Registration Nos. 33-81748
811-8640
As filed via EDGAR with the Securities and Exchange Commission on July 29, 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. 9
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
(Check appropriate box or boxes)
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
(Exact name of Registrant as specified in charter)
125 West 55th Street
New York, New York 10019
(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 filed a Rule 24f-2 Notice for the
fiscal year ended March 31, 1997 on July 24, 1997.
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A Item No. Location
- ------------- --------
Part A Prospectus Caption
- ------ ------------------
Item 1. Cover Page Cover Page
Item 2. Synopsis Not Applicable
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description of
Registrant The Company; Investment
Objectives and Policies;
Investment Policies and
Techniques; Special Risk
Considerations; Limiting
Investment Risks; Appendix
A
Item 5. Management of the Fund Management
Item 5A. Management's Discussion of
Fund Performance Not Applicable
Item 6. Capital Stock and Other
Securities How Distributions Are
Made; Tax Information;
Shareholder Communication
Item 7. Purchase of Securities
Being Offered About Your Investment;
How the Company Values
Its Shares
Item 8. Redemption or Repurchase About Your Investment;
Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
Statement of Additional
Part B Information Caption
- ------ -------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not Applicable
Item 13. Investment Objectives and
Policies Additional Information on
Portfolio Instruments and
Techniques; Additional
Risk Considerations;
Investment Limitations
Item 14. Management of the Registrant Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities General Information
Item 16. Investment Advisory and
Other Services Management of the Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices
Item 18. Capital Stock and Other
Securities General Information
Item 19. Purchase, Redemption and
Pricing of Securities Management of the Fund;
Being Offered Purchase of Shares;
Redemption of Shares;
Item 20. Tax Status Additional Information
Concerning Taxes
Item 21. Underwriters Distributor
Item 22. Calculation of Performance
Data Performance Calculations
Item 23. Financial Statements Report of Independent
Accountants; Financial
Statements
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. JULY 29, 1997
- --------------------------------------------------------------------------------
OFFITBANK VIF-HIGH YIELD FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFITBANK VIF - High Yield Fund (the "Fund") is an investment portfolio of the
OFFITBANK Variable Insurance Fund, Inc. (the "Company"), an open-end, management
investment company consisting of ten separate investment portfolios. The Fund's
investment objective is to seek high current income with capital appreciation as
a secondary objective. The Fund invests, under normal circumstances, at least
65% of its total assets in U.S. corporate fixed income securities rated below
investment grade offering potential returns that are sufficiently high to
justify the greater investment risks.
THE FUND MAY INVEST PRIMARILY IN HIGH YIELD, HIGH RISK CORPORATE DEBT SECURITIES
AND SOVEREIGN DEBT OBLIGATIONS WHICH ARE CONSIDERED SPECULATIVE AND SUBJECT TO
CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE AND POLICIES" AND "SPECIAL RISK
CONSIDERATIONS." There can be no assurance that the Fund's investment objective
will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Fund's investment adviser (the "Adviser"). The Adviser currently
manages in excess of $8.4 billion in assets. The address of the Company is 125
West 55th Street, New York, New York 10019. Yield and other information
regarding the Funds may be obtained by calling 1-800-618-9510.
SHARES OF THE FUND ARE SOLD ONLY TO CERTAIN LIFE INSURANCE COMPANIES
(COLLECTIVELY, "PARTICIPATING COMPANIES") AND THEIR SEPARATE ACCOUNTS
(COLLECTIVELY, THE "ACCOUNTS") TO FUND BENEFITS UNDER VARIABLE ANNUITY CONTRACTS
("CONTRACTS") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF ONE OR MORE OF THE
FUNDS IN ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND
POLICY OWNERS ("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH
ALLOCATION RIGHTS ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS.
SHARES ARE REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE
CONTRACTS AND POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated January 31, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus. INVESTORS ARE ADVISED THAT (A) THE
COMPANY IS NOT AUTHORIZED TO ENGAGE IN THE BUSINESS OF BANKING AND (B) SHARES OF
THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY,
OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR ARE THEY FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WHAT YOU NEED TO KNOW
Highlights ................................................................ 2
Financial Highlights ...................................................... 3
The Company ............................................................... 4
Investment Objective and Policies ......................................... 4
Investment Policies and Techniques ........................................ 6
Special Risk Considerations ............................................... 12
Limiting Investment Risks ................................................. 21
Management ................................................................ 22
About Your Investment ..................................................... 23
How the Company Values Its Shares ......................................... 23
How Distributions are Made: Tax Information ............................... 24
Shareholder Communications ................................................ 24
Performance Information ................................................... 25
Counsel; Independent Accountants .......................................... 25
Appendix A ............................................................... A-1
<PAGE>
HIGHLIGHTS
INTRODUCTION
OFFITBANK VIF-High Yield Fund (the "Fund") is one of ten separate investment
portfolios of the OFFITBANK Variable Insurance Fund, Inc. (the "Company") an
open-end, management investment company. The Fund's investment objective is to
seek high current income with capital appreciation as a secondary objective.
FUND MANAGEMENT
OFFITBANK, a New York State chartered trust company serves as the Fund's
Adviser.
SHARES OF THE FUND
Shares of the Fund are sold only to certain life insurance companies
(collectively, "Participating Companies") and their separate accounts
(collectively, the "Accounts") to fund benefits under variable annuity contracts
("Contracts") and variable life insurance policies ("Policies") to be offered by
the Participating Companies. The Accounts invest in shares of the Fund in
accordance with allocation instructions received from Contract and Policy owners
("Contract Owners" or "Policy Owners," as appropriate). Such allocation rights
are further described in the accompanying Account Prospectus. Shares are
redeemed to the extent necessary to provide benefits under the Contracts and
Policies.
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc., the Fund's Underwriter, to the Accounts without any sales or
other charge, at the Fund's net asset value on each day on which the New York
Stock Exchange ("NYSE") is open for business. The Company will effect orders to
purchase or redeem shares of the Fund, that are based on premium payments,
surrender and transfer requests and any other transaction requests from Contract
and Policy Owners, annuitants and beneficiaries, at the Fund's net asset value
per share next computed after the Account receives such transaction request.
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above.
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset value. See "About Your Investment."
