Registration Nos. 33-81748
811-8640
As filed via EDGAR with the Securities and Exchange Commission on April 30, 1997
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. 8
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9
(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
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 618-9510
Stephen Brent Wells, Esq.
OFFITBANK
520 Madison Avenue
New York, New York 10022
(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:
[x] 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 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 seven 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 on
or about May 30, 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
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The Registrant has filed the information required in the Emerging Market Fund's
prospectus in Post-Effective Amendment No. 6 to its Registration Statement on
Form N-1A on January 31, 1997, (accession #0000922423-97-000053) and is hereby
incorporated by reference. The Registrant has amended the Emerging Markets Fund
prospectus soley for the purpose of updating the financial highlights of the
Emerging Markets Fund.
Part A Prospectus Caption
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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
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Statement of Additional
Part B Information Caption
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Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
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
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Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
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THE OFFITBANK VARIABLE INSURANCE FUND, INC.
OFFITBANK VIF - Emerging Markets Fund
(the "Fund")
Supplement dated April 30, 1997
to the
Prospectus dated January 31, 1997
This Supplement provides new and additional information relating to the Fund
beyond that contained in the Prospectus and should be retained and read in
conjunction with the Prospectus.
1. FINANCIAL HIGHLIGHTS
The table below shows certain information concering the investment results for
the Fund for the period indicated.
The financial data included in this table has been derived from unaudited
financial statements and notes which are included in the Statement of Additional
Information. The Financial Highlights should be read in conjection with such
financial statements and notes thereto.
Period ended
March 31, 1997(a)
For a share of captial stock outstanding through the period (unaudited)
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PER SHARE OPERATING PERFORMANCE:
Net Asset Value Beginning of Period $10.00
INCOME FORM INVESTMENT OPERATIONS:
Net Investment Income 0.48
Net Realized and Unrealized Capital Gain (Loss) 0.30
Total Income from Investment Operations 0.78
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net Investment Income (0.48)
Realized Gains 0.00
Total dividends and distributions (0.48)
Net Asset Value Per Share End of Period $10.30
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TOTAL INVESTMENT RETURN 8.29%(3)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $4,346
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.50%(1)(2)
Net Investment Income 8.07%(1)(2)
PORTFOLIO TURNOVER RATE: 96%
(a) For the period August 28, 1996 (commencement of operations) through March
31, 1997.
(1) Annualized
(2) If the Fund had borne all expenses that were assumed by the Adviser and
Administrator the expense ratio and the net investment income ratio would
have been 4.48% and 5.09%, respectively, for the Fund.
(3) Not Annualized
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THE OFFITBANK VARIABLE INSURANCE FUND, INC.
125 West 55th Street
New York, New York 10019
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1997
As Revised April 30, 1997
The OFFITBANK Variable Insurance Fund, Inc. (the "Company") is a no load mutual
fund consisting of ten 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 DJG Value Equity Fund (the "Value Equity Fund"),
OFFITBANK VIF-U.S. Government Securities Fund ("U.S. Government Fund") ,
OFFITBANK VIF-U.S. Small Cap Fund ("U.S. Small Cap Fund"), OFFITBANK VIF-High
Yield Fund ("High Yield Fund"), OFFITBANK VIF-Emerging Markets Fund ("Emerging
Markets Fund"), OFFITBANK VIF-Global Convertible Fund ("Global Convertible
Fund") , OFFITBANK VIF-Total Return Fund ("Total Return Fund"), OFFITBANK
VIF-Latin America Equity Fund (the "Latin America Equity Fund"), OFFITBANK
VIF-CVO Greater China Fund (the "Greater China Fund") and OFFITBANK VIF-Mortgage
Securities Fund (the "Mortgage Securities Fund").
This Statement of Additional Information should be read in conjunction with the
individual Prospectuses offering shares of the following portfolios only: Value
Equity Fund, U.S. Government Fund, U.S. Small Cap Fund, High Yield Fund,
Emerging Markets Fund and Global Convertible Fund. The U.S. Small Cap Fund, U.S.
Government Fund, High Yield Fund, Emerging Markets Fund, Global Convertible
Fund, Total Return Fund, Latin America Equity Fund and Mortgage Securities Fund
are advised by OFFITBANK. OFFITBANK has retained Rockefeller & Co., Inc.
("Rockefeller & Co.") as Sub-Adviser to the U.S. Small Cap Fund. The Value
Equity Fund is advised by David J. Greene & Company ("DJ Greene"). The Greater
China Fund is advised by CVO Greater China Partners, L.P. As used herein, the
term "Adviser" shall mean, with respect to each Fund, the entity responsible for
portfolio management.
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Prospectus
offering each Fund. Any reference to the "Prospectus" in this Statement of
Additional Information is a reference to the Prospectus or Prospectuses offering
a Fund or Funds to which this Statement pertains. In each instance, the specific
Prospectus or Prospectuses referred to are referenced by the surrounding text,
which identifies a specific Fund or Funds.
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This Statement of Additional Information is NOT a prospectus and is only
authorized for distribution when preceded or accompanied by an effective
Prospectus. Copies of each Prospectus may be obtained by an investor without
charge by writing or calling the Company at the address and telephone number set
forth above.
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TABLE OF CONTENTS
PAGE
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND TECHNIQUES........................................................... 3
ADDITIONAL RISK CONSIDERATIONS........................................... 17
INVESTMENT LIMITATIONS................................................... 19
MANAGEMENT OF THE FUNDS.................................................. 21
PORTFOLIO TRANSACTIONS................................................... 29
PURCHASE OF SHARES....................................................... 30
REDEMPTION OF SHARES..................................................... 31
PERFORMANCE CALCULATIONS................................................. 31
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 33
DETERMINATION OF NET ASSET VALUE......................................... 33
GENERAL INFORMATION...................................................... 35
FINANCIAL STATEMENTS..................................................... 37
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND
TECHNIQUES
Information concerning each Fund's investment objective is set forth in each
fund's Prospectus under the heading "Investment Objectives and Policies." There
can be no assurance that any Fund will achieve its objective. The principal
features of each 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 each Fund's Prospectus.
