<PAGE>
-------------------------------
OFFITBANK VIF-HIGH YIELD FUND
OFFITBANK VIF-EMERGING MARKETS FUND
----------------------------
SEMI - ANNUAL REPORT
SEPTEMBER 30, 1996
THE
OFFITBANK
VARIABLE INSURANCE FUND, INC.
<PAGE>
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
Dear Shareholders:
We are very pleased to present to you the first OFFITBANK Variable Insurance
Fund, Inc. Semi-Annual report for the period ended September 30, 1996. Our two
initial portfolios, the High Yield Fund and the Emerging Markets Fund, began
their investment activities this year: High Yield on April 1 and Emerging
Markets on August 28. We believe that the Funds have gotten off to an excellent
start.
These Funds provide an efficient way for an investor who purchases variable
annuities or variable universal life insurance to achieve investment
diversification in two distinct and complex fixed income markets:
OFFITBANK VIF-HIGH YIELD FUND'S primary investment objective is high current
income with capital appreciation secondary. It invests primarily in "seasoned"
U.S. corporate debt securities rated below investment grade, and foreign
corporate, sovereign, municipal and mortgage-backed debt securities which offer
potential returns that are sufficiently high to justify the greater investment
risk.
OFFITBANK VIF-EMERGING MARKETS FUND is designed to provide investors with a
competitive total investment return by focusing on current yield and
opportunities for capital appreciation by investing in corporate and sovereign
debt securities of emerging market countries.
OFFITBANK's goal is to provide our clients with sound investment products that
meet their needs and objectives in a dynamic global financial environment.
These two Funds are identical to our initial existing mutual fund offerings and
represent our first steps in the tax advantaged annuities or life insurance
arena. In response to request from clients, in the ensuing months, OFFITBANK
expects to introduce additional funds to meet other investment needs for
variable insurance funds, including two equity funds for The Variable Universal
Life product managed by David J. Greene & Company and Rockefeller & Company.
Each new Fund is designed to provide investors with specialized investment
products which would otherwise require significant investment thresholds to
achieve appropriate diversification levels. They will be managed in the same
high quality professional manner that OFFITBANK has been providing for many
years.
The specific results of our first two Funds, along with an investment and market
commentary from each portfolio manager are part of this report. I believe that
each of these commentaries provides useful and informative insights into our
Funds and their markets, and I hope that you will find them helpful.
We greatly value your participation in the Variable Insurance Fund. Please let
me know if there is anything we can improve upon.
Sincerely,
Morris W. Offit
November 1, 1996
1
<PAGE>
OFFITBANK VIF-
HIGH YIELD FUND
- --------------------------------------------------------------------------------
The OFFITBANK VIF-High Yield Fund's total return for the third quarter of 1996
is 5.04% and is 6.96% since inception in April 1996. The Merrill Lynch BB 5-
6.99 year Index, a comparable risk benchmark, returned 3.12% and 4.10% and the
five year Treasury returned 1.61% and 1.45% respectively for the quarter and
since inception.
After having increased over 100 basis points in the first half of the year,
interest rates stabilized during the third quarter and finished the period
nearly unchanged. Bond market expectations of slow growth, a balanced budget
agreement and an easier monetary policy at the beginning of the year had
reversed course and fully discounted an increase in the fed funds rate for the
past several months. When the Federal Reserve left interest rates unchanged
after the September 24th meeting, the bond market responded positively. The
subsequent rally moved interest rates toward the lower end of their recent
trading range. Expectations of a near term increase in the fed funds rate have
been removed from the market. Further improvements in the bond market requires
credible evidence of a slowing economy, which we believe is likely in the next
few months.
The economic and market environment has been superb for high yield bonds. The
overall high yield market has been remarkably stable, with yields nearly
unchanged from the beginning of the year. Defaults and credit losses continue
to be inconsequential. The buoyant equity market and high level of merger and
acquisition activity have had a major positive impact on the high yield market.
A number of high yield issuers, including several that were held in the VIF-High
Yield Fund, have had positive credit moves as a result of mergers and
acquisitions.
The technicals of the high yield market have also been extraordinary. The near
record pace of new issues continues to be met with record demand. Approximately
$55 billion of new issues have been priced so far this year. As August wound
down, the new issue calendar disappeared as the pending deals were completed.
Mutual fund inflows and other new monies entering the market did not slow down,
further strengthening the market. The new issue calendar is beginning to fill
in once again but does not appear overwhelming.