RISK FACTORS
Investment in the Fund is subject to certain risks, as set forth in detail under
"Special Risk Considerations". The Fund invests at least 65% of its assets in
U.S. corporate fixed income securities rated below investment grade offering and
are generally perceived by the marketplace to be high yield/high risk
securities. See "Investment Objective and Policies" and "Special Risk
Considerations".
2
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights of the Fund for the period ended March 31, 1997. The
information below has been derived from financial statements included in the
Annual Report to Shareholders for the period ended March 31, 1997. Such
information has been audited by Price Waterhouse LLP, independent auditors for
the Company. The Annual Report is incorporated by reference into the Statement
of Additional Information. The information set forth below is for a share of the
Fund outstanding for the period indicated. Further information about the
performance of the Company is included in the Annual Report to Shareholders
which may be obtained by calling 1-800-618-9510.
<TABLE>
<CAPTION>
VIF-HIGH YIELD
FUND
For the period
Selected ratios and data for a Share of capital stock outstanding April 1, 1996*
through the period: through
March 31, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD..................................... $10.00
------
Net investment income............................................... 0.78
Net realized and unrealized gains on investments.................... 0.37
-----
Total from investment operations.................................... 1.15
-----
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income............................................... (0.78)
------
Total dividends and distributions................................... (0.78)
------
NET ASSET VALUE, END OF PERIOD........................................... $10.37
TOTAL INVESTMENT RETURN+................................................ 11.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............................
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................................ 1.15%
Net investment income............................................... 7.45%
PORTFOLIO TURNOVER RATE.................................................. 4 %
</TABLE>
* Commencement of Operations.
(1) If the Fund had borne all expenses that were assumed or waived by the
Adviser and Administrator, the above expense ratio would have been 2.25%
for the Fund.
+ Total return is based on the change in net asset value during the period
and assumes reinvestment of all dividends and distributions.
3
<PAGE>
THE COMPANY
The Company, a Maryland corporation formed on July 1, 1994, is designed to serve
as a funding vehicle for Contracts and Policies offered by the Accounts of
Participating Companies. Shares of the Fund are offered only to the Accounts
through OFFIT Funds Distributor, Inc. (the "Distributor"), the principal
underwriter for the Company. The Fund is a no-load, separate, non-diversified
investment portfolio of the Company, an open-end management investment company.
The Company is not authorized to engage in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Funds, which could possibly force the Company to sell portfolio securities
at disadvantageous prices. The Company's Directors intend to monitor events in
order to identify any material irreconcilable conflicts that may possibly arise
and to determine what action, if any, should be taken in response thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an objective which it pursues through investment policies as
described below. The objectives and policies of the Fund can be expected to
affect the return of the Fund and the degree of market and financial risk to
which the Fund is subject. For more information about the investment strategies
employed by the Fund, see "Investment Policies and Techniques." The investment
objective and policies of the Fund may, unless otherwise specifically stated, be
changed by the Directors of the Company without a vote of the shareholders. As a
matter of policy, the Directors would not materially change the investment
objective of the Fund without shareholder approval. There is no assurance that
the Fund will achieve its objective.
Additional portfolios may be created from time to time with different investment
objectives and policies for use as funding vehicles for the Accounts or for
other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Fund, with the classes being subject to different charges and expenses and
having such other different rights as the Directors may prescribe.
The Fund may utilize many of the same investment techniques and invest in
similar securities. Investors should note, however, that the Fund will invest
their assets in accordance with their respective investment objectives and
policies described below. Accordingly, the Adviser expects that the Fund's
investment portfolios will be distinct, notwithstanding their ability to invest
in comparable instruments.
The VIF-High Yield Fund's primary investment objective is high current income.
Capital appreciation is a secondary objective. The Fund will seek to achieve its
objectives by investing, under normal circumstances, at least 65% of its total
assets in U.S. corporate fixed income securities (including debt securities,
convertible securities and preferred stocks) which are lower rated or unrated at
the time of investment and are generally perceived by the marketplace to be high
yield/high risk securities, commonly referred to as "junk bonds." In addition,
the Fund will seek to invest in debt securities which are (i) "seasoned" senior
securities (as defined below) and offer sufficiently high potential yields to
justify the greater investment risk, (ii) judged by the Adviser to be more
creditworthy than generally perceived in the marketplace, or (iii) issued by
once creditworthy companies that are now considered a high risk investment
generally due to changing industry conditions, a change in company
capitalization or a reduction of earning power. The Fund will seek capital
appreciation opportunities in those special situations in which an issuer's
senior securities sell at a substantial discount in relation to their
liquidation value,
4
<PAGE>
or in which the creditworthiness of an issuer is believed, in the judgment of
the Adviser, to be improving. For purposes of this Prospectus, a "senior"
security of an issuer is any security entitled to preference over the issuer's
common stock in the distribution of income or assets upon liquidation.
Securities offering the high yield and appreciation potential characteristics
that the VIF-High Yield Fund seeks are generally found in mature cyclical or
depressed industries and highly leveraged companies. The Adviser attempts to
identify securities the underlying fundamentals of which are improving or are
sufficiently strong to sustain the issuer. The Adviser also attempts to identify
securities in which the asset values ultimately supporting the credit are
sufficient so that attractive returns are achievable in the event of bankruptcy,
reorganization or liquidation of the issuer. Some of the Fund's securities may
be obtained as a result of the issuer's reorganization or may be in default or
arrears.
In selecting a security for investment by the VIF-High Yield Fund, the Adviser
considers the following factors, among others: (i) the current yield, the yield
to maturity where appropriate, and the price of the security relative to other
securities of comparable quality and maturity; (ii) the balance sheet and
capital structure of the issuer; (iii) the market price of the security relative
to its face value; (iv) the rating, or absence of a rating, by Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's") or Duff &
Phelps Credit Rating Co. ("D&P"); (v) the variety of issuers and industries
represented in the Fund's portfolio; and (vi) management of the issuer. Industry
trends and fundamental developments that may affect an issuer are also analyzed,
including factors such as liquidity, profitability and asset quality. The
Adviser will be free to invest in high yield, high risk debt securities of any
maturity and duration and the interest rates on such securities may be fixed or
floating.
The VIF-High Yield Fund invests primarily in "seasoned" senior securities. The
Fund defines a "seasoned" security as any security whose issuer has been
operating in its current form for a considerable period of time. The Fund
generally does not invest in original issue high yield securities of newly
formed, highly leveraged corporations but reserves the right to do so. An
additional risk associated with such investments is the unproven credit quality
of newly formed corporations because of the lack of any operating history.
