Registration Nos. 33-81748
811-8640
As filed via EDGAR with the Securities and Exchange Commission on December 20,
1996
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 5
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6
(Check appropriate box or boxes)
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
(Exact name of Registrant as specified in charter)
237 Park Avenue
New York, New York 10017
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 618-9510
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Stephen Brent Wells, Esq.
OFFITBANK
520 Madison Avenue
New York, New York 10022
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(Name and Address of Agent for Service)
with a copy to:
Carl Frischling, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on _______ pursuant to paragraph (b)
[ ] on _______ pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on _______ pursuant to paragraph (a)(ii) of rule 485
[x] 60 days after filing pursuant to paragraph (a)(i)
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
The Registrant has registered an indefinite number or amount of its
shares of common stock for each of its five series of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940 on July 20, 1994. The Registrant intends to file a Rule 24f-2 Notice by
February 29, 1997.
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THE OFFITBANK VARIABLE INSURANCE FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A Item No. Location
Part A Prospectus Caption
Item 1. Cover Page Cover Page
Item 2. Synopsis Not Applicable
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description of
Registrant The Company; Investment
Objectives and Policies;
Investment Policies and
Techniques; Special Risk
Considerations; Limiting
Investment Risks; Appendix
A
Item 5. Management of the Fund Management
Item 5A. Management's Discussion of
Fund Performance Not Applicable
Item 6. Capital Stock and Other
Securities How Distributions Are
Made; Tax Information;
Shareholder Communication
Item 7. Purchase of Securities
Being Offered About Your Investment;
How the Company Values
Its Shares
Item 8. Redemption or Repurchase About Your Investment;
Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
Statement of Additional
Part B Information Caption
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not Applicable
Item 13. Investment Objectives and
Policies Additional Information on
Portfolio Instruments and
Techniques; Additional
Risk Considerations;
Investment Limitations
Item 14. Management of the Registrant Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities General Information
Item 16. Investment Advisory and
Other Services Management of the Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices
Item 18. Capital Stock and Other
Securities General Information
Item 19. Purchase, Redemption and
Pricing of Securities Management of the Fund;
Being Offered Purchase of Shares;
Redemption of Shares;
Item 20. Tax Status Additional Information
Concerning Taxes
Item 21. Underwriters Distributor
Item 22. Calculation of Performance
Data Performance Calculations
Item 23. Financial Statements Report of Independent
Accountants; Financial
Statements
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Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. _______, 1997
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OFFITBANK VIF-TOTAL RETURN FUND
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OFFITBANK VIF-Total Return Fund (the "Total Return Fund") is one of eight
separate non-diversified investment portfolios of the OFFITBANK Variable
Insurance Fund, Inc. (the "Company"), a newly organized open-end, management
investment company. The Total Return Fund's investment objective is to maximize
total return from a combination of capital appreciation and current income. The
Total Return Fund will seek to achieve its objective by investing primarily in a
diversified portfolio of fixed-income securities of varying maturities and by
giving OFFITBANK, the Fund's investment adviser (the "Adviser"), broad
discretion to deploy the Total Return Fund's assets among certain segments of
the fixed-income market that the Adviser believes will best contribute to the
achievement of the Total Return Fund's objective. The Total Return Fund may
invest directly in the markets and securities described is this prospectus, or
indirectly through investing in the other investment portfolios of the Company,
including the OFFITBANK VIF-U.S. Government Securities Fund (the "U.S.
Government Securities Fund"), the OFFITBANK VIF-High Yield Fund (the "High Yield
Fund") and the OFFITBANK VIF-Emerging Markets Fund (the "Emerging Markets Fund"
and collectively with the Total Return Fund, U.S. Government Securities Fund and
High Yield Fund, the "Funds" and each individually, a "Fund").
THE TOTAL RETURN FUND MAY INVEST ALL OR A PORTION OF ITS ASSETS IN HIGH YIELD,
HIGH RISK CORPORATE DEBT SECURITIES AND SOVEREIGN DEBT OBLIGATIONS WHICH ARE
CONSIDERED SPECULATIVE AND SUBJECT TO CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE
AND POLICIES" AND "SPECIAL RISK CONSIDERATIONS". There can be no assurance that
the Total Return Fund's investment objective will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Total Return Fund's investment adviser. The Adviser currently
manages in excess of $6 billion in assets principally invested in global fixed
income securities. The address of the Company is 237 Park Avenue, Suite 910, New
York, New York 10017. Yield and other information regarding the Total Return
Fund may be obtained by calling 1-800-618-9510.
SHARES OF THE TOTAL RETURN FUND ARE SOLD ONLY TO CERTAIN LIFE INSURANCE
COMPANIES (COLLECTIVELY, "PARTICIPATING COMPANIES") AND THEIR SEPARATE ACCOUNTS
(COLLECTIVELY, THE "ACCOUNTS") TO FUND BENEFITS UNDER VARIABLE ANNUITY CONTRACTS
("CONTRACTS") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF THE FUND IN
ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND POLICY OWNERS
("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH ALLOCATION RIGHTS
ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS. SHARES ARE
REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE CONTRACTS AND
POLICIES.
This Prospectus briefly sets forth certain information about the Total Return
Fund that investors should know before investing. Investors are advised to read
this Prospectus in conjunction with the prospectus for the Contract or Policy
which accompanies this Prospectus and retain this Prospectus for future
reference. Additional information about the Fund, contained in a Statement of
Additional Information dated _______, 1997, as amended or supplemented from time
to time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
INVESTORS ARE ADVISED THAT SHARES OF THE TOTAL RETURN FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATE OF
OFFITBANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THE COMPANY IS NOT
AUTHORIZED TO ENGAGE IN THE BUSINESS OF BANKING.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WHAT YOU NEED TO KNOW
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Financial Highlights........................................2 How the Company Values Its Shares..........................18
The Company.................................................3 How Distributions are Made: Tax Information................19
Investment Objective and Policies...........................3 Shareholder Communications ................................19
Investment Policies and Techniques..........................4 Performance Information....................................20
Special Risk Considerations.................................9 Counsel; Independent Accountants...........................20
Limiting Investment Risks..................................17 Appendix A................................................A-1
Description of the Underlying Funds .........................
Management.................................................17
About Your Investment......................................18
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FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights of the High Yield Fund and Emerging Markets Fund for the
period ending September 30, 1996. During that period, neither the Total Return
Fund nor the U.S. Government Securities Fund had commenced operations. The
information below has been derived from financial statements included in the
Semi-Annual Report to Shareholders for the periods ending September 30, 1996.
Such information has not been audited by Price Waterhouse LLP, independent
auditors for the Company. The Semi-Annual Report is incorporated by reference
into the Statement of Additional Information. The information set forth below is
for a share each Fund outstanding for the period indicated.
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<CAPTION>
VIF-HIGH YIELD VIF-EMERGING
FUND MARKETS FUND
For the period For the period
from April 1, August 28,
1996* through 1996* through
September 30, September 30,
For a share of capital stock outstanding through the period: 1996 1996
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PER SHARE OPERATING PERFORMANCE:
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NET ASSET VALUE, BEGINNING OF PERIOD..................................... 10.00 10 .00
Net investment income............................................... 0.39 0.07
Net realized and unrealized gains on investments.................... 0.29 0.18
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Total from investment operations................................... 0 .68 0 .25
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LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.............................................. (0 .39) (0 .07)
Total dividends and distribution................................... (0 .39) (0 .07)
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NET ASSET VALUE, END OF PERIOD.......................................... $10 .29 $10 .18
TOTAL INVESTMENT RETURN................................................. 6 .96% 2 .53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................... $9,2 11 $1,0 61
RATIOS TO AVERAGE NET ASSETS:
Expenses(1)(2)..................................................... 1 .15% 1 .50%
Net investment income(1)........................................... 7 .77% 8 .00%
PORTFOLIO TURNOVER RATE................................................. 0% 13 1%
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* Commencement of Operations.
(1) Annualized
(2) If the Funds had borne all expenses that were paid or assumed by the
Adviser and Administrator the above expense ratios would have been 2.70%
and 6.22% for the VIF-High Yield and VIF-Emerging Markets Fund,
respectively.
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THE COMPANY
The Company is designed to serve as a funding vehicle for Contracts and
Policies offered by the Accounts of Participating Companies. Shares of the Total
Return Fund are offered only to the Accounts through OFFIT Funds Distributor,
Inc. (the "Distributor"), the principal underwriter for the Company. The Fund is
a no-load, separate, non-diversified investment portfolio of the Company, a
newly organized, open-end management investment company. The Company is not
authorized to engage in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Total Return Fund, which could possibly force the Company to sell portfolio
securities at disadvantageous prices. The Company's Directors intend to monitor
events in order to identify any material irreconcilable conflicts that may
possibly arise and to determine what action, if any, should be taken in response
thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Total Return Fund has an investment objective which it pursues through
investment policies as described below. The objective and policies of the Fund
can be expected to affect the return of the Fund and the degree of market and
financial risk to which the Fund is subject. For more information about the
investment strategies employed by the Fund, see "Investment Policies and
Techniques." 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"). The investment
policies of the Fund may, unless otherwise specifically stated, be changed by
the Directors of the Company without a vote of the shareholders. There is no
assurance that the Fund will achieve its objective.
Additional portfolios may be created from time to time with different
investment objectives and policies for use as funding vehicles for the Accounts
or for other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Total Return Fund, with the classes being subject to different charges and
expenses and having such other different rights as the Directors may prescribe.
The investment objective of the Total Return Fund is to maximize total return
from a combination of capital appreciation and current income . The Fund will
seek to achieve its objective by investing primarily in a diversified portfolio
of fixed-income securities of varying maturities and by giving the Adviser broad
discretion to deploy the Fund's assets among certain segments of the
fixed-income market that the Adviser believes will best contribute to the
achievement of the Fund's objective. At any point in time, the Adviser will
deploy the Fund's assets based on the Adviser's analysis of current economic and
market conditions and the relative risks and opportunities present in the
following market segments: 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 "underlying funds"). The Fund may invest
directly in the markets and securities described in this prospectus, or
indirectly through investing in the underlying funds, including the U.S.
Government Securities Fund, the High Yield Fund and the Emerging Markets Fund.
In evaluating proposed investments for the Total Return Fund, the Adviser will
seek to enhance the total return on the Fund's portfolio through the active
management of (i) portfolio duration, (ii) allocation of investments among
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the various sectors of the fixed income market, (iii) yield curve positioning
and (iv) currency exposure. The Adviser will seek to maximize the Total Return
Fund's total return in terms of U.S. dollars. The Adviser intends to base its
investment decisions for the Total Return Fund on the continual evaluation of
various factors, including (i) the supply and demand for capital in various
capital markets, (ii) the shape of the global yield curve, (iii) "bottom up"
credit analysis of particular issuers, (iv) relative value between and within
global capital markets and (v) 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 Total Return 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 Total Return 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 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 Total Return 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 such investments may be non-performing
when purchased. See "Special Risk Considerations--High Yield Securities.
"
The Total Return Fund has established no rating criteria for the debt
securities in which it may invest and such securities may not be rated at all
for creditworthiness. Securities rated in the medium to lower rating categories
of nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the capacity
to pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price and risk of default than
securities in higher rating categories. See "Special Risk Considerations -- High
Yield 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 Corporation ("S&P"), Moody's Investors Services, Inc. ("Moody's") and
Duff & Phelps Credit Rating Co.
("D&P").
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INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES . The Funds may invest in securities of foreign issuers. When
the Funds invest in foreign securities, they may be denominated in foreign
currencies. Thus, each Fund's net asset value may be affected by changes in
exchange rates. See "Special Risk Considerations."
MORTGAGE-RELATED SECURITIES . The Funds may invest in mortgage-related
securities, consistent with their respective investment objectives and policies,
that provide funds for mortgage loans made to residential homeowners. These
include securities which represent interests in pools of mortgage loans made by
lenders such as savings and loan institutions, mortgage bankers, commercial
banks and others. Pools of mortgage loans are assembled for sale to investors
(such as the Funds) by various governmental, government-related and private
organizations. Interests in pools of mortgage-related securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Prepayments are caused by repayments of principal resulting
from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payments in such pools. However, timely payment of
interest and/or principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool or hazard
insurance. There can be no assurance that the private insurers can meet their
obligations under the policies. The Funds may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experience
and practices of the poolers the Adviser determines that the securities meet the
Funds' investment criteria. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
The Adviser expects that governmental, governmental-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 objective and policies, consider
making investments in such new types of securities. For additional information
regarding mortgage-related securities and the risks associated with investment
in such instruments, see "Additional Information on Portfolio Instruments -
Mortgage-Related Securities" in the Statement of Additional Information.