This mix of a positive technical and credit environment with rising to stable
interest rates, has resulted in a further compression of quality spreads.
Single B's have widely outperformed double BB's which in turn have widely
outperformed investment grade bonds. Specifically, with Treasurys producing a
near zero total return through September, the broad high yield market returned
6.9% with the single B component up 9.6% versus 3.5% for the double B component.
In terms of spreads, single B's have narrowed approximately 140 basis points to
Treasurys and 75 basis points to double B's since year end.
Although high yield spreads have tightened approximately 100 basis points this
year and are toward the lower end of their historical range, they are not
excessively tight given the low levels of expected credit losses. Institutional
acceptance of the high yield market is still in the early stages and we expect
demand to continue to broaden. While supply imbalances will occasionally widen
spreads, we believe that the long term case for high yield remains undiminished.
The Fund is invested in 32 issues representing 32 issuers. No single credit is
greater than 2% of the portfolio. The Fund continues to have a higher quality
focus with an average credit quality of Ba3/BB-.
Stephen T. Shapiro
November 1, 1996
2
<PAGE>
OFFITBANK
VIF - HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE / DEFENSE (4.27%)
Sequa Corp. Sr Notes, 8.75%, 12/15/01............................................ $ 150,000 $ 148,875
UNC Inc. Sr Notes, 9.125%, 07/15/03.............................................. 250,000 244,063
-----------
392,938
-----------
BROADCAST / TELECOMMUNICATIONS (8.85%)
Centennial Cellular Corp. Sr Notes, 8.875%, 11/01/01............................. 300,000 282,750
MFS Communications Corp. Sr Disc. Notes, 0/9.375%, 01/15/04...................... 300,000(1) 252,000
Viacom Inc. Sr Sub Notes, 8.00%, 07/07/06........................................ 300,000 280,599
-----------
815,349
-----------
CABLE (13.90%)
Cablevision Industries Corp. Sr Sub Notes, 9.25%, 11/01/05....................... 300,000 291,000
Lenfest Communications Sr. Notes, 8.375%, 11/01/05............................... 300,000 282,000
Rogers Cablesystems Sr Secured Notes, 9.625%, 08/01/02........................... 300,000 302,250
TeleWest plc Sr Debs, 9.625%, 10/01/06........................................... 250,000 248,125
Videotron Ltee Sr Sub Notes, 10.25%, 10/15/02.................................... 150,000 157,500
-----------
1,280,875
-----------
CHEMICALS (1.60%)
Sifto Canada Inc. Sr Notes, 8.50%, 07/15/00...................................... 150,000 147,750
-----------
CONSUMER GROUPS (4.88%)
Beverly Enterprises Sr Notes, 9.00%, 02/15/06.................................... 150,000 146,438
Host Marriott Travel Plaza Sr Notes, 9.50%, 05/15/05............................. 150,000 150,375
Revlon Consumer Products Sr Notes, 9.375%, 04/01/01.............................. 150,000 152,250
-----------
449,063
-----------
FINANCIAL SERVICES / INSURANCE (3.35%)
Presidential Life Corp. Sr Notes, 9.50%, 12/15/00................................ 150,000 156,000
Reliance Group Holdings, Inc. Sr Sub Notes, 9.75%, 11/15/03...................... 150,000 152,438
-----------
308,438
-----------
FOREST & PAPER PRODUCTS (5.02%)
Repap New Brunswick 1st Priority Sr Secured Notes, 9.875%, 07/15/00............. 150,000 154,500
Repap Wisconsin Inc. 1st Priority Sr Secured Notes, 9.25%, 02/01/02.............. 150,000 151,125
Stone Container Corp. Sr Secured Notes, 10.75%, 10/01/02......................... 150,000 157,125
-----------
462,750
-----------
GENERAL INDUSTRIES/MANUFACTURING (3.44%)
Unisys Corp. Sr Notes, 15.00%, 07/01/97.......................................... 300,000 316,500
-----------
HOTELS & GAMING (10.69%)
Host Marriott Properties Sr Secured Notes, 9.50%, 05/15/05....................... 300,000 300,750
John Q Hammons Hotel 1st Mortgage Notes, 8.875%, 02/15/04........................ 300,000 287,625
Prime Hospitality Corp. 1st Mortgage Notes, 9.25%, 01/15/06...................... 150,000 149,813
Trump Atlantic City, 1st Mortgage Notes, 11.25%, 05/01/06........................ 250,000 246,875
-----------
985,063
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
OFFITBANK
VIF - HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
METALS/MINING/IRON/STEEL (3.73%)
Armco Inc. Sr. Notes, 9.375%, 11/01/00........................................... $ 200,000 $ 200,000