The higher yields sought by the VIF-High Yield Fund are generally obtainable
from non-investment grade securities (i.e., rated BB or lower by S&P or D&P, or
Ba or lower by Moody's, or if unrated, of equivalent quality as determined by
the Adviser). See Appendix A to this Prospectus for a description of ratings of
S&P, Moody's and D&P. Investments in high yield, high risk debt securities
involve comparatively greater risks, including price volatility and the risk of
default in the timely payment of interest and principal, than higher rated
securities. Some of such investments may be non-performing when purchased. See
"Special Risk Considerations."
Although the VIF-High Yield Fund's investments are primarily in U.S. corporate
securities, it may also invest in foreign corporate debt securities, sovereign
debt, municipal securities and mortgage-backed debt having many of the
characteristics of its corporate portfolio. The Adviser does not currently
anticipate seeking investments in the common stock of any issuers. However, the
Fund may acquire securities convertible into common stock or receive common
stock in lieu of dividends, interest, or principal.
OFFITBANK VIF-High Yield Fund will generally be managed in a style similar to
OFFITBANK High Yield Fund.
GENERAL. As indicated above, the Fund is generally managed in the style similar
to other open-end investment companies which are managed by OFFITBANK and whose
shares are generally offered to the public. These other OFFITBANK Funds may,
however, employ different investment practices and may invest in securities
different from those in which their counterpart Fund invests, and, as such, may
not have identical portfolios or experience identical investment results.
5
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. When the Fund invests in
foreign securities, they may be denominated in foreign currencies. Thus, the
Fund's net asset value will be affected by changes in exchange rates.
See "Special Risk Considerations."
BRADY BONDS
The Fund may invest in "Brady Bonds" which are debt securities issued or
guaranteed by foreign governments in exchange for existing external commercial
bank indebtedness under a plan announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989. To date, over $154 billion (face amount) of Brady
Bonds have been issued by the governments of 15 countries, the largest
proportion having been issued by Argentina, Brazil, Mexico and Venezuela. Brady
Bonds have been issued only recently, and accordingly, they do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market.
The Fund may invest in either collateralized or uncollateralized Brady Bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least six months of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds which have been issued to date are rated BB or
B by S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may use, as portfolio management strategies, cross currency hedges,
interest rate transactions, commodity futures contracts in the form of futures
contracts on securities, securities indices and foreign currencies, and related
options transactions. The Fund also may enter into forward foreign currency
contracts and options transactions to hedge in connection with currency and
interest rate positions and in order to enhance the Fund's income or gain.
See "Special Risk Considerations--Hedging and Other Strategic Transactions."
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign entity and one or more financial
institutions ("Lenders"). The majority of the Fund's investments in Loans in
emerging markets is expected to be in the form of participations
("Participations") in Loans and assignments ("Assignments") of portions of Loans
from third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower government.
The Fund will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan ("Loan Agreement"), nor any rights of set-off against the borrower, and the
Fund may not directly benefit from any collateral supporting the Loan in which
it has purchased the Participation. As a result, the Fund will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, the Fund may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. The
6
<PAGE>
Fund will acquire Participations only if the Lender interpositioned between the
Fund and the borrower is determined by the Adviser to be creditworthy.
Creditworthiness will be judged based on the same credit analysis performed by
the Adviser when purchasing marketable securities. When the Fund purchases
Assignments from Lenders, the Fund will acquire direct rights against the
borrower on the Loan. However, since Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by the Fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Fund anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Funds' ability to dispose of particular
Assignments or Participations when necessary to meet the Funds' liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets, respectively. See "Illiquid Securities" below.
STRUCTURED PRODUCTS
The Fund may invest in interests in entities organized and operated solely for
the purpose of restructuring the investment characteristics of certain debt
obligations. This type of restructuring involves the deposit with or purchase by
an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("structured products") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured products to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to structured products is dependent on the extent
of the cash flow on the underlying instruments. The Fund may invest in
structured products which represent derived investment positions based on
relationships among different markets or asset classes.
The Fund may also invest in other types of structured products, including among
others, inverse floaters, spread trades and notes linked by a formula to the
price of an underlying instrument or currency. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent) (the "reference
rate"). As an example, inverse floaters may constitute a class of collateralized
mortgage obligations with a coupon rate that moves inversely to a designated
index, such as LIBOR (London Interbank Offered Rate) or the Cost of Funds Index.
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
A spread trade is an investment position relating to a difference in the prices
or interest rates of two securities or currencies where the value of the
investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities or
currencies. When the Fund invests in notes linked to the price of an underlying
instrument or currency, the price of the underlying security or the exchange
rate of the currency is determined by a multiple (based on a formula) of the
price of such underlying security or exchange rate of such currency. Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security. Total return on the
structured product is derived by linking return to one or more characteristics
of the underlying instrument. Although the Fund's purchase of structured
products would have a similar economic effect to that of borrowing against the
underlying securities, the purchase will not be deemed to be leverage for
purposes of the limitations placed on the extent of the Fund's assets that may
be used for borrowing and other leveraging activities.
7
<PAGE>
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). As a result, the Fund's investment in these structured products may
be limited by the restrictions contained in the 1940 Act. See "Other Investment
Companies" below. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which the Fund invests may
be deemed illiquid and subject to the 15% limitation described below under
"Illiquid Securities."
DEPOSITORY RECEIPTS AND DEPOSITORY SHARES
The Fund may invest in American Depository Receipts ("ADRs") or other similar
securities, such as American Depository Shares and Global Depository Shares,
convertible into securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. Generally, ADRs
in registered form are designed for use in U.S. securities markets. As a result
of the absence of established securities markets and publicly-owned corporations
in certain foreign countries as well as restrictions on direct investment by
foreign entities, the Fund may be able to invest in such countries solely or
primarily through ADRs or similar securities and government approved investment
vehicles. The Adviser expects that the Fund, to the extent of its investment in
ADRs, will invest predominantly in ADRs sponsored by the underlying issuers. The
Fund, however, may invest in unsponsored ADRs. Issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, which are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
have several unique investment characteristics such as (1) higher yields than
common stocks, but lower yields than comparable nonconvertible securities, (2) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) the potential for capital appreciation if
the market price of the underlying common stock increases.