REPURCHASE AGREEMENTS
If and to the extent authorized to do so, 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, DJ Greene, or Rockefeller &
Co., as the case may be, based on guidelines established by the Company's Board
of Directors, present minimal credit risks. The relevant 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
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under the repurchase agreement, each Fund may incur costs and experience time
delays in connection with the disposition of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
If and to the extent authorized to do so, each Fund may enter into reverse
repurchase agreements. A reverse repurchase agreement is a borrowing transaction
in which a 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 a Fund enters into a reverse repurchase agreement as described in the
Prospectus, it will place in a segregated custodian account liquid assets having
a value equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such equivalent value is maintained.
Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
DOLLAR ROLL TRANSACTIONS
In order to enhance portfolio returns and manage prepayment risks, if and to the
extent authorized to do so, each Fund may engage in dollar roll transactions
with respect to mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar
roll transaction, a 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, a 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 a Fund
exceeding the yield on the sold security. When a 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.
ASSET-BACKED SECURITIES
If and to the extent authorized to do so, each Fund may invest in Asset-Backed
Securities. Asset-backed securities are generally issued as pass through
certificates, which represent undivided fractional ownership interests in the
underlying pool of assets, or as debt instruments, and are generally issued as
the debt of a special purpose entity organized solely for the purpose of owning
such assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
Payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
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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.
MORTGAGE-BACKED SECURITIES
Collateralized Mortgage Obligations ("CMOs"). If and to the extent authorized to
do so, each Fund may invest in 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
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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"). If and to the extent authorized to
do so, each Fund may invest in 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.
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
If and to the extent authorized to do so, each Fund may hold equity securities
of foreign issuers in the form of American Depository Receipts ("ADRs"),
American Depository Shares ("ADSs") and European Depository Receipts ("EDRs"),
or other securities convertible into securities of
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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 each Fund's investment policies, each 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, if and to the extent authorized
to do so, each Fund may make secured loans of portfolio securities amounting to
not more than 30% of its total assets. Securities loans are made to
broker/dealers or institutional investors pursuant to agreements requiring that
the loans continuously be secured by collateral at least equal at all times to
the value of the securities lent plus any accrued interest, "marked to market"
on a daily basis. The collateral received will consist of cash, U.S. short-term
government securities, bank letters of credit or such other collateral as may be
permitted under each Fund's investment program and by regulatory agencies and
approved by the Company's Board of Directors. While the securities loan is
outstanding, each Fund will continue to receive the equivalent of the interest
or dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. Each Fund has the right
to call each loan and obtain the securities on five business days' notice. To
the extent applicable, each 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.
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UNITED STATES GOVERNMENT OBLIGATIONS
If and to the extent authorized to do so, each Fund may 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, each Fund may
invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(e.g., obligations of the Federal Home Loan Mortgage Corporation). In the case
of obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and that
have been established or sponsored by the U.S. government include, in addition
to those identified above, the Bank for Cooperatives, the Export-Import Bank,
the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
As stated in the Prospectus, bank obligations that may be purchased by and to
the extent authorized to do so, each Fund include certificates of deposit,
bankers' acceptances and fixed time deposits. A certificate of deposit is a
short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' 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
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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 each
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 each 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.
With the exception of the U.S. Small Cap Fund, the Funds will not purchase
securities which the relevant 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 each Fund's
investments. In the event unforeseen exchange controls or foreign withholding
taxes are imposed with respect to each Fund's investments, the effect may be to
reduce the income received by each Fund on such investments.
CONVERTIBLE SECURITIES
GENERAL. Under normal market circumstances, each Fund may invest in convertible
securities (the U.S. Small Cap Fund will limit its investment to up to 10% of
its total assets in such securities and the U.S. Government Fund may invest only
in convertible securities rated AAA). Set forth below is additional information
concerning convertible securities.
Convertible securities are issued and traded in a number of securities markets.
For the past several years, the principal markets have been the United States,
the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since each Fund's investments are expected to be
primarily in the U.S. market or the Euromarket where convertible bonds have been
primarily denominated in U.S. dollars, it is expected that ordinarily a
substantial portion of the convertible securities held by each Fund will be
denominated in U.S. dollars. However,
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the underlying equity securities typically will be quoted in the currency of the
country where the issuer is domiciled. With respect to convertible securities
denominated in a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued. As a result, fluctuations in the
exchange rate between the currency in which the debt security is denominated and
the currency in which the share price is quoted will affect the value of the
convertible security. Each Fund may enter into foreign currency hedging
transactions in which they may seek to reduce the impact of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent there are changes in interest rates or yields of similar non-convertible
securities, the investment value of the convertible security typically will
fluctuate. However, at the same time, the value of the convertible security will
be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock. If, because of a low price of the underlying common stock, the
conversion value is below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.
Holders of convertible securities have a claim on the assets of the issuer prior
to the common stockholders but may be subordinated to similar non-convertible
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security.
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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 and/or in the case of Funds other than the U.S.
