASDAQ-listed call options or stock index
call options granting the holder the right to purchase a specified quantity of
securities within a specified period of time at a specified price or to receive
cash in the case of stock index options.

A warrant is an instrument issued by a corporation that gives a holder the
right to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of the
security underlying the warrant may not exceed the exercise price of the warrant
and the warrant may expire without any value. See "Hedging and Derivatives"
below for a discussion of call options and stock index call options.

A synthetic convertible security differs from a traditional convertible
security in several respects. Unlike a traditional convertible security, which
is a single security having a unitary market value, a synthetic convertible
security is comprised of two or more separate securities, each with its own
market value. Therefore, the "market value" of a synthetic convertible security
is the sum of the values of its fixed income component and its convertibility
component. For this reason, the values of a synthetic convertible security and a
traditional convertible security will respond differently to market
fluctuations.

More flexibility is possible in the assembly of a synthetic convertible
security than in the purchase of a convertible security. Synthetic convertible
securities may be selected where the two components represent one issuer or are
issued by a single issuer, thus making the synthetic convertible security
similar to a traditional convertible security. Alternatively, the character of a
synthetic convertible security allows the combination of components representing
distinct issuers which will be used when the Adviser believes that such a
combination would better promote a Fund's investment objective. A synthetic
convertible security also is a more flexible investment in that its two
components may be purchased or sold separately. For example, a Fund may purchase
a warrant for inclusion in a synthetic convertible security but temporarily hold
short-term investments while postponing the purchase of a corresponding bond
pending development of more favorable market conditions.

A holder of a synthetic convertible security faces the risk of a decline in
the price of the stock or the level of the index involved in the convertibility
component, causing a decline in the value of the call option or warrant. Should
the price of the stock fall below the exercise price and remain there throughout
the exercise period, the entire amount paid for the call option or warrant would
be lost. Since a synthetic convertible security includes the fixed income
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the fixed
income instrument.

SHORT SALES

Short sales by the Funds involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested. The
Funds are permitted to engage in short sales only with respect to securities
related to those in their portfolios. The Adviser

66
- ---------------------------
<PAGE>
therefore expects that if the price of the securities a Fund is required to
replace in connection with a short sale increases, the value of the related
securities in the Fund's portfolio will also increase, although not necessarily
in the same proportion.

NON-DIVERSIFIED FUNDS

Each Fund is classified as a "non-diversified" fund under the 1940 Act,
which means that the Funds are not limited by the 1940 Act in the proportion of
their assets that may be invested in the obligations of a single issuer. Each
Fund, however, intends to comply with the diversification requirements imposed
by the Internal Revenue Code of 1986, as amended (the "Code") for qualification
as a regulated investment company. Thus, a Fund may invest a greater proportion
of its assets in the securities of a smaller number of issuers and, as a result,
will be subject to greater risk of loss with respect to its portfolio
securities.

HEDGING AND DERIVATIVES

Each of the Funds may be authorized to use a variety of investment
strategies described below to hedge various market risks (such as, to the extent
applicable, interest rates, currency exchange rates and broad or specific market
movements), to manage the effective maturity or duration of debt instruments
held by a Fund, or to seek to increase the Fund's income or gain. Limitations on
the portion of a Fund's assets that may be used in connection with the
investment strategies described below are set out in Appendix B to this
Prospectus.

A Fund may (if and to the extent so authorized and consistent with the
Fund's objective and policies) purchase and sell (or write) exchange-listed and
over-the-counter put and call options on securities, index futures contracts,
financial futures contracts and fixed income indices and other financial
instruments, enter into financial futures contracts, enter into interest rate
transactions, and enter into currency transactions (collectively, these
transactions are referred to in this Prospectus as "Hedging and Derivatives"). A
Fund's interest rate transactions may take the form of swaps, caps, floors and
collars, and a Fund's currency transactions may take the form of currency
forward contracts, currency futures contracts, currency swaps and options on
currencies or currency futures contracts.

Hedging and Derivatives may generally be used to attempt to protect against
possible changes in the market value of securities held or to be purchased by a
Fund resulting from securities markets or currency exchange rate fluctuations,
to protect a Fund's unrealized gains in the value of its securities, to
facilitate the sale of those securities for investment purposes, to manage the
effective maturity or duration of a Fund's securities or to establish a position
in the derivatives markets as a temporary substitute for purchasing or selling
particular securities. A Fund may use any or all types of Hedging and
Derivatives which it is authorized to use at any time; no particular strategy
will dictate the use of one type of transaction rather than another, as use of
any authorized Hedging and Derivatives will be a function of numerous variables,
including market conditions. The ability of a Fund to utilize Hedging and
Derivatives successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select a Fund's
securities. None of the Funds is a "commodity pool" (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Derivatives involving futures contracts and
options on futures contracts will be purchased, sold or entered into only for
bona fide hedging, and non-hedging purposes to the extent permitted by CFTC
regulations; provided that a Fund may enter into futures contracts or options
thereon for purposes other than bona fide hedging if immediately thereafter, the
sum of the amount of its initial margin and premiums on open contracts would not
exceed 5% of the liquidation value of such Fund's portfolio; provided further,
than in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation. The
use of certain Hedging and Derivatives will require that a Fund segregate cash,
U.S. government securities or other liquid assets to the extent such Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency.

67
----------------------
<PAGE>
To the extent a Fund conducts Hedging and Derivatives outside the United
States, such transactions may be subject to political, economic and legal risks
that are distinct from domestic transactions. Such risks are similar to those
applicable to investment in foreign securities described under "Securities of
Non-U.S. Issuers" above.

The Funds will not be obligated to pursue any of the Hedging and Derivatives
strategies and the Funds make no representation as to the availability of these
techniques at this time or at any time in the future. In addition, the Funds'
ability to pursue certain of these strategies may be limited by current economic
conditions, the Commodity Exchange Act, as amended, applicable rules and
regulations of the 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 SEC, the CFTC, the Code or
their investment objectives and policies, the Funds may utilize, without
limitation, Hedging and Derivatives.

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 appears in Appendix B. Risks associated with
Hedging and Derivatives are also described in Appendix B to this Prospectus.

YEAR 2000

The Company did not experience any significant malfunctions or errors in the
computer systems used by its service providers when the date changed from 1999
to 2000. Based on operations since January 1, 2000, the Company does not expect
any significant impact to its on-going business as a result of the "Year 2000
issue." However, it is possible that the full impact of the date change, which
was of concern due to computer programs that use two digits instead of four
digits to define years, has not been fully recognized. For example, it is
possible that Year 2000 or similar issues may affect the computer systems used
by the Company's service providers at month, quarter or year end. The Company
believes that any such problems are likely to be minor and correctable.

68
- ---------------------------

<PAGE>
MANAGEMENT OF THE FUNDS

INVESTMENT ADVISER

The OFFIT Investment Fund, Inc. (the "Company") receives investment
advisory services from OFFITBANK, whose principal address is 520 Madison
Avenue, New York, New York 10022 (the "Adviser" or "OFFITBANK"). OFFITBANK is
a subsidiary of the Wachovia Corporation, a leading bank holding company with
Wachovia Bank, NA as its principal subsidiary. OFFITBANK manages each Fund's
business and investment activities, subject to the authority of the Company's
Board of Directors. OFFITBANK's principal business is providing discretionary
investment management services to high net worth individuals and family
groups, foundations, endowments and corporations. OFFITBANK specializes in
global fixed income asset management and offers its clients a complete range
of investments in the major capital markets of the world. OFFITBANK currently
manages approximately $10.7 billion in assets and serves as investment
adviser to twenty registered investment company portfolios. Stephen T.
Shapiro serves as the portfolio manager of the High Yield Fund. Mr. Shapiro
is a Managing Director of OFFITBANK and has been associated with OFFITBANK
since 1983. Richard M. Johnston and Richard C. Madigan serve as portfolio
managers of the Emerging Markets Bond Fund. Mr. Johnston is a Managing
Director of OFFITBANK and has been director of OFFITBANK's Latin American
investments since 1991. Mr. Madigan co-heads OFFITBANK's emerging markets
investment team and has been associated with OFFITBANK since 1998. From 1996
to 1998, Mr. Madigan was Vice President and Principal of the Emerging Markets
Fixed Income Institutional Sales group at JP Morgan Securities, Inc. and from
1994 to 1996, Mr. Madigan was Vice President and Principal of the Cross
Border Finance Group at Citicorp Securities, Inc. Mr. Johnston and Scott D.
McKee serve as the portfolio managers of the Latin America Equity Fund. Mr.
McKee has been associated with OFFITBANK since February 2000. From 1994 to
2000, Mr. McKee established and led JP Morgan's emerging markets corporate
research team. Stephen Blitz and Issac Frankel serve as the portfolio
managers of the U.S. Government Securities, Mortgage Securities and Total
Return Funds. Mr. Blitz is a Managing Director of OFFITBANK and has been
associated with OFFITBANK since 1989. Mr. Frankel has been associated with
OFFITBANK since 1999. From 1994 to 1999, Mr. Frankel was Executive Vice
President at Andrew M. Carter & Company, where he developed and implemented a
fixed income relative value strategy for endowment and corporate pension
accounts. Carolyn N. Dolan and Michael Pietronico serve as the portfolio
managers of the New York Municipal Fund. Ms. Dolan has been associated with
OFFITBANK since 1983, with responsibilities for OFFITBANK's tax sensitive and
cross market portfolios. Mr. Pietronico has been associated with OFFITBANK
since 1992 and specializes in municipal securities. John H. Haldeman, Jr. and
Mr. Pietronico serve as the portfolio managers of the California Municipal
Fund. Mr. Haldeman is a Managing Director of OFFITBANK and has been
associated with OFFITBANK since 1988, with responsibilities in fixed income
portfolio management, specializing in municipal securities. Mr. Haldeman and
Mr. Pietronico also serve as the portfolio managers of the National Municipal
Fund.

For the fiscal year ended December 31, 1999, OFFITBANK received the
following fees, after waivers and reimbursements, as a percentage of the
following Fund's average net assets: High Yield Fund .70%, Emerging Markets Bond
Fund .90%, Latin America Equity Fund 1.00%, U.S. Government Securities Fund
.19%, Mortgage Securities Fund .22%, California Municipal Fund .06%, New York
Municipal Fund .24% and National Municipal Fund .13%.

The following chart shows the Company's other service providers and includes
their addresses and principal activities.

69
----------------------
<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
SHAREHOLDERS
Distribution and
Shareholder
Services

PRINCIPAL DISTRIBUTOR TRANSFER AGENT
OFFIT FUNDS DISTRIBUTOR, INC. PFPC INC.
3200 HORIZON DRIVE 400 BELLEVUE PARKWAY
KING OF PRUSSIA, PA 19406 WILMINGTON, DE 19809
Distributes Select Shares and Handles shareholder services,
contracts with Shareholder including recordkeeping and
Servicing Agents who distribute statements, distribution of
and redeem Advisor Shares and dividends and processing of buy
provide various services to and sell requests.
beneficial owners of Advisor
Shares.
Asset
Management

INVESTMENT ADVISER CUSTODIANS
OFFITBANK THE BANK OF NEW YORK
520 MADISON AVENUE ("BONY")
NEW YORK, NY 10022 90 WASHINGTON STREET
Manages the Funds' business and NEW YORK, NY 10286
investment THE CHASE MANHATTAN BANK
activities. ("CHASE")
4 METROTECH CENTER
BROOKLYN, NY 11245
Chase serves as the custodian of
the assets of the Latin America
Equity Fund.
BONY serves as custodian of the
assets of the remaining Funds.
The custodians settle all
portfolio trades and collect most
of the valuation data required for
calculating the Funds' net asset
value
("NAV").
Fund
Operations

ADMINISTRATOR AND
FUND ACCOUNTING AGENT
PFPC INC.
400 BELLEVUE PARKWAY
WILMINGTON, DE 19809
Provides facilities, equipment and
personnel to carry out
administrative services related to
the Funds and calculates the
Funds' NAV, dividends and
distributions.

BOARD OF DIRECTORS
Supervises the Funds' Activities
</TABLE>

70
- ---------------------------
<PAGE>
SHAREHOLDER INFORMATION

PRICING OF FUND SHARES

Shares of the Funds are priced at their net asset value ("NAV"). The NAV of
each Fund is calculated as follows:

<TABLE>
<S> <C> <C>
Value of Assets Attributable to a Class
NAV = - Value of Liabilities Attributable to the same Class
-----------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>

Each Fund's NAV is calculated once daily at 4:00 p.m. Eastern Time, Monday
through Friday on each day that the New York Stock Exchange (the "Exchange") is
open. Each Fund will effect purchases or redemptions of Fund shares at the next
NAV calculated after receipt of your order or request in proper form.

Foreign and domestic equity securities held by a Fund are valued using the
closing price or the last sale price on the exchange or in the principal
over-the-counter market where they are traded. If the last sale price is
unavailable, the last available quote or last bid price is normally used. Debt
securities held by a Fund generally are valued based on quoted bid prices. Short
term debt investments having maturities of 60 days or less are amortized to
maturity based on their cost, and if applicable, adjusted for foreign exchange
translation. If market quotations are unavailable or if an event occurs after
the close of an exchange that is expected to materially affect the value of a
security held by the Fund, securities and other assets will be valued at fair
value as determined in good faith by the Adviser according to procedures adopted
by the Company's Board of Directors.

If a Fund holds foreign equity securities, the calculation of that Fund's
NAV will not occur at the same time as the determination of the value of the
foreign equity securities in the Fund's portfolio, since these securities are
traded on foreign exchanges. Additionally, if the foreign equity securities held
by a Fund trade on days when that Fund does not price its shares, the NAV of the
Fund's shares may change when shareholders will not be able to purchase or
redeem the Fund's shares.

PURCHASE OF FUND SHARES

SELECT SHARES

You may purchase Select Shares of each Fund at the NAV per share next
calculated after your order is received by the Transfer Agent in proper form.
After an initial purchase is made, the Transfer Agent will set up an account for
you on the Company's records, which will show all of your transactions and the
balance of the shares you own. You can only purchase Select Shares of each Fund
on days that the Exchange is open and through the means described below.

71
----------------------
<PAGE>

INITIAL INVESTMENT 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
payable to The OFFIT Investment Fund, Inc.:

The OFFIT Investment Fund, Inc.
c/o PFPC Inc.
P.O. Box 8701
Wilmington, DE 19899

The Fund(s) to be purchased should be designated on the Account Application.
Subject to acceptance by the Company, payment for the purchase of Select Shares
received by mail will be credited to a shareholder's account at the NAV 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.

INITIAL INVESTMENT BY WIRE. Subject to acceptance by the Company, Select
Shares of each Fund may be purchased by wiring federal funds to PNC Bank (see
instructions below). A completed Account Application should be forwarded to the
Company at the address noted above under "Initial Investment by Mail" in advance
of the wire. For each Fund, notification must be given to the Company at
1-800-618-9510 prior to 4:00 p.m., New York time, on the business day prior to
the wire date. (Prior notification must also be received from investors with
existing accounts.) Funds should be wired to:

PNC Bank
Philadelphia, Pennsylvania
ABA# 031-0000-53
Account # 86-0179-1617
F/B/O The OFFIT Investment Fund, Inc.
Ref. (Fund Name and Account Number)

Federal funds purchases will be accepted only on a day on which the Company
and PNC Bank are open for business.

ADDITIONAL INVESTMENTS. Additional investments may be made at any time by
purchasing Select Shares of any Fund at NAV by mailing a check made payable to
The OFFIT Investment Fund, Inc. to the address noted above under "Initial
Investment by Mail" or by wiring monies to the custodian bank as outlined above
under "Initial Investment by Wire." For each Fund, notification must be given to
the Company at 1-800-618-9510 prior to 4:00 p.m., New York time, on the business
day prior to the wire date. Initial and additional purchases made by check
cannot be redeemed until payment of the purchase has been collected, which may
take seven to fifteen days from the purchase date.

SHAREHOLDER ORGANIZATIONS. Select Shares of the Company's Funds may also be
sold to corporations or other institutions such as trusts, foundations or
broker-dealers purchasing for the accounts of others ("Shareholder
Organizations"). Investors purchasing and redeeming shares of the Funds through
a Shareholder Organization may be charged a transaction-based fee or other fee
for the services of such organization. Each Shareholder Organization is
responsible for transmitting to its customers a schedule of any such fees and
information regarding any additional or different conditions regarding purchases
and redemptions. Customers of Shareholder Organizations should read this
Prospectus in light of the terms governing accounts with their organization. The
Company does not pay to or receive compensation from Shareholder Organizations
for the sale of Select Shares. The Company's officers are authorized to waive
the minimum initial and subsequent investment requirements.

IRA ACCOUNTS. The Company has an Individual Retirement Account ("IRA") form
available which may be obtained from the Distributor that permits the IRA to
invest in Select Shares of the Funds. The minimum investment for all such
retirement plans is $250,000. Investors desiring information regarding
investments through IRAs should write or telephone the Company at
1-800-618-9510.

72
- ---------------------------
<PAGE>
ADVISOR SHARES

All purchase orders for Advisor Shares must be placed through a Shareholder
Servicing Agent, which is a financial institution that has entered into an
agreement with the Company to provide various shareholder services to the
beneficial owners of Advisor Shares. Orders for purchases of Advisor Shares will
be executed at the NAV per share next determined after an order has been
transmitted to and accepted by the Distributor. Advisor Shares are subject to
such investment minimums and other terms and conditions as may be imposed by
Shareholder Servicing Agents from time to time. For further information as to
how to direct a Shareholder Servicing Agent to purchase Advisor Shares of any
Fund on your behalf, you should contact your Shareholder Servicing Agent or the
Distributor.

OTHER PURCHASE INFORMATION

The Company reserves the right, in its sole discretion, to suspend the
offering of shares of its Funds or to reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interests of
the Company.

Purchases of a Fund's shares will be made in full and fractional shares of
the Fund calculated to three decimal places. In the interest of economy and
convenience, certificates for shares will not be issued except at the written
request of the shareholder. Certificates for fractional shares, however, will
not be issued.

Select Shares have a minimum initial investment requirement of $250,000 and
a minimum additional investment requirement of $10,000. Advisor Shares have a
minimum initial investment requirement of $10,000 and no minimum additional
investment requirement. These minimums may be waived at the discretion of the
Adviser.

REDEMPTION OF FUND SHARES

You may redeem shares of the Funds at the next NAV calculated after a
redemption request is received by the Transfer Agent in proper form. You can
only redeem shares of the Funds on days the Exchange is open and through the
means described below.

SELECT SHARES

You may redeem Select Shares of each Fund of the Company by mail, or, if you
are authorized, by telephone. No charge is made for redemptions. The value of
Select Shares redeemed may be more or less than the purchase price, depending on
the market value of the investment securities held by the Fund.

REDEMPTION BY MAIL. Your redemption requests should be addressed to The
OFFIT Investment Fund, Inc., c/o PFPC Inc., P.O. Box 8701, Wilmington, DE 19899
and must include:

- the share certificates, if issued;

- 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;

- any required signature guarantees, which may be required when (i) the
redemption request proceeds are to be sent to someone other than the
registered shareholder(s), (ii) the redemption request is for $25,000 or
more, or (iii) a share transfer request is made. A signature guarantee
may be obtained from a domestic bank or trust company, broker, dealer,
clearing agency or savings association that participates in a Medallion
Program recognized by the Securities Transfer Association. The three
recognized Medallion Programs are Securities Transfer Agent Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York
Stock Exchange, Inc. Medallion Program (MSP). Signature Guarantees, which
are not a part of these programs, will not be accepted. Please note that
a notary public stamp or seal is not acceptable; and

- other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.

REDEMPTION BY TELEPHONE. If you are authorized to utilize the Telephone
Redemption Option, a redemption of Select Shares may be requested by calling the
Company at 1-800-618-9510 and requesting that

73
----------------------
<PAGE>

the redemption proceeds be mailed to the primary registration address or wired
per the authorized instructions. Select Shares cannot be redeemed by telephone
if share certificates are held for those shares. If the Telephone Redemption
Option or the Telephone Exchange Option (as described below) is authorized, the
Company and the Transfer Agent may act on telephone instructions from any person
representing himself or herself to be a shareholder and believed by the Company
or Transfer Agent to be genuine. The Transfer Agent's records of such
instructions are binding and shareholders, not the Company or 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. If you hold Select Shares of a Fund with a
value of $10,000 or more, you may elect to have periodic redemptions paid on a
monthly, quarterly, semiannual or annual basis (the "Systematic Withdrawal
Plan," or the "Plan"). The maximum withdrawal per year under the Systematic
Withdrawal Plan is 12% of the account value at the time of the election. A
number of Select Shares sufficient to make the scheduled redemption will
normally be redeemed on the date you select. Depending on the size of the
payment requested and fluctuations in the NAV of the shares redeemed,
redemptions for the purpose of making payments under the Systematic Withdrawal
Plan may reduce or even exhaust the account. You may request that the payments
under the Plan be sent to a predesignated bank or other designated party.

ADVISOR SHARES

You must place all redemption orders for Advisor Shares through a
Shareholder Servicing Agent in accordance with instructions or limitations
pertaining to your account with your Shareholder Servicing Agent. Redemption
orders for Advisor Shares are effected at the NAV next determined after the
order is received by the Distributor. You will be charged a redemption fee of
1.50% of the value of the Advisor Shares being redeemed if you redeem within 180
days of the purchase date. Shareholder Servicing Agents may also charge your
account for redemption services. You should contact your Shareholder Servicing
Agent or the Distributor for further information regarding redemption of Advisor
Shares, including the availability of wire or telephone redemption privileges,
or whether you may elect to participate in a systematic withdrawal plan.

OTHER REDEMPTION INFORMATION

Redemption proceeds for shares of the Company recently purchased by check
may not be distributed until payment for the purchase has been collected, which
may take up to fifteen days from the purchase date. Shareholders can avoid this
delay by utilizing the wire purchase option.

Redemption proceeds will ordinarily be paid within seven business days after
a redemption request is received by the Transfer Agent in proper form.

The Company may suspend the right of redemption or postpone the date at
times when the Exchange or the bond market is closed or under any emergency
circumstances as determined by the SEC.

If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Company to make payment
wholly or partly in cash, the Company may pay the redemption proceeds in whole
or in part by a distribution in-kind of readily marketable securities held by a
Fund in lieu of cash in conformity with applicable rules of the SEC. Investors
generally will incur brokerage charges on the sale of portfolio securities so
received in payment of redemptions.

SHAREHOLDER SERVICES

EXCHANGE PRIVILEGE. Shares of each class of any Fund may be exchanged for
shares of the same class of any other Fund of the Company based on the
respective NAV of the shares involved. The exchange privilege is only available,
however, with respect to the Funds that are registered for sale in a
shareholder's state of residence. In addition, with respect to Select Shares,
shareholders must transfer a minimum of $50,000 of assets between Funds for each
transfer. The Company imposes no exchange fees on Select Shares. Exchange
requests with respect to Select Shares should be sent to The OFFIT Investment
Fund, Inc., c/o PFPC Inc.,

74
- ---------------------------
<PAGE>

P.O. Box 8701, Wilmington, DE 19899 or, if the Telephone Exchange Option has
been authorized, by calling the Company at 1-800-618-9510. See "Redemption of
Fund Shares-Redemption By Telephone" above. Shareholders should note that an
exchange between Funds is considered a sale and purchase of shares for tax
purposes. A shareholder who holds Advisor Shares should consult his/her
Shareholder Servicing Agent to determine the availability of and terms and
conditions imposed on exchanges with the other Funds of the Company. You will be
charged an exchange fee of 1.50% of the Advisor Shares being exchanged if you
exchange within 180 days of the purchase date.

TRANSFER OF REGISTRATION. The registration of a Fund may be transferred by
writing to The OFFIT 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.

DIVIDENDS AND DISTRIBUTIONS

The High Yield, Total Return, U.S. Government Securities, Mortgage
Securities, California Municipal, New York Municipal and National Municipal
Funds declare dividends of substantially all of their net investment income
daily and pay dividends monthly. The Emerging Markets Bond Fund declares
dividends daily and pays dividends quarterly. The Latin America Equity Fund
declares and pays dividends at least annually. Each Fund distributes, at least
annually, substantially all net capital gains, if any, earned by such Fund. Each
Fund will inform shareholders of the amount and nature of all such income or
gains.

Dividends are paid in the form of additional shares of the same class of the
same Fund, unless you have 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 Transfer Agent and will become effective with respect to
dividends paid after its receipt. Dividends that are otherwise taxable are
taxable to you whether received in cash or in additional shares of a Fund. It is
anticipated that expenses incurred by each class of shares of each Fund will
differ and, accordingly, that the dividends distributed with respect to each
class will differ.

Shares purchased will begin earning dividends on the business day on which
federal funds are available in payment for such shares. Shares redeemed will
earn dividends through the date of redemption. Net investment income of the
Funds for a Saturday, Sunday or a holiday will be declared as a dividend on the
prior business day. If you who redeem all or a portion of a Fund's shares prior
to a dividend payment date, you will receive all dividends declared but unpaid
on those shares at the time of their redemption.

TAXES

Each Fund intends to qualify for taxation as a "regulated investment
company" ("RIC") under Subchapter M of the Code. The California Municipal, New
York Municipal and National Municipal Funds intend to satisfy conditions under
the Code that will enable interest from municipal obligations, which is exempt
from regular federal income taxes in the hands of these Funds, to qualify as
"exempt-interest dividends" when distributed to such Funds' shareholders. Under
the Code, such dividends are exempt from regular federal income taxes. Each Fund
that qualifies as a RIC 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 a Fund's net realized
long-term capital gain over its net realized short-term capital loss), if any,
that are distributed to its shareholders, provided that the Fund distributes
each taxable year (i) at least 90% of its net investment income for such taxable
year, and (ii) at least 90% of the excess of its tax-exempt interest income net
of certain deductions allocable to such income.

Each Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code, applicable to RICs generally will
be applied to each Fund separately, rather than to the Company as a whole. In
addition, net capital gain, net investment income and operating expenses will be
determined separately for each Fund.

Dividends, either in cash or reinvested in shares, paid by a Fund from net
investment income will be taxable to you as ordinary income. Whether paid in
cash or additional shares of a Fund, and regardless of the length of time the
shares in such Fund have been owned by you, distributions of net capital gain
which are

75
----------------------
<PAGE>
designated by a Fund as "capital gain dividends" are taxable to you as long-term
capital gain. You will be notified annually by the Company as to the federal tax
status of dividends and distributions paid by a Fund. Such dividends and
distributions may also be subject to state and local taxes.

Exchanges and redemptions of shares in a Fund are generally taxable events
for federal income tax purposes. You may also be subject to state and local
taxes on such exchanges and redemptions.

Depending on your residence for tax purposes, distributions from a Fund may
also be subject to state and local taxes or withholding taxes. You should
consult with your own tax adviser 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, if you are a resident of one of these states, distributions derived from a
Fund's investment in certain types of U.S. government securities should be free
from state and local income taxes to the extent that the interest income from
such investments would have been exempt from state and local income taxes if
such securities had been held directly by you. 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, if you are a resident of one of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities may not be entitled to the exemptions from state and local
taxes that would be available if you had purchased U.S. government securities
directly. The exemption from state and local income taxes does not preclude
states from asserting other taxes on the ownership of U.S. government
securities.