The Fund has no current intention of converting any convertible securities they
may own into equity securities or holding them as an equity investment upon
conversion, although they may do so for temporary purposes. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by the Fund is called for redemption, the Fund may be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-related securities, consistent with their
respective investment objectives and policies, that provide funds for mortgage
loans made to residential homeowners. These include securities which represent
interests in pools of mortgage loans made by lenders such as savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled for sale to investors (such as the Fund) by various
governmental, government-related and private organizations. Interests in pools
of mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Prepayments are caused by repayments of principal resulting
8
<PAGE>
from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payments in such pools. However, timely payment of
interest and/or principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool or hazard
insurance. There can be no assurance that the private insurers can meet their
obligations under the policies. The Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experience
and practices of the poolers the Adviser determines that the securities meet the
Fund's investment criteria. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
The Adviser expects that governmental, governmental-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-term fixed rate mortgages. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with the Fund's investment objective and policies, consider
making investments in such new types of securities. For additional information
regarding mortgage-related securities and the risks associated with investment
in such instruments, see "Additional Information on Portfolio Instruments -
Mortgage-Related Securities" in the Statement of Additional Information.
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities in accordance with its investment
objective and policies. Asset-backed securities represent an undivided ownership
interest in a pool of installment sales contracts and installment loans
collateralized by, among other things, credit card receivables and automobiles.
In general, asset-backed securities and the collateral supporting them are of
shorter maturity than mortgage loans. As a result, investment in these
securities should result in greater price stability for the Fund.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional Information.
The Fund will not limit their investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally traded on a
national securities exchange, such securities are widely traded by brokers and
dealers, and to such extent will not be considered illiquid for the purposes of
the Fund's limitation on investment in illiquid securities.
U.S. MUNICIPAL SECURITIES
In circumstances where the Adviser determines that investment in U.S.
dollar-denominated municipal obligations would facilitate the Fund's ability to
accomplish its investment objectives, the Fund may invest in such obligations,
including municipal bonds issued at a discount.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge"). Additionally, for example,
when the Fund believes that a foreign currency may
9
<PAGE>
suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's portfolio securities denominated in such
foreign currency. Conversely, when the Fund believes that the U.S. dollar may
suffer a substantial decline against foreign currency, it may enter into a
forward purchase contract to buy that foreign currency for a fixed dollar amount
("position hedge"). In this situation, the Fund may, in the alternative, enter
into a forward contract to sell a different foreign currency for a fixed U.S.
dollar amount where such Fund believes that the U.S. dollar value of the
currency to be sold pursuant to the forward contract will fall whenever there is
a decline in the U.S. dollar value of the currency in which portfolio securities
of the Fund are denominated ("cross-hedge"). The Fund's custodian will place
cash not available for investment or U.S. government securities or other high
quality debt securities in a segregated account having a value equal to the
aggregate amount of the Fund's commitments under forward contracts entered into
with respect to position hedges, cross-hedges and transaction hedges, to the
extent they do not already own the security subject to the transaction hedge. If
the value of the securities placed in a segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Fund's commitments with
respect to such contracts. As an alternative to maintaining all or part of the
segregated account, the Fund may purchase a call option permitting such Fund to
purchase the amount of foreign currency being hedged by a forward sale contract
at a price no higher than the forward contract price or the Fund may purchase a
put option permitting the Fund to sell the amount of foreign currency subject to
a forward purchase contract at a price as high or higher than the forward
contract price. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not entered into such contracts.
If the party with which the Fund enters into a forward contract becomes
insolvent or breaches its obligation under the contract, then the Fund may lose
the ability to purchase or sell a currency as desired.
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund would sell portfolio securities to financial
institutions, such as banks and broker-dealers, and agree to repurchase them at
an agreed upon date, price and interest payment. When effecting reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. A reverse repurchase agreement involves the risk that
the market value of the portfolio securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, which price is
fixed at the time the Fund enters into such agreement.
SECURITIES LOANS, REPURCHASE AGREEMENTS, WHEN-ISSUED AND FORWARD COMMITMENTS
TRANSACTIONS
The Fund may lend portfolio securities in an amount up to 30% of its assets to
broker-dealers, major banks or other recognized domestic institutional borrowers
of securities. The Fund may also enter into repurchase agreements with dealers,
domestic banks or recognized financial institutions which, in the opinion of the
Adviser, present minimal credit risks. These transactions must be fully
collateralized at all times, but involve some risk to the Fund if the other
party should default on its obligations and the Fund is delayed or prevented
from recovering the collateral. The Fund may also purchase securities on a
when-issued basis or for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of the securities
declines prior to the settlement date.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS
The Fund may invest in zero coupon securities and pay-in-kind bonds. These
investments involve special risk considerations. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. The Fund also may purchase pay-in-kind
bonds. Pay-in-kind bonds pay all or a portion of their interest in the form of
debt or equity securities. The Fund will only purchase pay-in-kind bonds
10
<PAGE>
that pay all or a portion of their interest in the form of debt securities. Zero
coupon securities and pay-in-kind bonds may be issued by a wide variety of
corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Fund is required to accrue as income each year the value of
securities received in respect of pay-in-kind bonds and a portion of the
original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Fund will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Fund may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements.
ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities which are not readily marketable, time
deposits and repurchase agreements not terminable within seven days. Illiquid
assets are assets which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment. Securities that have readily available market quotations
are not deemed illiquid for purposes of this limitation (irrespective of any
legal or contractual restrictions on resale). The Fund may purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Rule 144A securities generally must be sold
to other qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% limitation on investment in illiquid securities. The ability to
sell Rule 144A securities to qualified institutional buyers is a recent
development and it is not possible to predict how this market will mature. The
Adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES
The Fund reserves the right to invest up to 10% of its total assets in the
securities of other investment companies. The Fund may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company. The Fund
does not intend to invest in such investment companies unless, in the judgment
of the Adviser, the potential benefits of such investment justify the payment of
any premium to net asset value of the investment company or of any sales charge.
The Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by investment companies in which it invests in addition to
the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the Fund's investment
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most or all of the Fund's investments may be made in the United States and
denominated in U.S. dollars.
11
<PAGE>
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.