Wheeling-Pittsburgh Corp. Sr Notes, 9.375%, 11/15/03............................. 150,000 143,625
-----------
343,625
-----------
OIL & GAS (3.09%)
Clark R & M Holdings Sr Secured Notes, 0.00%, 02/15/00........................... 400,000 284,500
-----------
PACKAGING/CONTAINERS (3.42%)
Gaylord Container Sr Notes, 11.50%, 05/15/01..................................... 150,000 159,188
Owens-Illinois Corp. Sr Sub Notes, 10.00%, 08/01/02.............................. 150,000 155,625
-----------
314,813
-----------
PUBLISHING & PRINTING (3.40%)
K-III Communication Corp. Sr Notes, 10.625%, 05/01/02............................ 300,000 312,750
-----------
REAL ESTATE (1.75%)
Trizec Finance Sr Notes, 10.875%, 10/15/05....................................... 150,000 161,435
-----------
UTILITIES (1.68%)
Cleveland Electric 1st Mortgage Notes, 9.50%, 05/15/05........................... 150,000 154,875
-----------
TOTAL INVESTMENTS (COST $6,572,412)(73.07%)...................................... 6,730,724
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES (26.93%).......................... 2,480,270
-----------
TOTAL NET ASSETS (100.00%)....................................................... $9,210,994
-----------
-----------
</TABLE>
(1) Step-Up bond.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
OFFITBANK VIF-
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
Since the VIF-Emerging Markets Fund only began investing on August 28, 1996,
there is not much to report. Instead, we thought that we would share with you
our market views and investment strategy as of September 30, 1996.
Our current conviction is that significant value can be had in Latin American
debt because of the following reasons:
- - Immediately following the Mexican debt crisis of December 1994, Latin
American financial assets fell significantly in price and value. Mexico's
financial crises triggered a profound refocusing on economic reforms in the
region. Following the successful financial rescue effort of Mexico, in
March of 1995, undertaken by the U.S. in conjunction with various
multilateral organizations (i.e., IMF, World Bank, IADB, etc.), Latin
America governments accelerated and broadened their economic reforms, while
their corporate counterparts reorganized and retooled to become globally
competitive.
- - We believe that investor confidence has been restored and risk perception
has diminished. To illustrate just how much perception has improved, we
can look at the sovereign Brady Bonds of the big three economies of the
region, Mexico, Brazil, and Argentina. Since the devaluation, Latin
American Brady Bonds have generated a total U.S. dollar return of 45%. The
Latin American Brady Bond rally is occurring despite the back-up in U.S.
interest rates in the eight months of 1996. Indeed, close to $40 billion
of new sovereign and corporate bonds have been issued so far this year.
- - Technically the market appears very healthy, as a much larger and better
informed investor base is now actively involved in this market. U.S.,
European, and Asian institutional investors as well as high yield investors
from these markets are increasingly allocating a small portion of their
global portfolios to this new asset class.
- - There is good value in Emerging Markets debt, particularly Latin American
bonds. Despite the strong rally in emerging markets bonds, the Emerging
Markets Bond Index (EMBI+) still reflects an average spread of over 600
basis points over equivalent duration U.S. Treasurys. The difference
between U.S. High Yield and Emerging Markets debt is now more than 250
basis points wider than it was in early 1994.
We believe that OFFITBANK's VIF-Emerging Markets Fund will produce competitive
risk adjusted returns over time because:
- - We expect that approximately 50% of OFFITBANK's VIF-Emerging Markets Fund
will be invested in corporate dollar-denominated Eurobonds, where credit
analysis and credit fundamentals are the principal drivers.
- - Double B to Single B or equivalent Latin American corporate credits are
currently offering investors an attractive spread over equivalent
Treasurys, and we intend to increase the dollar-denominated corporate bond
allocation by the end of the first quarter 1997.
- - The balance of the portfolio will continue to be invested opportunistically
in Bradys, pre-Brady bank loans, and locally issued and traded money market
instruments which we believe will provide higher risk-adjusted returns
within the context of relatively stable currencies, without taking on
duration risk.