Each Fund intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of a non-deductible 4% federal excise
tax. To do so, each Fund intends to distribute an amount at least equal to
(i) 98% of its calendar year ordinary income, (ii) 98% of its capital gain net
income for the one-year period ending October 31st, and (iii) 100% of any
undistributed ordinary or capital gain net income from the prior calendar year.
Although dividends generally will be treated as distributed when paid, dividends
declared in October, November or December, payable to shareholders of record on
a specified date in one of those months and paid during the following
January will be treated as having been distributed by a Fund (and received by
the shareholders) on December 31 of the year declared.

A Fund may be subject to certain taxes imposed by foreign countries with
respect to dividends, capital gain and other income. If a Fund qualifies as a
RIC, if certain distribution requirements are satisfied and if more than 50% in
value of a Fund's total assets at the close of any taxable year consists of
stocks or securities of foreign corporations, which for this purpose should
include obligations issued by foreign governmental issuers, a Fund may elect to
treat any foreign income taxes paid by it that can be treated as income taxes
under U.S. federal income tax regulations as paid by its shareholders. The
Emerging Markets Bond and Latin America Equity Funds expect to qualify for this
election. Each of these Funds may make such an election in a taxable year in
which it is qualified to make the election. For any year that a Fund makes such
an election, an amount equal to the foreign income taxes paid by a Fund that can
be treated as income taxes under U.S. income tax principles will be included in
your income and you will be entitled (subject to certain limitations) to credit
the amount included in your income against your U.S. tax liabilities, if any, or
to deduct such amount from your U.S. taxable income, if any. Shortly after any
year for which it makes such an election, a 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, you 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 you
elect 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 your taxable income from foreign sources (but
not in excess of your entire taxable income) bears to your entire taxable
income. For this purpose, the Funds expect that the capital gain they distribute
to shareholders will generally not be treated as foreign source taxable income.
If a Fund makes this election, you will be treated as receiving foreign source
income in an

76
- ---------------------------
<PAGE>

amount equal to the sum of your proportionate share of foreign income taxes paid
by the Fund and the portion of dividends paid by the Fund representing income
earned from foreign sources. This limitation must be applied separately to
certain categories of income and the related foreign taxes.

Ordinary income dividends paid by a Fund to shareholders who are
non-resident aliens or foreign entities will be subject to a 30% withholding tax
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law or the income is "effectively connected" with a U.S.
trade or business. Generally, subject to certain exceptions, capital gain
dividends paid to non-resident shareholders or foreign entities and gains
realized on the sale of shares of a Fund will not be subject to U.S. federal
income tax. If you are a non-resident, you are urged to consult your own tax
adviser concerning the applicability of the U.S. withholding tax.

A Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) you
fail to furnish the Fund with your correct taxpayer identification number,
(ii) the Internal Revenue Service ("IRS") notifies the Fund that you have 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, you fail to
certify that you are not subject to backup withholding or that you are an exempt
recipient (such as a corporation).

CALIFORNIA, NEW YORK AND NATIONAL MUNICIPAL FUNDS

Although exempt-interest dividends paid by the California Municipal, New
York Municipal and National Municipal Funds may be excluded by shareholders of
such Funds from their gross income for regular federal income tax purposes,
under the Code, all or a portion of such dividends may be (i) a preference item
for purposes of the alternative minimum tax, (ii) a component of the "ACE"
adjustment for purposes of determining the amount of corporate alternative
minimum tax or (iii) a factor in determining the extent to which a shareholder's
Social Security benefits are taxable. Moreover, receipt of exempt-interest
dividends from each Fund may affect the federal tax liability of certain foreign
corporations, S Corporations and insurance companies. Furthermore, under the
Code, interest on indebtedness incurred or continued to purchase or carry
portfolio shares, which interest is deemed to relate to exempt-interest
dividends, will not be deductible by shareholders of the Fund for federal income
tax purposes.

Each Fund may hold without limit certain private activity bonds issued after
August 7, 1986. You must include, as an item of tax preference, the portion of
dividends paid by the Fund that is attributable to interest on such bonds in
your federal alternative minimum taxable income for purposes of determining
liability (if any) for the 26% or 28% alternative minimum tax applicable to
individuals and the 20% alternative minimum tax applicable to corporations.
Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the
taxability of such benefits.

Each Fund intends that substantially all dividends and distributions it pays
to its shareholders will be designated as exempt-interest dividends and as such
will be exempt from regular federal income taxes. However, to the extent each
Fund earns ordinary income from taxable investments or gains attributable to
accrued market discount or realizes capital gains, some portion of its dividends
and distributions may not qualify as exempt-interest dividends and may be
subject to regular federal income taxes.

The exemption of exempt-interest dividend income from regular federal income
taxation does not necessarily result in similar exemptions for such income under
the income or other tax laws of state or local taxing authorities. In general,
states exempt from state income tax only that portion of any exempt-interest
dividend that is derived from interest received by a RIC on its holdings of
obligations issued by that state or its political subdivisions and
instrumentalities and other obligations exempt from state taxation by federal
law.

A notice detailing the tax status of dividends and distributions paid by
each of the Funds will be mailed annually to each Fund's shareholders. As part
of this notice, the Fund will report to its shareholders the percentage of
interest income earned by the Fund during the preceding year on tax-exempt
obligations indicating, on a state-by-state basis, the source of such income.

77
----------------------
<PAGE>

CALIFORNIA STATE TAXATION. Individual shareholders of the California
Municipal Fund who are subject to California personal income taxation will not
be required to include in their California gross income that portion of exempt
interest dividends which the Fund clearly and accurately identifies as directly
attributable to interest earned on obligations, the interest on which is exempt
from California personal income tax, provided that at least 50% of the value of
the Fund's total assets consist of obligations the interest on which is exempt
from California personal income taxation. Distributions to individual
shareholders derived from interest on Municipal Obligations issued by
governmental authorities in states other than California, short-term capital
gain and other taxable income will be taxed as dividends for purposes of
California personal income taxation. The Fund's net capital gain for federal
income tax purposes will be taxed as long-term capital gain to individual
shareholders of the Fund for purposes of California personal income taxation.
Gain or loss, if any, resulting from an exchange or redemption of shares will be
recognized in the year of exchange or redemption. Present California law taxes
both long-term and short-term capital gain at the rates applicable to ordinary
income. California has an alternative minimum tax similar to the federal
alternative minimum tax. Generally corporate shareholders of the California
Municipal Fund subject to the California franchise tax will be required to
include any gain on an exchange or redemption of shares and all distributions of
exempt-interest, capital gains and other taxable income, if any, as income
subject to such tax. Shares of the Fund will be exempt from property taxes in
California.

To the extent shareholders are obligated to pay state or local taxes other
than to California, dividends received from the Fund may be subject to such
taxation.

NEW YORK STATE AND LOCAL TAXATION. Exempt-interest dividends paid to
shareholders of the New York Municipal Fund will not be subject to New York
State and New York City personal income taxes to the extent they represent
interest income directly attributable to federally tax-exempt obligations of the
State of New York and its political subdivisions and instrumentalities and other
obligations exempt from state taxation under federal law. The Fund intends that
substantially all of the dividends it designates as exempt-interest dividends
will also be exempt from New York State and New York City personal income taxes.
To the extent shareholders are obligated to pay state or local taxes other than
to New York, dividends received from the Fund may be subject to such taxation.
Similarly, exempt-interest dividends paid to shareholders who are residents of
Yonkers will not be subject to the City of Yonkers personal income tax
surcharge, except and to the extent that they are subject to the New York State
personal income tax on such income.

Corporate shareholders subject to New York State franchise tax or New York
City general corporation tax will be required to include all dividends received
from the Fund (including exempt-interest dividends) as net income subject to
such taxes. Furthermore, for purposes of calculating a corporate shareholder's
liability for such taxes under the alternative tax base measured by business and
investment capital, such shareholder's shares of the Fund will be included in
computing such shareholder's investment capital.

Shareholders will not be subject to the New York City unincorporated
business tax solely by reason of their ownership of shares in the Fund. If a
shareholder is subject to the New York City unincorporated business tax, income
and gains derived from the Fund in connection with an unincorporated business
will be subject to such tax, except for exempt-interest dividend income that is
directly attributable to interest on New York Municipal Securities. Shares of
the Fund will be exempt from local property taxes in New York State and New York
City.

----------------------------

Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide. You
should consult your tax adviser concerning a prospective investment in any of
the Funds and you should review the more detailed discussion of federal income
tax consideration in the Statement of Additional Information.

78
- ---------------------------
<PAGE>
DISTRIBUTION ARRANGEMENTS

Shares of the Funds are sold on a continuous basis by OFFIT Funds
Distributor, Inc.

MULTIPLE CLASS STRUCTURE. In addition to Select Shares and Advisor Shares,
the Fund also offers MSD&T Shares through a separate prospectus. For more
information on MSD&T Shares, contact the Company at 1-800-618-9510. The major
distinction between Select Shares and Advisor Shares is the service or
distribution fee plan related to each class. Select Shares may be purchased and
redeemed through the Distributor, OFFIT Funds Distributor, Inc. Advisor Shares
must be purchased and redeemed through a Shareholder Servicing Agent, which is a
financial institution that has entered into an agreement with the Company to
provide various shareholder services to the beneficial owners of Advisor Shares.
Since the fees associated with the service or distribution plan are paid out of
the Fund's assets on an on-going basis, over time shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by NASD
Regulation, Inc.

<TABLE>
<CAPTION>
FEE PLAN: APPLIES TO: PLAN PURPOSE: FEES:
- --------- ----------- ------------- -----
<S> <C> <C> <C>
Rule 12b-1 Advisor Shares The Plan is intended to Payments may not exceed
Distribution Plan reimburse the Distributor 0.25% of a Fund's
for certain distribution aggregate average daily
expenses intended to net assets attributable to
result in the sale of Advisor Shares. Holders of
Advisor Shares of the a Fund's Advisor Shares
Funds. generally bear this
expense. AT THIS TIME, THE
RULE 12b-1 DISTRIBUTION
FEE FOR ADVISOR SHARES IS
BEING WAIVED. THIS WAIVER
MAY BE TERMINATED AT ANY
TIME.

Shareholder Servicing Advisor Shares The Plan is intended to Payments may not exceed
Plan compensate Shareholder 0.25% of a Fund's
Servicing Agents for aggregate average daily
shareholder services net assets attributable to
provided to clients of the Advisor Shares. Holders of
Shareholder Servicing a Fund's Advisor Shares
Agents who own Advisor bear this expense.
Shares of the Funds.
</TABLE>

79
----------------------
<PAGE>
APPENDIX A

COMMERCIAL PAPER RATINGS

"A-1"--Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation 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 in higher
rating categories. 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
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the 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 that such payments
will be made during such grace period. The "D" rating will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.

LOCAL CURRENCY AND FOREIGN CURRENCY RISKS

County risk considerations are a standard part of S&P's analysis for credit
ratings on any issuer or issue. Currency of repayment is a key factor in this
analysis. An obligor's capacity to repay foreign obligations may be lower than
its capacity to repay obligations in its local currency due to the sovereign
government's own relatively lower capacity to repay external versus domestic
debt. These sovereign risk considerations are incorporated in the debt ratings
assigned to specific issues. Foreign currency issuers ratings are also
distinguished from local currency issuer ratings to identify those instances
where sovereign risks make them different for the same issuer.

"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

A-1
--------------------------
<PAGE>
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 to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.

"D-4"--Debt possesses speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.

"D-5"--Issuer has failed to meet scheduled principal and/or interest
payments.

"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 the higher ratings.

"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
default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.

A-2
- --------------------------
<PAGE>
"D"--Securities are in actual or imminent payment default.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

The following summarizes the ratings used by S&P for corporate and municipal
debt:

"AAA"--An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA"--An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

"A"--An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

"BBB"--An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

"BB"--An obligation rated "BB" is less vulnerable to nonpayment 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"--An obligation rated "B" is more vulnerable to nonpayment 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"--An obligation rated "CCC" is currently vulnerable to nonpayment, 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 nonpayment.

"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. 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 that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a 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.

"c"--The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.

"p"--The letter 'p' indicates that the rating is provisional. A provisional
ratings assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This

A-3
--------------------------
<PAGE>

rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.

*--Continuance of the ratings is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.

"r"--The 'r' highlights derivative, hybrid, and certain other obligations
that S&P believes may experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples of such obligations are
securities with principal or interest return indexed to equities, commodities,
or currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an 'r' symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.

N.R. Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
obligation as a matter of policy. Debt obligations if issuers outside the United
States and its territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the obligor but do
not take into account currency exchange and related uncertainties.

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 risk appear somewhat larger than the "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 operating 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: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.

A-4
- --------------------------
<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 to be 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 in periods of greater 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.

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 credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly 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 credit 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 credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.

"BBB"--Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity.

"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. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.

A-5
--------------------------
<PAGE>

"DDD," "DD" and "D"--Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-1000% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.

"NR" indicates the Fitch does not rate the issuer or issue in questions.

"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.

MUNICIPAL NOTE RATINGS

A S&P rating reflects the liquidity factors and market access risks unique
to notes due in three years or less. The following summarizes the ratings used
by S&P for municipal notes:

"SP-1"--The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.

"SP-2"--The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.

"SP-3"--The issuers of these municipal notes exhibit speculative capacity to
pay principal and interest.

Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk. The
following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:

"MIG-1"/"VMIG-1"--This designation denotes best quality. There is present
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. Margins of
protection that are 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. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.

A-6
- --------------------------
<PAGE>

"SG"--This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.

Fitch and D&P use the short-term ratings described under Commercial Paper
Ratings for municipal notes.

A-7
--------------------------
<PAGE>
APPENDIX B

HEDGING AND DERIVATIVES

Each Fund may be authorized to use a variety of investment strategies to
hedge various market risks (such as interest rates, currency exchange rates and
broad or specific market movements), to manage the effective maturity or
duration of debt instruments held by the Fund, or, with respect to certain
strategies, to seek to increase the Fund's income or gain (such investment
strategies and transactions are referred to herein as "Hedging and
Derivatives"). The description of each Fund indicates which, if any, of these
types of transactions may be used by such Fund. The Funds may be unable or
limited in their ability to engage in Hedging and Derivatives by certain
factors, including current economic conditions.

A detailed discussion of Hedging and Derivatives follows below. No Fund
which is authorized to use any of these investment strategies will be obligated,
however, to pursue any of such strategies and no Fund makes any representation
as to the availability of these techniques at this time or at any time in the
future. In addition, a Fund's ability to pursue certain of these strategies may
be limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools. To the extent not otherwise
restricted by the Securities and Exchange Commission (the "SEC"), the CFTC, the
Code or its investment objectives and policies, a Fund may utilize, without
limitation, Hedging and Derivatives. See "Additional Information Concerning
Dividends, Distributions and Taxes" in the Statement of Additional Information.

GENERAL CHARACTERISTICS OF OPTIONS

A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
A Fund's purchase of a put option on a security, for example, might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.

B-1
--------------------------
<PAGE>
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.

Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are determined by
negotiation of the parties. It is anticipated that any Fund authorized to use
OTC options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.

Unless the parties provide for it, no central clearing or guarantee function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A Fund
will enter into OTC option transactions only with U.S. government securities
dealers recognized by the Federal Reserve Bank of New York as "primary dealers,"
or broker-dealers, domestic or foreign banks, or other financial institutions
that are deemed creditworthy by the Adviser. In the absence of a change in the
current position of the staff of the SEC, 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.

B-2
- --------------------------
<PAGE>
If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. In selling put
options, a Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.

GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

If and to the extent authorized to do so, a Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate, currency or market changes, for duration
management and for permissible non-hedging purposes. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract and obligates the seller to deliver that position.

A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC and generally will be entered into only
for bona fide hedging, risk management (including duration management) or other
permissible non-hedging purposes. Maintaining a futures contract or selling an
option on a futures contract will typically require a Fund to deposit with a
financial intermediary, as security for its obligations, an amount of cash or
other specified assets ("initial margin") that initially is from 1% to 10% of
the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter daily as the mark-to-market value of the futures contract fluctuates.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.

No Fund will enter into a futures contract or option thereon for purposes
other than bona fide hedging if, immediately thereafter, the sum of the amount
of its initial margin and premiums required to maintain permissible non-hedging
positions in futures contracts and options thereon would exceed 5% of the
liquidation value of the Fund's net assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below under "Use
of Segregated and Other Special Accounts."

OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES

If and to the extent authorized to do so, a Fund may purchase and sell call
and put options on securities indices and other financial indices. In so doing,
the Fund can achieve many of the same objectives it would achieve through the
sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

B-3
--------------------------
<PAGE>
CURRENCY TRANSACTIONS

If and to the extent authorized to do so, a Fund may engage in currency
transactions with Counterparties to hedge the value of portfolio securities
denominated in particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange- listed and OTC options
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars." A Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.

Except as provided in this Prospectus, a Fund's dealings in forward currency
contracts and other currency transactions such as futures contracts, options,
options on futures contracts and swaps will be limited to hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.

A Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of a Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.

Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts".

COMBINED TRANSACTIONS

If and to the extent authorized to do so, a Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Derivatives, as part of a single or combined strategy when, in the judgment
of the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions will normally be
entered into by a Fund based on the Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase the risks or hinder achievement of the portfolio management objective.

SWAPS, CAPS, FLOORS AND COLLARS

A Fund may be authorized to enter into interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. A Fund will
enter into these transactions primarily to seek to preserve a 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

B-4
- --------------------------
<PAGE>
anticipates purchasing at a later date. A Fund will use these transactions for
non-speculative purposes and will not sell interest rate caps or floors if it
does not own securities or other instruments providing the income the Fund may
be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). A currency swap is an agreement to
exchange cash flows on a notional amount based on changes in the values of the
reference indices. An index swap is an agreement to exchange cash flows on a
national principal amount based on changes in the values of the reference index.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling the cap to the extent that a specified
index exceeds a predetermined interest rate. The purchase of an interest rate
floor entitles the purchaser to receive payments of interest on a notional
principal amount from the party selling the interest rate floor to the extent
that a specified index falls below a predetermined interest rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specific
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return with a
predetermined range of interest rates or values.

Provided the contract so permits, a Fund will usually enter into interest
rate swaps on a net basis, that is, the two payments streams are netted out in a
cash settlement on the payment date or dates specified in the instrument, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the Investment Company
Act of 1940, as amended and, thus, will not be treated as being subject to the
Fund's borrowing restrictions. A Fund will not enter into any swap, cap, floor,
collar or other derivative transaction unless the Counterparty is deemed
creditworthy by the Adviser. If a Counterparty defaults, a Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.

The liquidity of swap agreements will be determined by the Adviser based on
various factors, including: (1) the frequency of trades and quotations; (2) the
number of dealers and prospective purchasers in the marketplace; (3) dealer
undertakings to make a market; (4) the nature of the security (including any
demand or tender features); and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 15% restriction on investments in securities that are not
readily marketable.

Each Fund will maintain cash and appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
Fund enters into a swap agreement on a net basis, it will segregate assets with
a daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If a Fund enters into a swap agreement
on other than a net basis, it will segregate assets with a value equal to the
full amount of the Fund's accrued obligations under the agreement. See "Use of
Segregated and Other Special Accounts".

EURODOLLAR INSTRUMENTS

If and to the extent authorized to do so, a Fund may make investments in
Eurodollar instruments, which are typically dollar-denominated futures contracts
or options on those contracts that are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.

B-5
--------------------------
<PAGE>
RISK FACTORS

Hedging and Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of the Hedging and Derivatives could result in losses greater than
if they had not been used. Use of put and call options could result in losses to
a Fund, force the sale or purchase of portfolio securities at inopportune times
or for prices higher than (in the case of put options) or lower than (in the
case of call options) current market values, or cause a Fund to hold a security
it might otherwise sell.

The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to a Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium.

Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.

Losses resulting from the use of Hedging and Derivatives will reduce a
Fund's net asset value, and possibly income, and the losses can be greater than
if Hedging and Derivatives had not been used.

RISKS OF HEDGING AND DERIVATIVES OUTSIDE THE UNITED STATES

When conducted outside the United States, Hedging and Derivatives may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and will be subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of positions taken as part of
non-U.S. Hedging and Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors; (2) lesser availability
of data on which to make trading decisions than in the United States;
(3) delays in a Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the United States; (4) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States; and (5) lower trading volume and liquidity.

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS

B-6
- --------------------------
<PAGE>
Fund's obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by a Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid assets at least equal to the current amount of the obligation must be
segregated with the custodian or sub-custodian. The segregated assets cannot be
sold or transferred unless equivalent assets are substituted in their place or
it is no longer necessary to segregate them. A call option on securities written
by a Fund, for example, will require the Fund to hold the securities subject to
the call (or securities convertible into the needed securities without
additional consideration) or to segregate liquid assets sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by a
Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid assets equal to the excess of
the index value over the exercise price on a current basis. A put option on
securities written by a Fund will require the Fund to segregate liquid assets
equal to the exercise price. Except when a Fund enters into a forward contract
in connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the Fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency, liquid securities
denominated in that currency equal to a Fund's obligations or to segregate
liquid assets equal to the amount of the Fund's obligations.

OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although a Fund will not be
required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.

In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents or other liquid assets. A Fund will accrue the net amount of the
excess, if any, of its obligations relating to swaps over its entitlements with
respect to each swap on a daily basis and will segregate with its custodian, or
designated sub-custodian, an amount of cash or liquid assets having an aggregate
value equal to at least the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Fund's net obligation, if any.

Hedging and Derivatives may be covered by means other than those described
above when consistent with applicable regulatory policies. A Fund may also enter
into offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Hedging and Derivatives. A Fund could purchase a put option, for example, if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if it holds a
futures contracts or forward contract, a Fund could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Hedging and Derivatives may also be
offset in combinations. If the offsetting transaction terminates at the time of
or after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.

B-7
--------------------------
<PAGE>

THE OFFIT INVESTMENT FUND, INC.

- -----------------------------------------------------------------------------

OFFICERS AND DIRECTORS
Dr. Wallace Mathai-Davis
CHAIRMAN OF THE BOARD, PRESIDENT AND
DIRECTOR

Edward J. Landau
DIRECTOR

The Very Reverend James Parks Morton
DIRECTOR

Stephen M. Peck
DIRECTOR

Vincent M. Rella
TREASURER

Stephen Brent Wells
SECRETARY

Michael Kagan
ASSISTANT TREASURER

INVESTMENT ADVISER
OFFITBANK
520 Madison Avenue
New York, NY 10022-4213

DISTRIBUTOR
OFFIT Funds Distributor, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, PA 19428-2961

CUSTODIAN
The Chase Manhattan Bank
(Latin America Equity Fund)
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245

The Bank of New York
(all other Funds)
48 Wall Street
New York, NY 10286

LEGAL COUNSEL
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022

ADMINISTRATOR; TRANSFER AND DIVIDEND
DISBURSING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809

INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072

<PAGE>
FOR MORE INFORMATION

FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUNDS, THE FOLLOWING DOCUMENTS
ARE AVAILABLE FREE UPON REQUEST:

ANNUAL/SEMI-ANNUAL REPORTS: Contain performance data and information on
portfolio holdings for the Funds' most recently completed fiscal years or half
years and, on an annual basis, a statement from portfolio management and the
auditor's report.

STATEMENT OF ADDITIONAL INFORMATION (SAI): Contains more detailed information
about the Funds' policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.

Copies of these documents and answers to questions about the Funds may be
obtained without charge by contacting:

THE OFFIT INVESTMENT FUND, INC.
P.O. Box 8701
Wilmington, Delaware 19899
1-800-618-9510

Information about the Funds (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C., 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Funds may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.

FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING CHANGES TO EXISTING
ACCOUNTS, PURCHASING, EXCHANGING OR REDEEMING SHARES, OR OTHER INVESTOR
SERVICES, PLEASE CALL:

1-800-618-9510
MONDAY THROUGH FRIDAY
8:30 A.M. TO 5:00 P.M. (EST)

The Company's Investment Company Act File number is 811-08036.

<PAGE>

THE OFFIT INVESTMENT FUND, INC.

400 Bellevue Parkway
Wilmington, DE 19809
(800) 618-9510

STATEMENT OF ADDITIONAL INFORMATION

April 30, 2000

The OFFIT Investment Fund, Inc. (the "Company") is an open-end, management
investment company. This Statement of Additional Information ("SAI") provides
information about the Company applicable to the MSD&T Shares of the High Yield
Fund (the "Fund"). This information is in addition to the information that is
contained in the Fund's Prospectus dated April 30, 2000.

This SAI is not a prospectus. The Prospectus may be obtained, without
charge, by calling the Company toll-free at (800) 618-9510 or by writing to the
Fund c/o PFPC Inc., P.O. Box 8701, Wilmington, DE 19899. The SAI should be read
in conjunction with the Fund's Prospectus dated April 30, 2000 and the Company's
Annual Report dated December 31, 1999, which is hereby incorporated by
reference.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Organization and Classification.................................................... 3

Non-Primary Investment Strategies and Related Risks................................ 3

Additional Risk Considerations..................................................... 12

Fundamental Investment Policies.................................................... 13

Non-Fundamental Investment Policies................................................ 15

Management of the Company.......................................................... 16

Investment Adviser................................................................. 18

Distributor ....................................................................... 19

Administration, Fund Accounting, Transfer Agency and Custody Services ............. 20

Portfolio Transactions............................................................. 22

Purchase of Shares................................................................. 23

Redemption of Shares............................................................... 23

Performance Calculations........................................................... 23

Additional Information Concerning Dividends, Distributions and Taxes............... 25

Shareholder Services............................................................... 33

General Information ............................................................... 33

Financial Information ............................................................. 35
</TABLE>

2
<PAGE>

ORGANIZATION AND CLASSIFICATION

The Company is an open-end, management investment company that was
incorporated under the laws of the State of Maryland on September 8, 1993. The
Fund is non-diversified and offers three classes of shares: MSD&T, Select and
Advisor. MSD&T Shares 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. Select Shares may be purchased from the Company's
distributor, OFFIT Funds Distributor, Inc. (the "Distributor"). Advisor Shares
may be purchased through a Shareholder Servicing Agent, which is a financial
institution that has entered into an agreement with the Company to provide
various shareholder services to the beneficial owners of Advisor Shares. For
more information on Select and Advisor Shares, contact the Company at
1-800-618-9510.

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 Fund 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 Fund, except for shares
representing seed capital contributed to the Fund by the Distributor. No gain or
loss was recognized by the Partnership or the participating partners upon the
Transfer. The investment performance of the Fund may include the performance of
the Partnership. The investment objective and policies of the Fund are in all
material respects equivalent to those of the Partnership. While the 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 Investment Company Act of 1940, as amended
(the "1940 Act") and the Internal Revenue Code of 1986, as amended ("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
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 Fund (including the performance of the Partnership)
should not be interpreted as indicative of the Fund's future performance.