PORTFOLIO TURNOVER
The Fund will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because emerging markets can be
especially volatile, securities of emerging markets countries may at times be
held only briefly. It is not anticipated that, under normal conditions, the
portfolio turnover rates for the Fund will exceed 75% in any one year. A high
rate of portfolio turnover (100% or more) involves correspondingly greater
brokerage commission expenses and/or markups and markdowns, which will be borne
directly by the Fund and indirectly by the Fund's shareholders. High portfolio
turnover may also result in the realization of substantial net capital gains.
SPECIAL RISK CONSIDERATIONS
GENERAL
The Fund's net asset value will fluctuate, reflecting fluctuations in the market
value of its portfolio positions and its net currency exposure. The value of the
Fund's fixed income securities generally fluctuates inversely with interest rate
movements and fixed income securities with longer maturities tend to be subject
to increased volatility. There is no assurance that the Fund will achieve its
investment objective.
The Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of their
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk of
loss with respect to its portfolio securities as compared to a diversified fund.
The Fund, however, intends to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code") applicable
to segregated asset accounts underlying variable products under section 817(h)
of the Code and to regulated investment companies under Subchapter M of the
Code.
HIGH YIELD SECURITIES
GENERAL. The Fund may invest all or substantially all of its assets in high
yield, high risk debt securities, commonly referred to as "junk bonds."
Securities rated below investment grade and comparable unrated securities offer
yields that fluctuate over time, but generally are superior to the yields
offered by higher rated securities. However, securities rated below investment
grade also involve greater risks than higher rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which the Fund may invest may have, or be
considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's, S&P or D&P (i.e., rated C
by Moody's or CCC or lower by S&P or D&P). Under rating agency guidelines, these
securities are considered to have extremely poor prospects of ever attaining any
real investment standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay principal
when due in the event of adverse business, financial or economic conditions,
and/or to be in default or not current in the payment of interest or principal.
Such securities are considered speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. Unrated securities deemed comparable to these lower- and
lowest-rated securities will have similar characteristics. Accordingly, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by the Fund with a commensurate effect on the value of
their respective shares. Therefore, an investment in the Fund should not be
considered as a complete investment program for all investors.
12
<PAGE>
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on
the Fund's ability to dispose of particular portfolio investments and may limit
its ability to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If the Fund is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Company's Board of Directors to value the Fund's
portfolio securities and the Company's Directors may have to use a greater
degree of judgment in making such valuations. Furthermore, adverse publicity and
investor perceptions about lower-rated securities, whether or not based on
fundamental analysis, may tend to decrease the market value and liquidity of
such lower-rated securities. Less liquid secondary markets may also affect the
Fund's ability to sell securities at their fair value. In addition, the Fund may
invest up to 15% of its net assets, measured at the time of investment, in
illiquid securities, which may be more difficult to value and to sell at fair
value. If the secondary markets for high yield, high risk debt securities
contract due to adverse economic conditions or for other reasons, certain
previously liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may increase.
The ratings of fixed income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
PORTFOLIO RATINGS. During the fiscal period ended March 31, 1997,the percentage
of average annual assets of the Fund, calculated on a dollar-weighted basis,
which was invested in securities within the various ratings categories (based on
the higher of Standard & Poor's Corporation and Moody's Investor Service, Inc.
ratings as described in Appendix A), and in unrated securities determined to be
of comparable quality, was as follows:
BBB/Baa............................ 26%
BB/Ba.............................. 25%
B/B................................ 16%
Cash/Cash Equivalents.............. 31%
Unrated............................ 2%
------
Total Average Annual Assets: ........... 100%
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them, so
that their ability to service their debt obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. The risk
of loss due to default in payment of interest or principal by such issuers is
significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
Many fixed income securities, including certain U.S. corporate fixed income
securities in which the Fund may invest, contain call or buy-back features which
permit the issuer of the security to call or repurchase it. Such securities may
present risks based on payment expectations. If an issuer exercises such a "call
option" and redeems the security, the Fund may have to replace the called
security with a lower yielding security, resulting in a decreased rate of return
for the Fund.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose
the Fund to the direct or indirect consequences of political, social or economic
changes in the developing and emerging countries that issue the securities. The
ability and willingness of sovereign obligors in developing and emerging
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country. Countries
such as those in which the Funds may invest have historically experienced, and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, trade difficulties and extreme poverty and
unemployment.
13
<PAGE>
Many of these countries are also characterized by political uncertainty or
instability. Additional factors which may influence the ability or willingness
to service debt include, but are not limited to, a country's cash flow
situation, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of its debt service burden to the economy as a whole,
and its government's policy towards the International Monetary Fund, the World
Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than U.S. dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign sovereign
obligor cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks and multilateral organizations, and inflows of
foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. These obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Fund may invest will not be
subject to similar defaults or restructuring arrangements which may adversely
affect the value of such investments. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
In addition to high yield foreign sovereign debt securities, the Fund may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Foreign Securities" below.
14
<PAGE>
FOREIGN SECURITIES
A portion of the Fund's assets may be invested in the securities of non-U.S.
issuers. Investors should recognize that investing in securities of non-U.S.
issuers involves certain risks and special considerations, including those set
forth below, which are not typically associated with investing in securities of
U.S. issuers. Further, certain investments that the Fund may purchase, and
investment techniques in which it may engage, involve risks, including those set
forth below.
Social, Political and Economic Factors. Many countries in which the Fund will
invest, and the emerging market countries in particular, may be subject to a
substantially greater degree of social, political and economic instability than
is the case in the United States, Japan and Western European countries. Such
instability may result from, among other things, some or all of the following:
(i) authoritarian governments or military involvement in political and economic
decision-making, and changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies and terrorist activities; (iv)
hostile relations with neighboring countries; and (v) drug trafficking. Social,
political and economic instability could significantly disrupt the principal
financial markets in which the Funds invest and adversely affect the value of
the Fund's assets.
Individual foreign economies in general, and those of emerging market countries
in particular, may differ favorably or unfavorably and significantly from the
U.S. economy in such respects as the rate of growth of gross domestic product or
gross national product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, structural unemployment and balance of
payments position. Governments of many of these countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In some cases, the government owns or controls many companies, including
some of the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in many countries,
including emerging market countries, which could affect private sector companies
and the Fund, and on market conditions, prices and yields of securities in the
Fund's portfolio. There may be the possibility of nationalization or
expropriation of assets, or future confiscatory levels of taxation affecting the
Fund. In the event of nationalization, expropriation or other confiscation, the
Fund may not be fairly compensated for its loss and could lose its entire
investment in the country involved.