Richard M. Johnston Wallace Mathai-Davis
November 1, 1996
5
<PAGE>
OFFITBANK
VIF - EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL (19.10%)
ARGENTINA
Mastellone Hermanos S.A., 11.75%, 05/11/98........................................... 100,000 $ 100,750
-----------
BRAZIL
Elevadores Atlas S.A. Step-Up Bonds, 0/11.00%, 07/11/04............................. 50,000 (2) 50,375
-----------
MEXICO
Bufete Industrial, 11.375%, 07/15/99 (144A).......................................... $ 50,000 (1) 51,563
-----------
MEDIA (21.96%)
BRAZIL
RBS Participacoes S.A., Putable, 14.00%, 12/15/03.................................... 100,000 109,625
-----------
MEXICO
Grupo Televisa S.A. Step-Up Callable Bonds, 0/13.25%, 05/15/08 (144A)................ 200,000 (1,2) 123,500
-----------
UTILITY (9.51%)
BRAZIL
Comp Energetica Sao Paulo, 9.25%, 05/10/01........................................... 150,000 (a) 100,967
-----------
TOTAL INVESTMENTS (COST $530,253)(50.57%)...................................................... 536,780
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES (49.43%)........................................ 524,583
-----------
TOTAL NET ASSETS (100.00%)..................................................................... $1,061,363
-----------
-----------
</TABLE>
Principal denominated in the following currency:
(a) German Deutschmarks
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified instiutional buyers.
(2) Step-Up bond.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - SEPTEMBER 30, 1996
(UNAUDITED)
VIF - HIGH YIELD FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (cost $6,572,412)(Note 1a).......................................... $6,730,724
Cash...................................................................................... 2,284,615
Interest receivable....................................................................... 200,347
Receivable from Advisor (Note 2).......................................................... 11,124
Deferred organization expense............................................................. 20,160
-----------
Total Assets.......................................................................... $9,246,970
LIABILITIES:
Payable for fund shares repurchased....................................................... 1,866
Accrued expenses.......................................................................... 34,110
-----------
Total Liabilities..................................................................... 35,976
------------
NET ASSETS................................................................................. $9,210,994
------------
------------
Net assets consist of:
Shares of capital stock, $0.001 par value per share, 894,839 issued and outstanding...... $ 895
Additional paid-in capital............................................................... 9,051,787
Net unrealized appreciation on investments............................................... 158,312
-----------
NET ASSETS................................................................................. $9,210,994
------------
------------
NET ASSET VALUE PER SHARE.................................................................. $10.29
------------
------------
VIF - EMERGING MARKETS FUND
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value (cost $530,253)(Note 1a)........................................... $ 536,780
Cash..................................................................................... 508,149
Interest receivable...................................................................... 14,802
Receivable from Advisor (Note 2)......................................................... 3,473
Unrealized appreciation on forward currency contracts (Note 5)........................... 3,203
Deferred organization expense............................................................ 21,988
-----------
Total Assets........................................................................... $1,088,395
LIABILITIES:
Payable for fund shares repurchased...................................................... 313
Accrued expenses......................................................................... 26,719
-----------
Total Liabilities...................................................................... 27,032
------------
NET ASSETS................................................................................. $1,061,363
------------
------------
Net assets consist of:
Shares of capital stock, $0.001 par value per share, 104,238 issued and outstanding...... $ 104
Additional paid-in capital............................................................... 1,042,400
Accumulated net realized gain on investments and foreign currency transactions........... 9,221
Net unrealized appreciation on investments and foreign currency transactions............. 9,638
-----------
NET ASSETS................................................................................. $1,061,363
------------
------------
NET ASSET VALUE PER SHARE.................................................................. $10.18
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
VIF - HIGH YIELD FUND
FOR THE PERIOD FROM
APRIL 1, 1996*
THROUGH SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income............................................$180,825
--------
$180,825
EXPENSES
Advisory (Note 2)......................................... 17,206
Fund accounting (Note 2).................................. 15,600
Professional.............................................. 4,961
Trustee's fees............................................ 4,750
Administrative (Note 2)................................... 3,036
Amortization of organization expenses..................... 2,248
Registration.............................................. 1,800
Custodian................................................. 382
Transfer agent and shareholder servicing (Note 2)......... 345
Miscellaneous............................................. 4,343
--------
Total expenses before waivers/reimbursements........... 54,671
Less expenses waived/ reimbursed (Note 2).............. (31,366)
--------
Net expenses........................................... 23,305
--------