ASSET-BACKED SECURITIES . The Funds may invest in asset-backed securities in
accordance with their respective investment objectives and policies.
Asset-backed securities represent an undivided ownership interest in a pool of
installment sales contracts and installment loans collateralized by, among other
things, credit card receivables and automobiles. In general, asset-backed
securities and the collateral supporting them are of shorter maturity than
mortgage loans. As a result, investment in these securities should result in
greater price stability for a Fund.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional Information.
The Funds will not limit their investments to asset-backed securities with
credit enhancements. Although asset-backed securities are not generally traded
on a national securities exchange, such securities are widely traded by brokers
and dealers, and to such extent will not be considered illiquid for the purposes
of each Fund's limitation on investment in illiquid securities
BRADY BONDS. Each Fund, except the U.S. Government Securities Fund, may invest
in "Brady Bonds" which are debt securities issued or guaranteed by foreign
governments in exchange for existing external commercial bank indebtedness under
a plan announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989. To
date, over
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$120 billion (face amount) of Brady Bonds have been issued by the governments of
Argentina, Brazil, Costa Rica, Mexico, Nigeria, the Philippines, Uruguay and
Venezuela, the largest proportion having been issued by Argentina, Brazil,
Mexico and Venezuela. Brady Bonds have been issued only recently, and
accordingly, they do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the over-the-counter secondary
market.
The Funds 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 one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds which have been issued to date are rated BB or
B by S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.
HEDGING AND OTHER STRATEGIC TRANSACTIONS. The Funds, except the U.S. Government
Securities Fund, may use, as a portfolio management strategy, 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 Funds 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 Funds' income or gain.
See "Special Risk Considerations--Hedging and Other Strategic Transactions."
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Funds, except the U.S. Government
Securities Fund, may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a foreign entity and one or more financial
institutions ("Lenders"). The majority of the Funds' investments in Loans in
emerging markets is 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 government.
Such Fund will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, a Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan ("Loan Agreement"), nor any rights of set-off against the borrower, and
such Fund may not directly benefit from any collateral supporting the Loan in
which it has purchased the Participation. As a result, the Fund will assume the
credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Funds
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 Funds purchase
Assignments from Lenders, the Funds 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 Funds as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Funds may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Funds anticipate 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 each 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 Funds to
assign a value to those securities for purposes of valuing a Fund's portfolio
and calculating its net asset value. The investment of each Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets. See "Illiquid Securities" below.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Funds may purchase or sell
forward foreign currency exchange contracts ("forward contracts") as part of
their portfolio investment strategies . A forward contract
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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 the 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 a 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 high quality debt securities in a segregated 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 segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated 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 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.
STRUCTURED PRODUCTS. The Funds, except the U.S. Government Securities Fund, may
invest in interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of certain debt obligations. This
type of restructuring involves the deposit with or purchase by an entity, such
as a corporation or trust, of specified instruments (such as commercial bank
loans or Brady Bonds) and the issuance by that entity of one or more classes of
securities ("structured products") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured products to create securities with
different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to structured products is dependent on the extent of the cash flow
on the underlying instruments. The Funds may invest in structured products which
represent derived investment positions based on relationships among different
markets or asset classes.
The Funds may also invest in other types of structured products, including
among others, inverse floaters, spread trades and notes linked by a formula to
the price of an underlying instrument or currency. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent) (the "reference
rate"). As an example, inverse floaters may constitute a class of collateralized
mortgage obligations with a coupon rate that moves inversely to a designated
index, such as LIBOR (London Interbank Offered Rate) or the Cost of Funds Index.
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
A spread trade is an investment position relating to a difference in the prices
or interest rates of two securities or currencies where the value of the
investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities or
currencies. When a Fund invests in notes linked to the price of an underlying
instrument or currency, the price of the underlying security or the exchange
rate of the currency is determined by a multiple (based on a formula) of the
price of such underlying security or exchange rate of such currency. Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security. Total return on the
structured product is derived by linking return to one or more characteristics
of the underlying instrument. Although a Fund's purchase of structured products
would have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed
7
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to be leveraged for purposes of the limitations placed on the extent of the
Fund's assets that may be used for borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act . As a result, a Fund's investment in
these structured products may be limited by the restrictions contained in the
1940 Act. See "Other Investment Companies" below. Structured products are
typically sold in private placement transactions, and there currently is no
active trading market for structured products. As a result, certain structured
products in which the Funds invest may be deemed illiquid and subject to the 15%
limitation described below under "Illiquid Securities."
DEPOSITORY RECEIPTS AND DEPOSITORY SHARES . The Funds, except the U.S.
Government Securities Fund, may invest in American Depository Receipts ("ADRs")
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 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.
REVERSE REPURCHASE AGREEMENTS . The Funds may borrow by entering into reverse
repurchase agreements. Pursuant to such agreements, a Fund would sell portfolio
securities to financial institutions, such as banks and broker-dealers, and
agree to repurchase them at an agreed upon date, price and interest payment.
When effecting reverse repurchase transactions, securities of a dollar amount
equal in value to the securities subject to the agreement will be maintained in
a segregated account with the Fund's custodian. A reverse repurchase agreement
involves the risk that the market value of the portfolio securities sold by a
Fund may decline below the price of the securities the Fund is obligated to
repurchase, which price is fixed at the time the Fund enters into such
agreement.
SECURITIES LOANS, REPURCHASE AGREEMENTS, WHEN-ISSUED AND FORWARD COMMITMENTS
TRANSACTIONS . The Fund may lend portfolio securities in an amount up to 30% of
its assets to broker-dealers, major banks or other recognized domestic
institutional borrowers of securities. The Fund may also enter into repurchase
agreements with dealers, domestic banks or recognized financial institutions
which, in the opinion of the Adviser, present minimal credit risks. These
transactions must be fully collateralized at all times, but involve some risk to
the Fund if the other party should default on its obligations and the Fund is
delayed or prevented from recovering the collateral. The Fund may also purchase
securities on a when-issued basis or for future delivery, which may increase its
overall investment exposure and involves a risk of loss if the value of the
securities declines prior to the settlement date.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS . The Funds
may invest in zero coupon securities and pay-in-kind bonds. 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. When a zero coupon security is held to maturity, its entire return,
which consists of the amortization of discount, comes from the difference
between its purchase price and its maturity value. This difference is known at
the time of purchase, so that investors holding zero coupon securities until
maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. The 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 Funds 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
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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. 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.
ILLIQUID SECURITIES . No Fund will invest more than 15% of the value of its net
assets in illiquid securities, including securities which are not readily
marketable, time deposits and repurchase agreements not terminable within seven
days. Illiquid assets are assets which may not be sold or disposed of in the
ordinary course of business within seven days at approximately the value at
which a Fund has valued the investment. Securities that have readily available
market quotations are not deemed illiquid for purposes of this limitation
(irrespective of any legal or contractual restrictions on resale). The Funds may
purchase securities that are not registered under the Securities Act of 1933, as
amended, but which can be sold to qualified institutional buyers in accordance
with Rule 144A under that Act ("Rule 144A securities"). Rule 144A securities
generally must be sold to other qualified institutional buyers. If a particular
investment in Rule 144A securities is not determined to be liquid, that
investment will be included within the 15% limitation on investment in illiquid
securities. The ability to sell Rule 144A securities to qualified institutional
buyers is a recent development and it is not possible to predict how this market
will mature. The Funds may also invest in commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as the Funds who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other institutional
investors like the Funds through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus providing
liquidity. The Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES . Pursuant to an exemptive order from the
Commission, the Total Return Fund may purchase shares of any existing or future
series of the Company. The Fund will invest all or a portion of its assets in
shares of the underlying funds. Allocations of the Total Return Fund's assets
among underlying funds will be made in accordance with the Total Return Fund's
investment objective. The underlying funds in which the Total Return Fund may
presently invest along with their respective investment objectives are listed
below:
(1) OFFITBANK VIF-U.S. GOVERNMENT SECURITIES FUND: The investment objective
of the U.S. Government Securities Fund is to seek current income consistent
with preservation of capital. The Fund seeks to achieve its objective by
investing, under normal circumstances, at least 80% of its total assets in
U.S. Government Obligations.
(2) OFFITBANK VIF-HIGH YIELD FUND: The High Yield Fund seeks high current
income with capital appreciation as a secondary objective. The Fund
invests, under normal circumstances, at least 65% of its total assets in
U.S. corporate fixed income securities rated below investment grade
offering potential returns that are sufficiently high to justify the
greater investment risks.
(3) OFFITBANK VIF-EMERGING MARKETS FUND: The Emerging Markets Fund seeks to
provide investors with a competitive total investment return by focusing on
current yield and opportunities for capital appreciation primarily by
investing 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, but may invest up to 20% of its total
assets in equity securities.
The Total Return Fund reserves the right to invest up to 10% of its total assets
in the securities of investment companies other than the underlying funds
("unaffiliated funds"). The Total Return Fund may not invest more than 5% of its
total assets in the securities of any one unaffiliated fund or acquire more than
3% of the voting securities of any unaffiliated fund. The Total Return Fund does
not intend to invest in unaffiliated funds unless, in the judgment of the
Adviser, the potential benefits of such investment justify the payment of any
premium to net asset
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value of the unaffiliated fund or any sales charge. The Total Return Fund will
indirectly bear its proportionate share of any management fees and other
expenses paid by unaffiliated funds in which it invests in addition to the
advisory fee paid by the Total Return Fund.
The U.S. Government Securities Fund, High Yield Fund and Emerging Markets Fund
may each invest up to 10% of their respective total assets in the securities of
other investment companies. The Funds may not invest more than 5% of their
respective total assets in the securities of any one investment company or
acquire more than 3% of the voting securities of any other investment company.
The Funds do not intend to invest in other 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 any sales
charge. Each Fund will indirectly bear its proportionate share of any management
fees and other expenses paid by investment companies in which it invests in
addition to the advisory fee paid by the Fund.
TEMPORARY STRATEGIES . Each Fund retains the flexibility to respond promptly to
changes in market and economic conditions. Accordingly, consistent with each
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 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.
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.
PORTFOLIO TURNOVER . The Funds will not trade in securities with the intention
of generating short-term profits but, when circumstances warrant, securities may
be sold without regard to the length of time held. Because emerging markets can
be especially volatile, securities of emerging markets countries may at times be
held only briefly. It is not anticipated that, under normal conditions, the
portfolio turnover rates for the Total Return Fund, High Yield Fund, Emerging
Markets Fund and U.S. Government Securities Fund will exceed 100% , 75%, 200%
and 100%, respectively, in any one year. A high rate of portfolio turnover (100%
or more) involves correspondingly greater brokerage commission expenses and/or
markups and markdowns, which will be borne directly by the Fund and indirectly
by the Fund's shareholders. High portfolio turnover may also result in the
realization of substantial net capital gains.
CONVERTIBLE SECURITIES. The High Yield Fund and Emerging Market Fund may invest
in convertible securities, which are bonds, debentures, notes, preferred stocks
or other securities that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest generally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have several unique investment
characteristics such as (1) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (2) a lesser degree of fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (3) the potential for capital appreciation if the market price of the
underlying common stock increases.
The Funds have no current intention of converting any convertible securities
they may own into equity securities or holding them as an equity investment upon
conversion, although they may do so for temporary purposes. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by a Fund is called for redemption, such Fund may be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
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U.S. MUNICIPAL SECURITIES. In circumstances where the Adviser determines that
investment in U.S. dollar- denominated municipal obligations would facilitate
the High Yield Fund's ability to accomplish its investment objectives, the Fund
may invest in such obligations, including municipal bonds issued at a discount.
SPECIAL RISK CONSIDERATIONS
GENERAL
Each Fund's net asset value will fluctuate, reflecting fluctuations in the
market value of its portfolio positions and its net currency exposure. In
addition, to the extent that the Total Return Fund holds shares of the
underlying funds the Total Return Fund will be subject to the same risks as
those funds. The value of the securities held by the Funds generally fluctuates,
to varying degrees, based on, among other things, (1) interest rate movements,
(2) changes in the actual and perceived creditworthiness of the issuers of such
securities, (3) changes in any applicable foreign currency exchange rates, (4)
social, economic or political factors, (5) factors affecting the industry in
which the issuer operates, such as competition or technological advances and (6)
factors affecting the issuer directly, such as management changes or labor
relations. There is no assurance that the Funds will achieve their investment
objectives .