Investment and Repatriation Restrictions. Investment by the Fund in non-U.S.
issuers may be restricted or controlled to varying degrees. These restrictions
may limit or preclude investment in certain of such issuers or countries and may
increase the costs and expenses of the Fund. For example, certain countries
require governmental approval prior to investments by foreign persons in the
country or in a particular company or industry sector or limit investment by
foreign persons to only a specific class of securities of a company which may
have less advantageous terms (including price) than securities of the company
available for purchases by nationals. Certain countries may also restrict or
prohibit investment opportunities in issuers or industries deemed important to
national interests. As a result of investment restrictions, the Fund may, in
certain countries (such as Mexico) invest through intermediary vehicles or
trusts. In addition, the repatriation of both investment income and capital from
some of these countries requires governmental approval and if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose temporary restrictions on foreign capital remittances abroad. Even
where there is no outright restriction on repatriation of capital, the mechanics
of repatriation may affect certain aspects of the operation of the Fund.
The Fund could be adversely affected by delays in, or a refusal to grant any
required governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, the Fund was unable to distribute
substantially all of its net investment income and long-term capital gains
within applicable time periods, the Fund could be subject to U.S. federal income
and excise taxes which would not otherwise be incurred and may cease to qualify
for the favorable tax treatment
15
<PAGE>
afforded to regulated investment companies under the Code, in which case it
would become subject to U.S. federal income tax on all of its income and gains.
Currency Fluctuations. Because the Fund may invest a portion of its assets in
the securities of foreign issuers which are denominated in foreign currencies,
the strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the Fund's investment performance. A decline in the value of
any particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of the Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's net asset value and
any net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.
Inflation. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and emerging
market countries in particular. In an attempt to control inflation, wage and
price controls have been imposed at times in certain countries.
Market Characteristics; Differences in Securities Markets. The securities
markets in many countries, and in emerging markets in particular generally have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies listed on such markets may be less liquid and more
volatile than equity securities of U.S. companies of comparable size. Some of
the stock exchanges outside of the United States and in emerging market
countries, to the extent that established securities markets even exist, are in
the earlier stages of their development. A high proportion of the shares of many
foreign companies may be held by a limited number of persons, which may limit
the number of shares available for investment by the Fund. A limited number of
issuers in most, if not all, of these securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
In addition, the application of certain 1940 Act provisions may limit the Fund's
ability to invest in certain non-U.S. issuers and to participate in public
offerings in these countries. The limited liquidity of certain non-U.S.
securities markets may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country
16
<PAGE>
may trade at price-earning multiples higher than those of comparable companies
trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
Trading practices in certain foreign securities markets are also significantly
different from those in the United States. Brokerage commissions and other
transaction costs on the securities exchanges in many countries are generally
higher than in the United States. In addition, securities settlements and
clearance procedures in certain countries, and, in particular, in emerging
market countries, are less developed and less reliable than those in the United
States and the Fund may be subject to delays or other material difficulties and
could experience a loss if a counterparty defaults. Delays in settlement could
result in temporary periods when assets of the Funds are uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. The inability to dispose of a portfolio security due
to settlement problems could result either in losses to the Fund due to
subsequent declines in the value of such portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
Non-U.S. Subcustodians. Rules adopted under the 1940 Act permit the Fund to
maintain its non-U.S. securities and cash in the custody of certain eligible
non-U.S. banks and securities depositories. Certain banks in non-U.S. countries
may not be eligible subcustodians for the Fund, in which event the Fund may be
precluded from purchasing securities in which they would otherwise invest, and
other banks that are eligible subcustodians may be recently organized or
otherwise lack extensive operating experience. At present, custody arrangements
complying with the requirements of the Securities and Exchange Commission (the
"Commission") are available in each of the countries in which the Adviser
intends to invest. In certain countries in which the Fund may make investments,
there may be legal restrictions or limitations on the ability of the Fund to
recover assets held in custody by subcustodians in the event of the bankruptcy
of the subcustodian.
Government Supervision; Legal Systems. Disclosure and regulatory standards in
certain foreign countries, including emerging market countries, are in many
respects less stringent than U.S. standards. There may be less government
supervision and regulation of securities exchanges, listed companies and brokers
in these countries than exists in the United States. Brokers in some countries
may not be as well capitalized as those in the United States, so that they may
be more susceptible to financial failure in times of market, political, or
economic stress, exposing the Fund to a risk of loss. Less information may be
available to the Fund than with respect to investments in the United States and,
in certain of these countries, less information may be available to the Fund
than to local market participants. In addition, existing laws and regulations
are often inconsistently applied. Foreign investors may be adversely affected by
new laws and regulations, changes to existing laws and regulations and
preemption of local laws and regulations by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Financial Information and Standards. Non-U.S. issuers may be subject to
accounting, auditing and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular,
the assets and profits appearing on the financial statements of certain non-U.S.
issuers may not reflect their financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting
rules may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Moreover,
substantially less information may be publicly available about non-U.S. issuers
than is available about U.S. issuers.
17
<PAGE>
In addition to the foreign securities listed above, the Fund may also invest in
foreign sovereign debt securities, which involve certain additional risks. See
"Sovereign Debt Securities" above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may be authorized to use a variety of investment strategies to hedge
various market risks (such as interest rates, currency exchange rates and broad
or specific market movements), to manage the effective maturity or duration of
debt instruments held by the Fund, or, with respect to certain strategies, to
seek to increase the Fund's income or gain (such investment strategies and
transactions are referred to herein as "Hedging and Other Strategic
Transactions"). Currently, the Fund may use, as portfolio management strategies,
cross currency hedges, interest rate transactions, commodity futures contracts
in the form of futures contracts on securities, securities indices and foreign
currencies, and related options transactions. The Fund also may enter into
forward foreign currency contracts and options transactions to hedge in
connection with currency and interest rate positions and in order to enhance the
Fund's income or gain.
A discussion of the risks associated with Hedging and Other Strategic
Transactions follows below. The Fund will not be obligated, however, to pursue
any of such strategies and Fund makes no representation as to the availability
of these techniques at this time or at any time in the future. In addition, the
Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable rules and regulations of the
Commodity Futures Trading Commission ("CFTC") thereunder and the federal income
tax requirements applicable to regulated investment companies which are not
operated as commodity pools. To the extent not otherwise restricted by the
Commission, the CFTC, the Code or its investment objectives and policies, the
Fund may utilize, without limitation, Hedging and Other Strategic Transactions.