NET INVESTMENT INCOME...................................... 157,520
--------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net unrealized appreciation on investments................ 158,312
--------
Net realized and unrealized gain on investments........ 158,312
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....... $315,832
--------
--------
VIF - EMERGING MARKETS FUND
FOR THE PERIOD FROM
AUGUST 28, 1996*
THROUGH SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income............................................ $8,968
-------
$ 8,968
EXPENSES
Fund accounting (Note 2).................................. 2,500
Professional.............................................. 950
Advisory (Note 2)......................................... 848
Amortization of organization expenses..................... 420
Registration.............................................. 300
Trustee's fees............................................ 250
Administrative (Note 2)................................... 141
Custodian................................................. 40
Transfer agent and shareholder servicing (Note 2)......... 30
Miscellaneous............................................. 400
-------
Total expenses before waivers/reimbursements........... 5,879
Less expenses waived/ reimbursed (Note 2).............. (4,462)
--------
Net expenses........................................... 1,417
--------
NET INVESTMENT INCOME...................................... 7,551
--------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gains on investments and foreign currency
transactions............................................. 9,221
Net unrealized appreciation on investments and
foreign currency transactions............................ 9,638
-------
Net realized and unrealized gain on investments
and foreign currency transactions........................ 18,859
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....... $26,410
--------
--------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
VIF - HIGH YIELD FUND
FOR THE PERIOD FROM
APRIL 1, 1996*
THROUGH SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM:
OPERATIONS
Net investment income.....................................$ 157,520
Net change in unrealized appreciation on investments...... 158,312
----------
Net increase in net assets resulting from operations...... 315,832
----------
DIVIDENDS TO SHAREHOLDERS
From net investment income................................ (157,520)
----------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase in net assets from capital share
transactions............................................. 9,019,349
----------
Total increase in net assets.............................. 9,177,661
NET ASSETS
Beginning of period....................................... 33,333
----------
End of period.............................................$9,210,994
----------
----------
VIF - EMERGING MARKETS FUND
FOR THE PERIOD FROM
AUGUST 28, 1996*
THROUGH SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM:
OPERATIONS
Net investment income................................... $ 7,551
Net realized gain on investments and foreign currency
transactions........................................... 9,221
Net change in unrealized appreciation on investments
and foreign currency transactions..................... 9,638
----------
Net increase in net assets resulting from operations.... 26,410
----------
DIVIDENDS TO SHAREHOLDERS
From net investment income.............................. (7,551)
----------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase in net assets from capital share
transactions.......................................... 1,009,171
----------
Total increase in net assets............................ 1,028,030
NET ASSETS
Beginning of period..................................... 33,333
----------
End of period...........................................$1,061,363
----------
----------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
VIF - HIGH YIELD FUND
FOR THE PERIOD FROM
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL APRIL 1, 1996*
STOCK OUTSTANDING THROUGH THE PERIOD: THROUGH SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD....................... $10.00
--------
Net investment income..................................... 0.39
Net realized and unrealized gains on investments.......... 0.29
--------
Total from investment operations.......................... 0.68
--------
LESS DIVIDENDS FROM:
Net investment income..................................... (0.39)
--------
Total dividends........................................... (0.39)
--------
NET ASSET VALUE, END OF PERIOD............................. $10.29
--------
--------
TOTAL INVESTMENT RETURN+................................... 6.96%
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................. $9,211
Ratios to average net assets:
Expenses.................................................. 1.15% (1)(2)
Net investment income..................................... 7.77% (1)
PORTFOLIO TURNOVER RATE.................................... 0%
VIF - EMERGING MARKETS FUND
FOR THE PERIOD FROM
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL AUGUST 28, 1996*
STOCK OUTSTANDING THROUGH THE PERIOD: THROUGH SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD....................... $10.00
--------
Net investment income..................................... 0.07
Net realized and unrealized gains on investments.......... 0.18
--------
Total from investment operations.......................... 0.25
--------
LESS DIVIDENDS FROM:
Net investment income..................................... (0.07)
--------
Total dividends........................................... (0.07)
--------
NET ASSET VALUE, END OF PERIOD............................. $10.18
--------
--------
TOTAL INVESTMENT RETURN+................................... 2.53%
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................. $1,061
Ratios to average net assets:
Expenses.................................................. 1.50% (1)(2)
Net investment income..................................... 8.00% (1)
PORTFOLIO TURNOVER RATE.................................... 131%
_________________
* Commencement of operations.