NON-DIVERSIFIED FUND
Each 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. Thus, the
Funds may invest a greater proportion of their respective 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 their portfolio securities as compared to a
diversified fund. Each Fund, however, intends to comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended, (the
"Code") applicable to segregated asset accounts underlying variable products
under section 817(h) of the Code and to regulated investment companies under
Subchapter M of the Code.
FOREIGN SECURITIES
Most of the assets of the Emerging Markets Fund will be invested in the
securities of non-U.S. issuers. A portion of the assets of the High Yield Fund
and Total Return Fund may also be invested in the securities of non- U.S.
issuers. The U.S. Government Securities Fund, however, may not invest in the
securities of non-U.S. issuers. Investors should recognize that investing in
securities of non-U.S. issuers involves certain risks and special
considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. issuers. Further, certain
investments that the Fund may make, and investment techniques in which they may
engage, involve risks, including those set forth below.
SOCIAL, POLITICAL AND ECONOMIC FACTORS . Many countries in which the Funds will
invest 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 a Fund's assets.
Individual foreign economies in general 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 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
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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 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 purchases 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 the Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, the Funds were unable to distribute
substantially all of its net investment income and long-term capital gains
within applicable time periods, the Funds could be subject to U.S. federal
income and excise taxes which would not otherwise be incurred and may cease to
qualify for the favorable tax treatment afforded to regulated investment
companies under the Code, in which case it would become subject to U.S. federal
income tax on all of its income and gains.
CURRENCY FLUCTUATIONS . Because the Total Return Fund and High Yield Fund may
invest a portion of their respective assets, and the Emerging Markets Fund may
invest a substantial portion of its assets, in the securities of foreign 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 each Fund's
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of each
Fund's holdings of securities denominated in such currency and, therefore, will
cause an overall decline in the Fund's net asset value and any net investment
income and capital gains to be distributed in U.S. dollars to shareholders of
the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.
Although the Funds value their assets daily in terms of U.S. dollars, the Funds
do not intend to convert their holdings of foreign currencies into U.S. dollars
on a daily basis. Each Fund will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.
INFLATION . Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and emerging
market countries in particular. In an attempt to control inflation, wage and
price controls have been imposed at times in certain countries.
MARKET CHARACTERISTICS; DIFFERENCES IN SECURITIES MARKETS . The securities
markets in many countries, and in emerging markets 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 emerging market
countries, to the extent that established securities markets even exist, are in
the earlier stages of their
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development. A high proportion of the shares of many foreign companies may be
held by a limited number of persons, which may limit the number of shares
available for investment by the Funds . A limited number of issuers in most, if
not all, of these securities markets may represent a disproportionately large
percentage of market capitalization and trading volume. In addition, the
application of certain 1940 Act provisions may limit the Funds' ability to
invest in certain non-U.S. issuers and to participate in public offerings in
these countries. The limited liquidity of certain non-U.S. securities markets
may also affect the Funds' ability to acquire or dispose of securities at the
price and time it wishes to do so.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country may trade at price-earning multiples higher than those of comparable
companies trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
Trading practices in certain foreign securities markets are also significantly
different from those in the United States. Brokerage commissions and other
transaction costs on the securities exchanges in many countries are generally
higher than in the United States. In addition, securities settlements and
clearance procedures in certain countries, and, in particular, 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 and
could experience a loss if a counterparty defaults. Delays in settlement could
result in temporary periods when assets of a Fund are uninvested and no return
is earned thereon. The inability of a 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 Funds 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 Funds , in which event the Funds may
be precluded from purchasing securities in which they would otherwise invest,
and other banks that are eligible subcustodians may be recently organized or
otherwise lack extensive operating experience. At present, custody arrangements
complying with the requirements of the Commission are available in each of the
countries in which the Adviser intends to invest. In certain countries in which
the Funds may make investments, there may be legal restrictions or limitations
on the ability of the Funds to recover assets held in custody by subcustodians
in the event of the bankruptcy of the subcustodian.
GOVERNMENT SUPERVISION; LEGAL SYSTEMS . Disclosure and regulatory standards in
certain foreign countries, including 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.
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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.
In addition to the foreign securities listed above, the Funds may also invest in
foreign sovereign debt securities, which involve certain additional risks. See
"Sovereign Debt Securities" below.
HIGH YIELD SECURITIES
GENERAL . The Funds, except the U.S. Government Securities Fund, may invest all
or a portion of their respective assets in high yield, high risk debt
securities, commonly referred to as "junk bonds." Securities rated below
investment grade and comparable unrated securities offer yields that fluctuate
over time, but generally are superior to the yields offered by higher rated
securities. However, securities rated below investment grade also involve
greater risks 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 CCC or lower by S&P
or D&P). Under rating agency guidelines, these securities are considered to have
extremely poor prospects of ever attaining any real investment 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
each Fund's ability to dispose of particular portfolio investments and may limit
its ability to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Fund is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Company's Board of Directors to value 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 Funds
may invest up to 15% of their respective 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 each Fund's portfolio may become
illiquid and the proportion of the Fund's assets invested in illiquid securities
may increase.
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The ratings of fixed income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
CORPORATE DEBT SECURITIES . While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them, so
that their ability to service their debt obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. The risk
of loss due to default in payment of interest or principal by such issuers is
significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
Many fixed income securities, including certain U.S. corporate fixed income
securities in which the Funds may invest, contain call or buy-back features
which permit the issuer of the security to call or repurchase it. Such
securities may present risks based on payment expectations. If an issuer
exercises such a "call option" and redeems the security, the Funds may have to
replace the called security with a lower yielding security, resulting in a
decreased rate of return for the Funds .
SOVEREIGN DEBT SECURITIES . Investing in sovereign debt securities will expose
the Funds, including the U.S. Government Securities Fund, to the direct or
indirect consequences of political, social or economic changes in the developing
and emerging countries 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. 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 U.S. 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.
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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 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 Funds, except
the U.S. Government Securities Fund, may also invest in foreign corporate
securities. For a discussion of such securities and their associated risks, see
"Foreign Securities" above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
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 Other Strategic
Transactions"). Currently, each 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. Each 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.
A discussion of the risks associated with Hedging and Other Strategic
Transactions follows below. The Funds will not be obligated, however, to pursue
any of such 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, each Fund's ability to pursue certain of these strategies may be
limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools. To the extent not otherwise
restricted by the Commission, the CFTC, the Code or its investment objective and
policies, the Funds may utilize, without limitation, Hedging and Other Strategic
Transactions. For further information see "Additional Information on Investment
Policies and Techniques - Hedging and Other Strategic Transactions" and
"Additional Information Concerning Taxes" in the Statement of Additional
Information.
IN GENERAL . Subject to the constraints described above, the Funds may (if and
to the extent so authorized) 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, and enter into financial futures contracts, interest rate
transactions and currency transactions (collectively, these transactions are
referred to in this Prospectus as "Hedging and Other Strategic Transactions").
The Funds' interest rate transactions may take the form of swaps, caps, floors
and collars, and the Funds' currency transactions may take the form of currency
forward contracts, currency futures contracts, currency swaps and options on
currencies or currency futures contracts.
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Hedging and Other Strategic Transactions may generally be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by the Funds resulting from securities markets or currency exchange
rate fluctuations, to protect the Funds' unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The Funds may use any or all types
of Hedging and Other Strategic Transactions which they are 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 Other Strategic
Transaction will be a function of numerous variables, including market
conditions. The ability of the Funds to utilize Hedging and Other Strategic
Transactions 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 Funds'
securities. The Funds are not "commodity pools" (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 Other Strategic Transactions 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 Funds 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 Other Strategic
Transactions will require that the Funds segregate cash, U.S. government
securities or other liquid high grade debt obligations to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. A detailed discussion of various
Hedging and Other Strategic Transactions, including applicable regulations of
the CFTC and the requirement to segregate assets with respect to these
transactions, appears in the Statement of Additional Information.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS . Hedging and Other Strategic
Transactions 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 Other Strategic Transactions could result in losses
greater than if they had not been used. Use of put and call options could result
in losses to the Funds , 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 the Funds' 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 Funds 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 Funds 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 Funds are 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 Funds if they
are unable to deliver or receive currency or monies in settlement of obligations
and could also cause hedges they have
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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 Other Strategic Transactions will
reduce each Fund's net asset value, and possibly income, and the losses can be
greater than if Hedging and Other Strategic Transactions had not been used.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES .
When conducted outside the United States, Hedging and Other Strategic
Transactions 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 Other Strategic Transactions 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 each 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 Other
Strategic Transactions by the Total Return Fund, High Yield Fund and Emerging
Markets Fund will require, among other things, that the Funds segregate cash,
liquid high grade debt obligations or other assets with its custodian, or a
designated sub-custodian, to the extent each 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 Funds 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 high grade debt
obligations 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 high grade debt obligations
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 high grade debt
obligations 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 high grade debt obligations 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 the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
OTC options entered into by the Funds , 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 Funds will not
be required to do so. As a result, when each 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 Funds other than those
described above generally settle with physical delivery, and the Funds 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 Funds
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
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contract. These assets may consist of cash, cash equivalents, liquid high grade
debt securities or other acceptable assets. The Funds 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 high
grade debt obligations having an aggregate value equal to at least the accrued
excess. Caps, floors and collars require segregation of assets with a value
equal to each Fund's net obligation, if any.
Hedging and Other Strategic Transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. Each
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 Other Strategic Transactions. Each 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, each 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 Other Strategic Transactions 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.
INTEREST RATE FLUCTUATIONS AND CREDIT RISK. The performance of the Funds,
especially the U.S. Government Securities Fund, depends in part on interest rate
changes. As interest rates increase, the value of the fixed income securities
held by the Funds tend to decrease. This effect will be more pronounced with
respect to investments by the Funds in mortgage-related securities, the value of
which are more sensitive to interest rate changes. There is no restriction on
the maturity of the portfolios of the Funds or any individual portfolio
security, and to the extent each 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 quality of its investments. While U.S. Government securities
generally are of high quality, government securities that are not backed by the
full faith and credit of the U.S. Treasury may be affected by changes in the
creditworthiness of the agency that issued them. Guarantees of principal and
interest on obligations that may be purchased by the Funds are not guarantees of
the market value of such obligations, nor do they extend to the value of shares
of the Funds. Other fixed-income securities in which the Funds may invest, while
of investment-grade quality, may be of lesser credit quality than U.S.
Government securities.
CONCENTRATION
Under normal market conditions, the Emerging Markets Fund may invest greater
than 25% of its assets in securities of issuers whose primary business activity
is in the banking industry. Banks are subject to extensive government
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 financial difficulties of borrowers might
affect a bank's ability to meet its obligations. 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 obligations. For a
discussion of additional risks, see "Foreign Securities" above.
LIMITING INVESTMENT RISKS
To further protect investors, the Total Return Fund has adopted the following
investment limitations:
1. The Total Return Fund may not invest 25% or more of the value of its
total assets in securities of issuers in any one industry; provided
that there is no limitation with respect to investment in obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
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2. The Total Return 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 its total assets.
3. The Total Return Fund may not invest an amount equal to 15% or more of
the current value of its net assets in investments that are illiquid.
The foregoing investment limitations and certain of those described in the
Statement of Additional Information under "Investment Limitations" are
fundamental policies of the Total Return Fund that may be changed only when
permitted by law and approved by the holders of a "majority" of the Fund's
outstanding shares. If a percentage restriction on investment or use of assets
contained in these investment limitations or elsewhere in this Prospectus or
Statement of Additional Information is adhered to at the time a transaction is
effected, later changes in percentage resulting from any cause other than
actions by the Fund will not be considered a violation; provided, that the
restrictions on borrowing described in (2) above shall apply at all times. As
used in this Prospectus and in the Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting the Fund (e.g., approval of investment
advisory contracts), means the vote of the lesser of (i) 67% of the shares of
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. Shareholders are entitled to one
vote for each full share held and to fractional votes for fractional shares
held.
DESCRIPTION OF THE UNDERLYING FUNDS
THE U.S. GOVERNMENT SECURITIES FUND. The investment objective of the U.S.