NON-PRIMARY INVESTMENT STRATEGIES AND RELATED RISKS

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 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. Repurchase agreements are considered to be loans by the
Fund under the 1940 Act.

3
<PAGE>

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, 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 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.

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 Fund will not pay any additional fees for
such credit support. However, the existence of credit support may increase the
market price of the security.

4
<PAGE>

MORTGAGE-RELATED SECURITIES

The Fund may invest from time to time in mortgage-related securities,
consistent with its investment objective and policies, that provide funds for
mortgage loans made to residential home owners. These include securities, such
as collateralized mortgage obligations and stripped mortgage-backed securities
which represent interests in pools of mortgage loans made by lenders such as
savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled for sale to investors (such as a Fund) by
various government, government-related and private organizations.

The Adviser expects that government, government-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-term fixed rate mortgages. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with the Fund's investment objectives and policies, consider
making investments in such new types of securities.

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.

CONVERTIBLE SECURITIES

The Fund may invest in convertible securities. The convertible securities
that may be held by the Fund include any corporate debt security or preferred
stock that may be converted into underlying shares of common stock and include
both traditional convertible securities and synthetic convertible securities.
The common stock underlying convertible securities may be issued by a different
entity than the issuer of the convertible securities. Convertible securities
entitle the holder to receive interest payments paid on corporate debt
securities or the dividend preference on a preferred stock until such time as
the convertible security matures or is redeemed or until the holder elects to
exercise the conversion privilege. "Synthetic" convertible securities, as such
term is used herein, are created by combining separate securities which possess
the two principal characteristics of a true convertible security, fixed income
and the right to acquire equity securities. Convertible securities have several
unique investment characteristics such as (i) higher yields than common stocks,
but lower yields than comparable nonconvertible securities, (ii) a lesser degree
of fluctuation in value than the underlying stock since they have fixed income
characteristics, and (iii) 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.

5
<PAGE>

DEPOSITORY RECEIPTS AND DEPOSITORY SHARES

The Fund may hold equity securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), American Depository Shares ("ADSs") and
European Depository Receipts ("EDRs"), or other securities convertible into
securities of eligible issuers. These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. ADRs and ADSs typically are issued by an American bank or trust
company which evidences ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depository
Receipts ("CDRs"), are receipts issued in Europe typically by foreign banks and
trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs and ADSs in registered form are designed for use in
United States securities markets and EDRs and CDRs in bearer form are designed
for use in European securities markets. For purposes of the Fund's investment
policies, the Fund's investments in ADRs, ADSs, EDRs, and CDRs will be deemed to
be investments in the equity securities representing securities of foreign
issuers into which they may be converted. 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.

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 its 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
values would decline faster than would otherwise be the case.

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

6
<PAGE>

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.

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 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 they do not already
own the security subject to the transaction hedge. If the value of the
securities placed in a separate account declines, additional cash or investments
will be placed in the account on a daily basis so that the value of the account
will equal the amount of 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

7
<PAGE>

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.

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 ("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.

8
<PAGE>

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 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.

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 its 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. Pay-in-kind bonds 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

9
<PAGE>

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 "Additional
Information Concerning Dividends, Distributions and Taxes" below.

BANK OBLIGATIONS

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. 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.

10
<PAGE>
BRADY BONDS

The Fund may invest in "Brady Bonds", which are debt securities issued or
guaranteed by foreign governments in exchange for existing external defaulted
commercial bank indebtedness under a plan announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are actively traded in the over-the-counter secondary market.

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.

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 the 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 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.

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

11
<PAGE>

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
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.

HEDGING AND DERIVATIVES

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.

TEMPORARY STRATEGIES

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.

ADDITIONAL RISK CONSIDERATIONS

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 Dividends, Distributions and Taxes"
below.

INVESTING IN PUERTO RICO, THE UNITED STATES VIRGIN ISLANDS AND GUAM

The following information is a summary of special factors affecting
investments in Puerto Rican Municipal Obligations. The sources of payment for
such obligations and the marketability thereof may be affected by financial or
other difficulties experienced by Puerto Rico and certain of its municipalities
and public authorities. This information does not purport to be a complete
description and is based on information from statements relating to Puerto
Rico's economy published by the Government of Puerto Rico. The Company is not
responsible for the accuracy or timeliness of this information.

The economy of Puerto Rico is dominated by the manufacturing and service
sectors (including finance and tourism). Investment in fixed capital, including
public infrastructure, private development and construction, and purchases of
equipment and machinery accounted for approximately 25.1% of Puerto Rico's gross
domestic product in 1998. The economic growth of Puerto Rico was 3.1% in fiscal
year 1998, slightly lower than the average growth of highly developed countries
such as the US, Canada and the UK, which ranged between 3.2% and 3.7%. A key
element in 1998's economic growth was the level of internal investments in fixed
capital (including public infrastructure, private development projects and
purchase of equipment), which increased 5.4%, as well as the manufacturing and
services sectors that have traditionally dominated Puerto Rico's economy. The
economy of Puerto Rico expanded moderately during the early 1990s, with gross
domestic product increasing at rates between 0.8% and 0.9%. Over the past
several years, however, Puerto Rico has experienced more significant annual
increases in gross domestic product, ranging from a 2.5% in fiscal year 1994 to
a record high of 3.4% in fiscal year 1995. Annual increases in Puerto Rico's
gross domestic product for fiscal years 1996, 1997 and 1998 were 3.3%, 3.2% and
3.1%, respectively. The balance of net sales (exports and imports) is negative,
yet exports (tourism included) of goods and services experienced an aggressive
growth rate of 21.6% in the fiscal year 1998. Such growth in exports is
considered an important aspect of Puerto Rico's economic growth. Although Puerto
Rico's unemployment rate increased from 13.1% in fiscal year 1997 to 13.6% in
fiscal year 1998, the unemployment rate was still lower than the 14.5% average
for the last six years.

During the first quarter of the fiscal year 1999, Hurricane George hit
the island of Puerto Rico, causing severe damage. This hurricane is considered
one of most destructive in Puerto Rico's history, damaging almost all of the
country's infrastructure and effecting nearly every sector in the economy. As a
result of the pattern of growth of Puerto Rico's economy over the last six
years, coupled with the substantial federal and international aid received by
the Puerto Rican government, however, authorities project that the hurricane
will not have a large impact on Puerto Rico's trend of economic growth. The
government has made economic-growth projections under three potential scenarios:
minimal growth, base growth and maximum growth. Under the minimal- growth
scenario, Puerto Rico's economy is expected to grow 2.7% in fiscal year 1999 and
2.5% in fiscal year 2000, compared to growth rates of 3.0% and 2.7% under the
base-growth scenario and 3.4% and 3.0% under the maximum growth- scenario in
fiscal years 1999 and 2000, respectively. These growth projections are based on
an increasing rate of personal consumption, stable interest rates, declining oil
prices and policies of the Government of Puerto Rico.

12
<PAGE>

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.

FUNDAMENTAL INVESTMENT POLICIES

In addition to the Fund's investment objectives, the following is a list of
restrictions and fundamental investment policies that may not be changed without
the affirmative vote of a majority of the Fund's outstanding shares (as defined
below under "General Information - Capital Stock.") The Fund may not:

13
<PAGE>

2. invest an amount equal to 15% or more of the current value of its net
assets in investments that are illiquid;

3. 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;

4. 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
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;

5. 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;

6. 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);

7. 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; and

8. 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).

The Fund may not borrow money (except that it may enter into reverse
repurchase agreements) except from banks for temporary or emergency purposes;
PROVIDED, that (a) the amount of such borrowing may not exceed 20% of the value
of the 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. The Fund may not 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). Investment restriction (8) is a non-fundamental policy with respect to
the Fund. For purposes of determining whether the limitation discussed in
restriction number 1 above is met, the Fund considers each issuer to be a member
of the industry designated by its Standard Industry Classification ("SIC") code
and will apply the 25% limitation on a SIC by SIC basis.

14
<PAGE>

NON-FUNDAMENTAL INVESTMENT POLICIES

The following are non-fundamental investment policies and may be changed by
a vote of the Company's Board of Directors. The Fund may not:

1. invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;

2. 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);

3. 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%; and

4. purchase or retain securities of an issuer if those officers or
Directors of the Fund or its investment adviser who own more than 1/2
of 1% of such issuer's securities together own more than 5% of the
securities of such issuer.

In addition, the Fund may not:

1. invest for the purpose of exercising control over management of any
company; and

2. invest in puts, calls, straddles or spreads, except as described in
(3) above;

Except with respect to fundamental restriction number 2, and the
restriction on borrowing, 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.

As an investment policy, the Fund will generally manage its investments in
such a way as to satisfy the asset diversification test of the Investment
Company Act of 1940 in order to qualify as a regulated investment company. Under
this test, at the close of each quarter of a 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 such securities of any one issuer
(other than the 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. However, the
Adviser may in its sole discretion determine that it is in the best interest of
the Fund and its shareholders to not follow this policy.

15
<PAGE>

MANAGEMENT OF THE COMPANY

DIRECTORS AND OFFICERS

The business of the Company is managed under the direction of the Board of
Directors. Specifically, the Board of Directors is responsible for oversight of
the Fund by reviewing and approving agreements with the Fund's service
providers, and mandating policies for the Fund's operations. The principal
occupations of the directors and executive officers of the Company (and any
positions held with affiliated persons of the Company) for the past five years
are listed below.

<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE COMPANY PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- --------------------------------- ------------------------------------
<S> <C> <C>
Dr. Wallace Mathai-Davis Chairman of the Board, President, Managing Director, OFFITBANK (investment
OFFITBANK and Director adviser) (1986-present); one additional
520 Madison Avenue Chairman of the Board, President and
New York, NY 10022 Director position with the OFFIT Fund
Age: 55 Years Complex.

Edward J. Landau Director Of Counsel, Wolf, Block Schorr and
Wolf, Block Schorr and Solis-Cohen LLP Solis-Cohen, LLP (2/1/98-present); Member,
250 Park Avenue Lowenthal, Landau, Fischer & Bring, P.C
New York, NY 10177 (1960-1/31/98); Director, Revlon Group
Age: 72 Years Inc., Revlon Consumer Products Inc.;
Pittsburgh Annealing Box and Clad Metals
Inc.; one additional Director position with
the OFFIT Fund Complex.

The Very Reverend James Parks Director President, Interfaith Center of New York
Morton Interfaith Center of New York (1/1/98- present); formerly Dean of
570 Lexington Avenue Cathedral of St. John the Divine
New York, New York 10022 (1972-1996); one additional Director
Age: 75 Years position with the OFFIT Fund Complex.

Stephen M. Peck Director Investment Officer, Gilder Gagnon, Howe &
Gilder Gagnon, Howe & Co. LLC Co. LLC (1989 to present); Director,
1775 Broadway Harnischferger, Inc. and Fresenius Medical
New York, NY 10019 Care; one additional Director position
Age: 65 Years with the OFFIT Fund Complex.

16
<PAGE>

Vincent M. Rella Treasurer Controller, OFFITBANK (investment
OFFITBANK adviser) (1986 to present); one
520 Madison Avenue additional Officer position with the
New York, NY 10022 OFFIT Fund Complex.
Age: 47 Years

Stephen Brent Wells Secretary Managing Director, OFFITBANK (investment
OFFITBANK adviser) (1994 to present); one additional
520 Madison Avenue Officer position with the OFFIT Fund
New York, NY 10022 Complex.
Age: 55 Years

Michael Kagan Assistant Treasurer Administrator, OFFITBANK (investment
OFFITBANK adviser) (1998 to present); Administrator,
520 Madison Avenue Bankers Trust (1997); Audit Senior,
New York, NY 10022 PriceWaterhouse LLP (1994-1997); and one
Age: 29 Years additional Officer position with the OFFIT
Fund Complex.

David D. Marky Assistant Treasurer Vice-President and Director of Accounting
PFPC Inc. (1996-present) of PFPC Inc.; Assistant
103 Bellevue Parkway Vice President and Accounting Conversion
Wilmington, DE 19809 Manager (1992-1996) of PFPC Inc; one
Age: 34 Years additional Officer position with the OFFIT
Fund Complex.

Gary M. Gardner Assistant Secretary Senior Vice President (1994-present) of
PFPC Inc. PFPC Inc.; one additional Officer position
400 Bellevue Parkway with the OFFIT Fund Complex.
Wilmington, DE 19809
Age: 48 Years

David C. Lebisky Assistant Secretary Administrative Officer (1996-present) of
PFPC Inc. PFPC Inc.; Legal Assistant (1994-1996)
400 Bellevue Parkway with the law firm of Drinker Biddle &
Wilmington, DE 19809 Reath; one additional Officer position
Age: 28 years with the OFFIT Fund Complex.
</TABLE>

17
<PAGE>

The Board of Directors has designated an audit committee to advise the full
Board with respect to accounting, auditing and financial matters affecting the
Company. The Audit Committee is comprised of Mr. Landau, The Very Reverend
Morton and Mr. Peck and meets periodically.

The Company pays each Director who is not also an officer or affiliated
person an annual fee of $10,000 and a fee of $1,250 for each Board of Directors
and Board committee meeting attended and reimburses such Director for all
out-of-pocket expenses relating to attendance at meetings. Directors who are
affiliated with the Adviser do not receive compensation from the Company but are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.

DIRECTOR COMPENSATION
(The following table shows the compensation paid by the Company to the Directors
for 1999.)

<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated from Registrant and
Compensation Accrued as Part of Annual Benefits Fund Complex*
Name of Director From the Registrant Fund Expenses Upon Retirement Paid to Directors
- ---------------- ------------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Dr. Wallace Mathai-Davis $0 $0 $0 $0

Morris W. Offit** $0 $0 $0 $0

Edward J. Landau $17,500 $0 $0 $23,500

The Very Reverend
James Parks Morton $17,500 $0 $0 $23,500

Stephen M. Peck $8,750 $0 $0 $11,750
</TABLE>

*For this purpose, the "Fund Complex" consists of The OFFIT Investment Fund,
Inc. and The OFFIT Variable Insurance Fund, Inc., which are all the regulated
investment companies advised by OFFITBANK.
**Mr. Offit resigned as a Director effective September 1, 1999 and was succeeded
by Dr. Wallace Mathai-Davis.

INVESTMENT ADVISER

The Company has retained OFFITBANK, a New York State chartered trust
company, to act as its investment adviser (the "Adviser"). The Adviser is a
subsidiary of the Wachovia Corporation, a leading bank holding company with
Wachovia Bank, NA as its principal subsidiary. The advisory agreement (the
"Advisory Agreement") between the Adviser and the Company provides that the
Adviser shall manage the operations of the Company, subject to policies
established by the Board of Directors of the Company. Pursuant to the Advisory
Agreements, the Adviser manages the Company's investment portfolios, directs
purchases and sales of the portfolio securities and reports to the Company's
officers and directors regularly. In addition, the Adviser pays the compensation
of the Company's officers, employees and directors affiliated with the Adviser.
The Company bears all other costs of its operations, including the compensation
of its directors not affiliated with the Adviser.

For its services under the Advisory Agreement, the Adviser receives
from the Fund an advisory fee. The fee is calculated daily and paid monthly
based on the average daily net assets of the Fund, at the annual rate of .85% of
the first $200,000,000, .75% on the next $400,000,000 and .65% of

18
<PAGE>

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 services for their
customers. These services may include maintaining account records, processing
orders to purchase, redeem and exchange shares and answering customer inquiries.

The chart below shows the investment advisory fees for the Fund for the
last three fiscal years along with any waivers that reduced the investment
advisory fees. The fees shown were paid by the Fund to OFFITBANK.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
HIGH YIELD 1999 1998 1997
- ---------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $12,190,323 $11,091,248 $7,832,049
Fees waived $0 $0 $0
Net amount of fees paid by the Fund $12,190,323 $11,091,248 $7,832,049
</TABLE>

REGULATORY MATTERS

OFFITBANK is a trust company chartered under the New York Banking Law and
is supervised and examined thereunder by the New York Banking Department.
OFFITBANK is prohibited by its charter from accepting deposits other than
deposits arising directly from its exercise of the fiduciary powers granted
under the New York Banking Law and, accordingly, is not an insured depository
institution for purposes of the Federal Deposit Insurance Act or any other
banking law or regulation.

Banking laws and regulations, as currently interpreted by the New York
Banking Department, prohibit New York State chartered trust companies from
controlling, or distributing the shares of, a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit such
trust companies generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such trust companies from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. OFFITBANK believes that it may perform the services
described in the Fund's Prospectus without violation of such laws or
regulations. OFFITBANK is not a member of the Federal Reserve System and is not
subject to the Glass-Steagall Act, the Bank Holding Company Act of 1956 or any
other federal banking law or regulation that might affect its ability to perform
such services.

If OFFITBANK was prohibited from performing the services described in the
Fund's Prospectus, 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.

DISTRIBUTOR

19
<PAGE>

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 to distribute the Company's shares. In order to reimburse
the Distributor for its expenses incurred in certain activities intended to
result in the sale of MSD&T Shares of the Fund, the Company has amended its Plan
of Distribution (the "Plan") under Section 12(b) of the 1940 Act and Rule 12b-1
thereunder. Under the Plan and Distribution Agreement, the Fund is authorized to
spend for the account of MSD&T Shares up to 0.25% of its average daily net
assets solely attributable to MSD&T Shares annually, to reimburse the
Distributor for such activities primarily intended to result in the sale of
MSD&T Shares, which are summarized in the Prospectus. For the fiscal periods
ended December 31, 1999, December 31, 1998 and December 31, 1997, no
distribution costs were incurred by the Fund.

SHAREHOLDER SERVICING AGENTS

Pursuant to a Shareholder Servicing Plan adopted and amended by the Board
of Directors of the Company, the Company may enter into Shareholder Servicing
Agreements with financial institutions such as Mercantile-Safe Deposit and Trust
Company and its affiliated and correspondent banks and affiliates of State
Street Bank and Trust Company ("Shareholder Servicing Agents") with respect to
MSD&T Shares. Shareholder administrative support services will be performed by
Shareholder Servicing Agents for their customers who beneficially own MSD&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 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
.25% of the average daily net asset value of MSD&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 MSD&T Shares.

ADMINISTRATION, FUND ACCOUNTING, TRANSFER AGENCY
AND CUSTODY SERVICES

ADMINISTRATION

20
<PAGE>

compliance with the amounts and conditions of each state's qualification. For
the administrative and fund accounting services PFPC provides to the Company,
PFPC is paid an annual fee calculated daily and paid monthly which will not
exceed .125% of average daily net assets. From time to time, the
Administrator may waive all or a portion of its fees.

From January 1, 1997 to June 1, 1998, BISYS Fund Services Limited
Partnership ("BISYS") served as the Company's administrator. Prior to January 1,
1997, Furman Selz served as the Company's administrator.

The charts below show the administrative and fund accounting fees for the
Fund for the last three fiscal years along with any waivers that reduced those
fees.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
HIGH YIELD 1999 1998 1997
- ---------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $1,261,898 $1,696,494 $1,676,760
Fees waived $0 $442,728 $811,392
Net amount of fees paid by the Fund $1,261,898 $1,253,766 $865,368
</TABLE>

TRANSFER AGENCY

PFPC serves as the Company's Transfer Agent and Dividend Disbursing Agent.
As part of PFPC's duties, PFPC: (i) processes shareholder purchase and
redemption orders; (ii) issues periodic statements to shareholders; (iii)
processes transfers, exchanges and dividend payments; and (iv) maintains 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 assets of the
Fund. 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 in the name of the Fund; hold and disburse portfolio
securities on account of the Fund; 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 Fund's
operations. BONY is authorized under the Custodian Agreement to establish
separate account for the Fund's foreign securities with subcustodians, provided
that BONY remains responsible for the performance of all of its duties under the
Custodian Agreement. Prior to June 27, 1996, The Chase Manhattan Bank served as
the custodian for the Fund.

COUNSEL

Kramer Levin Naftalis & Frankel LLP, whose address is 919 Third Avenue, New
York, NY 10022, serves as counsel to the Company.

INDEPENDENT ACCOUNTANTS

Ernst & Young LLP, whose address is 200 Clarendon Street, Boston, MA
02116-5072, serves as the independent accountants for the Company for the fiscal
year ending December 31, 2000. The

21
<PAGE>

independent accountants conduct audits of the Company and assist in the
preparation of the Company's semi-annual and annual reports.

PORTFOLIO TRANSACTIONS

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 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.

22
<PAGE>

PURCHASE OF SHARES

For information pertaining to the manner in which MSD&T shares of the Fund
are offered to the public, see "Purchase of MSD&T 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 MSD&T shares of the Fund
may be redeemed, see "Redemption of MSD&T 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 "Exchange") or the bond market is
closed, or trading on the Exchange 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 the Fund, the 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 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 "Pricing of Fund Shares" 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

23
<PAGE>

assumes that all dividends and distributions are reinvested when paid. The
quotation assumes the amount was completely redeemed at the end of each 1, 5 and
10 year period (or, if shorter, the period since inception of the Fund) and the
deduction of all applicable Fund expenses on an annual basis. Average annual
total return is calculated according to the following formula:

n
P ( l + T ) = ERV

where: P = a hypothetical initial payment of $1,000.
T = the average annual total return.
N = the number of years.
ERV = the ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the period.

The Fund presents performance information for each class of shares
commencing with the Fund's inception (or the inception of the Partnership with
respect to the Fund, see "The Transfer" above for more information). Performance
information for each class of shares may also reflect performance for time
periods prior to the introduction of such class, and the performance for such
prior time periods will not reflect any fees and expenses, payable by such class
that were not borne by the Fund prior to the introduction of such class.

The average annual total return of the MSD&T Shares for the period November
1, 1999 (initial sale of MSD&T Shares) through December 31, 1999 was 2.38%.

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 - 1
---
P

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:

6
YIELD = 2 [ ( A - B + 1 ) - 1 ]
-----
cd

where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of any
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.

For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by 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,

24
<PAGE>

with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Undeclared earned income, computed in accordance
with generally accepted accounting principles, may be subtracted from the
maximum offering price calculation required pursuant to "d" above.

The 30-day yield for the MSD&T Shares for the period ended December 31,
1999 was 10.01%.

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 ranking group. 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.

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.

25
<PAGE>

QUALIFICATION AS A REGULATED INVESTMENT COMPANY

The Fund has elected to be taxed as a regulated investment company under
Subchapter M of 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 the 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) under Regulations that have not yet been promulgated, the
capitalized interest on acquisition indebtedness under Code Section 263(g),
among other amounts. However, if a Fund has a built-in loss with respect to a
position that becomes a part of a conversion transaction, the character of such
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.

26
<PAGE>

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 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 the 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, under an alternative method provided in Treasury Regulations).

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 may make
a mark-to-market election with respect to such stock. Pursuant

27
<PAGE>

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 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 a 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 Association, and the Student Loan Marketing Association, are treated as
U.S. Government securities.

28
<PAGE>

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,
with respect to capital gain net income, 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")). (Tax-exempt interest on municipal
obligations is not subject to the excise tax.) The balance of such income must
be distributed during the next calendar year. For the foregoing purposes, a
regulated 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, includes such gains and losses in determining the company's
ordinary taxable income for the succeeding calendar year). The 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 the 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. Distributions attributable to dividends received by the Fund from
domestic corporations will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below. Distributions
attributable to interest received by the Fund will not, and distributions
attributable to dividends paid by a foreign corporation generally should not,
qualify for the dividend-received deduction.

Ordinary income dividends paid by the Fund with respect to a taxable year
may qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations such as S corporations, which are not
eligible for the deduction because of their special characteristics, and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of dividends received
by the Fund from domestic corporations for the taxable year. A dividend received
by the Fund will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Fund has held for less than
46 days (91 days in the case of certain preferred stock), during the 90 day
period (180 days in the case of certain preferred stocks) beginning on the date
which is 45 days before the date on which such share becomes ex-dividend with
respect to such dividend excluding for this purpose under the rules of Code
Section 246(c) any period during which the Fund has an option to sell, is under
a contractual obligation to sell, has made and not closed a short sale of, is
the grantor

29
<PAGE>

of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the Fund is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code Section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items).

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. The Code provides, however, that under certain
conditions only 50% of the capital gain recognized upon a Fund's disposition of
domestic qualified "small business" stock will be subject to tax.

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,
exempt-interest 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).

30
<PAGE>

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 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 the 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 the 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)
(discussed above in connection with the dividends-received deduction for
corporations) 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.

31
<PAGE>

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 would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of the Fund, capital gain
dividends and exempt-interest dividends, and amounts retained by the Fund that
are designated as undistributed capital gains.

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 the 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.

BACKUP WITHHOLDING

The Fund may be required to withhold U.S. federal income tax at a rate of
31% ("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends (other than
exempt-interest dividends) if (i) the payee fails to furnish the Fund with the
payee's correct taxpayer identification number, (ii) the IRS notifies the Fund
that the payee has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (iii) when
required to do so, the payee fails to certify that he or she is not subject to
backup withholding.

Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.

32
<PAGE>

SHAREHOLDER SERVICES

The following supplements the information regarding shareholder services
set forth in the Company's Prospectus relating to the Fund.

EXCHANGE PRIVILEGE

A Shareholder who holds MSD&T 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 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 those of the Company, an
exchange between a series of a fund was deemed to be a taxable event. It is
likely, therefore, that a capital gain or loss would be realized on an exchange
between Funds or portfolios; shareholders may want to consult their tax advisers
for further information in this regard. The exchange privilege maybe modified or
terminated at any time.

TRANSFER OF SHARES

Shareholders may transfer shares of the Fund to another person by written
request to The OFFIT 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 MSD&T 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

CODE OF ETHICS

The Adviser, the Distributor and the Board of Directors have each adopted a
Code of Ethics under Rule 17j-1 of the 1940 Act. The Codes significantly
restrict the personal investing activities of persons with access to information
about recent portfolio transactions. Among other provisions, the Codes require
that such persons with access to information about the purchase or sale of
portfolio securities obtain preclearance before executing personal trades.

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 the 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

33
<PAGE>

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 the Fund of the Company is entitled to such
dividends and distributions out of the income earned on the assets belonging to
the 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 the Fund are entitled to receive the assets allocable to that class of shares
of the Fund which are available for distribution, and a proportionate
distribution, based upon the relative net assets of the Fund, of any general
assets not belonging to the Fund which are available for distribution. 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 each
class will differ.

Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid, non-assessable, fully transferable and redeemable at
the option of the holder.