Small Cap Fund, to manage the effective maturity or duration of debt instruments
held by a Fund. In addition, the Value Equity Fund may enter into transactions
to seek to increase a Fund's income or gain. The U.S. Government Fund currently
intends to pursue such transactions only to hedge its exposure to foreign
currencies versus the U.S. dollar. The discussion below supplements the
discussion in each Fund's 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 a 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
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entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
A Fund's inability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are determined by
negotiation of the parties. It is anticipated that any Fund authorized to use
OTC options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with a Fund or fails to 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 a Fund will expose a 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, each Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. In selling put
options, a Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate, currency or market changes, for duration
management and for permissible non-hedging purposes. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract and obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC and generally will be entered into only
for bona fide hedging, risk management (including duration management) or other
permissible non-hedging purposes. Maintaining a futures contract or selling an
option on a futures contract will typically require a Fund to deposit with a
financial intermediary, as security for its obligations, an amount of cash or
other specified
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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, each Fund may purchase and sell call
and put options on securities indices and other financial indices. In so doing,
each 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, each Fund may engage in currency
transactions with Counterparties to hedge the value of portfolio securities
denominated in particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange-listed and OTC options
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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". Each Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.
Except as provided in its Prospectus, each 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.
If and to the extent authorized to do so, 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 in the Prospectus
under "Use of Segregated and Other Special Accounts".
COMBINED TRANSACTIONS
If and to the extent authorized to do so, each 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
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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
If and to the extent authorized to do so, each Fund may be authorized to enter
into interest rate, currency and index swaps, the purchase or sale of related
caps, floors and collars. Each 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. Each 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 a 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, 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
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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.
A 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, each 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 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.
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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 each of 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.
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.
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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
If and to the extent authorized to do so, each Fund's net investment income from
foreign issuers may be subject to non-U.S. withholding taxes thereby reducing
each Fund's net investment income. See "Additional Information Concerning
Taxes".
ILLIQUID SECURITIES
If and to the extent authorized to do so, each Fund may invest up to 15% of its
net assets in illiquid securities. See "Limiting Investment Risks" in the
Prospectus. The sale of restricted or illiquid securities require more time and
result in higher brokerage charges or dealer discounts and other selling
expenses than the sale of securities eligible for trading on securities
exchanges or in the over-the-counter markets. Restricted securities often sell
at a price lower than similar securities that are not subject to restrictions on
resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
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 relevant 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 relevant Adviser will monitor the liquidity of
securities in each Fund's portfolio and report periodically on such decisions to
the Board of Directors.
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
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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;
(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
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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.
With respect to the U.S. Government Fund, the U.S. Government Fund has adopted
the following fundamental investment restriction: the Fund will not purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, or repurchase agreements
secured thereby) if, as a result, more than 25% of the value of the Fund's total
assets would be invested in the securities of companies whose principal business
activities are in the same industry. Note that each of the Funds is also subject
to this fundamental restriction as described under "Limiting Investment Risks"
in each such Funds' Prospectus.
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
each Fund which may be changed only when permitted by law and approved by the
holders of a majority of each Fund's outstanding voting securities, as described
under "General Information--Capital Stock". Restrictions (7) through (12) are
nonfundamental policies of each Fund, and may be changed by a vote of the
Company's Board of Directors.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the Company
for the past five years are listed below.
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL
HELD WITH OCCUPATION(S)
NAME, ADDRESS AND AGE THE COMPANY PAST 5 YEARS
- --------------------- ----------- ------------
<S> <C> <C>
Morris W. Offit, 60* 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.
- -----------------
* "Interested person" as defined in the 1940 Act.
21
<PAGE>
Edward J. Landau, 66 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, 66 Divine (1972 - present)
Cathedral of St. John the
Divine
1047 Madison Avenue
New York, NY 10025
Wallace Mathai-Davis, 52 Secretary and Managing Director, OFFITBANK
OFFITBANK Treasurer (1986 - present). Secretary and
520 Madison Avenue Treasurer of OFFITBANK
New York, NY 10022 Investment Fund, Inc.
Stephen Brent Wells, 52 Assistant Managing Director, OFFITBANK
OFFITBANK Treasurer (1994 - present); General Counsel,
520 Madison Avenue Gabelli Funds, Inc. (1993 - 1994);
New York, NY 10022 General Counsel and President,
Funds Group, Goldman Sachs
Asset Management (1989 - 1993)
Vincent M. Rella, 44 Assistant Controller, OFFITBANK (1986 -
OFFITBANK Treasurer present)
520 Madison Avenue
New York, NY 10022
Bruce Treff, 30 Assistant Counsel, BISYS Fund Services,
BISYS Fund Services Secretary Inc. since September 1995.
Limited Partnership Previously, Manager Alliance
3435 Stelzer Road Capital Management, L.P.
Columbus, Ohio 43219
Alaina Metz, 29 Assistant Chief Administrative Officer of
BISYS Fund Services Secretary BISYS Fund Services from June
Limited Partnership 1995 to present. Previously,
3435 Stelzer Road Supervisor of Blue Sky Department
Columbus, Ohio 43219 at Alliance Capital Management,
May 1989 to June 1995.
22
<PAGE>
Kristine Kelly, 28 Assistant Manager, BISYS Fund Services
BISYS Fund Services Secretary form January 1997 to present.
Limited Partnership Previously, Associate Director at
3435 Stelzer Road Furman Selz LLC.
Columbus, Ohio 43219
</TABLE>
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.
ESTIMATED DIRECTOR COMPENSATION
(FOR CALENDAR YEAR 1997)
<TABLE>
<CAPTION>
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 $20,000
The Very Reverend $5,000 0 N/A $20,000
James Parks Morton
</TABLE>
* For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.
INVESTMENT ADVISER
U.S. SMALL CAP FUND, U.S. GOVERNMENT FUND, HIGH YIELD FUND, EMERGING MARKETS
FUND AND GLOBAL CONVERTIBLE FUND
The Company has retained OFFITBANK, a New York State chartered trust company, to
act as its investment adviser (the "Adviser") for the U.S. Small Cap Fund, U.S.