Government Securities Fund is to seek current income consistent with
preservation of capital. The Fund seeks to achieve its objective by investing,
under normal circumstances, at least 80% of its total assets in U.S. Government
obligations. 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. Any Fund investments denominated in any foreign
currency will be hedged against fluctuations in value versus the U.S. dollar.
Obligations of the U.S. Government in which the Fund may invest are in two broad
categories and include the following: (a) direct obligations of the U.S.
Treasury, which differ only in their interest rates, maturities and times of
issuance, including U.S. Treasury Bills (maturities of one year or less), U.S.
Treasury Notes (maturities of one to ten years), and U.S. Treasury Bonds
(generally, maturities greater than ten years); and (b) obligations issued or
guaranteed by the agencies or instrumentalities of the U.S. Government which are
supported by: (i) the full faith and credit of the U.S. Government (e.g.,
Government National Mortgage Association ("GNMA") Certificates, See below); (ii)
the right of the issuer to borrow an amount limited to a specific amount of
credit from the U.S. Government; (iii) the credit of the instrumentality (e.g.,
bonds issued by the Federal National Mortgage Association ("FNMA")); or (iv) the
discretionary authority of the U.S. Government to purchase certain obligations
of U.S. Government agencies or instrumentalities (collectively, "Government
Securities").
Government Securities of the type in which the Fund may invest have historically
involved little risk of principal if held to maturity. The Government's
guarantee of the securities in the Fund, however, does not guarantee the net
asset value of the shares of the Fund. There are market risks inherent in all
investments in securities and the value of an investment in the Fund will
fluctuate over time. 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. Because of
these factors, the Fund's share value and yield are not guaranteed and will
fluctuate. The magnitude of these fluctuations generally will be greater when
the average maturity of the Fund's portfolio securities is longer.
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.
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Up to 20% of the Fund may be allocated to the sovereign obligations and other
fixed income securities, in each case denominated in non-U.S. currencies or
composite currencies, 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; and debt obligations of the U.S.
Government issued in non-dollar securities.
THE HIGH YIELD FUND. The High Yield Fund's primary investment objective is high
current income. Capital appreciation is a secondary objective. The Fund will
seek 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 and are generally perceived
by the marketplace to be high yield/high risk securities, commonly referred to
as "junk bonds." In addition, the Fund will seek to invest in debt securities
which are (i) "seasoned" senior securities, i.e. any security whose issuers have
been operating in their current form for a considerable period of time, and
offer sufficiently high potential yields to justify the greater investment risk,
(ii) judged by the Adviser to be more creditworthy than generally perceived in
the marketplace, or (iii) issued by once creditworthy companies that are now
considered a high risk investment generally due to changing industry conditions,
a change in company capitalization or a reduction of earning power. The Fund
will seek capital appreciation opportunities in those special situations in
which an issuer's senior securities sell at a substantial discount in relation
to their liquidation value, or in which the creditworthiness of an issuer is
believed, in the judgment of the Adviser, to be improving. For purposes of this
Prospectus, a "senior" security of an issuer is any security entitled to
preference over the issuer's common stock in the distribution of income or
assets upon liquidation.
The higher yields sought by the High Yield Fund are generally obtainable from
non-investment grade securities (i.e., rated BB or lower by S&P or D&P, or Ba or
lower by Moody's, or if unrated, of equivalent quality as determined by the
Adviser). See Appendix A to this Prospectus for a description of ratings of S&P,
Moody's and D&P. Investments in high yield, high risk debt securities involve
comparatively greater risks, including price volatility and the risk of default
in the timely payment of interest and principal, than higher rated securities.
Some of such investments may be non-performing when purchased. See "Special Risk
Considerations."
Although the High Yield Fund's investments are primarily in U.S. corporate
securities, it may also invest in foreign corporate debt securities, sovereign
debt, municipal securities and mortgage-backed debt having many of the
characteristics of its corporate portfolio. 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.
THE EMERGING MARKETS FUND. The investment objective of the Emerging Markets
Fund is to provide a competitive total investment return by focusing on current
yield and opportunities for capital appreciation. The Fund will seek to achieve
its objective by investing primarily in corporate and sovereign debt instruments
of emerging market countries. Under normal circumstances, the Fund will invest
at least 80% of its total assets in debt instruments, but may invest up to 20%
of its total assets in equity securities. As used in this Prospectus, an
"emerging market country" is any country that is considered to be an emerging or
developing country by the International Bank for Reconstruction and Development
(the "World Bank") or the International Finance Corporation, or is determined by
the Adviser to have per capita gross domestic product below $7,500 (in 1994
dollars). Under normal circumstances, the Fund will invest at least 25% of its
total assets in securities of issuers whose primary business activity is in the
banking industry. 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. See "Special Risk Considerations Concentration."
An "emerging market country" debt instrument or equity security, as used in this
Prospectus, means an instrument or security (a) of an issuer organized or with
more than 50% of its business activities in such emerging market country; (b)
denominated in such country's currency or with a primary trading market in such
emerging market country; (c) of a company which derives at least 50% of its
gross revenues from goods produced, sales made, services performed or
investments in such emerging market country; or (d) issued or guaranteed by the
government of such emerging market country, its agencies, political subdivisions
or instrumentalities, or the central bank of such country. Determinations as to
eligibility will be made by the Adviser based on publicly available information
and
21
<PAGE>
inquiries made to companies. See "Special Risk Considerations--Foreign
Securities" in this Prospectus and "Additional Risk Considerations--Non-Uniform
Corporate Disclosure Standards and Governmental Regulation" in the Statement of
Additional Information for a discussion of the nature of publicly available
information for non-U.S.
companies.
Debt Instruments. The Emerging Markets Fund intends to invest in debt
instruments including bonds, notes, bills, debentures, convertible securities,
debt with attached warrants, bank obligations, short-term paper, loan
participations and assignments, trust and partnership interests, money market
instruments and other similar instruments. Such instruments may be issued or
guaranteed by the governments of emerging market countries, their agencies,
instrumentalities or political subdivisions, international organizations or
business entities located in such countries, including financial institutions,
or companies located in emerging market countries that are subsidiaries of
multinational business entities. Such obligations may be payable in U.S.
dollars, Eurocurrencies or other currencies (including currencies of emerging
market countries which may be indexed to the U.S. dollar). The Adviser will be
free to invest in debt securities of any maturity and duration and the interest
rates on such securities may be fixed or floating. The Fund's debt instruments
may or may not be listed or traded on a securities exchange.
In selecting particular debt instruments for the VIF-Emerging Markets Fund, the
Adviser intends to consider factors such as liquidity, price volatility, tax
implications, interest rate sensitivity, foreign currency exchange risks,
counterparty risks and technical market considerations. 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 when purchased. See "Special Risk
Considerations--High Yield Securities."
Equity Securities. The Emerging Markets Fund may invest up to 20% of its total
assets in common stocks, preferred stocks, detachable warrants and other equity
securities that may or may not be listed or traded on a recognized securities
exchange. The Fund intends that such investments in equity securities often will
be related to the Fund's investments in debt instruments, such as those equity
securities received upon the exercise of convertible debt instruments or
attached warrants, or those equity securities acquired pursuant to investment
opportunities deriving from the Fund's activities in emerging market debt
markets. The equity securities purchased by the Fund may include American
Depositary Receipts, European Depositary Receipts and interests in investment
companies.
MANAGEMENT
The business and affairs of the Funds are managed under the general direction
and supervision of the Company's Board of Directors. Each Fund's day-to-day
operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK provides investment advisory services to the Funds pursuant to an
Investment Advisory Agreement with the Company (the "Advisory Agreement").
Subject to such policies as the Company's Board of Directors may determine, the
Adviser makes investment decisions for the Funds .
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive an advisory fee from the Total Return Fund, computed
daily and paid monthly, at the annual rate of 0.80% of the Fund's average daily
net assets. The advisory fee paid by the Total Return Fund is only with respect
to that portion of the Fund's assets invested directly in stocks, bonds, and
other instruments. The Adviser will waive its fee with respect to the portion of
the Total Return Fund's assets invested in the underlying funds. To the extent
that the Total Return Fund invests in the underlying funds, the Fund will
indirectly bear a pro rata share of fees and expenses incurred by the underlying
funds and the investment returns of the Total Return Fund will be net of the
expenses of the underlying funds.
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The investment advisory agreements for the underlying funds provide that, as
compensation for services, the Adviser is entitled to receive from each
underlying fund a monthly fee at the following annual rates based upon the
average daily net assets of the underlying fund: 0.85% for the first
$200,000,000 of assets and 0.75% for amounts in excess thereof in the case of
the High Yield Fund, 0.90% for the first $200,000,000 of assets and 0.80% for
amounts in excess thereof in the case of the Emerging Markets Fund, and 0.40% of
the average daily net assets of the U.S. Government Securities Fund. The
investment advisory fee for each underlying fund is higher than that paid by
most investment companies, but is comparable to that paid by other investment
companies that have strategies focusing on high yield and international
investments.
The Adviser is a New York State chartered trust company. Under its charter, the
Adviser may neither accept deposits nor make loans except for deposits or loans
arising directly from its exercise of the fiduciary powers granted it under the
New York Banking Law. The Adviser's principal business is the rendering of
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. The Adviser specializes
in fixed income management and offers its clients a complete range of fixed
income investments in capital markets throughout the world. The Adviser
currently manages in excess of $6 billion in assets and serves as investment
adviser to fifteen other registered investment companies (or portfolios
thereof).
PORTFOLIO MANAGER. Jack T. Burks will serve as the portfolio manager for the
Total Return Fund. Mr. Burks is a Managing Director of the Adviser and has been
associated with the Adviser since 1984.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
Bisys Fund Services, Inc. ("Bisys") serves as the Company's administrator and
generally assists the Company in all aspects of its administration and
operation. The Bank of New York serves as custodian of the assets of the Total
Return Fund. Bisys also provides transfer agency services and dividend
disbursing services for the Total Return Fund. The principal business addresses
of Bisys and The Bank of New York are: 125 West 55th Street , New York, New York
10019 and 90 Washington Street, New York, New York 10286 , respectively.
ABOUT YOUR INVESTMENT
Shares of the Total Return Fund are offered on a continuous basis directly by
OFFIT Funds Distributor, Inc., the Fund's Principal Underwriter, to the Accounts
without any sales or other charge, at the Fund's net asset value on each day on
which the New York Stock Exchange ("NYSE") is open for business. The Company
will effect orders to purchase or redeem shares of the Fund, that are based on
premium payments, surrender and transfer requests and any other transaction
requests from Contract and Policy Owners, annuitants and beneficiaries, at the
Fund's net asset value per share next computed after the Account receives such
transaction request. Any orders to purchase or redeem Fund shares that are not
based on actions by Contract or Policy Owners, annuitants, and beneficiaries
will be effected at the Fund's net asset value per share next computed after the
order is received by the Distributor. The Fund reserves the right to suspend the
sale of the Fund's shares in response to conditions in the securities markets or
for other reasons.
Individuals may not place orders directly with the Total Return Fund. Please
refer to the appropriate Account Prospectus of the Participating Company for
more information on the purchase of Portfolio shares.
REDEMPTION OF SHARES
An Account may redeem all or any portion of the shares of the Total Return Fund
in its account at any time at the net asset value per share of the Fu nd
calculated in the manner described above. Shares redeemed are entitled to earn
dividends, if any, up to and including the day redemption is effected. There is
no redemption charge. Payment of the redemption price will normally be made
within seven days after receipt of such tender for redemption.
The right of redemption may be suspended or the date of payment may be postponed
for any period during which the NYSE is closed (other than customary weekend and
holiday closings) or during which the SEC determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
SEC) exists as a result of which disposal by the Total Return Fund of securities
is not reasonably practicable or as a result of which it is not reasonably
practicable for the Company fairly to determine the value of the Fund's net
assets, or for such other periods as the SEC may by order permit for the
protection of security holders of the Company.
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EXCHANGE PRIVILEGE
A Contract or Policy Owner investing through an Account may exchange shares of
the Total Return Fund for shares of any of the other investment portfolios of
the Company on the basis of their respective net asset values.
HOW THE COMPANY VALUES ITS SHARES
The net asset value per share of the Total Return Fund is calculated once daily
at 4:15 p.m., New York time, Monday through Friday, each day the NYSE is open .
The net asset value per share of the Fund is computed by dividing the value of
the net assets of the Fund by the total number of Fund shares outstanding.