CERTAIN OWNERS OF SHARES OF THE COMPANY

As of April 4, 2000, to the knowledge of the Administrator, the Officers
and the Directors of the Company, as a group, owned less than 1% of the
outstanding voting shares of the Fund. As of April 4, 2000, the following
persons owned of record or beneficially 5% or more of the outstanding shares of
the Fund:

<TABLE>
<CAPTION>
NAME AND ADDRESS
SHARE CLASS OF BENEFICIAL OWNER PERCENTAGE
- ----------- ------------------- ----------
<S> <C> <C>
MSD&T Mercantile Safe Deposit & Trust Co. 71.50%(1)
Mutual Fund Administration
20 South Charles St., 5th Floor
Baltimore, MD 21201

MSD&T Total Return Bond Fund 27.38%(1)
Mutual Fund Administration
20 South Charles St., 5th Floor
Baltimore, MD 21201
</TABLE>

(1) Accountholder may be deemed to have "control" as defined under the
Securities Act of 1933.

OTHER INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the SEC
under the Securities Act of 1933 with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Statement of Additional Information pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.

34
<PAGE>

Registration Statement of which the Prospectus and this Statement of Additional
Information form a part, each such statement being qualified in all respects by
such reference.

FINANCIAL INFORMATION

The audited financial statements for the Company and the notes thereto
appearing in the most current fiscal year Annual Report to shareholders are
incorporated in this Statement of Additional Information by reference. No other
parts of the Annual Report are incorporated by reference herein. The financial
statements included in the Annual Report have been audited by the Company's
independent accountants for the fiscal year ended December 31, 1999,
PricewaterhouseCoopers LLP, whose report thereon dated February 16, 2000, is
also incorporated herein by reference. Such financial statements have been
incorporated herein in reliance upon such report given upon their authority as
experts in accounting and auditing. Additional copies of the Annual Report may
be obtained at no charge by telephoning the Company at 1-800-618-9510.

35
<PAGE>

THE OFFIT INVESTMENT FUND, INC.

400 Bellevue Parkway
Wilmington, DE 19809
(800) 618-9510

STATEMENT OF ADDITIONAL INFORMATION

April 30, 2000

The OFFIT Investment Fund, Inc. (the "Company") is an open-end, management
investment company comprised of the following investment portfolios:

OFFIT HIGH YIELD FUND

OFFIT EMERGING MARKETS BOND FUND

OFFIT LATIN AMERICA EQUITY FUND

OFFIT TOTAL RETURN FUND

OFFIT INVESTMENT GRADE GLOBAL DEBT FUND

OFFIT GLOBAL CONVERTIBLE FUND

OFFIT U.S. GOVERNMENT SECURITIES FUND

OFFIT MORTGAGE SECURITIES FUND

OFFIT CALIFORNIA MUNICIPAL FUND

OFFIT NEW YORK MUNICIPAL FUND

OFFIT NATIONAL MUNICIPAL FUND

(individually, a "Fund", and collectively, the "Funds"). This Statement of
Additional Information ("SAI") provides information about the Company applicable
to each of the Funds. This information is in addition to the information that is
contained in the Company's Prospectus dated April 30, 2000. The Investment Grade
Global Debt and Global Convertible Funds have not yet commenced investment
operations.

This SAI is not a prospectus. The Prospectus may be obtained, without
charge, by calling the Company toll-free at 1-800-618-9510 or by writing to the
Company c/o PFPC Inc., P.O. Box 8701, Wilmington, DE 19899. The SAI should be
read in conjunction with the Company's Prospectus dated April 30, 2000 and the
Company's Annual Report dated December 31, 1999, which is hereby incorporated by
reference.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Organization and Classification................................................. 3

Non-Primary Investment Strategies and Related Risks............................. 3

Additional Risk Considerations.................................................. 14

Fundamental Investment Policies................................................. 15

Non-Fundamental Investment Policies............................................. 16

Management of the Company....................................................... 17

Investment Adviser.............................................................. 20

Distributor .................................................................... 24

Administration, Fund Accounting, Transfer Agency and Custody Services .......... 25

Portfolio Transactions.......................................................... 28

Purchase of Shares.............................................................. 29

Redemption of Shares............................................................ 29

Performance Calculations........................................................ 30

Additional Information Concerning Dividends, Distributions and Taxes............ 34

Shareholder Services............................................................ 43

General Information ............................................................ 43

Financial Information .......................................................... 46

Appendix A: Special Factors Affecting the California Municipal Fund ............ A-1

Appendix B: Special Factors Affecting the New York Municipal Fund .............. B-1
</TABLE>

<PAGE>

ORGANIZATION AND CLASSIFICATION

The Company is an open-end, management investment company that was
incorporated under the laws of the State of Maryland on September 8, 1993. All
of the Funds are non-diversified and offer two classes of shares: Select and
Advisor. Select Shares may be purchased from the Company's distributor, OFFIT
Funds Distributor, Inc. and Advisor Shares may be purchased through a
Shareholder Servicing Agent, which is a financial institution that has entered
into an agreement with the Company to provide various shareholder services to
the beneficial owners of Advisor Shares. The High Yield Fund also offers MSD&T
Shares through a separate prospectus. MSD&T Shares are offered through
Mercantile - Safe Deposit and Trust Company and its affiliated and correspondent
banks. For more information on MSD&T Shares, contact the Company at
1-800-618-9510.

THE TRANSFER

NON-PRIMARY INVESTMENT STRATEGIES AND RELATED RISKS

The Funds may utilize many of the same investment techniques and certain
Funds may invest in similar securities. Investors should note, however, that the
Funds will invest their assets in accordance with their respective investment
objectives and policies. Accordingly, the Funds' investment adviser, OFFITBANK
(the "Adviser), expects that each Fund's investment portfolio will be distinct.

REPURCHASE AGREEMENTS

Each Fund may enter into repurchase agreements. A repurchase agreement is a
transaction in which the seller of a security commits itself at the time of the
sale to repurchase that security from the buyer at a mutually agreed upon time
and price. The Funds will enter into repurchase agreements only with dealers,
domestic banks or recognized financial institutions which, in the opinion of the
Adviser based on guidelines established by the Company's Board of Directors,
present minimal credit risks. The Adviser will monitor the value of the
securities underlying the repurchase agreement at the time the transaction is
entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always exceeds the repurchase price. In
the event of default by the seller under the repurchase agreement, the Fund may
incur costs and experience time delays in connection with the disposition of the
underlying securities. Repurchase agreements are considered to be loans by the
Funds under the 1940 Act.

REVERSE REPURCHASE AGREEMENTS

Each Fund may enter into reverse repurchase agreements. A reverse
repurchase agreement is a borrowing transaction in which the Fund transfers
possession of a security to another party, such as a bank or broker/dealer, in
return for cash, and agrees to repurchase, the security in the future at an
agreed upon price, which includes an interest component. Whenever the Funds
enter into reverse repurchase agreements, they will place in a segregated
custodian account liquid assets having a value equal to the repurchase price
(including accrued interest) and will subsequently

<PAGE>

monitor the account to ensure such equivalent value is maintained. Reverse
repurchase agreements are considered to be borrowings by the Funds under the
1940 Act.

ASSET-BACKED SECURITIES

Each of the Funds may invest in asset-backed securities. Asset-backed
securities are generally issued as pass through certificates, which represent
undivided fractional ownership interests in the underlying pool of assets, or as
debt instruments, and are generally issued as the debt of a special purpose
entity organized solely for the purpose of owning such assets and issuing such
debt. Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or other enhancement issued by a financial institution
unaffiliated with the entities issuing the securities. Assets which, to date,
have been used to back asset-backed securities include motor vehicle installment
sales contracts or installment loans secured by motor vehicles, and receivables
from revolving credit (credit card) agreements.

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.

MORTGAGE-RELATED SECURITIES

The Mortgage Securities Fund will invest substantially all of its assets,
and each of the other Funds may invest from time to time in mortgage-related
securities, consistent with its respective investment objectives and policies,
that provide funds for mortgage loans made to residential home owners. These
include securities, such as collateralized mortgage obligations and stripped
mortgage-backed securities which represent interests in pools of mortgage loans
made by lenders such as savings and loan institutions, mortgage bankers,
commercial banks and others. Pools of mortgage loans are assembled for sale to
investors (such as a Fund) by various government, government-related and private
organizations.

The Adviser expects that government, government-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-term fixed rate mortgages. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with each Fund's investment objectives and policies, consider
making investments in such new types of securities.

<PAGE>

SHORT SALES

Each Fund may make short sales of securities "against the box". A short
sale is a transaction in which a Fund sells a security it does not own in
anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, a Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.

CONVERTIBLE SECURITIES

The High Yield, Emerging Markets Bond, Latin America Equity, Total Return
and Global Debt Funds may, and the Global Convertible Fund will, invest in
convertible securities. The convertible securities that may be held by a Fund
include any corporate debt security or preferred stock that may be converted
into underlying shares of common stock and include both traditional convertible
securities and synthetic convertible securities. The common stock underlying
convertible securities may be issued by a different entity than the issuer of
the convertible securities. Convertible securities entitle the holder to receive
interest payments paid on corporate debt securities or the dividend preference
on a preferred stock until such time as the convertible security matures or is
redeemed or until the holder elects to exercise the conversion privilege.
"Synthetic" convertible securities, as such term is used herein, are created by
combining separate securities which possess the two principal characteristics of
a true convertible security, fixed income and the right to acquire equity
securities. Convertible securities have several unique investment
characteristics such as (i) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (ii) a lesser degree of fluctuation
in value than the underlying stock since they have fixed income characteristics,
and (iii) the potential for capital appreciation if the market price of the
underlying common stock increases.

The High Yield, Emerging Markets Bond, Latin America Equity, Total Return
and Global Debt Funds have no current intention of converting any convertible
securities they may own into equity securities or holding them as an equity
investment upon conversion, although they may do so for temporary purposes. A
convertible security might be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by a Fund is called for redemption, such Fund may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.

DEPOSITORY RECEIPTS AND DEPOSITORY SHARES

The High Yield, Emerging Markets Bond, Latin America Equity, Total Return,
Investment Grade Global Debt and Global Convertible Funds may hold equity
securities of foreign issuers in the form of American Depository Receipts
("ADRs"), American Depository Shares ("ADSs") and European Depository Receipts
("EDRs"), or other securities convertible into securities of eligible issuers.
These securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. ADRs and ADSs typically are issued
by an American bank or trust company which evidences ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depository Receipts ("CDRs"), are receipts issued in Europe
typically by foreign banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs and ADSs in registered form are
designed for use in United States securities markets and EDRs and CDRs in bearer
form are designed for use in European securities markets. For purposes of the
Funds' investment policies, the Funds' 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. 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 Funds 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 Funds, to the extent of their investment
in ADRs, will invest predominantly in ADRs sponsored by the underlying issuers.
The Funds, however, may invest in unsponsored ADRs. Issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs.

WARRANTS OR RIGHTS

<PAGE>

Warrants or rights may be acquired by each of the High Yield, Emerging
Markets Bond, Latin America Equity, Total Return, Investment Grade Global Debt
and Global Convertible Funds in connection with other securities or separately,
and provide the applicable Fund with the right to purchase at a later date other
securities of the issuer. Warrants or rights acquired by a Fund in units or
attached to securities will be deemed to be without value for purpose of this
restriction. These limits are not fundamental policies of the Funds and may be
changed by the Company's Board of Directors without shareholder approval.

BORROWING

The Latin America Equity, Total Return, Global Debt, National Municipal,
California Municipal and New York Municipal Funds' borrowings will not exceed
25% of each Fund's respective total assets (including the amount borrowed), less
all liabilities and indebtedness other than the borrowings and may use the
proceeds of such borrowings for investment purposes. These Funds may borrow for
leveraging purposes. The High Yield, Emerging Markets Bond, Global Convertible,
U.S. Government Securities and Mortgage Securities Funds borrowings will not
exceed 20% of their respective total assets and is permitted only for temporary
or emergency purposes. Any borrowing by the Funds may cause greater fluctuation
in the value of their shares than would be the case if the Funds did not borrow.
In the event that the Funds employ leverage, they would be subject to certain
additional risks. Use of leverage creates an opportunity for greater growth of
capital but would exaggerate any increases or decreases in the Funds' net asset
values. When the income and gains on securities purchased with the proceeds of
borrowings exceed the costs of such borrowings, the Funds' earnings or net asset
values will increase faster than otherwise would be the case; conversely, if
such income and gains fail to exceed such costs, the Funds' earnings or net
asset values would decline faster than would otherwise be the case.

The Latin America Equity, Total Return, Global Debt and the Municipal
Funds may, in addition to engaging in the transactions described above, borrow
money for temporary or emergency purposes (including, for example, clearance of
transactions, share repurchases or payments of dividends to shareholders) in an
amount not exceeding 5% of the value of the applicable Fund's total assets
(including the amount borrowed.)

WHEN ISSUED AND FORWARD COMMITMENT TRANSACTIONS

Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a forward commitment basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities at a
set price with payment and delivery taking place beyond the normal settlement
date, allow such Fund to lock in what the Adviser believes to be an attractive
price or yield on a security it owns or intends to purchase or sell, regardless
of future changes in interest rates or securities prices. No income accrues to
the purchaser of a security on a when-issued or forward commitment basis prior
to delivery. When a Fund purchases securities on a when-issued basis or engages
in forward commitment transactions, it sets aside securities or cash with its
custodian equal to the payment that will be due. Engaging in when-issued and
forward commitment transactions can cause greater fluctuation in a Fund's net
asset value and involves a risk that yields or prices available in the market on
the delivery date may be more advantageous to such Fund than those received in
each transaction.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Each Fund (other than the Municipal Funds) may purchase or sell forward
foreign currency exchange contracts ("forward contracts") as part of its
portfolio investment strategy. A forward contract is an obligation to purchase
or sell a specific currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders and their
customers. A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security
("transaction hedge"). Additionally, for example, when a Fund believes that a
foreign currency may suffer a substantial decline against the U.S. dollar, it
may enter into a forward sale contract to sell an amount of that foreign
currency approximating the value of some or all of such Fund's portfolio
securities denominated in such foreign currency. Conversely, when a Fund
believes that the U.S. dollar may suffer a substantial decline against foreign
currency, it may enter into a forward purchase contract to buy that foreign
currency for a fixed dollar amount ("position hedge"). In this situation, a Fund
may, in the alternative, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where such Fund believes that
the U.S. dollar value of the currency to be sold pursuant to the forward
contract will fall whenever there is a decline in the U.S. dollar value of the
currency in

<PAGE>

which portfolio securities of the Fund are denominated ("cross-hedge"). Each
Fund's custodian will place cash not available for investment or U.S. government
securities or other liquid investments in a separate account having a value
equal to the aggregate amount of such Fund's commitments under forward contracts
entered into with respect to position hedges, cross-hedges and transaction
hedges, to the extent they do not already own the security subject to the
transaction hedge. If the value of the securities placed in a separate account
declines, additional cash or investments will be placed in the account on a
daily basis so that the value of the account will equal the amount of such
Fund's commitments with respect to such contracts. As an alternative to
maintaining all or part of the separate account, a Fund may purchase a call
option permitting such Fund to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the forward contract
price or a Fund may purchase a put option permitting such Fund to sell the
amount of foreign currency subject to a forward purchase contract at a price as
high or higher than the forward contract price. Unanticipated changes in
currency prices may result in poorer overall performance for a Fund than if it
had not entered into such contracts. If the party with which a Fund enters into
a forward contract becomes insolvent or breaches its obligation under the
contract, then the Fund may lose the ability to purchase or sell a currency as
desired.

LOANS OF PORTFOLIO SECURITIES

For the purpose of realizing additional income, each Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. Securities loans are made to broker/dealers or institutional investors
pursuant to agreements requiring that the loans continuously be secured by
collateral at least equal at all times to the value of the securities lent plus
any accrued interest, "marked to market" on a daily basis. The collateral
received will consist of cash, U.S. short-term government securities, bank
letters of credit or such other collateral as may be permitted under the Fund's
investment program and by regulatory agencies and approved by the Company's
Board of Directors. While the securities loan is outstanding, a 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. Each Fund has a right to call each loan
and obtain the securities on five business days' notice. To the extent
applicable, a 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.

LOAN PARTICIPATIONS AND ASSIGNMENTS

Each Fund (other than the U.S. Government Securities, Mortgage Securities
and the Municipal Funds) may invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a domestic or foreign entity and
one or more financial institutions ("Lenders"). The majority of the Funds'
investments in Loans in Latin America and other emerging markets are expected to
be in the form of participations ("Participations") in Loans and assignments
("Assignments") of portions of Loans from third parties. Participations
typically will result in a Fund having a contractual relationship only with the
Lender, not with the borrower. Such Fund will have the right to receive payments
of principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and such Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, a 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, a 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. A 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 a
Fund purchases Assignments from Lenders, that 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 a Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.

<PAGE>

A Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and it is anticipated that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on a Fund's ability to dispose of particular Assignments
or Participations when necessary to meet a Fund's liquidity needs or in response
to a specific economic event, such as a deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for Assignments and
Participations also may make it more difficult for a Fund to assign a value to
those securities for purposes of valuing such Fund's portfolio and calculating
its net asset value. Each Fund currently treats investments in Participations
and Assignments as illiquid for purposes of its limitation on investments in
illiquid securities. See "Illiquid Securities" below. However, each Fund may
revise its policy in the future based upon further review of the liquidity of
Assignments and Participations. Any determination to treat an Assignment or
Participation as liquid would be made based on procedures adopted by the Board
of Directors.

U.S. GOVERNMENT OBLIGATIONS

Except for temporary defensive purposes, no Fund (other than the U.S.
Government Securities and Mortgage Securities Funds) will invest more than 25%
(35% with respect to the National Municipal, California Municipal and New York
Municipal Funds) of its net assets in securities issued or guaranteed by the
U.S. government or by its agencies or instrumentalities. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of bills,
notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by agencies
or instrumentalities established or sponsored by the U.S. government.

In addition to the U.S. Treasury obligations described above, the Funds may
invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.

ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS

Each Fund may invest in zero coupon securities and debt securities
(including for certain Funds convertible debt securities) acquired at a
discount. A substantial portion of the Emerging Markets Bond, Total Return and
Global Debt Fund's sovereign debt securities may be acquired at a discount. The
Funds will only purchase such securities to the extent consistent with their
respective investment objectives. These investments involve special risk
considerations. Zero coupon securities are debt securities that pay no cash
income but are sold at substantial discounts from their value at maturity. The
entire return of a zero coupon security consists of the amortization of
discount. The High Yield, Emerging Markets Bond, Latin America Equity, Total
Return and Global Debt Funds also may purchase pay-in-kind bonds. Pay-in-kind
bonds pay all or a portion of their interest in the form of debt or equity
securities. The High Yield and Global Debt Funds will only purchase pay-in-kind
bonds that pay all or a portion of their interest in the form of debt
securities. The Emerging Markets Bond, Latin America Equity, Total Return and
Global Convertible Funds may receive payments from pay-in-kind bonds in the form
of both debt and equity securities provided that such equity

<PAGE>

securities do not cause each of these Funds to exceed their respective
investment limitation in equity securities. Zero coupon securities and
pay-in-kind bonds may be issued by a wide variety of corporate and governmental
issuers.

Zero coupon securities, pay-in-kind bonds and debt securities acquired
at a discount are subject to greater price fluctuations in response to changes
in interest rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates than does the value of
ordinary interest-bearing debt securities with similar maturities. Under current
federal income tax law, the Funds are required to accrue as income each year the
value of securities received in respect of pay-in-kind bonds and a portion of
the original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Funds will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Funds may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements. See "Additional
Information Concerning Dividends, Distributions and Taxes" below.

BANK OBLIGATIONS

Bank obligations that may be purchased by each Fund include certificates of
deposit, bankers' acceptances and fixed time deposits. A certificate of deposit
is a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A banker's acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
The Funds do not consider fixed time deposits illiquid for purposes of the
restriction on investment in illiquid securities.

Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by a Fund,
the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by a Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.

VARIABLE AND FLOATING RATE INSTRUMENTS

Securities purchased by each Fund may include variable and floating rate
instruments, which provide for adjustments in the interest rate on certain reset
dates or whenever a specified interest rate index changes, respectively. 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.

<PAGE>

MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
INTERESTS

The National Municipal, California Municipal and New York Municipal Funds
may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover a Fund's original investment.

Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.

Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' 15% limitation on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such limitation. In determining the
liquidity of municipal lease obligations and certificates of participation, the
Adviser will consider a variety of factors including: (i) the willingness of
dealers to bid for the security; (ii) the number of dealers willing to purchase
or sell the obligation and the number of other potential buyers; (iii) the
frequency of trades or quotes for the obligation; and (iv) the nature of the
marketplace trades. In addition, the Adviser will consider factors unique to
particular lease obligations and certificates of participation affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by a Fund.

Each Fund may purchase participations in Municipal Securities held by a
commercial bank or other financial institution. Such participations provide a
Fund with the right to a pro rata undivided interest in the underlying Municipal
Securities. In addition, such participations generally provide a Fund with the
right to demand payment, on not more than seven days' notice, of all or any part
of such Fund's participation interest in the underlying Municipal Security, plus
accrued interest. Each Fund will only invest in such participations if, in the
opinion of bond counsel, counsel for the issuers of such participations or
counsel selected by the Adviser, the interest from such participations is exempt
from regular federal income tax and California income tax, in the case of the
California Municipal Fund, or New York State, New York City and City of Yonkers
personal income tax, in the case of the New York Municipal Fund.

PRE-REFUNDED MUNICIPAL SECURITIES

The National Municipal, California Municipal and New York Municipal Funds
may invest in pre-refunded Municipal Securities. The principal of and interest
on pre-refunded Municipal Securities are no longer paid from the original
revenue source for the securities. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by the
U.S. Government. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded Municipal
Securities. Issuers of Municipal Securities use this advance refunding technique
to obtain more favorable terms with respect to securities that are not yet
subject to call or redemption by the issuer. For example, advance refunding
enables an issuer to refinance debt at lower market interest rates, restructure
debt to improve cash flow or eliminate restrictive covenants in the indenture or

<PAGE>

other governing instrument for the pre-refunded Municipal Securities. However,
except for a change in revenue source from which principal and interest payments
are made, the pre-refunded Municipal Securities remain outstanding on their
original terms until they mature or are redeemed by the Issuer. Pre-refunded
Municipal Securities are usually purchased at a price which represents a premium
over their face value.

BRADY BONDS

Each Fund (other than the U.S. Government Securities, the Mortgage
Securities and the Municipal Funds) may invest in "Brady Bonds", which are debt
securities issued or guaranteed by foreign governments in exchange for existing
external defaulted commercial bank indebtedness under a plan announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the over-the-counter secondary
market.

Each such Fund may invest in either collateralized or uncollateralized
Brady Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are collateralized in full
as to principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Interest payments on such bonds generally are collateralized by cash
or securities in an amount that, in the case of fixed rate bonds, is equal to at
least six months of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter.

TENDER OPTION BONDS

The National Municipal, California Municipal and New York Municipal Funds
may invest in tender option bonds. A tender option bond is a Municipal Security
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term-tax-exempt rates. The bond is typically issued in
conjunction with the agreement of a third party, such as a bank, broker-dealer
or other financial institution, pursuant to which such institution grants the
security holders the option, at periodic intervals, to tender their securities
to the institution and receive the face value thereof. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the bond's fixed coupon rate and the rate, as determined
by a remarketing or similar agent at or near the commencement of such period,
that would cause the securities, coupled with the tender option, to trade at par
on the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term, tax-exempt rate. However, an institution will not be
obligated to accept tendered bonds in the event of certain defaults or a
significant downgrade in the credit rating assigned to the issuer of the bond.
The liquidity of a tender option bond is a function of the credit quality of
both the bond issuer and the financial institution providing liquidity. Tender
option bonds are deemed to be liquid unless, in the opinion of the Adviser, the
credit quality of the bond issuer and the financial institution is deemed, in
light of the Fund's credit quality requirements, to be inadequate.

No Fund will purchase tender option bonds unless at the time of such
purchase the Adviser reasonably expects that (i) based upon its assessment of
current and historical interest rate trends, prevailing short-term tax-exempt
rates will not exceed the stated interest rate on the underlying municipal
obligations at the time of the next tender fee adjustment, and (ii) the
circumstances which might entitle the grantor of a tender option to terminate
the tender option would not occur prior to the time of the next tender
opportunity. At the time of each tender opportunity, a Fund will exercise the
tender option with respect to any tender option bonds unless the Adviser
reasonably expects that, (i) based upon its assessment of current and historical
interest rate trends, prevailing short-term tax-exempt rates will not exceed the
stated interest rate on the underlying municipal obligations at the time of the
next tender fee adjustment, and (ii) the circumstances which might entitle the
grantor of a tender option to terminate the tender option would not occur prior
to the time of the next tender opportunity. Each Fund will exercise the tender
feature with respect to tender option bonds, or otherwise dispose of their
tender option bonds, prior to the time the tender option is scheduled to expire
pursuant to the terms of the agreement under which the tender option is granted.
Each Fund will purchase tender option bonds only when it is satisfied that (i)
the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax-exempt status of the underlying
municipal obligations and (ii) payment of any tender fees will not have the
effect of creating taxable income for the Funds.

Each Fund intends to invest in tender option bonds the interest on which
will, in the opinion of bond counsel, counsel for the issuer of interests
therein or counsel selected by the Adviser, be exempt from regular federal
income

<PAGE>

tax and, in the case of the California Municipal Fund, California state income
tax, or in the case of the New York Municipal Fund, New York State, New York
City and City of Yonkers personal income tax. However, because there can be no
assurance that the Internal Revenue Service (the "IRS") will agree with such
counsel's opinion in any particular case, there is a risk that a Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees, in relation to various regulated investment company tax provisions is
unclear. Each Fund intends to manage its portfolio in a manner designed to
eliminate or minimize any adverse impact from the tax rules applicable to these
investments.

AUCTION RATE SECURITIES

The National Municipal, California Municipal and New York Municipal Funds
may invest in auction rate securities. Auction rate securities consist of
auction rate Municipal Securities and auction rate preferred securities issued
by closed-end investment companies that invest primarily in Municipal
Securities. Provided that the auction mechanism is successful, auction rate
securities usually permit the holder to sell the securities in an auction at par
value at specified intervals. The dividend is reset by "Dutch" auction in which
bids are made by broker-dealers and other institutions for a certain amount of
securities at a specified minimum yield. The dividend rate set by the auction is
the lowest interest or dividend rate that covers all securities offered for
sale. While this process is designed to permit auction rate securities to be
traded at par value, there is the risk that an auction will fail due to
insufficient demand for the securities.

Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code. For
purposes of complying with the 35% limitation on each Fund's investments in
securities other than Municipal Securities, auction rate preferred securities
will not be treated as Municipal Securities unless substantially all of the
dividends on such securities are expected to be exempt from regular federal
income taxes and, in the case of the California Fund, California state income
tax, or, in the case of the New York Fund, New York State, New York City and
City of Yonkers personal income tax.

Each Fund's investments in auction rate preferred securities of closed-end
funds are subject to the limitations prescribed by the 1940 Act and certain
state securities regulations. These limitations include a prohibition against
acquiring more than 3% of the voting securities of any other investment company
and investing more than 5% of such Fund's assets in securities of any one
investment company or more than 10% of its assets in securities of all
investment companies. Each Fund will indirectly bear its proportionate share of
any management fees paid by such closed-end funds in addition to the advisory
and administration fees payable directly by such Fund.