Government Fund, High Yield Fund, Emerging Markets Fund and Global Convertible
Fund. The advisory agreement (the "Advisory Agreement") between the Adviser and
the Company provides that the Adviser shall manage the operations of the
Company, subject to policies established by the Board of Directors of the
Company. Pursuant to the Advisory Agreement, except in the case of the U.S.
Small Cap Fund, the Adviser manages the Company's investment portfolios, directs
23
<PAGE>
purchases and sales of the portfolio securities and reports thereon to the
Company's officers and directors regularly. In addition, the Adviser pays the
compensation of the Company's officers, employees and directors affiliated with
the Adviser. The Company bears all other costs of its operations, including the
compensation of its directors not affiliated with the Adviser.
For its services under the Advisory Agreement, the Adviser receives from each
Fund an advisory fee. The fee is payable monthly at an annual rate of 1.00% of
U.S. Small Cap Fund's average daily net assets, 0.40% of U.S. Government Fund's
average daily net assets 0.85% of the first $200,000,000 and 0.75% on amounts in
excess thereof of VIF-High Yield Fund's average daily net assets, 0.90% of the
first $200,000,000 and 0.80% on amounts in excess thereof of VIF-Emerging
Markets Fund's average daily net assets, 0.80% of the first $200,000,000 and
0.70% on amounts in excess thereof of VIF-Investment Grade Global Debt Fund's
average daily net assets and 0.90% of VIF-Global Convertible Fund's average
daily net assets. The Adviser may waive all or part of its fee from time to time
in order to increase a Fund's net investment income available for distribution
to shareholders. The Funds will not be required to reimburse the Adviser for any
advisory fees waived.
Unless sooner terminated, the Advisory Agreement provides that it will continue
in effect as to a particular Fund until February 28, 1997 and for consecutive
one year terms thereafter, provided 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.
VALUE EQUITY FUND
David J. Greene & Company ("DJ Greene") is responsible for managing the
investment portfolio of the Value Equity Fund. DJ Greene is a registered
investment adviser under the 1940 Act and a member of the New York Stock
Exchange. The advisory agreement (the "DJ Greene Agreement") between DJ Greene
and the Company provides that DJ Greene shall manage the investment operations
of the Company, subject to policies established by the Board of Directors of the
Company. Pursuant to the DJ Greene Agreement, DJ Greene manages the Company's
Value Equity Fund, directs purchases and sales of the portfolio securities for
the Value Equity Fund and reports regularly thereon to the Company's officers
and directors. The Company bears all other costs of its operations.
For its services under the Advisory Agreement, DJ Greene receives an advisory
fee. The fee is payable monthly at an annual rate of .80% of the Value Equity
Fund's average daily net worth. DJ Greene may waive all or part of its fee from
time to time in order to increase the Value Equity Fund's net investment income
available for distribution to shareholders. The Value Equity Fund will not be
required to reimburse DJ Greene for any advisory fees waived.
The DJ Greene Agreement, dated September 3, 1996, was approved by the Company's
Board of Directors on July 17, 1996, for an initial two year period. Unless
sooner terminated, the
24
<PAGE>
Advisory Agreement will continue in effect with respect to the Company and from
year to year thereafter if such continuance is approved at least annually by the
Company's Board of Directors or by a vote of a majority (as defined under
"General Information" - Capital Stock") of the outstanding shares of the Value
Equity 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 case in person at a meeting called for such purpose. The
Advisory Agreement may be terminated by the Company or DJ Greene on 60 days'
written notice and will terminate immediately in the event of its assignment.
SUB-ADVISER - U.S. SMALL CAP FUND
Rockefeller & Co., Inc. subject to the review and overall supervision of the
Adviser, is responsible for managing the investment portfolio of the U.S. Small
Cap Fund. Rockefeller & Co. is a registered investment adviser under the
Investment Advisers Act of 1940. Its earliest predecessor was established in the
19th century for the benefit of John D. Rockefeller and his family. Today,
Rockefeller & Co. is a private investment advisory and management firm that
serves the needs of the Rockefeller family and those of a small number of other
persons and institutions. As of January 1, 1996, Rockefeller & Co. managed over
$3 billion in assets. Rockefeller & Co., with offices at 30 Rockefeller Plaza,
New York, New York 10112, is a wholly-owned subsidiary of Rockefeller Financial
Services, Inc., all of the voting shares of which are owned by the Rockefeller
Family Trust. The Rockefeller Family Trust was established in 1979, primarily
for the benefit of the grandchildren of John D. Rockefeller, Jr. and their
descendants. The grantors of the trust property are the senior members of the
Rockefeller Family. In 1980, Rockefeller & Co. was registered as an investment
adviser and commenced providing management services to non-Rockefeller Family
clients. Rockefeller & Co. provides comprehensive investment management services
in the global equity and fixed- income markets. It allocates capital to asset
classes with superior investment return potential, commensurate with the overall
financial objectives and risk tolerances of its clients. Each asset class
employed is managed by a specialized investment unit with dedicated investment
and research professionals suited to its particular asset class or geographic
region. Rockefeller & Co. maintains offices in New York, London and Hong Kong.
Rockefeller & Co. has been retained to provide sub-advisory services to the U.S.