For further information see "Additional Information on Investment Policies and
Techniques - Hedging and Other Strategic Transactions" and "Additional
Information Concerning Taxes" in the Statement of Additional Information.
IN GENERAL
Subject to the constraints described above, the Fund may (if and to the extent
so authorized) purchase and sell (or write) exchange-listed and over-the-counter
put and call options on securities, index futures contracts, financial futures
contracts and fixed income indices and other financial instruments, and enter
into financial futures contracts, interest rate transactions and currency
transactions (collectively, these transactions are referred to in this
Prospectus as "Hedging and Other Strategic Transactions"). The Fund's interest
rate transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Hedging and Other Strategic Transactions may generally be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The Fund may use any or all types
of Hedging and Other Strategic Transactions which it is authorized to use at any
time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any authorized Hedging and Other Strategic
Transaction will be a function of numerous variables, including market
conditions. The ability of the Fund to utilize Hedging and Other Strategic
Transactions successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select the Fund's
securities. The Fund is not a "commodity pool' (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Other Strategic Transactions involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging, and non-hedging purposes to the extent
permitted by CFTC regulations; provided that the Fund may enter into futures
contracts or options thereon for purposes other
18
<PAGE>
than bona fide hedging if immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts would not exceed 5% of the
liquidation value of the Fund's portfolio; provided further, than in the case of
an option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. The use of certain
Hedging and Other Strategic Transactions will require that the Fund segregate
cash, U.S. government securities or other liquid high grade debt obligations to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security, financial instrument or currency. A detailed
discussion of various Hedging and Other Strategic Transactions, including
applicable regulations of the CFTC and the requirement to segregate assets with
respect to these transactions, appears in the Statement of Additional
Information.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
Hedging and Other Strategic Transactions have special risks associated with
them, including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of the Hedging and Other Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options could result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, or cause the Fund to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses. Although the Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Losses resulting from the use of Hedging and Other Strategic Transactions will
reduce the Fund's net asset value, and possibly income, and the losses can be
greater than if Hedging and Other Strategic Transactions had not been used.
19
<PAGE>
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken as
part of non-U.S. Hedging and Other Strategic Transactions also could be
adversely affected by: (1) other complex foreign political, legal and economic
factors, (2) lesser availability of data on which to make trading decisions than
in the United States, (3) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Other Strategic Transactions by the Fund will require,
among other things, that the Fund segregate cash, liquid high grade debt
obligations or other assets with its custodian, or a designated sub- custodian,
to the extent the Fund's obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency. In
general, either the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by the Fund,
for example, will require the Fund to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid high grade debt obligations
equal to the excess of the index value over the exercise price on a current
basis. A put option on securities written by the Fund will require the Fund to
segregate liquid high grade debt obligations equal to the exercise price. Except
when the Fund enters into a forward contract in connection with the purchase or
sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency, liquid securities denominated in
that currency equal to the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when the Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option on a futures contract, the Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt securities or other acceptable assets. The
Fund will accrue the net amount of the excess, if any, of its obligations
relating to swaps over its entitlements with respect to each swap on a daily
basis and will segregate with its custodian, or designated sub-custodian, an
amount of cash or liquid high grade debt obligations having an aggregate value
equal to at least the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
20
<PAGE>
Hedging and Other Strategic Transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. The
Fund may also enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding obligation in
related options and Hedging and Other Strategic Transactions. The Fund could
purchase a put option, for example, if the strike price of that option is the
same or higher than the strike price of a put option sold by the Fund. Moreover,
instead of segregating assets if it holds a futures contracts or forward
contract, the Fund could purchase a put option on the same futures contract or
forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging and Other Strategic Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it terminates
prior to that time, assets equal to any remaining obligation would need to be
segregated.
CONCENTRATION
Under normal market conditions, the Fund may invest greater than 25% of its
assets in securities of issuers whose primary business activity is in the
banking industry (see "Limiting Investment Risks" below). As such, an investment
in the Fund should be made with an understanding of the characteristics of the
banking industry and the risks that such an investment may entail. Banks are
subject to extensive government regulations that may limit both the amounts and
types of loans and other financial commitments that may be made and the interest
rates and fees that may be charged. The profitability of this industry is
largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from financial
difficulties of borrowers might affect a bank's ability to meet its obligations.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic obligations. For a discussion of additional risks, see
"Foreign Securities" above.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there
is no limitation with respect to investment in obligations issued
or guaranteed by the U.S. government, its agencies or
instrumentalities.
2. The Fund may not borrow money (except that they may enter into
reverse repurchase agreements) except from banks for temporary or
emergency purposes; provided, that (a) the amount of such
borrowing may not exceed 20% of the value of the Fund's total
assets and (b) the Fund will not purchase portfolio securities
while such outstanding borrowing exceeds 5% of the value of its
total assets.
3. The Fund may not invest an amount equal to 15% or more of the
current value of its net assets in investments that are illiquid.
The foregoing investment limitations and certain of those described in the
Statement of Additional Information under "Investment Limitations" are
fundamental policies of the Fund that may be changed only when permitted by law
and approved by the holders of a "majority" of the Fund's outstanding shares. If
a percentage restriction on investment or use of assets contained in these
investment limitations or elsewhere in this Prospectus or Statement of
Additional Information is adhered to at the time a transaction is effected,
later changes in percentage resulting from any cause other than actions by the
Fund will not be considered a violation; provided, that the restrictions on
borrowing described in (2) and the restrictions on illiquid investments
described in (3) above shall apply at all times. As used in this Prospectus and
in the Statement of Additional Information, the term "majority", when referring
to
21
<PAGE>
the approvals to be obtained from shareholders in connection with matters
affecting the Fund (e.g., approval of investment advisory contracts), means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting
if the holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. Shareholders are entitled to one vote for each full share held and
to fractional votes for fractional shares held.
MANAGEMENT
The business and affairs of the Fund are managed under the general direction and
supervision of the Company's Board of Directors. The Fund's day-to-day
operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK provides investment advisory services to the Fund pursuant to an
Investment Advisory Agreement with the Company (the "Advisory Agreement").