INSURANCE

The National Municipal, California Municipal and New York Municipal Funds
may invest in "insured" tax-exempt Municipal Securities. Insured Municipal
Securities are those for which scheduled payments of interest and principal are
guaranteed by a private (non-governmental) insurance company. The insurance only
entitles a Fund to receive the face or par value of the securities held by such
Fund. The insurance does not guarantee the market value of the Municipal
Securities or the value of the shares of a Fund.

Each Fund may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a premium and meeting the insurer's underwriting
standards, the bond issuer is able to obtain a high credit rating (usually, Aaa
from Moody's Investors Service, Inc. ("Moody's") or AAA from Standard & Poor's
Ratings Group ("Standard & Poor's") for the issued security. Such insurance is
likely to increase the purchase price and resale value of the security. New
issue insurance policies are noncancellable and continue in force as long as the
bonds are outstanding.

A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. Each Fund may purchase bonds
<PAGE>

which have already been insured under a secondary market insurance policy by a
prior investor, or a Fund may itself purchase such a policy from insurers for
bonds which are currently uninsured.

An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by the Funds will be obtained only from insurance companies rated, at the time
of purchase, Aaa by Moody's or AAA by Standard & Poor's.

ILLIQUID SECURITIES

No Fund will knowingly invest more than 15% of the value of its net assets
in illiquid securities, including securities which are not readily marketable,
time deposits and repurchase agreements not terminable within seven days.
Illiquid assets are assets which may not be sold or disposed of in the ordinary
course of business within seven days at approximately the value at which a Fund
has valued the investment. Securities that have readily available market
quotations are not deemed illiquid for purposes of this limitation (irrespective
of any legal or contractual restrictions on resale). The Funds may purchase
securities that are not registered under the Securities Act of 1933, as amended,
but which can be sold to qualified institutional buyers in accordance with Rule
144A under the 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
sale of restricted or illiquid securities require more time and result in higher
brokerage charges or dealer discounts and other selling expenses than the sale
of securities eligible for trading on securities exchanges or in the
over-the-counter markets. Restricted securities often sell at a price lower than
similar securities that are not subject to restrictions on resale.

With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933 and commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, are liquid or illiquid. The Board has
delegated the function of making day to day determinations of liquidity to the
Adviser, pursuant to guidelines reviewed by the Board. The Adviser takes into
account a number of factors in reaching liquidity decisions, including, but not
limited to: (i) the frequency of trading in the security; (ii) the number of
dealers who make quotes for the security; (iii) the number of dealers who have
undertaken to make a market in the security; (iv) the number of other potential
purchasers; and (v) the nature of the security and how trading is effected
(e.g., the time needed to sell the security, how offers are solicited and the
mechanics of transfer). The Adviser will monitor the liquidity of securities in
each Fund's portfolio and report periodically on such decisions to the Board of
Directors.

OTHER INVESTMENT COMPANIES

The Total Return Fund may invest all or any portion of its assets in each
of the other Funds. Each other Fund reserves the right to invest up to 10% of
its total assets in the securities of other unaffiliated investment companies.
Each other Fund may not invest more than 5% of its total assets in the
securities of any one investment company or acquire more than 3% of the voting
securities of any other investment company. No such Fund intends to invest in
such investment companies unless, in the judgment of the Adviser, the potential
benefits of such investment justify the payment of any premium to net asset
value of the investment company or of any sales charge. Each such other Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by investment companies in which it invests in addition to the
advisory fee paid by the Fund. To the extent that the Total Return Fund's assets
are invested in the other Funds of the Company, no advisory fee is paid at the
Fund level, and shareholders incur their proportionate share of advisory fees
paid by the other Funds.

FUTURE DEVELOPMENTS

Each Fund may, following notice to its shareholders, take advantage of
other investment practices which are not at present contemplated for use by a
Fund or which currently are not available but which may be developed, to the
extent such investment practices are both consistent with a Fund's investment
objectives and legally permissible for such Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.

<PAGE>

HEDGING AND DERIVATIVES

Each Fund (other than the Municipal Funds) may use, as portfolio management
strategies, cross currency hedges, interest rate transactions, commodity futures
contracts in the form of futures contracts on securities, securities indices and
foreign currencies, and related options transactions. Each such Fund also may
enter into forward foreign currency contracts and options transactions to hedge
in connection with currency and interest rate positions and in order to enhance
the Fund's income or gain. The Municipal Funds may, in order to further their
investment objectives, purchase or sell futures contracts on (i) U.S. Government
Securities and (ii) municipal bond indices. Currently, at least one exchange
trades futures contracts on an index of long-term municipal bonds, and the Funds
reserve the right to conduct futures transactions based on an index which may be
developed in the future to correlate with price movements in municipal
obligations. In addition, each such Fund may buy and sell interest rate futures
contracts and options on interest rate futures contracts. The Funds will not
engage in futures and options transactions for leveraging purposes. The Funds
may be unable or limited in their ability to engage in Hedging and Derivatives
by certain factors, including current economic conditions. See Appendix B to the
Prospectus.

TEMPORARY STRATEGIES

Each 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,
each of the Funds (other than the Municipal Funds) temporarily may hold cash
(U.S. dollars, foreign currencies or multinational currency units) and/or invest
up to 100% of their respective assets in high quality debt securities or money
market instruments of U.S. or foreign issuers, and most or all of each Fund's
investments may be made in the United States and denominated in U.S. dollars.
The Municipal Funds may, for temporary defensive purposes, invest without
limitation in taxable, high quality short term money market instruments if, in
the opinion of the Adviser, adverse conditions prevail in the markets for
Municipal Securities (including conditions under which such obligations are
unavailable for investment). Any net interest income derived from taxable
securities and distributed by the Municipal Funds will be taxable as ordinary
income when distributed.

In addition, pending investment of proceeds from new sales of Fund shares
or to meet ordinary daily cash needs, each Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.

ADDITIONAL RISK CONSIDERATIONS

NON-U.S. WITHHOLDING TAXES

A Fund's net investment income from foreign issuers may be subject to
non-U.S. withholding taxes, thereby reducing the Fund's net investment income.
See "Additional Information Concerning Dividends, Distributions and Taxes"
below.

INVESTING IN PUERTO RICO, THE UNITED STATES VIRGIN ISLANDS AND GUAM

<PAGE>

FUNDAMENTAL INVESTMENT POLICIES

In addition to the Funds' investment objectives, the following is a list of
restrictions and fundamental investment policies that may not be changed without
the affirmative vote of a majority of the Funds' outstanding shares (as defined
below under "General Information - Capital Stock.") No Fund may:

1. invest 25% or more of the value of its total assets in securities of
issuers in any one industry; provided, that there is no limitation
with respect to investment in obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities; and provided
further, that, with respect to the California Municipal Fund and the
New York Municipal Fund, there is no limitation with respect to
obligations issued or guaranteed by any state, territory or possession
of the United States, the District of Columbia, or any of their
authorities, agencies, instrumentalities or political subdivisions;

2. invest an amount equal to 15% or more of the current value of their
net assets in investments that are illiquid;

3. purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase and sell currency forward
contracts, options on foreign currencies and may otherwise engage in
transactions in foreign currencies;

4. make loans, except that a Fund may (a) (i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in
loans and participations in accordance with its investment objectives
and policies, (b) make loans of portfolio securities and (c) enter
into repurchase agreements with respect to portfolio securities;

5. underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with a Fund's investment
program may be deemed to be an underwriting;

<PAGE>

7. purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5% of
a Fund's total assets in the case of any one other investment company
and 10% of such total assets in the case of all other investment
companies in the aggregate. This restriction shall not apply to
investment company securities received or acquired by a Fund pursuant
to a merger or plan of reorganization; and

8. 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).

The High Yield, Emerging Markets Bond, Global Convertible, U.S. Government
Securities and Mortgage Securities Funds may not borrow money (except that they
may enter into reverse repurchase agreements) except from banks for temporary or
emergency purposes; PROVIDED, that (a) the amount of such borrowing may not
exceed 20% of the value of such Fund's total assets, and (b) each such Fund will
not purchase portfolio securities while such outstanding borrowing exceeds 5% of
the value of such Fund's total assets. The Latin America Equity, Total Return
and Global Debt Funds may borrow money from banks and enter into reverse
repurchase agreements in an aggregate amount up to 25% of their total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing. The California Municipal, New York Municipal and National
Municipal Funds may not borrow money, except (a) from banks or by entering into
reverse repurchase agreements, in aggregate amounts not exceeding 25% of the
value of its total assets at the time of such borrowing and (b) in amounts not
exceeding 5% of the value of its total assets at the time of such borrowing for
temporary or emergency purposes (including for clearance of securities
transactions or payment of redemptions or dividends). For purposes of the
California Municipal, New York Municipal and National Municipal Funds'
investment limitation, the term "total assets" shall be calculated after giving
effect to the net proceeds of any borrowings and reduced by any liabilities and
indebtedness other than such borrowings. The High Yield, Emerging Markets Bond,
Investment Grade Global Debt, Global Convertible and Latin America Equity Funds
may not purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions, and except for initial and variation margin payments
in connection with the use of options, futures contracts, options thereon or
forward currency contracts; a Fund may also make deposits of margin in
connection with futures and forward contracts and options thereon) (other than
Municipal Funds). Investment restriction (8) is a fundamental policy with
respect to the National Municipal, California Municipal and New York Municipal
Funds and a non-fundamental policy with respect to all other Funds. For purposes
of determining whether the limitation discussed in restriction number 1 above is
met, a Fund considers each issuer to be a member of the industry designated by
its Standard Industry Classification ("SIC") code and will apply the 25%
limitation on a SIC by SIC basis.

NON-FUNDAMENTAL INVESTMENT POLICIES

The following are non-fundamental investment policies and may be changed by
a vote of the Company's Board of Directors. No Fund may:

1. invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;

3. invest in stock or bond futures and/or options on futures unless (i)
not more than 5% of a Fund's total assets are required as deposit to
secure obligations under such futures and/or options on futures
contracts, provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing such 5%; and

<PAGE>

In addition, each of the High Yield, Emerging Markets Bond, Investment
Grade Global Debt, Global Convertible and Latin America Equity Funds may not:

1. invest for the purpose of exercising control over management of any
company; and

2. invest in puts, calls, straddles or spreads, except as described in
(3) above;

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 COMPANY

DIRECTORS AND OFFICERS

The business of the Company is managed under the direction of the Board of
Directors. Specifically, the Board of Directors is responsible for oversight of
the Funds by reviewing and approving agreements with the Funds' service
providers, and mandating policies for the Funds' operations. The principal
occupations of the directors and executive officers of the Company (and any
positions held with affiliated persons of the Company) for the past five years
are listed below.
<PAGE>

<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE COMPANY PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- --------------------------------- ------------------------------------
<S> <C> <C>
Dr. Wallace Mathai-Davis Chairman of the Board, President, Managing Director, OFFITBANK (investment
OFFITBANK and Director adviser) (1986-present); one additional
520 Madison Avenue Chairman of the Board, President, and
New York, NY 10022 Director position with the OFFIT Fund
Age: 55 Years Complex.

The Very Reverend James Parks Morton Director President, Interfaith Center of New York
Interfaith Center of New York (1/1/98- present); formerly Dean of
570 Lexington Avenue Cathedral of St. John the Divine
New York, New York 10022 (1972-1996); one additional Director
Age: 75 Years position with the OFFIT Fund Complex.

Stephen M. Peck Director Investment Officer, Gilder Gagnon Howe &
Gilder Gagnon Howe & Co. LLC Co. LLC (1989 to present); Director,
1775 Broadway Harnischferger, Inc. and Fresenius Medical
New York, NY 10019 Care; one additional Director position
Age: 65 Years with the OFFIT Fund Complex.

Vincent M. Rella Treasurer Controller and Managing Director,
OFFITBANK OFFITBANK (investment adviser) (1986 to
520 Madison Avenue present); one additional Officer position
New York, NY 10022 with the OFFIT Fund Complex.
Age: 47 Years

<PAGE>
<CAPTION>
Stephen Brent Wells Secretary Managing Director, OFFITBANK (investment
OFFITBANK adviser) (1994 to present); one additional
520 Madison Avenue Officer position with the OFFIT Fund
New York, NY 10022 Complex.
Age: 55 Years

Michael Kagan Assistant Treasurer Administrator, OFFITBANK (investment
OFFITBANK adviser) (1998 to present); Administrator,
520 Madison Avenue Bankers Trust (1997); Audit Senior,
New York, NY 10022 PriceWaterhouse LLP (1994-1996); one
Age: 29 Years additional Officer position with the OFFIT
Fund Complex.

Gary M. Gardner Assistant Secretary Senior Vice-President (1994-present) of
PFPC Inc. PFPC Inc.; one additional Officer position
400 Bellevue Parkway with the OFFIT Fund Complex.
Wilmington, DE 19809
Age: 48 Years

19
<PAGE>

DIRECTOR COMPENSATION

(The following table shows the compensation paid by the Company to the Directors
for 1999.)

Morris W. Offit** $0 $0 $0 $0

Edward J. Landau $17,500 $0 $0 $23,500

The Very Reverend
James Parks Morton $17,500 $0 $0 $23,500

Stephen M. Peck $8,750 $0 $0 $11,750
</TABLE>

*For this purpose, the "Fund Complex" consists of The OFFIT Investment Fund,
Inc. and The OFFIT Variable Insurance Fund, Inc., which are all the regulated
investment companies advised by OFFIT.

**Mr. Offit resigned as a Director effective September 1, 1999 and was succeeded
by Dr. Wallace Mathai-Davis.

INVESTMENT ADVISER

The Company has retained OFFITBANK, a New York State chartered trust
company, to act as its investment adviser (the "Adviser"). The Adviser is a
subsidiary of the Wachovia Corporation, a leading bank holding company with
Wachovia Bank, NA as its principal subsidiary. The advisory agreement (the
"Advisory Agreement") between the Adviser and the Company provides that the
Adviser shall manage the operations of the Company, subject to policies
established by the Board of Directors of the Company. Pursuant to the Advisory
Agreement, the Adviser manages the Company's investment portfolios, directs
purchases and sales of the portfolio securities and reports to the Company's
officers and directors regularly. In addition, the Adviser pays the compensation
of the Company's officers, employees and directors affiliated with the Adviser.
The Company bears all other costs of its operations, including the compensation
of its directors not affiliated with the Adviser.

For its services under the Advisory Agreement, the Adviser receives from
each Fund an advisory fee. The fee is calculated daily and paid monthly based on
the average daily net assets of each

20
<PAGE>

Fund, at the annual rate of .85% of the first $200,000,000, .75% on the next
$400,000,000 and .65% of amounts in excess of $600,000,000 of the OFFIT High
Yield Fund's average daily net assets; .90% of the first $200,000,000 and .80%
on amounts in excess thereof of the OFFIT Emerging Markets Bond Fund's average
daily net assets; .80% of the first $200,000,000 and .70% on amounts in excess
thereof of the OFFIT Investment Grade Global Debt Fund's average daily net
assets; .90% of the OFFIT Global Convertible Fund's average daily net assets;
1.00% of the OFFIT Latin America Equity Fund's average daily net assets; .35% of
the OFFIT U.S. Government Securities Fund's average daily net assets; .35% of
the OFFIT Mortgage Securities Fund's average daily net assets; .35% of the OFFIT
National Municipal Fund's average daily net assets; .35% of the OFFIT California
Municipal Fund's average daily net assets and .35% of the OFFIT New York
Municipal Fund's average daily net assets. With respect to OFFIT Total Return
Fund, the Adviser is entitled to receive a monthly fee from the Fund at the
annual rate of .50% with respect to the Fund's assets other than investments in
the other Funds of the Company. The Adviser may waive all or part of its fee
from time to time in order to increase a Fund's net investment income available
for distribution to shareholders. The Funds will not be required to reimburse
the Adviser for any advisory fees waived. The Adviser may from time to time, at
its own expense, provide compensation to financial institutions for performing
administration or other services for their customers. These services may include
maintaining account records, processing orders to purchase, redeem and exchange
shares and answering customer inquiries.

The charts below show the investment advisory fees for each Fund for the
last three fiscal years along with any waivers that reduced the investment
advisory fees. The fees shown were paid by the Funds to OFFITBANK.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
HIGH YIELD 1999 1998 1997
- ---------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $12,190,323 $11,091,248 $7,832,049
Fees waived $0 $0 $0
Net amount of fees paid by the Fund $12,190,323 $11,091,248 $7,832,049

21
<PAGE>

<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
EMERGING MARKETS BOND 1999 1998 1997
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $1,344,676 $1,960,803 $1,527,416
Fees waived $0 $0 $0
Net amount of fees paid by the Fund $1,344,676 $1,960,803 $1,527,416

FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
LATIN AMERICA EQUITY 1999 1998 1997
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $174,866 $370,195 $589,281
Fees waived $133 $0 $0
Net amount of fees paid by the Fund $174,733 $370,195 $589,281

Fees earned $143,287 $67,110 $3,596
Fees waived $67,394 $38,093 $3,596
Net amount of fees paid by the Fund $75,893 $29,017 $0

Fees earned $212,993 $120,529 $20,098
Fees waived $77,030 $78,778 $20,098
Net amount of fees paid by the Fund $135,963 $41,751 $0

Fees earned $45,892 $28,769 $7,908
Fees waived $38,084 $28,008 $7,908
Net amount of fees paid by the Fund $7,808 $761 $0

Fees earned $251,216 $203,373 $108,310
Fees waived $76,589 $90,180 $79,754
Net amount of fees paid by the Fund $174,627 $113,193 $28,556

22
<PAGE>

<PAGE>

Fees earned $77,770 $48,983 $1,654
Fees waived $49,941 $32,995 $1,654
Net amount of fees paid by the Fund $27,829 $15,988 $0
</TABLE>

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.

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 the Company's Prospectus without violation of such laws or
regulations. OFFITBANK is not a member of the Federal Reserve System and is not
subject to the Glass-Steagall Act, the Bank Holding Company Act of 1956 or any
other federal banking law or regulation that might affect its ability to perform
such services.

If the Adviser was prohibited from performing the services described in the
Company's Prospectus with respect to the Funds, it is expected that the
Company's Board of Directors would recommend to each Fund's shareholders that
they approve new agreements with another entity or entities qualified to perform
such services and selected by the Board of Directors. The Company does not
anticipate that investors would suffer any adverse financial consequences as a
result of these occurrences.

DISTRIBUTOR

OFFIT Funds Distributor, Inc. (the "Distributor"), a wholly-owned
subsidiary of Provident Distributors, Inc., with its principal office at 3200
Horizon Drive, King of Prussia, PA 19406, 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 to distribute 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, 1999, December 31, 1998 and December 31, 1997, no distribution
costs were incurred by the Funds.

24
<PAGE>

SHAREHOLDER SERVICING AGENTS

Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents") with respect to Advisor
Shares. Shareholder administrative support services will be performed by
Shareholder Servicing Agents for their customers who beneficially own Advisor
Shares. Such services may include, among other things: assisting in aggregating
and processing purchase, exchange and redemption transactions; placing net
purchase and redemption orders with the Distributor; transmitting and receiving
funds in connection with customer orders to purchase or redeem shares;
processing dividend payments; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's positions in the Funds; transmitting, on behalf of the
Company, proxy statements, annual reports, updating prospectuses and other
communications from the Company to the shareholders of the Funds; and receiving,
tabulating and transmitting to the Company proxies executed by shareholders with
respect to meetings of shareholders of the Fund. Customers may have or be given
the right to vote shares held of record by Shareholder Servicing Agents.

For the services provided, the Company's Shareholder Servicing Plan permits
each Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.25% of the average daily net asset value of Advisor Shares of the Fund for
which such Shareholder Servicing Agents provide services for the benefit of
customers. Shareholder Servicing Agents will provide their customers with a
schedule of any credits, fees or of the terms or conditions that may be
applicable to the investment of customer assets in each Fund's Advisor Shares.

ADMINISTRATION, FUND ACCOUNTING, TRANSFER AGENCY AND CUSTODY SERVICES

ADMINISTRATION

PFPC Inc. ("PFPC"), serves as Administrator to the Company. Pursuant to an
Administration and Accounting Services Agreement with the Company, 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 Chase Manhattan Bank or the Bank of New York
in their capacity as custodians of the Company. The services provided by PFPC as
Administrator include regulatory compliance, assistance in the preparation and
filing of post-effective amendments to the Company's registration statement with
the 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.

The charts below show the administrative and fund accounting fees for each
Fund for the last three fiscal years along with any waivers that reduced those
fees.

25
<PAGE>

FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
EMERGING MARKETS BOND 1999 1998 1997
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $201,761 $323,147 $287,853
Fees waived $44,823 $110,256 $127,416
Net amount of fees paid by the Fund $156,938 $212,891 $160,437

FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
LATIN AMERICA EQUITY 1999 1998 1997
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $36,858 $84,123 $120,957
Fees waived $33,736 $24,102 $44,196
Net amount of fees paid by the Fund $3,122 $60,021 $76,761

FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
U.S. GOVERNMENT SECURITIES 1999 1998 1997
- -------------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $66,174 $46,334 $16,590
Fees waived $12,282 $20,309 $1,541
Net amount of fees paid by the Fund $53,892 $26,025 $15,049

FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
MORTGAGE SECURITIES 1999 1998 1997
- ------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $91,069 $64,994 $23,663
Fees waived $18,256 $19,481 $8,613
Net amount of fees paid by the Fund $72,813 $45,513 $15,050

FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
CALIFORNIA MUNICIPAL 1999 1998 1997
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $31,390 $36,408 $27,513
Fees waived $31,390 $19,754 $3,373
Net amount of fees paid by the Fund $0 $16,654 $24,140

26
<PAGE>

FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
NEW YORK MUNICIPAL 1999 1998 1997
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Fees earned $104,720 $104,769 $81,696
Fees waived $21,533 $26,071 $36,410
Net amount of fees paid by the Fund $83,187 $78,698 $45,286

FISCAL YEAR ENDED
----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
NATIONAL MUNICIPAL 1999 1998 1997
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Fees earned $42,774 $42,005 $6,595
Fees waived $21,808 $17,845 $709
Net amount of fees paid by the Fund $20,966 $24,160 $5,886
</TABLE>

TRANSFER AGENCY

CUSTODY

The Chase Manhattan Bank ("Chase") serves as the Company's custodian with
respect to the Latin America Equity Fund. Prior to September 1, 1999, Chase also
served as the custodian for the Emerging Markets Bond Fund and prior to June 27,
1996, Chase also served as the custodian for the High Yield and New York
Municipal Funds. Chase is located at 4 MetroTech Center, 18th Floor, Brooklyn,
New York 11245. The Bank of New York ("BONY") serves as custodian of the assets
of the High Yield, Emerging Markets Bond, Total Return, Global Debt, Global
Convertible, U.S. Government Securities, Mortgage Securities, National
Municipal, California Municipal and New York Municipal Funds. The principal
business address of BONY is 48 Wall Street, New York, New York 10286. Under the
Custodian Agreements, each Custodian has agreed to maintain a separate account
or accounts in the name of each applicable Fund; hold and disburse portfolio
securities on account of each Fund; collect and receive all income and other
payments and distributions on account of each Fund's portfolio securities; and
make periodic reports to the Company's Board of Directors concerning the Funds'
operations. Each is authorized under the Custodian Agreements to establish
separate accounts for the Funds' foreign securities with subcustodians, provided
that the custodian remains responsible for the performance of all of its duties
under the Custodian Agreements.

COUNSEL

Kramer Levin Naftalis & Frankel LLP, whose address is 919 Third Avenue, New
York, NY 10022, serves as counsel to the Company.

27
<PAGE>

INDEPENDENT ACCOUNTANTS

Ernst & Young LLP, whose address is 200 Clarendon Street, Boston, MA
02116-5072, serves as the independent accountants for the Company for the fiscal
year ending December 31, 2000. The independent accountants conduct audits of the
Company and assist in the preparation of the Company's semi-annual and annual
reports.

PORTFOLIO TRANSACTIONS

The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Company's Board of Directors, the Adviser is primarily
responsible for the Company's portfolio decisions and the placing of the
Company's portfolio transactions. When selecting brokers and dealers to handle
the purchase and sale of portfolio securities, the Adviser looks for prompt
execution of the order at a favorable price. Generally, the Adviser works with
recognized dealers in these securities, except when a better price and execution
of the order can be obtained elsewhere. The High Yield, Emerging Markets Bond,
U.S. Government Securities, Mortgage Securities, California Municipal, New York
Municipal and National Municipal Funds did not pay any brokerage commissions for
the fiscal periods ended December 31, 1997. The Latin America Equity Fund paid
brokerage commissions of $467,811 for the fiscal period ended December 31, 1997.
For the fiscal year ended December 31, 1998, the High Yield, Emerging Markets
Bond, Latin America Equity, U.S. Government Securities, Mortgage Securities,
California Municipal, New York Municipal and National Municipal Funds paid
$3,184, $0, $218, $673, $0, $0, $0 and $0, respectively, in brokerage
commissions. For the fiscal year ended December 31, 1999, the High Yield,
Emerging Markets Bond, Latin America Equity, U.S. Government Securities,
Mortgage Securities, California Municipal, New York Municipal and National
Municipal Funds paid $15,327, $0, $73,358, $0, $0, $0, $0 and $0, respectively,
in brokerage commissions.

Trading practices in certain emerging market and Latin American countries
are significantly different from those in the United States, and these
differences may have adverse consequences on the investment operations of the
Emerging Markets Bond, Global Debt, Global Convertible, Total Return and Latin
America Equity Funds. Brokerage commissions and other transaction costs on the
securities exchanges of emerging market and Latin American countries are
generally higher than in the United States. In addition, securities settlements
and clearance procedures in emerging market countries are less developed and
less reliable than those in the United States and the Funds may be subject to
delays or other material difficulties. Delays in settlement could result in
temporary periods when assets of the Funds are uninvested and no return is
earned thereon. The inability of a Fund to make intended security purchases due
to settlement problems could cause such Fund to miss attractive investment
opportunities. The inability to dispose of a portfolio security due to
settlement problems could result either in losses to a Fund due to subsequent
declines in the value of such portfolio security or, if such Fund has entered
into a contract to sell the security, could result in possible liability to the
purchaser.

28
<PAGE>

Factors relating to brokers in emerging market and Latin American countries
may also expose the Funds' to risks in connection with the execution of
portfolio transactions. There may be less government supervision and regulation
of securities exchanges and brokers in these countries than exists in the United
States. Brokers in these countries may not be as well capitalized as those in
the United States, so that they may be more susceptible to financial failure in
times of market, political, or economic stress, exposing the Funds to a risk of
loss in the event of such failure.

PURCHASE OF SHARES

For information pertaining to the manner in which shares of each class of
each Fund are offered to the public, see "Purchase of Fund Shares" in the
Prospectus. The Company reserves the right, in its sole discretion, to (i)
suspend the offering of shares of its Funds, and (ii) reject purchase orders
when, in the judgment of management, such suspension or rejection is in the best
interest of the Company. The officers of the Company may, from time to time,
waive the minimum initial and subsequent investment requirements.