Small Cap Fund pursuant to an agreement between Rockefeller & Co. and OFFITBANK
(the "Sub-Advisory Agreement"). Pursuant to the Sub-Advisory Agreement,
OFFITBANK has delegated to Rockefeller & Co. the authority and responsibility to
make and execute portfolio investment decisions for the U.S. Small Cap Fund
within the framework of the U.S. Small Cap Fund's investment objectives,
policies and restrictions, and subject to review by OFFITBANK and the Board of
Directors of the Company. The Sub-Advisory Agreement provides that OFFITBANK,
and not the U.S. Small Cap Fund will pay to Rockefeller & Co. monthly
compensation based on the average daily net assets of the U.S. Small Cap Fund at
the annual rate of 1.00%.
The Sub-Advisory Agreement, dated September 3, 1996, was approved by the Fund's
Directors on July 17, 1996. The Sub-Advisory Agreement provides that it may be
terminated without
25
<PAGE>
penalty by either the Fund or Rockefeller & Co. at any time by the giving of 60
days' written notice to the other and terminates automatically in the event of
"assignment", as defined in the 1940 Act or upon termination of the Advisory
Agreement. The Sub-Advisory Agreement provides that, unless sooner terminated,
it shall continue in effect for an initial two year period, and from year to
year thereafter only so long as such continuance is specifically approved at
least annually by either the Board of Directors of the Company or by a vote of
the majority of the outstanding voting securities of the Fund, provided, that in
either event, such continuance is also approved by the vote of the majority of
the Directors who are not parties to the Sub-Advisory Agreement or "interested
persons" of such parties cast in person at a meeting called for the purpose of
voting on such approval.
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 or DJ Greene 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.
26
<PAGE>
DISTRIBUTOR
OFFIT Funds Distributor, Inc., (the "Distributor"), a wholly-owned subsidiary of
BISYS Fund Services Limited Partnership, with its principal office at 125 West
55th Street, New York 10019, 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
continuance of the Distribution Agreement, the Directors must determine that the
Agreement is in the best interest of the shareholders of the Fund.
ADMINISTRATION, FUND ACCOUNTING, CUSTODY AND TRANSFER AGENCY SERVICES
BISYS Fund Services Limited Partnership, d/b/a BISYS Fund Services ("BISYS")
provides the Company with administrative services pursuant to an Administration
Agreement dated October 1, 1996 (the "Administration Agreement"). BISYS Fund
Services, Inc. provides the Company with fund accounting services pursuant to a
Fund Accounting Agreement dated October 1, 1996 (the "Fund Accounting
Agreement"). Both the Administration Agreement and the Fund Accounting Agreement
continue to be in effect until January 1, 1998 and from year to year thereafter
if such continuances are 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 calculating the net asset value of each Fund,
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.
27
<PAGE>
BISYS Fund Services, Inc. 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 Fund
Services, Inc. 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 each Funds' operations. Each Fund pays BISYS Fund Services, Inc. such
compensation as may be agreed upon from time to time. The Transfer Agency
Agreement continues in effect until January 1, 1998 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.
The Bank of New York ("BONY") serves as the Company's custodian, with respect to
all Funds, other than the Emerging Markets Fund, pursuant to a custodian
agreement (the "BONY Custodian Agreement") with the Company. BONY is located at
90 Washington Street, New York, New York 10286. Under the BONY Custodian
Agreement, BONY 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. BONY is
authorized under the BONY Custodian Agreement to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Funds, provided that
BONY remains responsible for the performance of all of its duties under the BONY
Custodian Agreement. BONY is entitled to receive such compensation from the
Funds as may be agreed upon from time to time.
The Chase Manhattan Bank, N.A. ("Chase") serves as the Company's custodian, with
respect to the Emerging Markets Fund only, pursuant to a custodian agreement
(the "Chase Custodian Agreement") with the Company. Chase is located at 4
MetroTech Center, 18th Floor, Brooklyn, New York 11245. Under the Chase
Custodian Agreement, Chase 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. Chase is
authorized under the Chase Custodian Agreement to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Funds, provided that
Chase remains responsible for the performance of all of its duties under the
Chase Custodian Agreement. Chase is entitled to receive monthly fees under the
Chase 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
28
<PAGE>
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 Chase 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 each of the Funds to the
organizations retained to provide services for each of the Funds may be waived
from time to time in order to increase such Funds' net investment income
available for distribution to shareholders or total return.
Except as otherwise noted, OFFITBANK, BISYS and BISYS Fund Services, Inc. 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 to
shareholders; advisory and administration fees; charges of its custodian and
transfer agent; certain insurance costs; auditing and legal expenses; fees of
independent pricing services; costs of shareholders' reports and shareholder
meetings, 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.
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 policies
established by the Company's Board of Directors, except as stated below, the
Adviser is primarily responsible for the Company's portfolio decisions and the
placing of the Company's portfolio transactions. DJ Greene is primarily
responsible for the portfolio decisions and the placing of the portfolio
transaction for the Value Equity Fund. Rockefeller & Co., however, under the
supervision of the Adviser, is primarily responsible for the portfolio decisions
and the placing of the portfolio transactions for the U.S. Small Cap Fund.
With respect to the U.S. Government Fund High Yield Fund, Emerging Markets Fund,
Global Convertible Fund and Total Return Fund, portfolio securities normally
will be purchased or sold from or to dealers at a net price, which may include
dealer spreads and underwriting commissions. With respect to the U.S. Small Cap
Fund, Value Equity Fund, 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
29
<PAGE>
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, DJ Greene and Rockefeller & Co. each
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 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, DJ Greene or Rockefeller &
Co., as the case may be. 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, DJ Greene and Rockefeller & Co. may aggregate the securities to be
sold or purchased for the Company with those to be sold or purchased for other
funds or accounts in order to obtain best execution.
PURCHASE OF SHARES
The Company reserves the right, in its sole discretion, to (i) suspend the
offering of shares of each 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.