(1) Annualized
(2) If the Funds had borne all expenses that were assumed or waived by the
Advisor and Administrator, the above expense ratios would have been 2.70%
and 6.22% for the VIF-High Yield and VIF-Emerging Markets Funds,
respectively..
+ Total return is based on the change in net assets value during the period
and assumes reinvestment of all dividends and distributions.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
NOTES TO FINANCIAL STATEMENT (UNAUDITED)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES. The OFFITBANK Variable Insurance Fund,
Inc. (the "Company") was incorporated in Maryland on October 17, 1994. The
Company is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). Each Fund operates as an open-ended management investment company.
The Company consists of eight separately managed investment portfolios (the
"Funds"): OFFITBANK VIF-High Yield Fund, OFFITBANK VIF-Emerging Markets Fund,
OFFITBANK VIF-Investment Grade Global Debt Fund, OFFITBANK VIF-Total Return
Fund, OFFITBANK VIF-Global Convertible Fund, OFFITBANK VIF-U.S. Government
Securities Fund, OFFITBANK VIF-U.S. Small Cap Fund and OFFITBANK VIF-DJG Value
Equity Fund. Of these, only the VIF-High Yield Fund and VIF-Emerging Markets
Fund had commenced operations as of April 1, 1996 and August 28, 1996,
respectively. The following are significant accounting policies followed by the
Company in the preparation of these financial statements:
a. VALUATION OF SECURITIES. Securities held in the Funds 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 amortized cost.
Securities for which market quotations are not readily available are valued at
fair value determined in good faith by or under the direction of the Company's
Board of Directors. Securities 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.
b. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Funds are
maintained in U.S. dollars as follows:
i. market value of investment securities and other assets and liabilities
at the exchange rate on the valuation date;
ii. purchases and sales of investment securities, income and expenses at
the exchange rate prevailing on the respective date of such
transactions.
The resultant exchange gains and losses are included in the Statement of
Operations.
c. ORGANIZATIONAL EXPENSES. Costs incurred in connection with the organization
and initial registration of the Funds have been deferred and are being amortized
over a sixty-month period, beginning with Fund's commencement of operations.
d. ALLOCATION OF EXPENSES. Expenses directly attributable to a Fund are
charged to that Fund. Other expenses are allocated proportionately among each
Fund of the Company in relation to the net assets of each Fund or on another
reasonable basis.
e. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Interest income,
including, where applicable, amortization of premium and accretion of discount
on investments, is accrued daily.
f. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net investment
income are declared daily and paid monthly for the VIF-High Yield Fund and
declared daily and paid quarterly for the VIF-Emerging Markets Fund.
Distributions of net realized gains are normally declared and paid at least
annually by the Fund. The Funds record dividends and distributions to
shareholders on the ex-dividend date. The amount of dividends and distributions
from net investment income and net realized capital gains are determined in
accordance with federal income tax regulations which may differ with generally
accepted accounting principles. These "book/tax" differences are either
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require a
reclassification.
11
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
NOTES TO FINANCIAL STATEMENT (UNAUDITED)
- --------------------------------------------------------------------------------
g. FEDERAL INCOME TAXES. The Funds intend to qualify as a "regulated
investment company" under Subchapter L and Subchapter M of the Internal Revenue
Code and distribute all of its taxable income to its shareholders. Therefore,
no federal income tax provision is required.
h. USE OF ESTIMATES. Estimates and assumptions are required to be made
regarding assets, liabilities, and changes in net assets resulting from
operations when financial statements are prepared. Actual results could differ
from these amounts.
2. INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION AGREEMENTS. The
Company has entered into an investment advisory agreement (the "Investment
Advisory Agreement") with OFFITBANK (the "Adviser"). The Investment Advisory
Agreement provides that the Funds pay the Adviser an investment advisory fee
that is calculated and paid monthly at the annual rate of 0.85% of net assets in
the case of the VIF-High Yield Fund and 0.90% of net assets for the VIF-Emerging
Markets Fund. The Advisor provides portfolio management and certain bookkeeping
services for the Company. For the period ended September 30, 1996, the Advisor
earned and waived fees of $17,206 and $848 for the VIF-High Yield and VIF-
Emerging Markets Funds, respectively.