REDEMPTION OF SHARES

For information pertaining to the manner in which each class of each Fund
may be redeemed, see "Redemption of Fund 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 "Exchange") or the bond market is
closed, or trading on the Exchange 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 a Fund to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the SEC may permit.

29
<PAGE>

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 a Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part in investment securities or in cash, as the Board of Directors
may deem advisable; however, payment will be made wholly in cash unless the
Board of Directors believes that economic or market conditions exist which would
make such a practice detrimental to the best interests of the Company. If
redemptions are paid in investment securities, such securities will be valued as
set forth in the Company's Prospectus under "Pricing of Fund Shares" and
redeeming shareholders would normally incur brokerage expenses if they converted
these securities to cash.

No charge is made by a Fund for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by a Fund.

PERFORMANCE CALCULATIONS

The Company may from time to time quote various performance figures to
illustrate the past performance of each class of shares of its Funds.
Performance quotations by investment companies are subject to rules adopted by
the SEC, which require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
Fund be accompanied by certain standardized performance information computed as
required by the SEC. An explanation of the SEC methods for computing performance
follows.

TOTAL RETURN

A Fund's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5 and 10 year periods (or, if shorter,
the period since inception of the Fund) that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes that all dividends and distributions are reinvested when paid. The
quotation assumes the amount was completely redeemed at the end of each 1, 5 and
10 year period (or, if shorter, the period since inception of the Fund) and the
deduction of all applicable Fund expenses on an annual basis. Average annual
total return is calculated according to the following formula:

n
P ( l + T ) = ERV

Each Fund presents performance information for each class of shares
commencing with the Fund's inception (or the inception of the Partnership with
respect to the High Yield Fund, see "The Transfer" above for more information).
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

30
<PAGE>

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.

On April 29, 1996, all of the outstanding shares of the Funds were
reclassified as "Select Shares" and the Funds began to offer a new class of
shares, "Advisor Shares." The percentages shown in the tables below are based on
the fees and expenses actually paid by each Fund for the periods presented,
rather than the fees and expenses currently payable by each class of shares,
which in certain cases are different (as indicated in the footnotes to the
tables).

The following tables set forth the average annual total returns for each
class of shares of each of the High Yield Fund, Emerging Markets Bond Fund,
Latin America Equity Fund, New York Municipal Fund, California Municipal Fund,
National Municipal Fund, U.S. Government Securities Fund and Mortgage Securities
Fund for certain time periods ended December 31, 1999.

<TABLE>
<CAPTION>
High Yield Fund - Select Shares*
--------------------------------
<S> <C>
One Year................................................................................ 1.10%
Since Inception (March 2, 1994)......................................................... 7.95%
- ------------
*As of December 31, 1999, and for substantially all of the year ended, there
were no Advisor Shares outstanding.

Emerging Markets Bond Fund - Select Shares*
-------------------------------------------
<S> <C>
One Year................................................................................ 27.81%
Since Inception (March 8, 1994)......................................................... 11.30%
- ------------
*As of December 31, 1999 there were no Advisor Shares outstanding.

Latin America Equity Fund - Select Shares*
------------------------------------------
<S> <C>
One Year................................................................................ 52.76%
Since Inception (February 13, 1996)..................................................... 5.67%
- ------------
*As of December 31, 1999 there were no Advisor Shares outstanding.

New York Municipal Fund - Select Shares*
----------------------------------------
<S> <C>
One Year................................................................................ (0.65%)
Since Inception (April 3, 1995)......................................................... 5.23%
- ------------
*As of December 31, 1999 there were no Advisor Shares outstanding.

31
<PAGE>

California Municipal Fund - Select Shares*
------------------------------------------
<S> <C>
One Year................................................................................ (0.77%)
Since Inception (April 2, 1997)......................................................... 4.49%
- ------------
*As of December 31, 1999 there were no Advisor Shares outstanding.

National Municipal Fund - Select Shares*
----------------------------------------
<S> <C>
One Year................................................................................ 0.14%
Since Inception (October 20, 1997)...................................................... 4.41%
- ------------
*As of December 31, 1999 there were no Advisor Shares outstanding.

U.S. Government Securities Fund-Select Shares*
----------------------------------------------
<S> <C>
One Year................................................................................ (1.95%)
Since Inception (July 1, 1997).......................................................... 4.91%
- ------------
*As of December 31, 1999 there were no Advisor Shares outstanding.

Mortgage Securities Fund - Select Shares*
-----------------------------------------
<S> <C>
One Year................................................................................ 0.23%
Since Inception (July 1, 1997).......................................................... 4.99%
</TABLE>

- ------------

*As of December 31, 1999 there were no Advisor Shares outstanding.

As described in the Prospectus under the caption "Fees and Expenses of the
Fund," the New York Municipal Fund, California Municipal, National Municipal,
U.S. Government Securities and Mortgage Securities Funds have been and still are
subject to certain fee waivers. For the period April 30, 1999 through December
31, 1999, the High Yield, Emerging Markets Bond and Latin America Equity Funds
were also subject to certain fee waivers. Absent such waivers, the returns shown
above would be lower.

The Funds may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating aggregate total return can be expressed as follows:

Aggregate Total Return = ERV - 1
---
P

In addition to total return, each Fund may quote performance in terms
of a 30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the SEC and can be expressed as follows:

6
YIELD = 2 [ ( a - b + 1 ) - 1 ]
-----
cd

where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of any
reimbursements).

32
<PAGE>

c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.

For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations.

Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by a Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Undeclared earned income, computed in accordance
with generally accepted accounting principles, may be subtracted from the
maximum offering price calculation required pursuant to "d" above.

The 30-day yield for the Select Shares of each of the High Yield, Emerging
Markets Bond, Latin America Equity, U.S. Government Securities, Mortgage
Securities, California Municipal, New York Municipal and National Municipal
Funds for the period ended December 31, 1999, was 10.24%, 12.88%, NA, 5.67%,
6.11%, 4.40%, 4.61% and 4.66% respectively. As of December 31, 1999, there were
no Advisor Shares outstanding.

Each Fund may also advertise tax-equivalent yields which are computed by
dividing that portion of yield that is tax-exempt by one, minus a stated income
tax rate and adding the quotient to that portion, if any, of the yield that is
not tax-exempt.

Each Fund may also advertise its "risk adjusted return," which reflects the
total return of the Fund over time adjusted to reflect volatility of the Fund.

The performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc. or other independent services which monitor the
performance of investment companies, and may be quoted in advertising in terms
of their rankings in each applicable ranking group. In addition, the Company may
use performance data reported in financial and industry publications, including
BARRON'S, BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY,
MORNINGSTAR, MUTUAL FUND VALUES, THE WALL STREET JOURNAL, THE NEW YORK TIMES AND
U.S.A. TODAY.

A Fund may include in advertising or sales literature discussions or
illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting), investment
management techniques, policies or investment suitability of a Fund, economic
and political conditions and the relationship between sectors of the economy and
the economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks and bonds. From time
to time advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well as
the views of the Adviser as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related

33
<PAGE>

matters believed to be of relevance to a Fund. In addition, selected indices may
be used to illustrate historic performance of select asset classes.

ADDITIONAL INFORMATION CONCERNING DIVIDENDS, DISTRIBUTIONS AND TAXES

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
Funds. The following is only a summary of certain additional tax considerations
generally affecting each 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 Funds or the implications to
shareholders, and the discussions here and in the Funds Prospectus are not
intended as substitutes for careful tax planning. Accordingly, potential
purchasers of shares of the Funds 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

Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a 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 a 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 general, gain or loss recognized by a 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 a 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.

34
<PAGE>

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 a 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) under Regulations that have not yet been promulgated, the
capitalized interest on acquisition indebtedness under Code Section 263(g),
among other amounts. However, if a Fund has a built-in loss with respect to a
position that becomes a part of a conversion transaction, the character of such
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 Funds'
shareholders.

In general, for purposes of determining whether capital gain or loss
recognized by a 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, a 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 a Fund on the lapse of, or any gain or loss
recognized by a 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 a 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. A 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.

A 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

35
<PAGE>

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, provided in Treasury Regulations).

A Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a 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, a 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 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 a 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.

36
<PAGE>

In addition to satisfying the requirements described above, a 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 a 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 Association, and the Student Loan Marketing Association, are treated as
U.S. Government securities.

If for any taxable year a 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

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, includes 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.

37
<PAGE>

FUND DISTRIBUTIONS

Each 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. Distributions attributable to dividends received by a Fund from
domestic corporations will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below. Distributions
attributable to interest received by the Funds will not, and distributions
attributable to dividends paid by a foreign corporation generally should not,
qualify for the dividend-received deduction.

Ordinary income dividends paid by a Fund with respect to a taxable year may
qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations such as S corporations, which are not
eligible for the deduction because of their special characteristics, and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of dividends received
by the Fund from domestic corporations for the taxable year. A dividend received
by a Fund will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Fund has held for less than
46 days (91 days in the case of certain preferred stock), during the 90 day
period (180 days in the case of certain preferred stocks) beginning on the date
which is 45 days before the date on which such share becomes ex-dividend with
respect to such dividend, excluding for this purpose under the rules of Code
Section 246(c) any period during which the Fund has an option to sell, is under
a contractual obligation to sell, has made and not closed a short sale of, is
the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or
has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that the
Fund is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Fund or (2) by application of
Code Section 246(b) which in general limits the dividends-received deduction to
70% of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).

A Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. Each 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. The Code provides, however, that under certain
conditions only 50% of the capital gain recognized upon a Fund's disposition of
domestic qualified "small business" stock will be subject to tax.

Conversely, if a 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 a 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.

The National Municipal Fund, California Municipal Fund and New York
Municipal Fund (each a "Tax Exempt Fund") intend to qualify to pay
exempt-interest dividends by satisfying the requirement that at the close of
each quarter of the Tax-Exempt Funds' taxable year at least 50% of each Fund's
total assets

38
<PAGE>

consists of tax-exempt municipal obligations. Distributions from a Tax-Exempt
Fund will constitute exempt-interest dividends to the extent of such Fund's
tax-exempt interest income (net of expenses and amortized bond premium).
Exempt-interest dividends distributed to shareholders of a Tax-Exempt Fund are
excluded from gross income for federal income tax purposes. However,
shareholders required to file a federal income tax return will be required to
report the receipt of exempt interest dividends on their returns. In general, a
state exempts from state income tax only interest earned on obligations issued
by that state or its political subdivisions and instrumentalities. Therefore,
shareholders that are subject to tax in another state may be subject to state
and local tax in such state on this interest. Moreover, while exempt-interest
dividends are excluded from gross income for federal income tax purposes, they
may be subject to alternative minimum tax ("AMT") in certain circumstances and
may have other collateral tax consequences as discussed below. Distributions by
a Tax-Exempt Fund of any investment company taxable income or of any net capital
gain will be taxable to shareholders as discussed above.

AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for non-corporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 generally will constitute an item of tax
preference includable in AMTI for both corporate and non-corporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (I.E., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI. For purposes of the corporate AMT, the corporate
dividends- received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders generally will be required
to take the full amount of any dividend received from a Fund into account
(without a dividends-received deduction) in determining their adjusted current
earnings.

Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of a Tax-Exempt Fund is denied a deduction
for interest on indebtedness incurred or continued to purchase or carry shares
of a Tax-Exempt Fund. Moreover, a shareholder who is (or is related to) a
"substantial user" of a facility financed by industrial development bonds held
by a Tax-Exempt Fund will likely be subject to tax on dividends paid by the
Tax-Exempt Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance companies, and foreign corporations engaged in a trade or
business in the United States. Prospective investors should consult their own
advisers as to such consequences.

Investment income that may be received by a 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 a 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 a Fund's assets to be invested in various countries is not known:
If more than 50% of the value of a 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

39
<PAGE>

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 a Fund that do not constitute ordinary income dividends,
exempt-interest 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 a 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 shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a 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 a 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.

Each 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 a 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 a 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) (discussed
above in connection with the dividends-received deduction for corporations)
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 a 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

40
<PAGE>

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 a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.

If the income from a 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 would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Fund, capital gain
dividends and exempt-interest dividends, and amounts retained by the Fund that
are designated as undistributed capital gains.

If the income from a 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, a 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

41
<PAGE>

CALIFORNIA MUNICIPAL FUND, NEW YORK MUNICIPAL FUND AND NATIONAL MUNICIPAL FUND

The California Municipal Fund, New York Municipal Fund and National
Municipal Fund intend to qualify to pay "exempt-interest dividends," as that
term is defined in the Code, by holding at the end of each quarter of its
taxable year at least 50% of the value of its total assets in the form of
obligations described in section 103(a) of the Code. These Funds' policy is to
pay in each taxable year exempt-interest dividends equal to at least 90% of each
such Fund's interest from tax-exempt obligations net of certain deductions.
Except as discussed below, exempt-interest dividends will be exempt from regular
federal income tax.

Although exempt-interest dividends may be excluded from a shareholder's
gross income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholder's liability (if any) under the federal individual and corporate
alternative minimum tax provisions of the Code. Exempt-interest dividends will
constitute a specific preference item for purposes of the federal alternative
minimum tax to the extent that such dividends are derived from certain types of
private activity bonds issued after August 7, 1986. In addition, all
exempt-interest dividends will be a component of the "adjusted current earnings"
adjustment item for purposes of the federal corporate alternative minimum tax.
Moreover, the receipt of dividends from the Fund may increase a foreign
corporate shareholder's liability under the branch profits tax, and may also
affect the federal tax liability of certain Subchapter S corporations and
insurance companies. Furthermore, the receipt of exempt-interest dividends may
be a factor in determining the extent to which as shareholder's Social Security
benefits are taxable.

The exemption of interest income for regular federal income tax purposes
may not result in similar exemptions under the tax law of state and local taxing
Authorities. In general, a state exempts from state income tax only interest
earned on obligations issued by that state or its political subdivisions and
instrumentalities.

Interest on indebtedness incurred by a shareholder to purchase or carry a
Fund's shares is not deductible for federal income tax purposes if such Fund
distributes exempt-interest dividends during the shareholder's taxable year.

BACKUP WITHHOLDING

The Funds may be required to withhold U.S. federal income tax at a rate of
31% ("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends (other than
exempt-interest dividends) if (i) the payee fails to furnish a Fund with the
payee's correct taxpayer identification number, (ii) the IRS notifies a Fund
that the payee has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (iii) when
required to do so, the payee fails to certify that he or she is not subject to
backup withholding.

Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.

42
<PAGE>

SHAREHOLDER SERVICES

The following supplements the information regarding shareholder services
set forth in the Company's Prospectus relating to the Funds:

EXCHANGE PRIVILEGE

Shares of each class of any Fund of the Company may be exchanged for shares
of the same class of any of the other Funds of the Company 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 OFFIT Investment Fund, Inc., c/o PFPC Inc. P.O. Box 8701, Wilmington, DE
19899. 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.

TRANSFER OF SHARES

Shareholders may transfer shares of the Company's Funds to another person
by written request to The OFFIT 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 Fund 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

CODE OF ETHICS

43
<PAGE>

Codes require that such persons with access to information about the purchase or
sale of portfolio securities obtain preclearance before executing personal
trades.

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 a Fund and all additional investment portfolios, means
the vote of the lesser of (i) 67% of the Company's shares represented at a
meeting if the holders of more than 50% of the outstanding shares are present in
person or by proxy or (ii) more than 50% of the Company's outstanding shares.
The term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting the Company, any other single
Fund (e.g., approval of Advisory Agreements) or any single class of a Fund,
means the vote of the lesser of (i) 67% of the shares of the Fund represented at
a meeting if the holders of more than 50% of the outstanding shares of the Fund,
or of the class of shares of the Fund, if a class vote is required, are present
in person or by proxy or (ii) more than 50% of the outstanding shares of the
Fund or of the class of shares of the Fund, if a class vote is required.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held.

Each share of each class of a Fund of the Company is entitled to such
dividends and distributions out of the income earned on the assets belonging to
that Fund as are declared in the discretion of the Company's Board of Directors.
In the event of the liquidation or dissolution of the Company, shares of a class
of a Fund are entitled to receive the assets allocable to that class of shares
of such Fund which are available for distribution, and a proportionate
distribution, based upon the relative net assets of the Funds, of any general
assets not belonging to a Fund which are available for distribution. It is
anticipated that expenses incurred by each class of shares of each Fund will
differ and, accordingly, that the dividends distributed with respect to each
class will differ.

Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid, non-assessable, fully transferable and redeemable at
the option of the holder.

CERTAIN OWNERS OF SHARES OF THE COMPANY

As of April 4, 2000, to the knowledge of the Administrator, the Officers
and the Directors of the Company, as a group, own less than 1% of the
outstanding voting shares of each Fund. As of April 4, 2000, the following
persons owned of record or beneficially 5% or more of the outstanding shares of
the Funds of the Company:

<TABLE>
<CAPTION>
Name and Address of
Fund Beneficial Owner Percentage
- ---- ------------------- ----------
<S> <C> <C>
High Yield (MSD&T Shares) Mercantile Safe Deposit & Trust Co. 71.50%(1)
Mutual Fund Administration
20 South Charles St., 5th Floor
Baltimore, MD 21201

MSD&T Total Return Bond Fund 27.38%(1)
Mutual Fund Administration
20 South Charles St., 5th Floor
Baltimore, MD 21201

44
<PAGE>

Emerging Markets Bond (Select Shares) OFFITBANK 24.01%(2)
520 Madison Ave.
New York, NY 10022-4213

Latin America Equity (Select Shares) OFFITBANK 54.89%(2)
520 Madison Ave.
New York, NY 10022-4213

Wendel & Co. 5.29%
c/o OFFITBANK
520 Madison Ave.
New York, NY 10022-4213

U.S. Government Securities (Select Shares) OFFITBANK 39.67%(2)
520 Madison Ave.
New York, NY 10022-4213

Remy Capital Partners II LP 21.59%
c/o OFFITBANK
520 Madison Ave.
New York, NY 10022-4213

Mortgage Securities (Select Shares) OFFITBANK 56%(2)
520 Madison Ave.
New York, NY 10022-4213

California Municipal (Select Shares) OFFITBANK 48.63%(2)
520 Madison Ave.
New York, NY 10022-4213

Mathilde M. Notaras 8.96%
c/o OFFITBANK
520 Madison Ave.
New York, NY 10022-4213

New York Municipal (Select Shares) OFFITBANK 19.80%(2)
520 Madison Ave.
New York, NY 10022-4213

National Municipal (Select Shares) OFFITBANK 63.96%(2)
520 Madison Ave.
New York, NY 10022-4213

45
<PAGE>

Post & Co. 6.46%
c/o OFFITBANK
520 Madison Ave.
New York, NY 10022-4213

Reliable Liquors Inc. 9.15%
c/o OFFITBANK
520 Madison Ave.
New York, NY 10022-4213
</TABLE>

(1) Accountholder may be deemed to have "control" as defined under the
Securities Act of 1933.

(2) As a result of the voting and disposition authority granted to the Adviser
in management agreements with clients who are invested in the Funds, the
Adviser was the beneficial owner (as defined for purposes of the Securities
Exchange Act of 1934, as amended) in the amounts noted above (2) as of
April 4, 2000.

OTHER INFORMATION

Statements contained in the Prospectus or in this Statement of Additional
Information regarding the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.

FINANCIAL INFORMATION

The audited financial statements for the Company and the notes thereto
appearing in the most current fiscal year Annual Report to shareholders are
incorporated in this Statement of Additional Information by reference. No other
parts of the Annual Report are incorporated by reference herein. The financial
statements included in the Annual Report have been audited by the Company's
independent accountants for the fiscal year ended December 31, 1999.
PricewaterhouseCoopers LLP, whose report thereon dated February 16, 2000, is
also incorporated herein by reference. Such financial statements have been
incorporated herein in reliance upon such report given upon their authority as
experts in accounting and auditing. Additional copies of the Annual Report may
be obtained at no charge by telephoning the Company at 1-800-618-9510.

46
<PAGE>

APPENDIX A

SPECIAL FACTORS AFFECTING THE CALIFORNIA MUNICIPAL FUND

The following information is a summary of special factors affecting
investments in California Municipal Obligations. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by the State of California (the "State") and certain of
its municipalities and public authorities. This information does not purport to
be a complete description and is based on information from statements relating
to offerings of California issuers. The Company is not responsible for the
accuracy or timeliness of this information.

RECENT DEVELOPMENTS

In the Governor's Budget released on January 8, 1999, and the May Revision
to the 1999-2000 Governor's Budget, released May 14, 1999, the Department of
Finance projected that the California economy will continue to show robust
growth through 1999, although at a slightly lower pace than in 1998. The
economic expansion has been marked by strong growth in high technology business
services (including computer software, internet applications, biotechnology and
other engineering and management consulting), construction, computers and
electronic components. The Asian economic crisis, which began in late 1997, had
some dampening effects on the State's economy in 1998, adding to weak demand for
several key export industries, including electronics and aerospace
manufacturing, agriculture, apparel manufacturing, and motion picture
production. Several elements have partially off-set California's Asia-related
problems, including the high demand for computer related services and a surging
construction industry (both residential and commercial), which has boosted
activity in such manufacturing-related industries as lumber, stone-clay-glass,
fabricated metals and furniture and in the financial-services sector.

Moody's, Standard and Poor's and Fitch IBCA assigned their municipal bond
ratings of A1, A+ and AA-, respectively, to the State's general obligation
bonds. Each such rating reflects only the views of the respective rating agency,
and an explanation of the significance of such rating may be obtained from such
rating agency. There is no assurance that such ratings will continue for any
given period of time or that they will not be revised or withdrawn entirely by
such rating agency if, in the judgment of such rating agency, circumstances so
warrant. A downward revision or withdrawal of any such rating may have an
adverse effect on the market price of the State's general obligation bonds.

CONSTITUTIONAL LIMITS ON SPENDING AND TAXES

STATE APPROPRIATIONS LIMIT

The State is subject to an annual appropriations limit imposed by Article
XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
voter-authorized bonds.

Article XIII B prohibits the State from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," with respect to the state, are authorizations to spend "proceeds of
taxes," which consist of tax revenues, and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent that
such proceeds exceed "the cost reasonably borne by that entity in providing the
regulation, product or service," but "proceeds of taxes" exclude most State
subventions to local governments, tax refunds and some benefit payments such as
unemployment insurance. No limit is imposed on appropriations of funds which are
not "proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.

Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriations of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.

A-1
<PAGE>

The State's Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in State per capita personal income
and changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government. The measurement of change in population is a blended average of
statewide overall population growth, and change in attendance at local school
and community college ("K-14") districts. The Appropriations Limit is tested
over consecutive two-year periods. Any excess of the aggregate "proceeds of
taxes" received over such two-year period above the combined Appropriations
Limits for those two years is divided equally between transfers to K-14
districts and refunds to taxpayers.

PROPOSITION 98

On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by Proposition
111, which was enacted on June 5, 1990), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth. Legislation adopted
prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of the General Fund tax revenues, based on 1986-87 appropriations. However, that
percentage has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.

Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.

During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from Fiscal Year
1991-92 to Fiscal Year 1993-94.

In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State is repaying
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.

Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 through 1998-99 have resulted or will
result in retroactive increases in Proposition 98 appropriations from subsequent
fiscal years' budgets. Because of the State's increasing revenues, per-pupil
funding at the K-12 level has increased by about 44 percent from the level in
place from 1991-92 through 1993-94, and is estimated at about $6,025 per ADA in
1999-00. A significant amount of the "extra" Proposition 98 monies in the last
few years have been allocated to special programs, most particularly an
initiative to allow each classroom from grades K-3 to have no more than 20
pupils by the end of the 1997-98 school year. Furthermore, since General Fund
revenue growth is expected to continue

A-2
<PAGE>

in 1999-00, there are also new initiatives to increase school safety, improve
schools' accountability for pupil performance, provide additional textbooks to
schools, fund deferred maintenance projects, increase beginning teacher's
salaries and provide performance incentives to teachers.

SOURCES OF TAX REVENUE

The following is a summary of the State's major revenue sources.

PERSONAL INCOME TAX

The California personal income tax, which in 1997-98 contributed about 51
percent of General Fund revenues, is closely modeled after the federal income
tax law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1 to 9.3 percent.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
("AMT") which is much like the federal AMT.

The personal income tax is adjusted annually by the change in the consumer
price index to prevent taxpayers from being pushed into higher tax brackets
without a real increase in income.

SALES TAX

The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Sales tax accounted for about 32
percent of General Fund revenue in 1997-98. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas delivered
through mains and electricity. Other exemptions provide relief for a variety of
sales ranging from custom computer software to aircraft.

A-3
<PAGE>

BANK AND CORPORATION TAX

Bank and corporation tax revenues, which comprised about 11 percent of
General Fund revenue in 1997-98, are derived from the following taxes:

1. The franchise tax and the corporate income tax are levied at a 8.84
percent rate on profits. The former is imposed on corporations for the
privilege of doing business in California, while the latter is imposed
on corporations that derive income from California sources but are not
sufficiently present to be classified as doing business in the State.

2. Banks and other financial corporations are subject to the franchise
tax plus an additional tax at the rate of 2.0 percent on their net
income. This additional tax is in lieu of personal property taxes and
business license taxes.

3. The alternative minimum tax ("AMT") is similar to that in federal law.
In general, the AMT is based on a higher level of net income computed
by adding back certain tax preferences. This tax is imposed at a rate
of 6.65 percent.

4. A minimum franchise tax of up to $800 is imposed on corporations
subject to the franchise tax but not on those subject to the corporate
income tax. Beginning in 2000, all new corporations are exempted from
the minimum franchise tax for the first two years of incorporation.

5. Sub-Chapter S corporations are taxed at 1.5 percent of profits.

INSURANCE TAX

The majority of insurance written in California is subject to a 2.35
percent gross premium tax. For insurers, this premium tax takes the place of all
other State and local taxes except those on real property and motor vehicles.
Exceptions to the 2.35 percent rate are certain pension and profit-sharing plans
which are taxed at the lesser rate of 0.50 percent, surplus lines and
nonadmitted insurance at 3 percent and ocean marine insurers at 5 percent of
underwriting profits. Insurance taxes comprised approximately 2.2 percent of
General Fund revenues in 1997-98.

OTHER TAXES

Other General Fund major taxes and license revenues include: Estate,
Inheritance and Gift Taxes, Cigarette Taxes, Alcoholic Beverage Taxes, Horse
Racing Revenues and trailer coach license fees. These other sources totaled
approximately 2.4 percent of General Fund revenues in the 1997-98 Fiscal Year.

SPECIAL FUND REVENUES

The California Constitution, codes and statutes specify the uses of certain
revenue. Such receipts are accounted for in various Special Funds. In general,
Special Fund revenues comprise three categories of income:

1. Receipts from tax levies which are allocated to specified functions,
such as motor vehicle taxes and fees and certain taxes on tobacco
products.