Equity securities held by the Fund are valued at the last sale price on the
exchange or in the principal over-the-counter market in which such securities
are traded, as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. Debt securities
held by the Fund generally are valued based on quoted bid prices. Short-term
debt investments having maturities of 60 days or less are amortized to maturity
based on their cost, and if applicable, adjusted for foreign exchange
translation. Foreign securities are valued on the basis of quotations from the
primary market in which they are traded and are translated from the local
currency into U.S. dollars using prevailing exchange rates.
Securities for which market quotations are not readily available are valued at
fair value determined in good faith by or under the direction of the Company's
Board of Directors (as may be delegated from time to time to a pricing committee
designated by the Board of Directors). Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics.
HOW DISTRIBUTIONS ARE MADE: TAX INFORMATION
DISTRIBUTIONS
The Total Return Fund will declare and distribute dividends from net investment
income and will distribute its net capital gains, if any, at least annually.
Such income and capital gains distributions will be made in shares of the Fund.
TAX MATTERS
THE TOTAL RETURN FUND . The Total Return Fund intends to qualify as a regulated
investment company by satisfying the requirements under Subchapter M of the
Internal Revenue Code, as amended (the "Code"), concerning the diversification
of assets, distribution of income, and sources of income. When the Fund
qualifies as a regulated investment company and all of its taxable income is
distributed in accordance with the timing requirements imposed by the Code, the
Fund will not be subject to Federal income tax. If, however, for any taxable
year the Fund does not qualify as a regulated investment company, then all of
its taxable income will be subject to tax at regular corporate rates (without
any deduction for distributions to the Accounts), and the receipt of such
distributions will be taxable to the extent that the Fund has current and
accumulated earnings and profits.
FUND DISTRIBUTIONS . Distributions by the Total Return Fund are taxable, if at
all, to the Accounts, and not to Contract or Policy Owners. An Account will
include distributions in its taxable income in the year in which they are
received (whether paid in cash or reinvested), or deemed to be received in
accordance with certain provisions of the Code.
SHARE REDEMPTIONS . Redemptions of the shares held by the Accounts generally
will not result in gain or loss for the Accounts and will not result in gain or
loss for the Contract or Policy Owners.
SUMMARY . The foregoing discussion of Federal income tax consequences is based
on tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuity contracts,
respectively, under the Code. If the foregoing requirements are not met, then
the Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
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Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of the Total Return Fund are the
investment vehicle, reports that will include, among other things, the Company's
unaudited semi-annual financial statements and year-end financial statements
audited by the Company's independent accountants. Each report will show the
investments owned by the Fund and will provide other information about the Fund
and its operations. It is expected that the Company will pay a portion of the
cost of preparing certain of these reports. Contract and Policy Owners may
obtain information about their investment on any business day by calling
toll-free 1-800-618-9510 between 8:15 a.m. and 6:00 p.m., New York time.
Specially trained representatives will answer questions and provide information
about Contract and Policy Owners' accounts.
Each Account owning shares of the Total Return Fund will vote its shares in
accordance with instructions received from Contract or Policy Owners, annuitants
and beneficiaries. Fund shares held by an Account as to which no instructions
have been received will be voted for or against any proposition, or in
abstention, in the same proportion as the shares of that Account as to which
instructions have been received. Fund shares held by an Account that are not
attributable to Contracts or Policies will also be voted for or against any
proposition in the same proportion as the shares for which voting instructions
are received by the Account. If the Participating Insurance Company determines,
however, that it is permitted to vote any such shares of the Fund in its own
right, it may elect to do so, subject to the then current interpretation of the
1940 Act and the rules thereunder.
PERFORMANCE INFORMATION
From time to time the Total Return Fund may advertise certain information about
its performance. The Fund may present standardized and nonstandardized total
return in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Fund may make available information as to its
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Total Return Fund may be quoted and compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Fund published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A. Today or The New York Times or other industry or
financial publications.
The Total Return Fund's performance information is historical, will fluctuate
and should not be considered as representative of future results. The
Commission's formulas for calculating performance are described under
"Performance Information" in the Statement of Additional Information. Quotations
of the Fund's performance will not reflect charges levied at the Account level.
COUNSEL; INDEPENDENT ACCOUNTANTS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York, serves
as counsel to the Company. Price Waterhouse LLP serves as the independent
accountants to the Company. Price Waterhouse LLP is located at 1177 Avenue of
the Americas, New York, New York 10036.
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APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which the Fund
may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
uture cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterize
bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
nvestment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
A-1
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S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
A-2
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DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
A-3
<PAGE>
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative source s of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
------------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether the Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-4
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
237 Park Avenue, Suite 910
New York, New York 10017
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
________ __, 1997
The OFFITBANK Variable Insurance Fund, Inc. (the "Company") is a no load mutual
fund consisting of eight portfolios whose shares are available to participating
life insurance companies ("Participating Companies") and their separate accounts
("Accounts") to fund benefits under variable annuity contracts ("Contracts") and
variable life insurance policies ("Policies") issued by the Participating
Companies. The portfolios are OFFITBANK VIF-High Yield Fund, OFFITBANK
VIF-Investment Grade Global Debt Fund, OFFITBANK VIF- Emerging Markets Fund,
OFFITBANK - DJG Value Equity Fund, OFFITBANK VIF-U.S. Government Securities
Fund, OFFITBANK VIF-U.S. Small Cap Fund, OFFITBANK VIF- Global Convertible Fund
Income Fund and OFFITBANK VIF-Total Return Fund. This Statement of Additional
Information sets forth information about the Company applicable to the following
portfolio only: OFFITBANK VIF-Total Return Bond Fund ( the "Total Return Fund").
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Company's
Prospectus dated ________ __, 1997 (the "Prospectus"). This Statement of
Additional Information contains additional information to that set forth in the
Prospectus and should be read in conjunction with the Prospectus, additional
copies of which may be obtained without charge by writing or calling the Company
at the address and telephone number set forth above.
<PAGE>
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TABLE OF CONTENTS
PAGE
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND TECHNIQUES..................................................... 2
ADDITIONAL RISK CONSIDERATIONS..................................... 16
INVESTMENT LIMITATIONS............................................. 18
MANAGEMENT OF THE FUND............................................. 20
PORTFOLIO TRANSACTIONS............................................. 26
PURCHASE OF SHARES................................................. 27
REDEMPTION OF SHARES............................................... 27
PERFORMANCE CALCULATIONS........................................... 27
ADDITIONAL INFORMATION CONCERNING TAXES............................ 29
DETERMINATION OF NET ASSET VALUE................................... 30
GENERAL INFORMATION................................................ 31
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND
TECHNIQUES
The Total Return Fund's investment objective is to maximize total return from a
combination of capital appreciation and current income. The Total Return Fund
will seek to achieve its objective by investing primarily in a diversified
portfolio of fixed-income securities of varying maturities and by giving
OFFITBANK, the Fund's investment adviser (the "Adviser"), broad discretion to
deploy the Total Return Fund's assets among certain segments of the fixed-income
market that the Adviser believes will best contribute to the achievement of the
Total Return Fund's objective. The Total Return Fund may invest directly in the
markets and securities described is this prospectus, or indirectly through
investing in the other investment portfolios of the Company, including the
OFFITBANK VIF-U.S. Government Securities Fund (the "U.S. Government Securities
Fund"), the OFFITBANK VIF-High Yield Fund (the "High Yield Fund") and the
OFFITBANK VIF-Emerging Markets Fund (the "Emerging Markets Fund" and
collectively with the Total Return Fund, U.S. Government Securities Fund and
High Yield Fund, the "Funds" and each individually, a "Fund").
There can be no assurance that the Total Return Fund will achieve its objective.
The principal features of the Total Return Fund's investment program and the
primary risks associated with that program are discussed in the Prospectus. The
following discussion of investment policies supplements the discussion of
investment objectives and policies set forth in the Prospectus.
2
<PAGE>
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
OFFITBANK (the "Adviser") based on guidelines established by the Company's Board
of Directors, present minimal credit risks. The Adviser will monitor the value
of the securities underlying the repurchase agreement at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the securities always exceeds the
repurchase price plus accrued interest. In the event of default by the seller
under the repurchase agreement, the Fund may incur costs and experience time
delays in connection with the disposition of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement is a borrowing transaction in which the Fund transfers possession of a
security to another party, such as a bank or broker/dealer, in return for cash,
and agrees to repurchase the security in the future at an agreed upon price,
which includes an interest component. Whenever the Funds enter into reverse
repurchase agreements as described in the Prospectus, they will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained. Reverse repurchase
agreements are considered to be borrowings by the Funds under the 1940 Act.
DOLLAR ROLL TRANSACTIONS
In order to enhance portfolio returns and manage prepayment risks, a Fund may
engage in dollar roll transactions with respect to mortgage securities issued by
GNMA, FNMA and FHLMC. In a dollar roll transaction, the Fund sells a mortgage
security held in the portfolio to a financial institution such as a bank or
broker-dealer, and simultaneously agrees to repurchase a substantially similar
security (same type, coupon and maturity) from the institution at a later date
at an agreed upon price. The mortgage securities that are repurchased will bear
the same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories. During the
period between the sale and repurchase, the Fund will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in short-term instruments, and the income from these
investments, together with any additional fee income received on the sale, could
generate income for the Fund exceeding the yield on the sold security. When the
Fund enters into a dollar roll transaction, cash or liquid securities of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
repurchased, are segregated with its custodian at the trade date. These
securities are marked to market daily and are maintained until the transaction
is settled.
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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 Funds will not pay any additional fee for
such credit support. The existence of credit support may increase the market
price of the security.
4
<PAGE>
MORTGAGE-BACKED SECURITIES
Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations
collateralized by certificates issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, but also may be collateralized by whole loans or private
pass-through securities (such collateral collectively referred to as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid 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, for example, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in 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.
Stripped Mortgage-Backed Securities ("SMBS"). SMBS are derivative multiclass
mortgage securities. SMBS 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.
SMBS 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 SMBS will have at least one class receiving
only a small portion of the principal from the Mortgage Assets, while the other
classes 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 class) while the other class will receive all of the
principal ("PO" or principal-only class). The yield to maturity on an IO class
is extremely sensitive 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 and result in a loss to the investor.
5
<PAGE>
Under the Internal Revenue Code of 1986, as amended, POs may generate taxable
income from the current accrual of original issue discount, without a
corresponding distribution of cash to a Fund. In addition, the Staff of the
United States Securities and Exchange Commission (the "SEC") considers privately
issued SMBS to be illiquid securities.
Mortgage-backed and asset-backed securities are generically considered to be
derivative securities.
DEPOSITORY RECEIPTS
The Funds may hold equity securities of foreign issuers in the form of American
Depository Receipts ("ADRs"), American Depository Shares ("ADSs") and European
Depository Receipts ("EDRs"), or other securities convertible into securities of
eligible issuers. These securities may not necessarily be denominated in the
same currency as the securities for which they may be exchanged. ADRs and ADSs
typically are issued by an American bank or trust company which evidences
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depository Receipts ("CDRs"), are
receipts issued in Europe typically by foreign banks and trust companies that
evidence ownership of either foreign or domestic securities. Generally, ADRs and
ADSs in registered form are designed for use in United States securities markets
and EDRs, and CDRs in bearer form are designed for use in European securities
markets. For purposes of the Fund's investment policies, the Fund's investments
in ADRs, ADSs, EDRs, and CDRs will be deemed to be investments in the equity
securities representing securities of foreign issuers into which they may be
converted.
WARRANTS OR RIGHTS
Warrants or rights may be acquired by a 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 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.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, a 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
6
<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.
UNITED STATES GOVERNMENT OBLIGATIONS
Each Fund will invest in securities issued or guaranteed by the U.S. government
or by its agencies or instrumentalities. Such securities in general include a
wide variety of U.S. Treasury obligations consisting of bills, notes and bonds,
which principally differ only in their interest rates, maturities and times of
issuance. Securities issued or guaranteed by U.S. government agencies and
instrumentalities are debt securities issued by agencies or instrumentalities
established or sponsored by the U.S. government.
In addition to the U.S. Treasury obligations described above, the Funds may
invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(e.g., obligations of the Federal 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.
7
<PAGE>
BANK OBLIGATIONS
As stated in the Prospectus, bank obligations that may be purchased by the Funds
include certificates of deposit, bankers' acceptances and fixed time deposits. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A banker's acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party. The Funds do not consider fixed time
deposits illiquid for purposes of the restriction on investment in illiquid
securities.