Furman Selz LLC ("Furman Selz") provides the Company with administrative, fund
accounting, dividend disbursing and transfer agency services pursuant to an
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement are subject to the supervision of the Company's
Board of Directors and officers and include the day-to-day administration of
matters related to the corporate existence of the Company, maintenance of its
records, preparation of reports, supervision of the Company's arrangements with
its custodian and assistance in the preparation of the Company's registration
statements under federal and state laws. Pursuant to the Administration
Agreement, the Company pays Furman Selz a monthly fee for its services which on
an annualized basis will not exceed 0.15% of the average daily net assets of the
Company. For the period ended September 30, 1996, Furman Selz earned and waived
fees of $3,036 and $141 for the VIF-High Yield and VIF-Emerging Markets Funds,
respectively.
As Administrator, Furman Selz provides the Funds with fund accounting and
related services. For these services Furman Selz is paid a fee of $2,500 per
month, plus out-of-pocket expenses. For the period ended September 30, 1996,
Furman Selz earned fees of $15,600 and $2,500 for the VIF-High Yield and VIF-
Emerging Markets Funds, respectively.
Furman Selz acts as Transfer Agent for the Funds. Furman Selz receives
reimbursement of certain expenses plus a per account fee of $15.00 per year.
For the period ended September 30, 1996, Furman Selz earned fees of $345 and $30
for the VIF-High Yield and VIF-Emerging Markets Funds, respectively.
OFFITBANK has voluntarily agreed to cap the expenses of the VIF-High Yield Fund
at 1.15% and of the VIF Emerging Markets Fund at 1.50%. In order to maintain
this ratio, the Advisor has agreed to reimburse the Funds $11,124 and $3,473,
respectively.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc., an affiliate of Furman Selz LLC.
Under the Distribution Agreement, the Distributor, as agent of the Company,
agrees to use its best efforts as sole distributor of the Company's shares.
Under the Plan of Distribution, the Fund is authorized to spend up to 0.25% of
its average net assets to compensate the Distributor for its services. The
Distribution Agreement provides that the Company will bear the costs of the
registration of its shares with the Commission and various states and the
printing of its prospectuses, statements of additional information and reports
to shareholders. For the period ended September 30, 1996, no distribution costs
were incurred.
12
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
NOTES TO FINANCIAL STATEMENT (UNAUDITED)
- --------------------------------------------------------------------------------
3. INVESTMENTS. Purchase and sales of securities for the period ended
September 30, 1996, other than short-term securities, amounted to $6,791,325 and
$0 , respectively for the VIF-High Yield Fund and $1,196,545 and $619,091 ,
respectively for the VIF-Emerging Markets Fund. The cost of securities is
substantially the same for Federal income tax purposes as it is for financial
reporting purposes.
VIF-HIGH VIF-
YIELD EMERGING
MARKETS
----------- -----------
Aggregate cost.......................... $ 6,572,412 $530,253
------------ ----------
------------ ----------
Gross unrealized appreciation........... $ 159,526 $7,445
Gross unrealized depreciation........... (1,214) (918)
------------ ----------
Net unrealized appreciation............. $ 158,312 $6,527
------------ ----------
------------ ----------
4. CAPITAL STOCK TRANSACTIONS. The Company's Articles of Incorporation permit
the Company to issue ten billion shares (par value $0.001). Transactions in
shares of common stock for the period ended September 30, 1996, were as follows:
VIF-HIGH YIELD VIF-EMERGING MARKETS
-------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ---------- --------- ---------
Beginning balance........ 3,333 $ 33,333 3,333 $ 33,333
-------- ---------- --------- ---------
Shares sold.............. 879,874 8,899,133 100,191 1,001,907
Shares issued in
reinvestment of net
investment
income................... 15,755 161,756 747 7,598
Shares redeemed.......... (4,123) (41,540) (33) (334)
-------- ---------- --------- ---------
Net increase............. 891,506 9,019,349 100,905 1,009,171
-------- ---------- --------- ---------
Ending balance........... 894,839 $9,052,682 104,238 $1,042,504
-------- ---------- --------- ---------
-------- ---------- --------- ---------
5. DERIVATIVE INSTRUMENTS. The Funds may invest in various financial
instuments including positions in forward currency contracts, currency swaps and
purchased foreign currency options. The Funds enter into such contracts for the
purpose of hedging exposure to changes in foreign currency exchange rates on
their portfolio holdings.
Each of the Funds is also permitted to enter into swap agreements to manage
interest rate or currency exposure. Swap agreements involve the committment to
exchange with another party cash flows which are based upon the application of
interest rates, currency movements or other financial indices to a notional
principal amount. Gains and losses associated with currency swap transactions
are included in realized gains and losses on foreign currency translation.