30
<PAGE>
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 each 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 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
31
<PAGE>
A Fund may also calculate total return on an aggregate basis which reflects the
cumulative percentage change in value over the measuring period. The formula for
calculating aggregate total return can be expressed as follows:
Aggregate Total Return = [( ERV ) - 1]
-------------
P
In addition to total return, 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:
(a-b
Yield = 2 [ --- +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, 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 each of 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.
32
<PAGE>
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.
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 NYSE is closed Saturdays, Sundays
and the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, the Fourth of July,
33
<PAGE>
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 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 recent transactions or offers with respect to
such securities and any available analysts' reports regarding the issuer.
To the extent a Fund invests in foreign securities, the calculation of the
Fund's 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
34
<PAGE>
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.
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.
35
<PAGE>
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.
COUNSEL
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022,
serves as counsel to each of 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.
As of April 15, 1997, the Trustees and officers of the Company in the aggregate
owned none of the outstanding shares of any of the Portfolios. Also, as of that
date, the shareholders listed below owned of record more than five percent of
the following Portfolios:
Shares of % of
Shareholder Portfolio Owned Portfolio Owned
----------- --------------- ---------------
Emerging Markets Fund:
C M Life 418,369.960 83.666%
c/o Continuum
301 West 11th Street
Kansas City, Missouri 64105-1634
Security Equity Life Insurance Co. 78,439.024 15.686%
84 Business Park Drive
Armonk, New York 10504-1711
36
<PAGE>
High Yield Fund:
C M Life 1,771,897.191 81.980%
c/o Continuum
301 West 11th Street
Kansas City, Missouri 64105-1634
Security Equity Life Insurance Co. 366,248.496 17.870%
84 Business Park Drive
Armonk, New York 10504-1711
FINANCIAL STATEMENTS
The unaudited financial statements for the OFFITBANK VIF-Emerging Markets Fund
for the period ended March 31, 1997 and the unaudited statement of assets and
liabilities and report thereon for the Company for the period ended March 31,
1997 are included herein. The unaudited financial statements for OFFITBANK
VIF-High Yield Fund for the period ended September 30, 1996 and the unaudited
statement of assets and liabilities and report thereon for the Company for the
period ended September 30, 1996 are included herein by reference to the
Company's Semi-Annual Report to Shareholders dated November 30, 1996.
37
<PAGE>
OFFITBANK VIF EMERGING MARKETS FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 28, 1996(COMMENCEMENT OF OPERATIONS) - MARCH 31, 1997
INVESTMENT INCOME:
Interest income $143,397
Total Income $143,397
EXPENSES:
Advisory fee 13,449
Administration fee 2,241
Fund accounting fee and expenses 15,000
Custodian fees and expenses 4,599
Professional 24,510
Trustees' fees 1,350
Transfer and shareholder servicing agent fees 538
Registration fees 1295
Insurance 33
Organization expense 2,653
Miscellaneous 1,458
-----
Total expenses/fees before waivers/reimbursements 67,126
------
Less: expenses/fees waived/reimbursed (44,660)
-------
Net Expenses 22,466
------
NET INVESTMENT INCOME 120,931
-------
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments and foreign
currency transactions 16,858
Net unrealized appreciation on investments and
foreign currency transactions 50,342
------
Net realized and unrealized gain on
investments and foreign currency transactions 67,200
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $188,131
========
<PAGE>
OFFITBANK VIF-EMERGING MARKETS FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period from
August 28, 1996
(Commencement of Operations)
through March 31, 1997
-------------------------------
OPERATIONS:
<S> <C>
Net investment income $120,931
Net realized gain on investments and foreign currency
transactions 16,858
Net unrealized appreciation on investments and
foreign currency transactions 50,342
------
Net increase in net assets resulting from operations 188,131
-------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (120,931)
--------
Total Distributions (120,931)
--------
CAPITAL STOCK TRANSACTIONS:
Proceeds from sales of shares 4,138,941
Net asset value of shares issued in reinvestment 120,931
-------
4,259,872
---------
Cost of shares redeemed (14,803)
-------
Net increase in net assets from capital share transactions 4,245,069
---------
Total increase in net assets 67,200
------
NET ASSETS:
Beginning of period 33,333
------
End of period $4,345,602
==========
</TABLE>
<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.
1
<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 March 31, 1997, the Advisor
earned and waived fees of $13,449 for the VIF-Emerging Markets Fund.
Furman Selz LLC ("Furman Selz") provided 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 were 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 paid 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. From August 26, 1996 to December 31, 1996, Furman Selz earned and
waived fees of $1,005 for the VIF-Emerging Markets Fund.
As Administrator, Furman Selz provided the Funds with fund accounting and
related services. For these services Furman Selz was paid a fee of $2,500 per
month, plus out-of-pocket expenses. From August 26, 1996 to December 31, 1996,
Furman Selz earned fees of $7,500 for the VIF-Emerging Markets Fund.
Furman Selz acted as Transfer Agent for the Funds. Furman Selz received
reimbursement of certain expenses plus a per account fee of $15.00 per year.
From August 26, 1996 to December 31, 1996, Furman Selz earned fees of $414 for
the VIF-Emerging Markets Fund.
The Company has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. 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
March 31, 1997, no distribution costs were incurred.
On October 1, 1996, the Company entered into agreements with BISYS Fund Services
("BISYS") pursuant to which BISYS will perform the administrative, accounting
and transfer agency services described above on substantially similiar terms.
BISYS also acquired from Furman Selz its interest in OFFIT Funds Distributor,
Inc. The agreements became effective on January 1, 1997.
From January 1, 1997 to March 31, 1997, BISYS earned administrative services
fees, fund accounting fees and transfer agent fees of $1,236, $7,500 and $124
for the VIF-Emerging Markets Fund, respectively. During the same period BISYS
also waived the administrative service fees of $1,236 for the Fund.