Banks are subject to extensive governmental regulations that may limit both the
amounts and types of loans and other financial commitments that may be made and
the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of funding lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by a Fund,
the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by a Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.
The Funds will not purchase securities which the Adviser believes, at the time
of purchase, will be subject to exchange controls or foreign withholding taxes;
however, there can be no assurance that such laws may not become applicable to
certain of the Funds' investments. In the event unforeseen exchange controls or
foreign withholding taxes are imposed with respect to the Funds' investments,
the effect may be to reduce the income received by the Funds on such
investments.
8
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HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Special Risk Considerations - Hedging and
Other Strategic Transactions," each Fund may enter into transactions in options,
futures, and forward contracts on a variety of instruments and indexes, in order
to hedge various market risks, 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. The discussion below supplements the
discussion in the Prospectus.
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 Other Strategic Transactions involving options require
segregation of Fund assets in special accounts, as described below under "Use of
Segregated and Other Special Accounts".
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
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<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.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are determined by
negotiation of the parties. It is anticipated that any Fund authorized to use
OTC options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with a Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the Adviser must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC option will be met. A Fund will enter into
OTC option transactions only with U.S. government securities dealers recognized
by the Federal Reserve Bank of New York as "primary dealers", or broker-dealers,
domestic or foreign banks, or other financial institutions that are deemed
creditworthy by the Adviser. In the absence of a change in the current position
of the staff of the 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.
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If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
If and to the extent authorized to do so, a Fund may purchase and sell call
options on securities and on Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the OTC markets, and on securities indices,
currencies and futures contracts. All calls sold by a Fund must be "covered",
that is, the Fund must own the securities subject to the call, must own an
offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though a Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose the Fund during the term of the option
to possible loss of opportunity to realize appreciation in the market price of
the underlying security or instrument and may require the Fund to hold a
security or instrument that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. In selling put
options, a Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate, currency or market changes, for duration
management and for permissible non-hedging purposes. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale 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
11
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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.
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
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<PAGE>
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. 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".
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<PAGE>
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 Other Strategic Transaction, 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,
the purchase or sale of related caps, floors and collars. A Fund will enter into
these transactions primarily to seek to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. A Fund will use these transactions for non-speculative purposes and will
not sell interest rate caps or floors if it does not own securities or other
instruments providing the income the Fund may be obligated to pay. Interest rate
swaps involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). A currency swap is an agreement to exchange cash flows on a notional
amount based on changes in the values of the reference indices. The purchase of
a cap entitles the purchaser to receive payments on a notional principal amount
from the party selling the cap to the extent that a specified index exceeds a
predetermined interest rate. The purchase of an interest rate floor entitles the
purchaser to receive payments of interest on a notional principal amount from
the party selling the interest rate floor to the extent that a specified index
falls below a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specific index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return with a predetermined range of interest
rates or values.
Provided the contract so permits, a Fund will usually enter into interest rate
swaps on a net basis, that is, the two payments streams are netted out in a cash
settlement on the payment date or dates specified in the instrument, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. A
Fund will not enter into any swap, cap, floor,
14
<PAGE>
collar or other derivative transaction unless the Counterparty is deemed
creditworthy by the Adviser. If a Counterparty defaults, a Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the Adviser based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 15% restriction on investments in securities that are not
readily marketable.
Each Fund will maintain cash and appropriate liquid assets (i.e., high grade
debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If a Fund enters into a swap agreement on a
net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If a
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts".
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, a Fund may make investments in
Eurodollar instruments, which are typically dollar-denominated futures contracts
or options on those contracts that are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
ADDITIONAL RISK CONSIDERATIONS
POLITICAL AND ECONOMIC RISKS
Investing in securities of non-U.S. companies may entail additional risks due to
the potential political and economic instability of certain countries and the
risks of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment and on
15
<PAGE>
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, a Fund could lose its
entire investment in any such country.
ILLIQUID SECURITIES
A Fund may invest up to 15% of its net assets in illiquid securities. See
"Limiting Investment Risks" in the Prospectus. The sale of restricted or
illiquid securities require more time and result in higher brokerage charges or
dealer discounts and other selling expenses than the sale of securities eligible
for trading on securities exchanges or in the over-the-counter markets.
Restricted securities often sell at a price lower than similar securities that
are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, 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.
FOREIGN INVESTMENT RESTRICTIONS
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as the Funds. For example, certain countries require governmental approval
prior to investments by foreign persons, or limit the amount of investment by
foreign persons in a particular company, or limit the investment by foreign
persons to only a specific class of securities of a company that may have less
advantageous terms than securities of the company available for purchase by
nationals. Moreover, the national policies of certain countries may restrict
investment opportunities in issuers or industries deemed sensitive to national
interests. In addition. some countries require governmental approval for the
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors. A Fund could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions on investments.
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<PAGE>
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ in some cases significantly from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the securities held by a Fund will not be
registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by a
Fund than is available concerning U.S. issuers. In instances where the financial
statements of an issuer are not deemed to reflect accurately the financial
situation of the issuer, the Adviser will take appropriate steps to evaluate the
proposed investment, which may include interviews with its management and
consultations with accountants, bankers and other specialists. There is
substantially less publicly available information about foreign companies than
there are reports and ratings published about U.S. companies and the U.S.
government. In addition, where public information is available, it may be less
reliable than such information regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS
Securities of many foreign issuers may be less liquid and their prices more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities exchanges and brokers generally are subject to less governmental
supervision and regulation than in the United States, and foreign securities
exchange transactions usually are subject to fixed commissions, which generally
are higher than negotiated commissions on U.S. transactions. In addition,
foreign securities exchange transactions may be subject to difficulties
associated with the settlement of such transactions. Delays in settlement could
result in temporary periods when assets of a Fund are uninvested and no return
is earned thereon. The inability of a Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive
opportunities. Inability to dispose of a portfolio security due to settlement
problems either could result in losses to a Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. The
Adviser will consider such difficulties when determining the allocation of such
Fund's assets, though the Adviser does not believe that such difficulties will
have a material adverse effect on the Fund's portfolio trading activities.
NON-U.S. WITHHOLDING TAXES
A Fund's net investment income from foreign issuers may be subject to non-U.S.
withholding taxes thereby reducing the Fund's net investment income. See
"Additional Information Concerning Taxes."
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<PAGE>
INVESTMENT LIMITATIONS
In addition to the restrictions described under "Limiting Investment Risks" in
the Prospectus, each Fund may not:
(1) purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase and sell currency forward
contracts, options on foreign currencies and may otherwise engage in
transactions in foreign currencies;
(2) make loans, except that a Fund may (a) (i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in
loans and participations in accordance with its investment
objectives and policies, (b) make loans of portfolio securities and
(c) enter into repurchase agreements with respect to portfolio
securities;
(3) underwrite the securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof
and later disposition of such securities in accordance with a Fund's
investment program may be deemed to be an underwriting;
(4) purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests therein
or securities issued by companies that invest in real estate or
interests therein);
(5) purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5%
of a Fund's net assets in the case of any one other investment
company and 10% of such net assets in the case of all other
investment companies in the aggregate. This restriction shall not
apply to investment company securities received or acquired by a
Fund pursuant to a merger or plan of reorganization;
(6) 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);
(7) sell securities short (except for short positions in a futures
contract or forward contract);
(8) invest for the purpose of exercising control over management of any
company;
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<PAGE>
(9) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases;
(10) pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure permitted borrowings;
(11) 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
(12) invest in puts, calls straddles or spreads, except as described in
(11) 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.
Investment restrictions (1) through (5) described above and those set forth in
the Prospectus under "Limiting Investment Risks" are fundamental policies of the
Funds which may be changed only when permitted by law and approved by the
holders of a majority of a Fund's outstanding voting securities, as described
under "General Information--Capital Stock". Restrictions (7) through (12) are
nonfundamental policies of the Funds, and may be changed by a vote of the
Company's Board of Directors.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the Company
for the past five years are listed below.
NAME AND ADDRESS POSITION(S) PRINCIPAL
HELD WITH OCCUPATION(S)
THE COMPANY PAST 5 YEARS
Morris W. Offit* Chairman of the President and Director,
OFFITBANK Board, President OFFITBANK (1983 - present).
520 Madison Avenue and Director Chairman of the Board, President
New York, NY 10022 and Director of OFFITBANK
Investment Fund, Inc.
Edward J. Landau Director Member, Lowenthal, Landau
Lowenthal, Landau, Fischer & Bring, P.C. (1960 -
Fischer & Bring, P.C. present); Director, Revlon Group
250 Park Avenue Inc. (cosmetics), Revlon Consumer
New York, NY 10177 Products Inc. (cosmetics),
Pittsburgh Annealing Box (metal
fabricating) and Clad Metals Inc.
(cookware).
The Very Reverend Director Dean of Cathedral of St. John the
James Parks Morton Divine (1972 - present)
Cathedral of St.
John the Divine
1047 Madison Avenue
New York, NY 10025
Wallace Mathai-Davis Secretary and Managing Director, OFFITBANK
OFFITBANK Treasurer (1986 - present). Secretary and
520 Madison Avenue Treasurer of OFFITBANK
New York, NY 10017 Investment Fund, Inc.
John J. Pileggi Assistant Treasurer [Title], BISYS Fund Services
BISYS Fund Services (1996-Present) Director, Furman
125 West 55th Street Selz Incorporated (1987 - 1996).
New York, NY 10019 Assistant Treasurer of
OFFITBANK Investment Fund, Inc.
- -----------------
* "Interested person" as defined in the 1940 Act.
The Board of Directors has designated an audit committee to advise the full
Board with respect to accounting, auditing and financial matters affecting the
Company. The Audit Committee is comprised of Mr. Landau and The Very Reverend
Morton and meets periodically.
The Company pays each Director who is not also an officer or affiliated person
an annual fee of $3,000 and a fee of $500 for each Board of Directors and Board
committee meeting attended and are reimbursed for all out-of-pocket expenses
relating to attendance at meetings. Directors who are affiliated with the
Adviser do not receive compensation from the Company but are reimbursed for all
out-of-pocket expenses relating to attendance at meetings. As of the date of
this Registration Statement, the Directors have received $0 compensation from
the Company.
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<TABLE>
<CAPTION>
ESTIMATED DIRECTOR COMPENSATION
(FOR CALENDAR YEAR 1995)
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
BENEFITS ANNUAL FROM REGISTRANT
AGGREGATE ACCRUED BENEFITS AND FUND
COMPENSATION AS PART OF FUND UPON COMPLEX* PAID
NAME OF PERSON, POSITION FROM REGISTRANT EXPENSES RETIREMENT TO DIRECTORS
- ------------------------ --------------- -------- ---------- ------------
<S> <C> <C> <C>
Morris W. Offit $ 0 0 N/A $ 0
Edward J. Landau $5,000 0 N/A $12,500
The Very Reverend $5,000 0 N/A $12,500
James Parks Morton
</TABLE>
* For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.
INVESTMENT ADVISER
The Company has retained OFFITBANK, a New York State chartered trust company, to
act as its investment adviser (the "Adviser"). The advisory agreement (the
"Advisory Agreement") between the Adviser and the Company provides that the
Adviser shall manage the operations of the Company, subject to policy
established by the Board of Directors of the Company. Pursuant to the Advisory
Agreement, the Adviser manages the Company's investment portfolios, directs
purchases and sales of the portfolio securities and reports thereon to the
Company's officers and directors regularly. In addition, the Adviser pays the
compensation of the Company's officers, employees and directors affiliated with
the Adviser. The Company bears all other costs of its operations, including the
compensation of its directors not affiliated with the Adviser.
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive an advisory fee from the Total Return Fund, computed
daily and paid monthly, at the annual rate of 0.80% of the Fund's average daily
net assets . The advisory fee paid by the Total Return Fund is only with respect
to that portion of the Fund's assets invested directly in stocks, bonds, and
other instruments. The Adviser will waive its fee with respect to the portion of
the Total Return Fund's assets invested in the underlying funds. To the extent
that the Total Return Fund invests in the underlying funds, the Fund will
indirectly bear a pro rata share of fees and expenses incurred by the underlying
funds and the investment returns of the Total Return Fund will be net of the
expenses of the underlying funds.