A forward foreign exchange contract is a commitment to sell or buy a foreign
currency at a future date at a negotiated exchange rate. The Fund bears the
market risk which arises from possible changes in foreign exchange values.
Risks may arise from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of the foreign
currency relative to the U.S. dollar. Forward foreign exchange contracts may
involve market or credit risk in excess of the amounts reflected on the Fund's
statement of assets and liabilities.
13
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
NOTES TO FINANCIAL STATEMENT (UNAUDITED)
- --------------------------------------------------------------------------------
The gain or loss from the difference between the cost of original contracts and
the amount realized upon the closing of such contracts is included in net
realized gain on foreign exchange. Fluctuations in the value of forward
contracts held at September 30, 1996 are recorded for financial reporting
purposes as unrealized gains and losses by the Funds.
The table below indicates the VIF-Emerging Market Fund's outstanding forward
currency contract positions at September 30, 1996:
VALUE ON VALUE AT
CONTRACT MATURITY ORIGINATION SEPTEMBER UNREALIZED
CURRENCY AMOUNTS DATE DATE 30, 1996 APPRECIATION
---------- ---------- ---------- ------------- ---------- --------------
SELL DEM $(160,000) 11-13-96 $(108,401) $(105,198) $3,203
A purchased option contract gives the Fund the right to sell (puts) or purchase
(calls) a specified amount of foreign currency at a fixed price. The maximum
exposure to loss for any contract is limited to the premium initially paid for
the option. Such options are reflected at value in the Fund's portfolio of
investments.
The VIF-Emerging Markets Fund may also invest in indexed securities whose value
is linked directly to changes in foreign currencies, interest rates and other
financial indices. Indexed securities may be more volatile than the underlying
instrument but the risk of loss is limited to the amount of the original
investment.
6. OTHER MATTERS. The VIF-Emerging Markets Fund and the VIF-High Yield Fund
invest in obligations of foreign entities and securities denominated in
foreign currencies that involve risk not typically involved in domestic
investments. Such risks include fluctuations in the foreign exchange rates,
ability to convert proceeds into U.S. dollars, less publically available
information about foreign financial instruments, less liquidity resulting
from substantially less trading volume, more volatile prices and generally
less government supervision of foreign securities markets and issuers.
7. SUBSEQUENT EVENTS. Furman Selz has consummated an agreement with BISYS
Group, Inc. ("BISYS") whereby services currently provided to the Company by
Furman Selz will be provided to the Company by BISYS and certain of its
affiliates under new Administrative Services, Transfer Agency and Fund
Accounting Agreements between the Company and BISYS.
Effective November 11, 1996, The Bank of New York will serve as custodian for
the VIF-High Yield Fund. The Chase Manhattan Bank, N.A. will continue as
custodian for VIF-Emerging Markets Fund.
14
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS INVESTMENT ADVISOR
OFFITBANK
Morris W. Offit 520 Madison Avenue
CHAIRMAN OF THE BOARD, New York, NY 10022-4213
PRESIDENT AND DIRECTOR
DISTRIBUTOR
Edward J. Landau OFFIT Funds Distributor, Inc.
DIRECTOR 237 Park Avenue
New York, NY 10017
The Very Reverend
James Parks Morton CUSTODIAN - VIF-HIGH YIELD FUND
DIRECTOR The Bank of New York
90 Washington Street, 11th Floor
Dr. Wallace Mathai-Davis New York, NY 10286
SECRETARY AND TREASURER
CUSTODIAN - VIF-EMERGING MARKETS FUND
John J. Pileggi The Chase Manhattan Bank, N.A.
ASSISTANT TREASURER 4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
Joan V. Fiore
ASSISTANT SECRETARY LEGAL COUNSEL
Kramer, Levin, Naftalis & Frankel
Gordon M. Forrester 919 Third Avenue
ASSISTANT TREASURER New York, NY 10022
ADMINISTRATOR, TRANSFER AGENT AND DIVIDEND
Sheryl Hirschfeld DISBURSING AGENT
ASSISTANT SECRETARY Furman Selz LLC
230 Park Avenue
Carrie Zuckerman New York, NY 10169
ASSISTANT SECRETARY
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
237 PARK AVENUE, SUITE 910, NEW YORK, NY 10017
212 758 9600