2
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
NOTES TO FINANCIAL STATEMENT (UNAUDITED)
- -------------------------------------------------------------------------------
OFFITBANK has voluntarily agreed to cap the expenses of the VIF Emerging Markets
Fund at 1.50%. In order to maintain this ratio, the Advisor has agreed to
reimburse the Fund $28,970.
3. INVESTMENTS. Purchase and sales of securities for the period ended March 31,
1997, other than short-term securities, amounted to $1,930,781 and $5,501,745
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-EMERGING
MARKETS
---------------
Aggregate cost ..................... $ 3,462,167
===========
Gross unrealized appreciation....... $ 69,352
Gross unrealized depreciation....... (22,366)
-----------
Net unrealized appreciation......... $ 46,986
===========
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 March 31, 1997, were as follows:
VIF-EMERGING MARKETS
-----------------------------
SHARES AMOUNT
-------------- ----------
Beginning balance ... 3,333 $ 33,333
-------- -----------
Shares sold ......... 408,159 4,138,941
Shares issued in
reinvestment of net
investment income.. 11,829 120,931
Shares redeemed ..... (1,447) (14,803)
-------- -----------
Net increase ........ 418,541 4,245,069
-------- -----------
Ending balance ...... 421,874 $ 4,278,402
======== ===========
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.
3
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
NOTES TO FINANCIAL STATEMENT (UNAUDITED)
- -------------------------------------------------------------------------------
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.
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 March 31, 1997 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 March 31, 1997:
<TABLE>
<CAPTION>
VALUE ON VALUE AT
CONTRACT MATURITY ORIGINATION SEPTEMBER UNREALIZED
CURRENCY AMOUNTS DATE DATE 30, 1996 APPRECIATION
------------------ -------------------- ------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
BUY DEM 240,000 04-22-97 $145,378 $143,841 $(1,537)
SELL DEM (520,000) 04-22-97 (316,454) (311,656) 4,798
</TABLE>
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 nto 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.
4
<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 Financial
Highlights for the period ended March 31, 1997 for the
OFFITBANK VIF - Emerging Markets Fund (unaudited).
With respect to the OFFITBANK VIF - Emerging Markets Fund
series of the Registrant only, included in the Statement of
Additional Information:
(1) Portfolio of Investments dated March 31, 1997
(unaudited).
(2) Statements of Assets and Liabilities dated March 31,
1997 (unaudited).
(3) Statements of Operations for the period ended March 31,
1997 (unaudited).
(4) Statement of Changes in Net Assets for the period ended
March 31, 1997 (unaudited).
(5) Financial Highlights for the period ended March 31,
1997 (unaudited). (6) Notes to Financial Statements
dated March 31, 1997 (unaudited).
(7) Statement of Assets and Liabilities dated March 31,
1997.
With respect to the High Yield Fund series of the Registrant
only, included in the Semi-Annual Report to Shareholders, and
incorporated by reference in the Statement of Additional
Information from the Rule 30-D filing made by the Registrant
on December 3, 1996 (Accession Number 0000912057-96-028069):
(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.
<PAGE>
(b) Exhibits:
Exhibit
Number Description
------ -----------
Ex-99.B1(a) -- Registrant's Articles of Incorporation (4)
Ex-99.B1(b) -- Registrant's Articles of Amendment (4)
Ex-99.B2 -- Registrant's Amended and Restated By-Laws (4)
Ex-99.B3 -- None.
Ex-99.B4 -- Form of Specimen Share Certificates (4)
Ex-99.B5(a) -- Advisory Agreement between Registrant and OFFITBANK
(4)
Ex-99.B5(b) -- Form of Advisory Agreement between the Registrant and
David J. Greene and Company (2)
Ex-99.B5(c) -- Form of Investment Sub-Advisory Agreement between
OFFITBANK and Rockefeller & Co. Inc. (3)
EX-99.B5(d) -- Form of Investment Advisory Agreement between the
Registrant and CVO Greater China Partners, L.P. (7)
Ex-99.B6 -- Distribution Agreement between Registrant and OFFIT
Funds Distributor, Inc. (5)
Ex-99.B7 -- None.
Ex-99.B8(a) -- Form of Custodian Agreement between Registrant and The
Chase Manhattan Bank, N.A. (1)
EX-99.B8(b) -- Custody Agreement between Registrant and The Bank of
New York (5)
Ex-99.B9(a) -- Administration Agreement between Registrant and BISYS
Fund Services Limited Partnership (5)
Ex-99.B9(b) -- Transfer Agency Agreement between Registrant and BISYS
Fund Services, Inc. (5)
Ex-99.B9(c) -- Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITBANK, C.M. Life Insurance Company, Connecticut
Mutual Life Insurance Company and Connecticut Mutual
Financial Services, L.L.C. (4)
Ex-99.B9(d) -- Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITBANK and Security Equity Life Insurance Company
(4)
Ex-99.B9(e) -- Fund Accounting Agreement between the Registrant and
BISYS Fund Services, Inc. (5)
Ex-99.B10 -- Opinion of Kramer, Levin, Naftalis, Nessen, Kamin &
Frankel (4)
Ex-99.B11(a) -- Consent of Kramer, Levin, Naftalis & Frankel (6)
Ex-99.B11(b) -- None.
Ex-99.B12 -- Unaudited financial statements for the period ended
March 31, 1997.(6)
Ex-99.B13 -- Purchase Agreement between Registrant and OFFIT Funds
Distributor, Inc. (4)
Ex-99.B14 -- None.
Ex-99.B15 -- None.
Ex-99.B16 -- None.