The investment advisory agreements for the underlying funds provide that, as
compensation for services, the Adviser is entitled to receive from each
underlying fund a monthly fee at the following annual rates based upon the
average daily net assets of the underlying fund: 0.85% for the first
$200,000,000 of assets and 0.75% for amounts in excess thereof in the case of
the High Yield Fund, 0.90% for the first $200,000,000 of assets and 0.80% for
amounts in excess thereof in the case of the Emerging Markets Fund, and 0.40% of
the average daily net assets of the U.S. Government Securities Fund. The
investment advisory fee for each underlying fund is higher than that paid by
most investment companies, but is comparable to that paid by other investment
companies that have strategies focusing on high yield and international
investments.
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<PAGE>
The Advisory Agreement was approved by the Company's Board of Directors on
October 17, 1994 and by the Fund's sole shareholder, OFFIT Funds Distributor, on
March 1, 1995. Unless sooner terminated, the Advisory Agreement will continue in
effect with respect to the Company until February 28, 1977, and from year to
year thereafter if such continuance is approved at least annually by the
Company's Board of Directors or by a vote of a majority (as defined under
"General Information--Capital Stock") of the outstanding shares of each Fund,
and, in either case, by a majority of the directors who are not parties to the
contract or "interested persons" (as defined in the 1940 Act) of any party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreement may be terminated by the Company or the Adviser on 60 days' written
notice, and will terminate immediately in the event of its assignment.
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<PAGE>
REGULATORY MATTERS
OFFITBANK is a trust company chartered under the New York Banking Law and is
supervised and examined thereunder by the New York Banking Department. OFFITBANK
is prohibited by its charter from accepting deposits other than deposits arising
directly from its exercise of the fiduciary powers granted under the New York
Banking Law and, accordingly, is not an insured depository institution for
purposes of the Federal Deposit Insurance Act or any other banking law or
regulation.
Banking laws and regulations, as currently interpreted by the New York Banking
Department, prohibit New York State chartered trust companies from controlling,
or distributing the shares of, a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit such trust
companies generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such trust companies from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. OFFITBANK believes that it may perform the services
described in this Prospectus with respect to the Company without violation of
such laws or regulations. OFFITBANK is not a member of the Federal Reserve
System and is not subject to the Glass-Steagall Act, the Bank Holding Company
Act of 1956 or any other federal banking law or regulation that might affect its
ability to perform such services.
If the Adviser were prohibited from performing the services described in this
Prospectus with respect to the Funds, it is expected that the Company's Board of
Directors would recommend to each Fund's shareholders that they approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board of Directors. The Company does not anticipate that
investors would suffer any adverse financial consequences as a result of these
occurrences.
DISTRIBUTOR
OFFIT Funds Distributor, Inc., (the "Distributor"), a wholly-owned subsidiary of
BISYS Fund Services Limited Partnership with its principal office at 237 Park
Avenue, New York, New York 10017, distributes the shares of the Company. Under a
distribution agreement with the Company (the "Distribution Agreement"), the
Distributor is not obligated to sell any specific amount of shares of the
Company. The Distributor, as agent of the Company, agrees to use its best
efforts as sole distributor of the Company's shares.
The Distribution Agreement will continue in effect with respect to a particular
Fund from year to year if such continuance is approved at least annually by the
Company's Board of Directors and by a majority of the Directors who have no
direct or indirect financial interest in the Agreement ("Qualified Directors")
and who are not "interested persons" (as defined in the 1940 Act) of any party
by votes cast in person at a meeting called for such purpose. In approving the
22
<PAGE>
continuance of the Distribution Agreement, the Directors must determine that the
Agreement is in the best interest of the shareholders of each Fund.
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES
BISYS Fund Services, Limited Partnership ("BISYS ") provides the Company with
administrative and fund accounting services pursuant to an Administration
Agreement dated ____________________ (the "Administration Agreement"). The
Administration Agreement continues in effect until February 28, 1997 and from
year to year thereafter if such continuance is approved at least annually by the
Company's Board of Directors and by a majority of the Directors who are not
parties to such Agreement or "interested persons" (as defined in the 1940 Act).
Pursuant to the Administration Agreement, BISYS performs certain administrative
and clerical services, including certain accounting services, facilitation of
redemption requests, exchange privileges, and account adjustments and
maintenance of certain books and records; and certain services to the Company's
shareholders, including assuring that investments and redemptions are completed
efficiently, responding to shareholder inquiries and maintaining a flow of
information to shareholders. BISYS also furnishes office space and certain
facilities reasonably necessary for the performance of its services under the
Administration Agreement, and provides the office space, facilities, equipment
and personnel necessary to perform the following services for the Company: SEC
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Company operations, including custodian,
accountants and counsel and other parties performing services or operational
functions for the Company. As compensation for its administrative services,
BISYS receives a monthly fee, based on an annual rate of .15% of aggregate
average daily net assets of the Funds plus an annual fee of $30,000 for each
Fund.
BISYS serves as the Company's Transfer Agent and Dividend Disbursing Agent
pursuant to a transfer agency agreement (the "Transfer Agency Agreement") with
the Company. Under the Transfer Agency Agreement, BISYS has agreed, among other
things, to: (i) issue and redeem shares of each Fund; (ii) transmit all
communications by each Fund to its shareholders of record, including reports to
shareholders, dividend and distribution notices and proxy materials for meetings
of shareholders; (iii) respond to correspondence by shareholders and others
relating to its duties; (iv) maintain shareholder accounts; and (v) make
periodic reports to the Board of Directors concerning the Funds' operations. The
Funds pay BISYS such compensation as may be agreed upon from time to time. The
Transfer Agency Agreement continues in effect until ____________________ and
from year to year thereafter if such continuance is approved at least annually
by the Company's Board of Directors and by a majority of the Directors who are
not "interested persons" (as defined in the 1940 Act) of any party, and such
Agreement may be terminated by either party on 60 days' written notice.
23
<PAGE>
The Chase Manhattan Bank, N.A. (the "Custodian") serves as the Company's
custodian pursuant to a custodian agreement (the "Custodian Agreement") with the
Company. The Custodian is located at 4 MetroTech Center, 18th Floor, Brooklyn,
New York 11245. Under the Custodian Agreement, the Custodian has agreed to (i)
maintain a segregated account or accounts in the name of each Fund; (ii) hold
and disburse portfolio securities on account of each Fund; (iii) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio securities; (iv) respond to correspondence relating to its
duties; and (v) make periodic reports to the Company's Board of Directors
concerning the Funds' operations. The Custodian is authorized under the
Custodian Agreement to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Funds, provided that the Custodian remains
responsible for the performance of all of its duties under the Custodian
Agreement. The Custodian is entitled to receive monthly fees under the Custodian
Agreement based upon the types of assets held by each Fund, at the annual rate
of .0865% on the first $10 million and .05% on amounts in excess thereof for
assets held in the United States and .20% on the first $10 million and .15% on
amounts in excess thereof for assets held outside the United States, except that
with respect to assets held in certain emerging market countries, the annual fee
shall be .30% of such Fund's assets held in the particular type of security. The
Custodian Agreement continues in effect until December 31, 1996 and from year to
year thereafter if such continuance is approved at least annually by the
Company's Board of Directors and by a majority of the Directors who are not
parties to such Agreement or "interested persons" (as defined in the 1940 Act)
of any party, and such Agreement may be terminated by either party on 60 days'
written notice.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by any or all of the Funds to the organizations
retained to provide services for the Funds may be waived from time to time in
order to increase such Funds' net investment income available for distribution
to shareholders.
Except as otherwise noted, OFFITBANK and BISYS bear all expenses in connection
with the performance of their advisory and administrative services respectively.
The Company bears the expenses incurred in its operations, including: taxes;
interest; fees (including fees paid to its directors who are not affiliated with
the Company); fees payable to the SEC; costs of preparing prospectuses for
regulatory purposes and for distribution; advisory and administration fees;
charges of its custodian and transfer agent; certain insurance costs; auditing
and legal expenses; fees of independent pricing services; costs of shareholders'
reports and shareholder meetings, including proxy statements and related
materials; and any extraordinary expenses. The Company also pays for brokerage
fees and commissions, if any, in connection with the purchase of portfolio
securities.
24
<PAGE>
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.
Portfolio 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 the transaction is conducted in accordance with procedures established by
the Company's Board of Directors and complies in all other respects with certain
criteria or an exemptive order allowing such transactions is obtained from the
SEC. Affiliated persons of the Company, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for the
Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees and 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
25
<PAGE>
be sold or purchased for the Company with those to be sold or purchased for
other funds or accounts in order to obtain best execution.
PURCHASE OF SHARES
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.
REDEMPTION OF SHARES
The Company may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange (the "NYSE") or the bond
market is closed, or trading on the NYSE is restricted as determined by the SEC,
(ii) during any period when an emergency exists as defined by the rules of the
SEC as a result of which it is not reasonably practicable for 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.
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.
PERFORMANCE CALCULATIONS
The Company may from time to time quote various performance figures to
illustrate the past performance 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 funding the average annual
compounded rates of return over 1, 5 and 10 year periods (or, if sooner, the
period since inception of the Fund) that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The calculation assures 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
26
<PAGE>
Fund expenses on an annual basis. Average annual total return is calculated
according to the following formula:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the stated period
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:
Yield = 2 [ (a-b+1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the minimum 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.
The performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or other independent services which monitor the performance data
of investment companies, and may be quoted in advertising in terms of their
rankings in each applicable universe. In addition, the Company may use
performance reported in financial and industry publications,
27
<PAGE>
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.
Performance information presented for the Funds should not be compared directly
with performance information of other insurance products without taking into
account insurance-related charges and expenses payable under the variable
annuity contract and variable life insurance policy. These charges and expenses
are not reflected in the Funds' performance and would reduce an investor's
return under the annuity contract or life policy.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax considerations that
are not described in the Prospectus and generally affect each Fund and its
shareholders. No attempt is made to present a detailed explanation of the tax
treatment of each Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
Each Fund intends to qualify to be treated as a "regulated investment company"
("RIC") under the Internal Revenue Code of 1986 (the "Code"). If so qualified,
each Fund will not be subject to federal income tax on its investment company
taxable income and net capital gains to the extent that such investment company
taxable income and net capital gains are distributed in each taxable year to the
separate accounts of insurance companies that hold its shares. In addition, if
each Fund distributes annually to the separate accounts its ordinary income and
capital gain net income, in the manner prescribed in the Code, it will also not
be subject to the 4% federal excise tax otherwise applicable to the RIC's on any
of its income or gains. Distributions of net investment income and net
short-term capital gains will be treated as ordinary income and distributions of
net long-term capital gains will be treated as long-term capital gain in the
hands of the insurance companies. Under current tax law, capital gains or
dividends from any Funds are not currently taxable when left to accumulate
within a variable annuity or variable life insurance contract.
Section 817(h) of the Code requires that investments of a segregated asset
account of an insurance company be "adequately diversified", in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of the
variable annuity contracts or variable life insurance policies investing in the
account to receive the tax-deferred or tax-free treatment generally afforded
holders of annuities or life insurance policies under the Code. The Department
of the Treasury has issued Regulations under section 817(h) which, among other
things, provide the manner in which a segregated asset account will treat
investments in a RIC for purposes of the applicable diversification
requirements. Under the Regulations, if a RIC satisfies certain conditions, that
RIC will not be treated as a single investment for these purposes, but rather
the segregated asset account will be treated as owning its proportionate share
of each of the assets of the RIC. Each Fund plans to satisfy these conditions at
all times so that each segregated asset account of a life insurance company
investing in the Funds will be treated as adequately diversified under the Code
and Regulations.
28
<PAGE>
For information concerning the federal income tax consequences to the holders of
variable annuity contracts and variable rate insurance policies, such holders
should consult the prospectuses used in connection with the issuance of their
particular contracts or policies.
DETERMINATION OF NET ASSET VALUE
The Company values the shares of each Fund daily on each day the New York Stock
Exchange (the "NYSE") is open. Currently, the NYS E is closed Saturdays, Sundays
and the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, the Fourth of July, Labor Day, Thanksgiving and Christmas. The
Company determines net asset value as of the close of the NYSE. However, equity
options held by a Fund are priced as of the close of trading at 4:10 p.m, and
futures on U.S. government securities and index options held by a Fund are
priced as of their close of trading at 4:15 p.m.