2. Charges for special services to specific functions, including such
items as business and professional license fees.

3. Rental royalties and other receipts designated for particular purposes
(e.g., oil and gas royalties).

Motor vehicle related taxes and fees accounted for about 58 percent of all
Special Fund revenue in 1997-98. Principal sources of this income are motor
vehicle fuel taxes, registration and weight fees and vehicle license fees.
During the 1997-98 Fiscal Year, $8.4 billion was derived from the ownership or
operation of motor vehicles. About $4.8 billion of this revenue was returned to
local governments. The remainder was available for various State programs
related to transportation and services to vehicle owners. These amounts include
the additional fees and taxes derived from the passage of Proposition 111 in
June 1990.

A-4
<PAGE>

Chapter 322, Statutes of 1998, reduced vehicle license fees by 25 percent
beginning January 1, 1999, and the 1999-2000 Budget cut the fees by an
additional 10 percent for the calendar year 2000 only. In addition, the
1999-2000 Budget provided a one-year reduction in vehicle license fees for
certain commercial motor vehicles. Vehicle license fees, over and above the
costs of collection and refunds authorized by law, are constitutionally defined
local revenues. A continuous appropriation from the General Fund will replace
the vehicle license fee revenue that local governments would otherwise lose due
to the fee reductions. If in any year the Legislature fails to appropriate
enough funds to fully offset the then-applicable vehicle license fee reduction,
the fee may be increased to assure that local governments are not disadvantaged.
Therefore, the amount of revenue going to local governments will remain the same
as under prior law.

On November 8, 1988, voters approved Proposition 99, which imposed, as of
January 1, 1989, an additional 25 cents per pack excise tax on cigarettes, and a
new, equivalent excise tax on other tobacco products. The initiative requires
that funds from this tax be allocated to anti-tobacco education and research and
indigent health services, and environmental and recreation programs. Legislation
enacted in 1993 added an additional 2 cents per pack excise tax for the purpose
of funding breast cancer research.

PRIOR FISCAL YEARS' FINANCIAL RESULTS

Beginning January 1, 1999, after voters approved a constitutional amendment
(Proposition 10 of 1998), the excise tax imposed on distributors selling
cigarettes in California was increased from 37 to 87 cents per package. At the
same time, this amendment imposed a new excise tax on cigars, chewing tobacco,
pipe tobacco, and snuff that was implemented at a rate "equivalent" to a 50 cent
per pack tax on cigarettes. Proceeds of this new state excise tax are to be
allocated primarily for early childhood development programs. Under current law,
any increase in the tax on cigarettes automatically triggers an increase in the
tax on other tobacco products. Thus, this amendment increased the excise tax on
other tobacco products in total by the equivalent of a $1 per pack increase in
the tax on cigarettes.

TOBACCO LITIGATION

In late 1998, the State signed a settlement agreement with the four major
cigarette manufacturers, which was later ratified by a State court judge having
jurisdiction over a pending lawsuit brought by the State against these
companies. The settlement became final in late September, 1999. Under the
settlement, the companies will pay California governments a total of
approximately $25 billion over a period of 25 years. In addition, payments of
approximately $1 billion per year will continue in perpetuity. Under the
settlement, half of these moneys will be paid to the State and half to local
governments (all counties and the cities of San Diego, Los Angeles, San
Francisco and San Jose). The State's 1999-2000 Budget includes receipt of about
$560 million of these settlement moneys to the General Fund by June 30, 2000.

The specific amount to be received by the State and local governments is,
however, subject to adjustment for a number of reasons. Various details in the
settlement allow reduction of the companies' payments because of events such as
certain federal government actions, or reductions in cigarette sales. In the
event that any of the companies goes into bankruptcy, the State could seek to
terminate the agreement with respect to those companies filing bankruptcy
actions thereby reinstating all claims against those companies. The State may
then pursue those claims in the bankruptcy litigation, or as otherwise provided
by law.

PRIOR YEARS' FINANCIAL RESULTS

The State's financial condition improved markedly during the fiscal years
starting in 1995-96, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and external deficit borrowing has occurred over the end of the last
four fiscal years. The last borrowing to spread out the repayment of a budget
deficit over the end of a fiscal year was $4.0 billion of revenue participation
warrants issued in July, 1994 and which matured in April, 1996.

The economy grew strongly during the fiscal years beginning in 1995-96, and
as a result, the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and
$1.0 billion in 1998-99) than were initially planned when the budgets were
enacted. These additional funds were largely directed to school spending as
mandated by Proposition 98, and to make up shortfalls from reduced

A-5
<PAGE>

federal health and welfare aid in 1995-96 and 1996-97 and particularly in
1998-99 to fund new program incentives. The accumulated budget deficit from the
recession years was finally eliminated.

The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:

1. The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element was a bill
which provided for a phased-in reduction of the Vehicle License Fee
("VLF"). Since the VLF is transferred to cities and counties under
existing law, the bill provided for the General Fund to replace the
lost revenues. Starting on January 1, 1999, the VLF has been reduced
by 25 percent, at a cost to the General Fund of approximately $500
million in the 1998-99 Fiscal Year and about $1 billion annually
thereafter.

In addition to the cut in VLF, the 1998-99 budget included both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a nonrefundable
renters tax credit ($133 million), and various targeted business tax credits
($106 million).

2. Proposition 98 funding for K-14 schools was increased by $1.7 billion
in General Fund moneys over revised 1997-98 levels, over $300 million
higher than the minimum Proposition 98 guarantee. Of the 1998-99
funds, major new programs included money for instructional and library
materials, deferred maintenance, support for increasing the school
year to 180 days and reduction of class sizes in Grade 9. The Budget
also included $250 million as repayment of prior years' loans to
schools, as part of the settlement of the CTA v. Gould lawsuit.

3. Funding for higher education increased substantially above the actual
1997-98 level. General Fund support was increased by $340 million
(15.6 percent) for the University of California and $267 million (14.1
percent) for the California State University system. In addition,
Community Colleges funding increased by $300 million (6.6 percent).

4. The Budget included increased funding for health, welfare and social
services programs. A 4.9 percent grant increase was included in the
basic welfare grants, the first increase in those grants in 9 years.

5. Funding for the judiciary and criminal justice programs increased by
about 11 percent over 1997-98, primarily to reflect increased State
support for local trial courts and rising prison population.

6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the
Headwaters Forest, funding for the Infrastructure and Economic
Development Bank ($50 million) and funding for the construction of
local jails. The State realized savings of $433 million from a
reduction in the State's contribution to the State Teacher's
Retirement System in 1998-99.

The May Revision to the 1999-2000 Governor's Budget (hereafter shortened to
"1999-00"), released on May 14, 1999 (the "1999 May Revision"), reported that
stronger than expected economic conditions in the State for the latter part of
1998 and into 1999 would produce total 1998-99 General Fund revenues of about
$57.9 billion, almost $1.0 billion above the 1998 Budget Act estimates and $1.6
billion above the initial estimates in the January 1999-2000 Governor's Budget.
The 1999 May Revision projects 1998-99 General Fund expenditures of $58.6
billion, about $400 million higher than the January 1999-2000 Governor's Budget
estimate. Some of this additional revenue will be directed to K-14 schools
pursuant to Proposition 98. The 1999 May Revision projected a balance in the
SFEU at June 30, 1999, of approximately $1.9 billion, $1.3 billion higher than
estimated in January.

CURRENT STATE BUDGET

The discussion below of the 1999-00 Fiscal Year budget is based on
estimates and projections of revenues and expenditures for the current fiscal
year and must not be construed as statements of fact. These estimates and
projections are based upon various assumptions in the 1999 Budget Act which may
be affected by numerous factors, including future economic conditions in the
State and the nation, and there can be no assurance that the estimates will be
achieved.

A-6
<PAGE>

1999-00 FISCAL YEAR BUDGET

On January 8, 1999, Governor Davis released his proposed budget for Fiscal
Year 1999-00 (the "January Governor's Budget"). The January Governor's Budget
generally reported that general fund revenues for FY 1998-99 and FY 1999-00
would be lower than earlier projections (primarily due to weaker overseas
economic conditions perceived in late 1998), while some caseloads would be
higher than earlier projections. The January Governor's Budget proposed $60.5
billion of general fund expenditures in FY 1999-00, with a $415 million SFEU
reserve at June 30, 2000.

The 1999 May Revision showed an additional $4.3 billion of revenues for
combined fiscal years 1998-99 and 1999-00. The completion of the 1999 Budget Act
occurred in a timely fashion. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.

The final 1999 Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the SFEU would
have a balance at June 30, 2000, of about $880 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated in
bargaining with employee unions), and for litigation reserves. The 1999 Budget
Act anticipates normal cash flow borrowing during the fiscal year.

The principal features of the 1999 Budget Act include the following:

1. Proposition 98 funding for K-12 schools was increased by $1.6 billion
in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1990-00
funds, major new programs included money for reading improvement, new
textbooks, school safety, improving teacher quality, funding teacher
bonuses, providing greater accountability for school performance,
increasing preschool and after school care programs and funding
deferred maintenance of school facilities. The Budget also includes
$310 million as repayment of prior years' loans to school, as part of
the settlement of the CTA v. Gould lawsuit.

2. Funding for higher education increased substantially above the actual
1998-99 level. General Fund support was increased by $184 million (7.3
percent) for the University of California and $126 million (5.9
percent) for the California State University system. In addition,
Community Colleges funding increased by $324.3 million (6.6 percent).
As a result, undergraduate fees at UC and CSU will be reduced for the
second consecutive year, and the per-unit charge at Community Colleges
will be reduced by $1.

3. The Budget included increased funding of nearly $600 million for
health and human services.

4. About $800 million from the general fund will be directed toward
infrastructure costs, including $425 million in additional funding for
the Infrastructure Bank, initial planning costs for a new prison in
the Central Valley, additional equipment for train and ferry service,
and payment of deferred maintenance for state parks.

5. The Legislature enacted a one-year additional reduction of 10 percent
of the VLF for calendar year 2000, at a General Fund cost of about
$250 million in each of fiscal year 1999-00 and 2000-01 to make up
lost funding to local governments. Conversion of this one-time
reduction to a permanent cut will remain subject to the revenue tests
in the legislation adopted last year. Several other targeted tax cuts,
primarily for businesses, were also approved, at a cost of $54 million
in 1999-00.

A-7
<PAGE>

6. A one-time appropriation of $150 million, to be split between cities
and counties, was made to offset property tax shifts during the early
1990's. Additionally, an ongoing $50 million was appropriated as a
subvention to cities for jail booking or processing fees charged by
counties when an individual arrested by city personnel is taken to a
county detention facility.

ADDITIONAL CONSIDERATIONS

California Municipal Obligations may also include obligations of the
governments of Puerto Rico and other U.S. territories and their political
subdivisions to the extent that these obligations are exempt from California
State personal income taxes. Accordingly, the Fund may be adversely affected by
local political and economic conditions and developments within Puerto Rico and
certain other U.S. territories affecting the issuers of such obligations. For
information concerning the economy of Puerto Rico, please see Appendix E of this
Statement of Additional Information.

YEAR 2000

The State's reliance on information technology in every aspect of its
operations has made Year 2000-related ("Y2K") information technology ("IT")
issues a high priority for the State. The Department of Information Technology
("DOIT"), an independent office reporting directly to the Governor, is
responsible for ensuring the State's information technology processes are fully
functional before the year 2000. The DOIT has created a Year 2000 Task Force and
a California 2000 Office to establish statewide policy requirements; to gather,
coordinate, and share information; and to monitor statewide progress. In
December 1996, the DOIT began requiring departments to report on Y2K activities
and currently requires departmental monthly reporting of Y2K status. The DOIT
has emphasized to departments that efforts should be focused on applications
that support mission-critical business practices.

The risks posed by Y2K information technology related issues are not
confined to computer systems, but also include problems presented by embedded
microchips (products or systems that contain microchips to perform functions
such as traffic control, instruments used in hospitals or medical laboratories,
and California Aqueduct monitoring). To address these problems, Governor Davis
issued Executive Order D-3-99, broadening the responsibilities of the DOIT to
resolve these issues as well as legal questions associated with Y2K issues.

In its quarterly report for the period ending July 15, 1999 (the "July
Quarterly Report"), the DOIT discusses the new administration's progress in
addressing Y2K issues under a new action-based strategy and management model.
The key components of this strategy include centralization and coordination of
the State's Y2K efforts, delivery of essential services and emergency
preparedness, elimination of obstacles and barriers in an effort to streamline
the current funding request process, and broad-based collaboration across public
and private sectors through a comprehensive communication plan. Departments,
programs and systems will be categorized by tier according to the amount of
assistance required to become Y2K compliant. The first tier, which consists of
departments that are of no specific cause of concern, have been required to
report their status and may be subject to independent review. The second tier
consists of departments that require targeted assistance. The California 2000
Project Office will deploy an Action team to provide the necessary assistance.
The third tier consists of seriously troubled departments where the California
Year 2000 Project Office will assume Y2K management responsibility.

An ongoing survey of State departments reports over 500 mission critical IT
systems, approximately 97% of which have completed remediation.

The DOIT estimates total Y2K costs identified by the departments under its
supervision about $357 million. These costs are part of much larger overall IT
costs incurred annually by the State, including costs incurred by certain
independent State entities, such as the judiciary, the Legislature, the
University of California and California State University System. Furthermore,
cost estimates for embedded systems only apply to the subset of embedded systems
posing the highest risk to essential programs. For fiscal year 1999-00, the
Legislature created a fund of $33.5 million ($13.5 million General Fund) for
unanticipated Y2K costs, which can be increased if necessary.

The State Treasurer's Office has reported that its systems for bond
payments are fully Y2K compliant. The State Controller's Office has reported
that it has completed the necessary Y2K remediation projects for the State
fiscal and accounting system, consistent with the Governor's Executive Order.
The final steps of testing will be completed

A-8
<PAGE>

during 1999. Both offices are actively working with the outside entities with
whom they interface to ensure that they are also compliant.

In sum, although substantial progress has been made toward the goal of Y2K
compliance, the task is very large and will likely encounter some unexpected
difficulties. The State cannot guarantee that all mission critical systems will
be ready and tested by late 1999 or what the impact failure of any particular IT
system(s) or of outside interfaces with IT systems might have. However, all
mission critical systems will have a contingency business plan in place to
mitigate potential system failures.

LITIGATION

The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. Following are some of the more significant
lawsuits against the State:

On December 24, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to school
districts beginning in 1993-94 is a reimbursable state mandated cost. The test
claim was heard on October 29, 1998, and the Commission on State Mandates found
in favor of the State. In March, 1999, Sonoma County filed suit in the Superior
Court to overturn the Commission's decision. The State is contesting this
lawsuit. Should the courts find in favor of the counties, the impact to the
State General Fund could be as high as $10.0 billion with an annual Proposition
98 General Fund cost of at least $3.6 billion. This cost would grow in
accordance with the annual assessed value growth rate.

On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the trial
court issued a preliminary injunction prohibiting the State Controller from
paying moneys from the State Treasury for fiscal year 1998-99, with certain
limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation.

On July 22 and 27, 1998, various employee unions which had intervened in
the case appealed the trial court's preliminary injunction and asked the Court
of Appeal to stay the preliminary injunction. On July 28, 1998, the Court of
Appeal granted the unions' requests and stayed the preliminary injunction
pending the Court of Appeal's decision on the merits of the appeal. On August 5,
1998, the Court of Appeal denied the plaintiffs' request to reconsider the stay.
Also on July 22, 1998, the State Controller asked the California Supreme Court
to immediately stay the trial court's preliminary injunction and to overrule the
order granting the preliminary injunction on the merits. On July 29, 1998, the
Supreme Court transferred the State Controller's request to the Court of Appeal.
The matters are now pending before the Court of Appeal. Briefs have been
submitted; no date has yet been set for oral agreement.

The State is a defendant in Ceridian Corporation v. Franchise Tax Board, a
suit which challenges the validity of two sections of the California Tax laws.
The first relates to deduction from corporate taxes for dividends received from
insurance companies to the extent the insurance companies have California
activities. The second relates to corporate deduction of dividends to the extent
the earnings of the dividend paying corporation have already been included in
the measure of their California tax. If both sections of the California Tax law
are invalidated, and all dividends become deductible, then in the future General
Fund collections would be reduced annually in the $200-$250 million range for
all taxpayers.

A-9
<PAGE>

The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to State-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates ("Commission")). The Board of
Control decided in favor of local school districts' claims for reimbursement for
special education programs for handicapped students. The case was then brought
to the trial court by the State and later remanded to the Commission for
redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the issuance
of a final consolidated decision is anticipated sometime in late 1998. To date,
the Legislature has not appropriated funds. The liability to the State, if all
potentially eligible school districts pursue timely claims, has been estimated
by the Department of Finance at more than $1 billion. The Commission on State
Mandates issued a decision in December 1998 determining that a portion, but not
all, of the claims constituted state mandated local costs. The Commission is now
developing parameters and guidelines for claims for reimbursement. The
Department of Finance has not yet determined whether to seek judicial review of
the Commission's decision.

In Capitola Land v. Anderson and other related state and federal cases,
plaintiffs sought payments from the State under the AFDC-Foster Care program.
Judgment was rendered against the State in Capitola, which the State appealed
and lost. The State then filed a state plan amendment with the federal
Department of Health and Human Services to enable the State to comply with the
Capitola ruling and receive federal funding. The DHHS denied the state plan
amendment, and the State has filed suit against DHHS. The Legislature also
enacted a statute which required federal funding in order to comply with the
Capitola judgment. The State then refused to implement the Capitola judgment
based on the new statute. Certain plaintiffs moved for an order of contempt
against the State, which was granted by the trial court, but was stayed and
annulled by the Court of Appeal. The plaintiffs are petitioning the California
Supreme Court for review. If, as a result of this litigation, compliance with
the Capitola judgment is required and the judgment is applied retroactively,
liability to the State could exceed $200 million.

In January of 1997, California experienced major flooding in six different
areas with preliminary estimates of property damage of approximately $1.6 to
$2.0 billion. A substantial number of plaintiffs have joined suit against the
State, local agencies, and private companies and contractors seeking
compensation for the damages they suffered as a result of the 1997 flooding. The
State is vigorously defending the action.

The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr. et al., the State is seeking recovery for
the past costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts resulting in significant findings
of liability against the State as owner, operator, and generator of wastes taken
to the site. Present estimates of the cleanup range from $400 million to $600
million.

The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The trial court has found liability in inverse condemnation and awarded damages
of $500,000 to a sample of plaintiffs. The State's potential liability to the
remaining plaintiffs ranges from $800 million to $1.5 billion. In 1992, the
State and plaintiffs filed appeals. In August 1999, the court of appeal issued a
decision reversing the trial court's judgment against the State and remanding
the case for retrial on the inverse condemnation cause of action.

The State is a defendant in an action, Emily Q., et al. v. Belshe, et al.,
to compel a change in early screening procedures for children with mental health
needs. The lawsuit is limited to Los Angeles

A-10
<PAGE>

County. The State has filed an answer in this case. An adverse outcome is
possible with the potential liability of $500 million per year.

Plaintiffs in County of San Bernardino v. Barlow Respiratory Hospital and
related actions seek mandamus relief requiring the State to retroactively
increase out-patient Medi-Cal reimbursement rates. Plaintiffs have estimated the
damages to be several hundred million dollars. The State is vigorously defending
these cases, as well as related federal cases addressing the calculation of
Medi-Cal reimbursement rates in the future.

The State is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and Tobacco
Products Surtax Fund for years ended June 30, 1990, through June 30, 1995, for
related disease research. If the State loses, the General Fund and funds from
other sources would be used to reimburse the Cigarette and Tobacco Products
Surtax Fund, an agency fund, for approximately $166 million. However, the
superior court issued an order in December 1998 granting the State's demurrer to
the entire action and dismissing the case. The superior court thereafter
reconsidered its ruling and allowed plaintiffs to amend their complaint. The
State demurred to the amended complaint. In July, 1999, the court again
sustained the State's demurrer to the amended complaint, and issued a judgment
dismissing the case. Plaintiffs appealed. The matter will be briefed and will be
scheduled for oral argument before the court.

A-11
<PAGE>

APPENDIX B

SPECIAL FACTORS AFFECTING THE NEW YORK MUNICIPAL FUND

The following information is a summary of special factors affecting
investments in New York Municipal Obligations. The sources of payment for such
obligations and the marketability thereof may be affected by financial or other
difficulties experienced by New York State (the "State") and certain of its
municipalities and public authorities. This information does not purport to be a
complete description and is based on information from official statements
relating to securities offerings of New York issuers. The Company is not
responsible for the accuracy or timeliness of this information.

NEW YORK STATE

The factors affecting the State's financial condition are complex and
the following description constitutes only a summary.

CURRENT ECONOMIC OUTLOOK

The State Financial Plan is based upon a June 1999 projection by The
Division of Budget ("DOB") of national and State economic activity. The
information in this section summarizes the State economic situation and outlook
upon which projections of receipts and certain disbursements were made for the
1999-2000 Financial Plan.

The State economy has continued to expand, with over 600,000 jobs added
since late 1992. Employment growth has been slower than in the nation during
this period, although the State's relative performance has improved in the last
two years. Growth in average wages in New York has generally outperformed the
nation, while growth in personal income per capita has kept pace with the
nation.

The forecast of the State's economy shows continued expansion during
the 1999 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to continue
to do well, while employment in the manufacturing sector is expected to post a
modest decline. On an average annual basis, the employment growth rate in the
State is expected to be somewhat lower than in 1998 and the unemployment rate is
expected to drop further to 5.1 percent. Personal income is expected to record
moderate gains in 1999. Wage growth in 1999 is expected to be slower than in the
previous year as the recent robust growth in bonus payments moderates.

The forecast for continued growth, and any resultant impact on the
State's 1999-2000 Financial Plan, contains some uncertainties.
Stronger-than-expected gains in employment and wages or in stock market prices
could lead to unanticipated strong growth in consumer spending. Inventory
investment due to Y2K may be significantly stronger than expected towards the
end of this year possibly followed by significant weakness early next year.
Also, improvements in foreign economies may be weaker than expected and
therefore, may have unanticipated effects on the domestic economy. The inflation
rate may differ significantly from expectations due to the conflicting impacts
of a tight labor market and improved productivity growth as well as to the
future direction and magnitude of fluctuations of oil prices. In addition, the
State economic forecast could over- or underestimate the level of future bonus
payments, financial sector profits or inflation growth, resulting in unexpected
economic impacts. Similarly, the State forecast could fail to correctly estimate
the amount of employment change in the banking, financial and other business
service sectors as well as the direction of employment change that is likely to
accompany telecommunications and energy deregulation.

B-1
<PAGE>

1998-99 FISCAL YEAR

The State ended its 1998-99 fiscal year on March 31, 1999 in balance on
a cash basis, with a General Fund cash surplus as reported by the DOB of $1.82
billion. The cash surplus was derived primarily from higher-than-projected tax
collections as a result of continued economic growth, particularly in the
financial markets and the securities industries.

The State reported a General Fund closing cash balance of $892 million,
an increase of $254 million from the prior fiscal year. The balance is held in
three accounts within the General Fund: the Tax Stabilization Reserve Fund
(TSRF), the Contingency Reserve Fund (CRF) and the Community Projects Fund
(CPF). The TSRF closing balance was $473 million, following an additional
deposit of $73 million in 1998-99. The CRF closing balance was $107 million,
following a deposit of $39 million in 1998-99. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $312 million.

The closing fund balance excludes $2.31 billion that the State
deposited into the tax refund reserve account at the close of 1998-99 to pay for
tax refunds in 1999-2000 of which $521 million was made available as a result of
the Local Government Assistance Corporation (LGAC) financing program and was
required to be on deposit as of March 31, 1999. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in 1998-99, while increasing reported receipts in 1999-2000 General Fund
receipts and transfers from other funds (net of tax refund reserve account
activity) for the 1998-99 fiscal year totaled $36.74 billion, an increase of
6.34 percent from 1997-98 levels. General Fund disbursements and transfers to
other funds totaled $36.49 billion for the 1998-99 fiscal year, an increase of
6.23 percent from 1997-98 levels.

1997-98 FISCAL YEAR

The State ended its 1997-98 fiscal year in balance on a cash basis,
with a General Fund cash surplus as reported by DOB of approximately $2.04
billion. The cash surplus was derived primarily from higher-than-anticipated
receipts and lower spending on welfare, Medicaid, and other entitlement
programs.

The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The TSRF closing balance was $400
million, following a required deposit of $15 million (repaying a transfer made
in 1991-92) and an additional deposit of $68 million made from the 1997-98
surplus. The CRF closing balance was $68 million, following a $27 million
deposit from the surplus. The CPF closed the fiscal year with a balance of $170
million. The General Fund closing balance did not include $2.39 billion in the
tax refund reserve account, of which $521 million was made available as a result
of the LGAC financing program and was required to be on deposit on March 31,
1998.

General Fund receipt and transfers from other funds for the 1997-98
fiscal year (including net tax refund reserve account activity) totaled $34.55
billion, an annual increase of $1.51 billion, or 4.57 percent over 1996-97.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent.

1996-97 FISCAL YEAR

The State ended its 1996-97 fiscal year on March 31, 1997 in balance on
a cash basis, with a General Fund cash surplus as reported by DOB of
approximately $1.42 billion. The cash surplus was derived primarily from
higher-than-expected receipts and lower-than-expected spending for social
services programs.

B-2
<PAGE>

The General Fund closing fund balance was $433 million, an increase of
$146 million from the 1995-96 fiscal year. The balance included $317 million in
the TSRF, after a required deposit of $15 million and an additional deposit of
$65 million in 1996-97. In addition, $41 million remained on deposit in the CRF.
The remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing fund balance did not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.

General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the previous
fiscal year (net of tax refund reserve account activity). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.

PUBLIC AUTHORITIES

The fiscal stability of the State is related, in part, to the fiscal
stability of its public authorities, meaning public benefit corporations created
pursuant to State law, other than local authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself and may issue bonds and notes within the amounts, and
restrictions set forth in legislative authorization. The State's access to the
public credit markets could be impaired, and the market price of its outstanding
debt may be materially and adversely affected, if any of its public authorities
were to default on their respective obligations, particularly those using the
financing techniques referred to as State-supported or State-related debt. As of
December 31, 1998, there were 17 public authorities that had outstanding debt of
$100 million or more, and the aggregate outstanding debt, including refunding
bonds, of all State public authorities was $94 billion, only a portion of which
constitutes State-supported or State related debt.

The State has numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue producing public facilities. Public authorities generally pay their
operating expenses and debt service costs from revenues generated by the
projects they finance or operate, such as tolls charged for the use of highways,
bridges or tunnels, charges for public power, electrical gas utility services,
rentals charged for housing units, and charges for occupancy at medical care
facilities.

In addition, State legislation authorizes several financing techniques
for public authorities. Also, there are statutory arrangements providing for
State local assistance payments, otherwise payable to localities, to be made
under certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements, the
affected localities could seek additional State assistance if local assistance
payments are so diverted.