Ex-B. P of A -- Powers of Attorney (4)
Ex-27 -- Financial Data Schedule (6)
- --------------------------------
(1) Filed as an Exhibit to Registrant's Pre-Effective Amendment No. 1 on
March 6, 1995 and incorporated herein by reference.
(2) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 2 on
June 5, 1996 and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 4 on
August 16, 1996 and incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 6 filed
electronically on January 31, 1997, accession number 0000922423-97-
000053 and incorporated herein by reference.
(5) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 7
filed electronically on February 13, 1997, accession number
0000922423-97- 000090 and incorporated herein by reference.
(6) Filed herewith.
(7) To be filed by Amendment.
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 26. Number of Holders of Securities
As of April 8,1997
OFFITBANK VIF-High Yield Fund 4
OFFITBANK VIF-Emerging Markets Fund 3
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 1
OFFITBANK VIF-DJG Value Equity Fund 1
Item 27. Indemnification
Reference is made to Article VII of Registrant's Articles of
Incorporation (filed as an Exhibit to Registrant's Post-Effective Amendment No.
6 filed electronically on January 31, 1997, accession number 0000922423-
97-000053 and incorporated herein by reference) and Article VIII of Registrant'S
Amended and Restated By-Laws (filed as an Exhibit to Registrant's Post-Effective
Amendment No. 6 filed electronically on January 31, 1997, accession number
0000922423-97-000053 and incorporated herein by reference).
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 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.
<PAGE>
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
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).
<PAGE>
(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.
125 West 55th Street
New York, New York 10019
(records of principal underwriter)
(4) Rockefeller & Co., Inc.
30 Rockefeller Plaza
New York, New York 10112
(records relating to its functions as investment
subadviser for OFFITBANK VIF-U.S. Small Cap Fund only)
(5) David J. Greene & Company
599 Lexington Avenue
New York, New York 10022
(records relating to its functions as investment
adviser for DJG Value Equity Fund only)
(6) CVO Greater China Partners, L.P.
520 Madison Avenue
New York, New York 10022
(records relating to its functions as investment
adviser for OFFITBANK VIF-CVO Greater China Fund only)
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not Applicable
(b) The Registrant, on behalf of DJG Value Equity Fund and
OFFITBANK VIF- U.S. Small Cap Fund, undertakes to file a
Post-Effective amendment containing reasonably current
financial statements, which need not be certified, within four
to six months from the later of the effective date of this
Registration Statement or the commencement of the public
offering under the Securities Act of 1933.
(c) The Registrant undertakes to furnish each person to whom a
prospectus is delivered, a copy of the Registrant's latest
annual report to shareholders which will include the
information required by item 5A, upon request and without
charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 8 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 29th day of April, 1997.
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, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated and on the 29th day of April, 1997.
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/Wallace Mathai-Davis
- -----------------------
Wallace Mathai-Davis Secretary and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Morris W. Offit
- -------------------
Morris W. Offit
Attorney-in-fact
* Attorney-in-Fact pursuant to powers of attorney filed as an exhibit to
Registrant's Post-Effective Amendment No. 6 filed electronically on January
31, 1997, accession number 0000922423-97-000053 and incorporated herein by
reference.
<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
Ex-27 Financial Data Schedule
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
Arthur H. Aufses III Monica C. Lord Sherwin Kamin
Thomas D. Balliett Richard Marlin Arthur B. Kramer
Jay G. Baris Thomas E. Molner Maurice N. Nessen
Philip Bentley Thomas H. Moreland Founding Partners
Saul E. Burian Ellen R. Nadler Counsel
Barry Michael Cass Gary P. Naftalis _____
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
Kenneth P. Kopelman Judith Singer M. Frances Buchinsky
Michael Paul Korotkin Howard A. Sobel Abbe L. Dienstag
Shari K. Krouner Jeffrey S. Trachtman Ronald S. Greenberg
Kevin B. Leblang Jonathan M. Wagner Debora K. Grobman
David P. Levin Harold P. Weinberger Christian S. Herzeca
Ezra G. Levin E. Lisk Wyckoff, Jr. Jane Lee
Larry M. Loeb Pinchas Mendelson
Lynn R. Saidenberg
Special Counsel
-----
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
April 29, 1997
The OFFITBANK Variable Insurance Fund, Inc.
125 West 55th Street
New York, New York 10019
Re: Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A
File No. 33-81748
-----------------------------------
Gentlemen:
We hereby consent to the reference to our firm as counsel in this
Registration Statement on Form N-1A.
Very truly yours,
/s/Kramer, Levin, Naftalis & Frankel
------------------------------------
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> OFFITBANK VIF EMERGING MARKETS FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> AUG-28-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 3462
<INVESTMENTS-AT-VALUE> 3509
<RECEIVABLES> 491
<ASSETS-OTHER> 398
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4398
<PAYABLE-FOR-SECURITIES> 0
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<OTHER-ITEMS-LIABILITIES> 52
<TOTAL-LIABILITIES> 52
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4279
<SHARES-COMMON-STOCK> 422
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<ACCUMULATED-NET-GAINS> 17
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50
<NET-ASSETS> 4346
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 143
<OTHER-INCOME> 0
<EXPENSES-NET> 22
<NET-INVESTMENT-INCOME> 121
<REALIZED-GAINS-CURRENT> 17
<APPREC-INCREASE-CURRENT> 50
<NET-CHANGE-FROM-OPS> 188
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 121
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4139
<NUMBER-OF-SHARES-REDEEMED> 14
<SHARES-REINVESTED> 121
<NET-CHANGE-IN-ASSETS> 4313
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 67
<AVERAGE-NET-ASSETS> 2360
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .30
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.30
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