Each Fund determines net asset value as follows: Securities for which market
quotations are readily available are valued at prices which, in the opinion of
the Directors, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sales price on or,
if no sales are reported (as in the case of some securities traded
over-the-counter) the last reported bid price, except that certain U.S.
government securities are stated at the mean between the reported bid and asked
prices. Short-term investments having remaining maturities of 60 days or less
are stated at amortized cost, which approximates market. All other securities
and assets are valued at their fair value following procedures approved by the
Directors. Liabilities are deducted from the total, and the resulting amount is
divided by the number of shares outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. Securities for which reliable
quotations are not readily available and all other assets will be valued at
their respective fair market value as determined in good faith by, or under
procedures established by, the Company's Board of Directors.
If any securities held by a Fund are restricted as to resale, their fair value
will be determined in good faith by, or under procedures established by, the
Company's Board of Directors. The Directors periodically review such valuations
and procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding, the prices of any
29
<PAGE>
recent transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
The Funds will invest in foreign securities, and as a result, the calculation of
the Funds' net asset value may not take place contemporaneously with the
determination of the prices of certain of the portfolio securities used in the
calculation. Also, because of the amount of time required to collect and process
trading information as to large numbers of securities issues, the values of
certain securities (such as convertible bonds, U.S. government securities, and
tax-exempt securities) are determined based on market quotations collected
earlier in the day at the latest practicable time prior to the close of the
NYSE. Occasionally, events which affect the values of such securities (and, with
respect to foreign securities, the value of the currency in which the security
is denominated) may occur between the times at which they are determined and the
close of the NYSE and will therefore not be reflected in the computation of a
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by, or under procedures established
by, the Company's Board of Directors.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law. As
used in this Statement of Additional Information, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Company and all Funds, 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 any single Fund (e.g., approval of Advisory
Agreements), means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy or (ii) more than 50% of
the outstanding shares of the Fund. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Each share 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 Fund are entitled
to receive the assets allocable to that 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.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-accessible, fully transferable and redeemable at the
option of the holder.
30
<PAGE>
As of the date of this Statement of Additional Information, OFFIT Funds
Distributor, Inc. was the record and beneficial owner of all of the outstanding
shares of the Company's common stock and thus may be deemed to "control" the
Company as that term is defined in the 1940 Act. The shares held by OFFIT Funds
Distributor, Inc. are intended to enable the Company to meet an initial
capitalization requirement imposed under the 1940 Act. OFFIT Funds Distributor,
Inc. has undertaken that the shares were purchased for investment purposes only
and that they will be sold only pursuant to a registration statement under the
Securities Act of 1933, as amended, or an applicable exemption from the
registration requirements thereof.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Company.
Price Waterhouse LLP is located at 1177 Avenue of the Americas, New York, New
York 10036. The Financial Statements for the period ended September 30, 1996 for
each of the High Yield Fund and the Emerging Markets Fund are included in each
Fund's semi-annual report which is incorporated herein by reference.
COUNSEL
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022,
serves as counsel to the Funds.
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.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
31
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in the Prospectus:
(1) Financial Highlights for the period ended September
30, 1996 for the OFFITBANK VIF - Emerging Markets
Fund and OFFITBANK VIF - High Yield Fund
(unaudited).
Included in Semi-Annual Report to Shareholders, and
incorporated by reference in the Statement of Additional
Information:
(1) Portfolios of Investments dated September 30, 1996
(unaudited).
(2) Statements of Assets and Liabilities dated
September 30, 1996 (unaudited).
(3) Statements of Operations for the period ended
September 30, 1996 (unaudited).
(4) Statement of Changes in Net Assets for the period
ended September 30, 1996 (unaudited).
(5) Financial Highlights for the period ended
September 30, 1996 (unaudited).
(6) Notes to Financial Statements dated September 30,
1996 (unaudited).
(7) Statement of Assets and Liabilities dated
September 30, 1996.
(b) Exhibits:
Exhibit
Number Description
------ -----------
Ex-99.B1(a) -- Registrant's Articles of Incorporation (1)
Ex-99.B1(b) -- Registrant's Articles of Amendment (3)
Ex-99.B2 -- Registrant's Amended and Restated By-Laws (2)
Ex-99.B3 -- None.
Ex-99.B4 -- Form of Specimen Share Certificates (2)
Ex-99.B5(a) -- Form of Advisory Agreement between Registrant and
OFFITBANK (2)
Ex-99.B5(b) -- Form of Advisory Agreement between the Registrant and
David J. Greene and Company (3)
Ex-99.B5(c) -- Form of Investment Sub-Advisory Agreement
between OFFITBANK and Rockefeller & Co. Inc. (5)
Ex-99.B6 -- Form of Distribution Agreement between Registrant and
OFFIT Funds Distributor, Inc. (2)
Ex-99.B7 -- None.
Ex-99.B8 -- Form of Custodian Agreement between Registrant and The
Chase Manhattan Bank, N.A. (2)
Ex-99.B9(a) -- Form of Administration Agreement between Registrant
and Furman Selz Incorporated (2)
Ex-99.B9(b) -- Form of Transfer Agency Agreement between
Registrant and Furman Selz Incorporated (2)
Ex-99.B9(c) -- Form of Participation Agreement (2)
Ex-99.B10 -- Opinion of Kramer, Levin, Naftalis, Nessen, Kamin &
Frankel (2)
Ex-99.B11(a)-- Consent of Kramer, Levin, Naftalis & Frankel (6)
Ex-99.B11(b)-- None.
<PAGE>
Ex-99.B12 -- None.
Ex-99.B13 -- Copy of Purchase Agreement between Registrant and
OFFIT Funds Distributor, Inc. (2)
Ex-99.B14 -- None.
Ex-99.B15 -- None.
Ex-99.B16 -- None.
Ex-27 -- None.
Ex-P of A -- Powers of Attorney (2)
- --------------------------------
(1) Filed as an Exhibit to Registrant's initial Registration Statement on
July 20, 1994 and incorporated herein by reference.
(2) Filed as an Exhibit to Registrant's Pre-Effective Amendment No. 1 on
March 6, 1995 and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 2 on
June 5, 1996 and incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 4 on
August 16, 1996 and incorporated herein by reference.
(5) To be filed by Amendment.
(6) Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 26. Number of Holders of Securities
As of December 16, 1996
OFFITBANK VIF-High Yield Fund 2
OFFITBANK VIF-Investment Grade
Global Debt Fund 0
OFFITBANK VIF-Emerging Markets
Fund 2
OFFITBANK VIF-Total Return Fund 0
OFFITBANK VIF-Global Convertible
Fund 0
OFFITBANK VIF-U.S. Government
Securities Fund 0
OFFITBANK VIF-U.S. Small Cap Fund 0
OFFITBANK VIF-DJG Value Equity
Fund 0
Item 27. Indemnification
Reference is made to Article VII of Registrant's Articles of Incorporation
(incorporated herein by reference) and Article VIII of Registrant s Amended and
Restated By-Laws (Exhibit 2) to Registrant's Pre-Effective Amendment No. 1 filed
March 6, 1995.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been
<PAGE>
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Item 28. Business and Other Connections of Investment Adviser
The Adviser provides a wide range of asset management services to
individuals, institutions and retirement benefit plans.
To the knowledge of Registrant, none of the Directors or executive officers
of the Adviser except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature.
Principal Occupation or
Other Employment of a
Position with Substantial Nature During
Name OFFITBANK the Past Two Years
- ---- --------- ------------------
H. Furlong Baldwin Director Chairman of the Board,
Mercantile Safe Deposit & Mercantile Bankshares
Trust Co.
Two Hopkins Plaza
Baltimore, MD 21201
Morris, W. Offit, C.F.A. Director Chairman of the Board
OFFITBANK OFFITBANK
520 Madison Avenue
New York, N.Y. 10022
Marchese Alessandro Director Private Investor
di Montezemolo
200 Murray Place
Southampton, N.Y. 11969
David H. Margolis Director Chairman of the
Coltec Industries Inc. Executive Committee,
430 Park Avenue Coltec Industries Inc.
New York, N.Y. 10022
Harvey M. Meyerhoff Director Chairman of the Board,
Magna Holdings, Inc. Magna Holdings, Inc.
25 South Charles Street
Suite 2100
Baltimore, M.D. 21201
George Randolph Packard Director Dean, The Paul H. Nitze
4425 Garfield Street, N.W. School of Advanced
Washington, D.C. 20007 International Studies,
Johns Hopkins University
Edward V. Regan Director President, The Jerome
31 West 52nd Street Levy Economics Institute
17th floor of Bard College
New York, N.Y.
B. Lance Sauerteig Director Private Investor
130 Edgehill Road
New Haven, CT 06511
Herbert P. Sillman Director Private Investor
425 Harmon
Birmingham, MI 48009
<PAGE>
Ricardo Steinbruch Director
Grupo Vichuna
Rua Ltacolomi 412
Higlenopolis
Sao Paolo, S.P. Brazil
01239-020
Item 29. Principal Underwriters
(a) In addition to Registrant, OFFIT Funds Distributor, Inc. currently
acts as distributor for The OFFITBANK Investment Fund, Inc.
(b) The information required by this Item 29(b) with respect to each
director, officer or partner of OFFIT Funds Distributor, Inc. is
incorporated by reference to Schedule A of Form BD filed by OFFIT Funds
Distributor, Inc. pursuant to the Securities Exchange Act of 1934 (SEC File
No. 8-46960).
(c) Not applicable.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of:
(1) The OFFITBANK Variable Insurance Fund, Inc.
237 Park Avenue, Suite 910
New York, New York 10017
(Records relating to the Company)
(2) OFFITBANK
520 Madison Avenue
New York, New York 10022
(advisory records)
(3) OFFIT Funds Distributor, Inc.
230 Park Avenue
New York, New York 10169
(records of principal underwriter)
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 20th day of December, 1996.
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
By /s/ Morris W. Offit
-------------------
Morris W. Offit, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the 20th day of December, 1996.
SIGNATURE TITLE
- --------- -----
/s/ Morris W. Offit Director, Chairman of
- ------------------- the Board and President
Morris W. Offit (Principal Executive Director)
* Director
- -------------------
Edward J. Landau
*
- ------------------- Director
The Very Reverend James Parks Morton
/s/ Morris W. Offit
- -------------------
Morris W. Offit
Attorney-in-fact
* Attorney-in-Fact pursuant to powers of attorney filed with Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on March 6, 1995
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
Ex-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
<PAGE>
<PAGE>
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
Arthur H. Aufses III Richard Marlin Sherwin Kamin
Thomas D. Balliett Thomas E. Molner Arthur B. Kramer
Jay G. Baris Thomas H. Moreland Maurice N. Nessen
Saul E. Burian Ellen R. Nadler Founding Partners
Barry Michael Cass Gary P. Naftalis Counsel
Thomas E. Constance Michael J. Nassau --------
Michael J. Dell Michael S. Nelson Martin Balsam
Kenneth H. Eckstein Jay A. Neveloff Joshua M. Berman
Charlotte M. Fischman Michael S.oberman Jules Buchwald
David S. Frankel Paul S. Pearlman Rudolph De Winter
Marvin E. Frankel Susan J. Penry-williams Meyer Eisenberg
Alan R. Friedman Bruce Rabb Arthur D. Emil
Carl Frischling Allan E. Reznick Maxwell M. Rabb
Mark J. Headley Scott S. Rosenblum James Schreiber
Robert M. Heller Michele D. Ross Counsel
Philip S. Kaufman Max J. Schwartz -------
Peter S. Kolevzon Mark B. Segall M. Frances Buchinsky
Kenneth P. Kopelman Judith Singer Debora K. Grobman
Michael Paul Korotkin Howard A. Sobel Christian S. Herzeca
Kevin B. Leblang Steven C. Todrys Pinchas Mendelson
David P. Levin Jeffrey S. Trachtman Lynn R. Saidenberg
Ezra G. Levin D. Grant Vingoe Jonathan M. Wagner
Larry M. Loeb Harold P. Weinberger Special Counsel
Monica C. Lord E. Lisk Wyckoff, Jr. -------
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
December 20, 1996
The OFFITBANK Variable Insurance
Fund, Inc.
237 Park Avenue
Suite 910
New York, New York 10017
Re: Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A
File No. 33-81748
-------------------------------------
Gentlemen:
We hereby consent to the reference of our firm as counsel in this
Registration Statement on Form N-1A.
Very truly yours,
/s/Kramer, Levin, Naftalis & Frankel
------------------------------------