Some authorities also receive moneys from State appropriations to pay
for the operating costs of certain of their programs. As described below, the
Metropolitan Transportation Authority ("MTA") receives the bulk of this money in
order to provide transit and commuter services.

Beginning in 1998, the Long Island Power Authority ("LIPA") assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of August
24, 1999, LIPA has issued over $5 billion in bonds secured solely by ratepayer
charges. LIPA's debt is not considered either State-supported or State-related
debt.

B-3
<PAGE>

METROPOLITAN TRANSPORTATION AUTHORITY

The MTA oversees the operation of subway and bus lines in New York City
by its affiliates, the New York City Transit Authority and the Manhattan and
Bronx Surface Transit Operating Authority (collectively, the "TA"). The MTA
operates certain commuter rail and bus services in the New York Metropolitan
area through MTA's subsidiaries, the Long Island Rail Road Company, the
Metro-North Commuter Railroad Company, and the Metropolitan Suburban Bus
Authority.

In addition, the Staten Island Rapid Transit Operating Authority, an
MTA subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"), the
MTA operates certain intrastate toll bridges and tunnels. Because fare revenues
are not sufficient to finance the mass transit portion of these operations, the
MTA has depended on, and will continue to depend on, operating support from the
State, local governments and TBTA, including loans, grants and subsidies. If
current revenue projections are not realized and/or operating expenses exceed
current projections, the TA or commuter railroads may be required to seek
additional State assistance, raise fares or take other actions.

Since 1980, the State has enacted several taxes -- including a
surcharge on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation Region
served by the MTA and a special one-quarter of 1 percent regional sales and use
tax -- that provide revenues for mass transit purposes, including assistance to
the MTA. Since 1987 State law has required that the proceeds of a one-quarter of
1 percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance to
the MTA. The 1999-2000 enacted budget provides State assistance to the MTA
totaling approximately $1.4 billion, an increase of $55 million over the 1998-99
fiscal year.

State legislation accompanying the 1996-97 adopted State budget
authorized the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds
to finance a portion of the $12.17 billion MTA capital plan for the 1995 through
1999 calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board ("CPRB") approved the 1995-99 Capital Program and
subsequently amended it in August 1997 and in March 1999. The MTA plan now
totals $12.55 billion. The 1995-99 Capital Program is the fourth capital plan
since the Legislature authorized procedures for the adoption, approval and
amendment of MTA capital programs and is designed to upgrade the performance of
the MTA's transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The currently approved 1995-99 Capital Program assumes the
issuance of an estimated $5.2 billion in bonds under this $6.5 billion aggregate
bonding authority. The remainder of the plan is projected to be financed with
assistance from the federal government, the State, the City of New York, and
from various other revenues generated from actions taken by the MTA.

The MTA is expected to submit a proposed capital plan for 2000 through
2004 by October 1, 1999 for consideration by the CPRB (the "2000-04 Capital
Program"). There can be no assurance that the proposed capital plan will be
approved by the CPRB without significant modifications, that the plan as adopted
will be adequate to finance the MTA's capital needs over the plan period, or
that funding sources identified in the approved plan will not be reduced or
eliminated.

There can be no assurance that all the necessary governmental actions
for future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 and 2000-04
Capital Programs, or parts thereof, will not be delayed or reduced. Should
funding levels fall below current projections, the MTA would have to revise its
1995-99 and 2000-04

B-4
<PAGE>

Capital Programs accordingly. If the 1995-99 and 2000-04 Capital Programs are
delayed or reduced, ridership and fare revenues may decline, which could, among
other things, impair the MTA's ability to meet its operating expenses without
additional assistance.

LOCALITIES

THE CITY OF NEW YORK

The fiscal health of the State may also be affected by the fiscal
health of New York City (the "City"), which continues to require significant
financial assistance from the State. State aid contributes to the City's ability
to balance its budget and to meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets. The City has achieved balanced operating results for each of its fiscal
years since 1981 as reported in accordance with the then applicable GAAP
standards.

FISCAL OVERSIGHT

In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation for the City of New York
("NYC MAC") to provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs; and the Office of the State Deputy Comptroller for the City of New York
("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A "Control Period" existed from 1975 to 1986 during which the
City was subject to certain statutorily-prescribed fiscal controls. Although the
Control Board terminated the Control Period in 1986 when certain statutory
conditions were met. State law requires the Control Board to reimpose a Control
Period upon the occurrence or "substantial likelihood and imminence" of the
occurrence of certain events, including (but not limited to) a City operating
budget deficit of more than $100 million or impaired access to the public credit
markets.

Currently, the City and its Covered Organizations (i.e., those which
receive or may receive moneys from the City directly, indirectly or
contingently) operate under a four-year financial plan (the "Financial Plan")
which the City prepares annually and periodically updates. The City's Financial
Plan summarizes its capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies, some of which are uncertain and may not materialize. Unforeseen
developments and changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements.

To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City to market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In 1997 the State created the New York City Transitional Finance Authority to
finance a portion of the City's capital program because the City was approaching
its State Constitutional general debt limit. Without the additional financing
capacity of the Transitional Finance Authority, projected contracts for City
capital projects would have exceeded the City's debt limit during City fiscal
year 1997-98. Despite this additional financing mechanism, the City currently
projects that if no further action is taken, it will reach its debt limit in
City fiscal year 1999-2000. To continue its capital plan without interruption,
the City is proposing an amendment to the State Constitution to change the
methodology use to calculate the debt limit. Since an amendment to the
Constitution to raise the debt limit could not take effect until City fiscal
year 2001-02 at the earliest, the City has decided to securitize a portion of
its share of the proceeds from the settlement with the nation's tobacco
companies. However, a number of potential

B-5
<PAGE>

developments may affect both the availability and level of funding that the City
will receive from the tobacco settlement. City officials have indicated that,
should their efforts to securitize a portion of City tobacco settlement proceeds
fail or not be accomplished in a timely manner, the City will request that the
State increase the borrowing authority of the TFA.

MONITORING AGENCIES

The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with the Financial Plan. According to recent staff reports, while
economic growth in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax revenues
and generated a substantial surplus for the City in City fiscal year 1997-98.
Recent staff reports also indicate that the City projects a substantial surplus
for City fiscal year 1998-99. Although several sectors of the City's economy
have expanded recently, especially tourism and business and professional
services, City tax revenues remain heavily dependent on the continued
profitability of the securities industries and the course of the national
economy. In addition, the size of recent tax reductions has increased to over $2
billion in City fiscal year 1999-2000 through the expiration of a personal
income tax surcharge, the repeal of the non-resident earnings tax and the
elimination of the sales tax on clothing items costing less than $110. Staff
reports have indicated that recent City budgets have been balanced in part
through the use of non-recurring resources and that the City's Financial Plan
tends to rely in part on actions outside its direct control. These reports have
also indicated that the City has not yet brought its long-term expenditure
growth in line with recurring revenue growth and that the City is therefore
likely to continue to face substantial gaps between forecast revenues and
expenditures in future years that must be closed with reduced expenditures
and/or increased revenues. In addition to these monitoring agencies, the
Independent Budget Office ("IBO") has been established pursuant to the City
Charter to provide analysis to elected officials and the public on relevant
fiscal and budgetary issues affecting the City. Copies of the most recent
Control Board, OSDC and City Comptroller, and IBO staff reports are available by
contacting the Control Board at 270 Broadway, 21st Floor, New York, NY, 10007,
Attention: Executive Director; OSDC at 270 Broadway, 23rd Floor, New York, NY
10007, Attention: Deputy Comptroller; the City Comptroller at Municipal
Building, Room 517, One Centre Street, New York, NY 10007, Attention: Deputy
Comptroller, Finance; and the IBO at 110 William Street, 14th Floor, New York,
NY 10038, Attention: Director.

OTHER LOCALITIES

Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1999-2000
fiscal year.

The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totals $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550 million,
and has continued funding at this new level since that date.

While the distribution of General Purpose State Aid for local
governments was originally based on a statutory formula, in recent years both
the total amount appropriated and the shares appropriated to specific localities
have been determined by the Legislature. A State commission established to study
the

B-6
<PAGE>

distribution and amounts of general purpose local government aid failed to agree
on any recommendations for a new formula.

Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1997, the total indebtedness
of all localities in the State, other than New York City, was approximately
$21.0 billion. A small portion (approximately $80 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
(other than New York City) authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-two localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1997.

Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs, which in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.

New York Municipal Obligations may also include obligations of the
governments of Puerto Rico and other U.S. territories and their political
subdivisions to the extent that these obligations are exempt from New York State
and New York City personal income taxes. Accordingly, the Fund may be adversely
affected by local political and economic conditions and developments within
Puerto Rico and certain other U.S. territories affecting the issuers for such
obligations. For information concerning the economy of Puerto Rico, please see
Appendix E or this Statement of Additional Information.

YEAR 2000 COMPLIANCE

New York State is currently addressing Year 2000 ("Y2K") data
processing compliance issues. The Year 2000 issue not only affects computer
programs, but also the hardware, software and networks on which they operate. In
addition, any system or equipment that is dependent on an embedded chip, such as
telecommunication equipment and security systems, may also be adversely
affected.

In April 1999 the State Comptroller released an audit on the State's
Year 2000 compliance. The audit, which reviewed the State's Y2K compliance
activities through October 1998, found that the State had made progress in
achieving Y2K compliance, but needed to improve its activities in several areas,
including data interchanges and contingency planning.

The Office for Technology (OFT) will continue to monitor compliance
progress for the State's mission-critical and high-priority systems and is
reporting compliance progress to the Governor's Office on a quarterly basis. The
1999-2000 enacted budget allocates $19 million for priority embedded systems and
$20 million for unanticipated expenses related to bringing technology into Y2K
compliance. OFT reports that as of June 1999, the State had completed over 98
percent of the overall compliance effort for its mission-critical systems; 55 of
the 56 systems are now Year 2000 compliant. As of June 1999, the State had
completed 87 percent of the overall compliance effort on the high-priority
systems; 236 systems are now Year 2000 compliant. The State has also procured
independent validation and verification

B-7
<PAGE>

services from a qualified vendor to perform an automated review of code that has
been fixed and a testing review process for all mission-critical systems which
is scheduled to be completed by September 1999.

The State is also addressing a number of issues related to bringing its
mission critical systems into compliance, including: testing throughout 1999 of
over 800 data exchange interfaces with federal, state, local and private data
partners; completion of an inventory of priority equipment and systems that may
depend on embedded chips and may therefore need remediation in 1999; and
contacting critical vendors and supply partners to obtain Year 2000 compliance
status information and assurances. Since problems could be identified during the
compliance testing phase that could produce compliance delays, the State
agencies were required to complete contingency plans for priority systems and
business processes by the first quarter of calendar year 1999. These plans have
been completed and tested as of June 1999 and are being integrated into the
State Emergency Response Plan under the direction of the State Emergency
Management Office. In addition, the State Public Service Commission has ordered
that all State regulated utilities complete Year 2000 activities for
mission-critical systems, including contingency plans, by July 1, 1999. The
Public Service Commission is currently reviewing these plans as part of their
Y2K regulatory and oversight role. The State has also been working with local
governments since December 1996 to raise awareness, promote action and provide
assistance with Year 2000 compliance.

While the State is taking what it believes to be appropriate action to
address Year 2000 compliance, there can be no guarantee that all of the State's
systems and equipment will be Year 2000 compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Year 2000
compliance by outside parties is beyond the State's control to remediate, the
failure of outside parties to achieve Year 2000 compliance could have an adverse
impact on State operations or finances as well.

LITIGATION

GENERAL

The legal proceedings noted below involve State finances, and programs
and miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1999-2000
fiscal year or thereafter.

Adverse developments in these proceedings, other proceedings for which
there are unanticipated, unfavorable and material judgments, or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1999-2000 Financial Plan. The State believes that the 1999-2000 Financial Plan
includes sufficient reserves to offset the costs associated with the payment of
judgments that may be required during the 1999-2000 fiscal year. These reserves
include (but are not limited to) amounts, appropriated for court of claims
payments and projected fund balances in the General Fund. In addition, any
amounts ultimately required to be paid by the State may be subject to settlement
or may be paid over a multi-year period. There can be no assurance, however,
that adverse decisions in legal proceedings against the State would not exceed
the amount of all potential 1999-2000 Financial Plan resources available for the
payment of judgments and, could therefore, affect the ability of the State to
maintain a balanced 1999-2000 Financial Plan. In its General Purpose Financial
Statements, the State reports its estimated liability for awarded and
anticipated unfavorable judgments.

B-8
<PAGE>

STATE FINANCE POLICIES

TAX LAW

In New York Association of Convenience Stores et al. v. Urbach, et al.,
petitioners New York Association of Convenience Stores, National Association of
Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. seek to
compel respondents, the Commissioner of Taxation and Finance and the Department
of Taxation and Finance, to enforce sales and excise taxes pursuant to Tax Law
Articles 12-A, 20 and 28 on tobacco products and motor fuel sold to non-Indian
consumers on Indian reservations. In orders dated August 13, 1996 and August 24,
1996, the Supreme Court, Albany County, ordered, inter alia, that there be equal
implementation and enforcement of said taxes for sales to non-Indian consumers
on and off Indian reservations, and further ordered that, if respondents failed
to comply within 120 days, no tobacco products or motor fuel could be introduced
onto Indian reservations other than for Indian consumption or, alternatively,
the collection and enforcement of such taxes would be suspended statewide.
Respondents appealed to the Appellate Division, Third Department and invoked
CPLR 5519(a)(1), which provides that the taking of the appeal stayed all
proceedings to enforce the orders pending the appeal. Petitioner's motion to
vacate the stay was denied. In a decision entered May 8, 1997, the Third
Department modified the orders by deleting the portion thereof that provided for
the statewide suspension of the enforcement and collection of the sales and
excise taxes on motor fuel and tobacco products. The Third Department held,
inter alia, that petitioners had not sought such relief in their petition and
that it was an error for the Supreme Court to have awarded such undemanded
relief without adequate notice of its intent to do so. On May 22, 1997,
respondents appealed to the Court of Appeals on other grounds, and again invoked
the statutory stay. On October 23, 1997, the Court of Appeals granted
petitioners' motion for leave to cross-appeal from the portion of the Third
Department's decision that deleted the statewide suspension of the enforcement
and collection of the sales and excise taxes on motor fuel and tobacco. On July
9, 1998, the New York Court of Appeals reversed the order of the Appellate
Division, Third Department, and remanded the matter to the Supreme Court, Albany
County, for further proceedings. The Court held that the petitioners had
standing to assert an equal protection claim, but that their claim did not
implicate racial discrimination. The Court remanded the case to Supreme Court,
Albany County, for resolution of the question of whether there was a rational
basis for the Tax Department's policy of non-enforcement of the sales and excise
taxes on reservation sales of cigarettes and motor fuel to non-Indians. In a
footnote, the Court stated that, in view of its disposition of the case,
petitioners' cross-appeal regarding the statewide suspension of the taxes is
"academic." By decision and judgment dated July 9, 1999, the Supreme Court,
Albany County, granted judgment dismissing the petition. The time in which to
appeal the July 9, 1999 decision and judgment has not yet expired.

LINE ITEM VETO

In an action commenced in June 1998 by the Speaker of the Assembly of
the State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998. By order entered January 7, 1999, the Court denied
the State's motion to dismiss. On January 27, 1999, the State appealed that
order. On April 27, 1999, the Appellate Division, First Department, held that
the State's automatic stay of litigation pending the resolution of the appeal
would be vacated unless the State perfected its appeal for the Court's September
1999 appellate term. The State perfected its appeal on July 12, 1999.

B-9
<PAGE>

STATE PROGRAMS

MEDICAID

Several cases challenge provisions of Chapter 81 of the Laws of 1995
which alter the nursing home Medicaid reimbursement methodology on and after
April 1, 1995. Included are New York State Health Facilities Association, et al.
v. DeBuono, et al., St. Luke's Nursing Center, et al. v. DeBuono, et al., New
York Association of Homes and Services for the Aging v. DeBuono et al. (three
cases), Healthcare Association of New York State v. DeBuono and Bayberry Nursing
Home et al. v. Pataki, et al. Plaintiffs allege that the changes in methodology
have been adopted in violation of procedural and substantive requirements of
State and federal law.

In a consolidated action commenced in 1992, Medicaid recipients and
home health care providers and organizations challenge promulgation by the State
Department of Social Services ("DSS") in June 1992 of a home assessment resource
review instrument ("HARRI"), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).
In a related case, Rodriguez v. DeBuono, on April 19, 1999, the United States
District Court for the Southern District of New York enjoined the State's use of
task based assessment, which is similar to the HARRI, unless the State assesses
safety monitoring as a separate task based assessment, on the grounds that its
use without such additional assessment violated federal Medicaid law and the
Americans with Disabilities Act. The State appealed from the April 19, 1999
order and on July 12, 1999 argued the appeal before the Second Circuit. In
several cases, plaintiffs seek retroactive claims for reimbursement for services
provided to Medicaid recipients who were also eligible for Medicare during the
period January 1, 1987 to June 2, 1992. Included are Matter of New York State
Radiological Society v. Wing, Appel v. Wing, E.F.S. Medical Supplies v. Dowling,
Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric Medical Association
v. Wing and New York State Psychiatric Association v. Wing. These cases were
commenced after the State's reimbursement methodology was held invalid in New
York City Health and Hospital Corp. v. Perales. The State contends that these
claims are time-barred. In a judgment dated September 5, 1996, the Supreme
Court, Albany County, dismissed Matter of New York State Radiological Society v.
Wing as time-barred. By order dated November 26, 1997, the Appellate Division,
Third Department, affirmed that judgment. By decision dated June 9, 1998, the
Court of Appeals denied leave to appeal. In a decision entered December 15,
1998, the Appellate Division, First Department, dismissed the remaining cases in
accordance with the result in Matter of New York State Radiological Society v.
Wing. By decision dated July 8, 1999, the Court of Appeals denied leave to
appeal.

Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law (S)2807-d, which imposes a tax on the gross receipts hospitals and
residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2 percent and 3.8 percent assessments on gross receipts imposed
pursuant to Public Health Law (S)(S) 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii),
respectively, are unconstitutional. An order entered August 27, 1997, enforced
the terms of the decision. The State appealed that order. By decision and order
dated August 31, 1998, the Appellate Division, Second Department, affirmed that
order. On September 30, 1998, the State moved for re-argument or, in the
alternative, for a certified question for the Court of Appeals to review. By
order dated January 7, 1999, the motion was denied. A final order was entered in
Supreme Court on January 26, 1999. On February 23, 1999, the State appealed that
order to the Court of Appeals. The case is scheduled to be argued on October 20,
1999.

B-10
<PAGE>

In Dental Society, et al. v. Pataki, et al. (United States District
Court, Northern District of New York, commenced February 2, 1999), plaintiffs
challenge the State's reimbursement rates for dental care provided under the
State's dental Medicaid program. Plaintiffs claim that the State's Medicaid fee
schedule violates Title XIX of the Social Security Act (42 U.S.C. (S) 1396a et
seq.) and the federal and State Constitutions. On June 25, 1999, the State filed
its answer.

SHELTER ALLOWANCE

In an action commenced in March 1987 against State and New York City
officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York County),
plaintiffs allege that the shelter allowance granted to recipients of public
assistance is not adequate for proper housing.

In a decision dated April 16, 1997, the Court held that the shelter
allowance promulgated by the Legislature and enforced through DSS regulations is
not reasonably related to the cost of rental housing in New York City and
results in homelessness to families in New York City. A judgment was entered on
July 25, 1997, directing, inter alia, that the State (i) submit a proposed
schedule of shelter allowances (for the Aid to Dependent Children program and
any successor program) that bears a reasonable relation to the cost of housing
in New York City; and (ii) compel the New York City Department of Social
Services to pay plaintiffs a monthly shelter allowance in the full amount of
their contract rents, provided they continue to meet the eligibility
requirements for public assistance, until such time as a lawful shelter
allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State has appealed to the Appellate Division,
First Department, from each and every provision of this judgment except that
portion directing the continued provision of interim relief. By decision and
order dated May 6, 1999, the Appellate Division, First Department, affirmed the
July 25, 1997 judgment. By order dated July 8, 1999, the Appellate Division
denied the State's motion for leave to appeal to the Court of Appeals from the
May 6, 1999 decision and order. The State's motion for leave to appeal to the
Court of Appeals is pending in that court.

CIVIL RIGHTS CLAIMS

In an action commenced in 1980 (United States, et al. v. Yonkers Board
of Education, et al.), the United States District Court for the Southern
District of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to develop
and comply with a remedial educational improvement plan ("EIP I"). On January
19, 1989, the District Court granted motions by Yonkers and the NAACP to add the
State Education Department, the Yonkers Board of Education, and the State Urban
Development Corporation as defendants, based on allegations that they had
participated in the perpetuation of the segregated school system. On August 30,
1993, the District Court found that vestiges of a dual school system continued
to exist in Yonkers. On March 27, 1995, the District Court made factual findings
regarding the role of the State and the other State defendants (the "State") in
connection with the creation and maintenance of the dual school system, but
found no legal basis for imposing liability. On September 3, 1996, the United
States Court of Appeals for the Second Circuit, based on the District Court's
factual findings, held the State defendants liable under 42 USC (S)1983 and the
Equal Educational Opportunity Act, 20 USC (S)(S)1701, et seq., for the unlawful
dual school system, because the State, inter alia, had taken no action to force
the school district to desegregate despite its actual or constructive knowledge
of de jure segregation. By order dated October 8, 1997, the District Court held
that vestiges of the prior segregated school system continued to exist and that,
based on the State's conduct in creating and maintaining that system, the State
is liable for eliminating segregation and its vestiges in Yonkers and must fund
a remedy to accomplish that goal. Yonkers presented a proposed educational
improvement plan ("EIP II") to eradicate these vestiges of segregation. The
October 8, 1997 order of the District Court ordered that EIP II be implemented
and directed that, within 10 days of the entry of the Order, the State make
available to Yonkers $450,000 to

B-11
<PAGE>

support planning activities to prepare the EIP II budget for 1997-98 and the
accompanying capital facilities plan. A final judgment to implement EIP II was
entered on October 14, 1997. On November 7, 1997, the State appealed that
judgment to the Second Circuit. The appeal is pending. Additionally, the Court
adopted a requirement that the State pay to Yonkers approximately $9.85 million
as its pro rata share of the funding of EIP I for the 1996-97 school year. The
requirement for State funding of EIP I was reduced to an order on December 2,
1997 and reduced to a judgment on February 10, 1998. The State appealed that
order to the Second Circuit on December 31, 1997 and amended the notice of
appeal after entry of the judgment. By decision dated June 22, 1999, as
discussed below, the Second Circuit affirmed the District Court's order
requiring the State to pay one-half the cost of EIP I for the 1996-97 school
year and remanded the case to the District Court for further proceedings
consistent with its decisions.

On June 15, 1998, the District Court issued an opinion setting forth
the formula for the allocation of the costs of EIP I and EIP II between the
State and the City for the school years 1997-98 through 2005-06. That opinion
was reduced to an order on July 27, 1998. The order directed the State to pay
$37.5 million by August 1, 1998 for estimated EIP costs for the 1997-98 school
year. The State made this payment, as directed. On August 24, 1998, the State
appealed that order to the Second Circuit. The city of Yonkers and the Yonkers
Board of Education cross appealed to the Second Circuit from that order. By
stipulation of the parties approved by the Second Circuit on November 19, 1998,
the appeals from the July 27, 1998 order were withdrawn without prejudice to
reinstatement upon determination of the State's appeal of the October 14, 1997
judgment discussed above.

On April 15, 1999, the District Court issued two additional orders. The
first order directed the State to pay to Yonkers an additional $11.3 million by
May 1, 1999, as the State's remaining share of EIP costs for the 1997-98 school
year. The second order directed the State to pay to Yonkers $69.1 million as its
share of the estimated EIP costs for the 1998-99 school year. The State made
both payments on April 30, 1999.

In a decision dated June 22, 1999, the Second Circuit found no basis
for the District Court's findings that vestiges of a dual system continued to
exist in Yonkers and reversed the order directing the implementation of EIP II.
The Second Circuit also affirmed the District Court's order requiring the State
to pay one-half of the cost of EIP I for the 1996-97 school year and remanded
the case to the District Court for further proceedings consistent with its
decision. On July 2, 1999 the NAACP filed a petition for rehearing of the June
22, 1999 decision before the Second Circuit, en banc. The State has joined in
the City of Yonker's motion to stay further implementation of EIP II pending the
decision on the petition for rehearing. By order dated August 5, 1999, the
Second Circuit granted the motion staying further implementation of EIP II
pending appeal.

On July 27, 1999, the City of Yonkers moved in the District Court to
modify the July 27, 1998 order to require the State to make payments for EIP
expenses each month from July 1999 through April 2000 of $9.22 million per month
instead of paying $92.2 million by May 1, 2000. By memorandum and order dated
July 29, 1999, the District Court denied this motion.

REAL PROPERTY CLAIMS

On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County
of Oneida, the United States Supreme Court affirmed a judgment of the United
States Court of Appeals for the Second Circuit holding that the Oneida Indians
have a common-law right of action against Madison and Oneida Counties for
wrongful possession of 872 acres of land illegally sold to the State in 1795. At
the same time, however, the Court reversed the Second Circuit by holding that a
third-party claim by the counties against the State for indemnification was not
properly before the federal courts. The case was remanded to the District Court
for an assessment of damages, which action is still pending. The counties may
still seek indemnification in the State courts.

B-12
<PAGE>

In 1998, the United States filed a complaint in intervention in Oneida
Indian Nation of New York. In December 1998, both the United States and the
tribal plaintiffs moved for leave to amend their complaints to assert claims for
250,000 acres, to add the State as a defendant, and to certify a class made up
of all individuals who currently purport to hold title within said 250,000 acre
area. These motions were argued March 29, 1999 and are still awaiting
determination. The District Court has not yet rendered a decision. By order
dated February 24, 1999, the District Court appointed a federal settlement
master. A conference scheduled by the District Court for May 26, 1999 to address
the administration of this case has been adjourned indefinitely.

Several other actions involving Indian claims to land in upstate New
York are also pending. Included are Cayuga Indian Nation of New York v. Cuomo,
et al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New
York, et al., both in the United States District Court for the Northern District
of New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions but may
enhance others. In the Cayuga Indian Nation of New York case, by order dated
March 29, 1999, the United States District Court for the Northern District of
New York appointed a federal settlement master. In June 1999, the federal
government moved to have the State held jointly and severally liable for any
damages owed to the plaintiffs. This motion was argued before the District Court
on July 8, 1999. The damages phase of the trial of this case is scheduled to
begin on December 1, 1999. In the Canadian St. Regis Band of Mohawk Indians
case, the United States District Court for the Northern District of New York has
directed the parties to rebrief outstanding motions to dismiss brought by the
defendants. The State filed its brief on July 1, 1999. The motions are scheduled
for argument on September 21, 1999.

B-13
<PAGE>