Subject to such policies as the Company's Board of Directors may determine, the
Adviser makes investment decisions for the Fund.
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive from the Fund a monthly fee at the annual rate of .85%
for the first $200,000,000 of assets and .75% for amounts in excess thereof
based upon the average daily net assets of the Fund. The investment advisory fee
for the Fund is higher than that paid by most investment companies, but is
comparable to that paid by other investment companies that have strategies
focusing on high yield and international investments.
The Adviser is a New York State chartered trust company. Under its charter, the
Adviser may neither accept deposits nor make loans except for deposits or loans
arising directly from its exercise of the fiduciary powers granted it under the
New York Banking Law. The Adviser's principal business is the rendering of
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. The Adviser specializes
in fixed income management and offers its clients a complete range of fixed
income investments in capital markets throughout the world. The Adviser
currently manages in excess of $8.4 billion in assets and serves as investment
adviser to twenty-one other registered investment companies (or portfolios
thereof). The principal business address of the Adviser is 520 Madison Avenue,
New York, New York 10022.
PORTFOLIO MANAGERS. Stephen T. Shapiro will serve as the portfolio manager for
the Fund. Mr. Shapiro is a Managing Director of the Adviser and has been
associated with the Adviser since 1983.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
BISYS Fund Services Limited Partnership, d/b/a BISYS Fund Services ("BISYS")
serves as the Company's administrator and generally assists the Company in all
aspects of its administration and operation. The Bank of New York serves as
custodian of the assets of the Fund. Pursuant to an Administration Agreement
between the Company and BISYS, BISYS is entitled to a monthly fee, based on an
annual rate of .15% of aggregate average daily net assets of the Company as
compensation for its administrative services. BISYS may waive this fee from time
to time. BISYS Fund Services, Inc. provides transfer agency services and
dividend disbursing services for the Fund. The principal business address of
BISYS and BISYS Fund Services, Inc. is 3435 Stelzer Road, Columbus, Ohio 43219.
The principal business address of The Bank of New York is 90 Washington Street,
New York, New York 10286.
FUND EXPENSES
In addition to the fees described above with respect to the Investment Advisory
Agreement, the Fund will be responsible for expenses relating to administration,
custody, transfer agency, legal, audit and accounting, directors fees and other
miscellaneous expenses pursuant to written agreements with such service
providers or otherwise.
22
<PAGE>
Such expenses are subject to waiver by the relevant service provider or
reimbursement by the Adviser or Administrator.
ABOUT YOUR INVESTMENT
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc., the Fund's Principal Underwriter, to the Accounts without any
sales or other charge, at the Fund's net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for business. The Company will effect
orders to purchase or redeem shares of the Fund, that are based on premium
payments, surrender and transfer requests and any other transaction requests
from Contract and Policy Owners, annuitants and beneficiaries, at the Fund's net
asset value per share next computed after the Account receives such transaction
request. Any orders to purchase or redeem Fund shares that are not based on
actions by Contract or Policy Owners, annuitants, and beneficiaries will be
effected at the Fund's net asset value per share next computed after the order
is received by the Distributor. The Fund reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Individuals may not place orders directly with the Fund. Please refer to the
appropriate Account Prospectus of the Participating Company for more information
on the purchase of Portfolio shares.
REDEMPTION OF SHARES
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above. Shares redeemed are entitled to earn dividends, if
any, up to and including the day redemption is effected. There is no redemption
charge. Payment of the redemption price will normally be made within seven days
after receipt of such tender for redemption.
The right of redemption may be suspended or the date of payment may be postponed
for any period during which the NYSE is closed (other than customary weekend and
holiday closings) or during which the SEC determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
SEC) exists as a result of which disposal by the Fund of securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Company fairly to determine the value of the Fund's net assets, or for
such other periods as the SEC may by order permit for the protection of security
holders of the Company.
EXCHANGE PRIVILEGE
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset values.
HOW THE COMPANY VALUES ITS SHARES
The net asset value per share of the Fund is calculated once daily at 4:15 p.m.,
New York time, Monday through Friday, each day the NYSE is open. The net asset
value per share of the Fund is computed by dividing the value of the net assets
of the Fund by the total number of Fund shares outstanding. Equity securities
held by the Fund are valued at the last sale price on the exchange or in the
principal over-the-counter market in which such securities are traded, as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price. Debt securities held by the Fund
generally are valued based on quoted bid prices. Short-term debt investments
having maturities of 60 days or less are amortized to maturity based on their
cost, and if applicable, adjusted for foreign exchange translation. Foreign
securities are valued on the basis of quotations from the primary market in
which they are traded and are translated from the local currency into U.S.
dollars using prevailing exchange rates.
23
<PAGE>
Securities for which market quotations are not readily available are valued at
fair value determined in good faith by or under the direction of the Company's
Board of Directors (as may be delegated from time to time to a pricing committee
designated by the Board of Directors). Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics.
HOW DISTRIBUTIONS ARE MADE: TAX INFORMATION
DISTRIBUTIONS
The Fund will declare dividends daily and pay the dividends monthly from net
investment income and will distribute its net capital gains, if any, at least
annually. Such income and capital gains distributions will be made in shares of
the Fund.
TAX MATTERS
THE FUND. The Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code, as
amended (the "Code"), concerning the diversification of assets, distribution of
income, and sources of income. When the Fund qualifies as a regulated investment
company and all of its taxable income is distributed in accordance with the
timing requirements imposed by the Code, the Fund will not be subject to Federal
income tax. If, however, for any taxable year the Fund does not qualify as a
regulated investment company, then all of its taxable income will be subject to
tax at regular corporate rates (without any deduction for distributions to the
Accounts), and the receipt of such distributions will be taxable to the extent
that the distributing Fund has current and accumulated earnings and profits.
FUND DISTRIBUTIONS. Distributions by the Fund are taxable, if at all, to the
Accounts, and not to Contract or Policy Owners. An Account will include
distributions in its taxable income in the year in which they are received
(whether paid in cash or reinvested).
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of one or more Funds are the investment
vehicle reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by
24
<PAGE>
calling toll-free 1-800-618-9510 between 8:15 a.m. and 6:00 p.m., New York time.
Specially trained representatives will answer questions and provide information
about Contract and Policy Owners accounts.
Each Account owning shares of the Fund will vote its shares in accordance with
instructions received from Contract or Policy Owners, annuitants and
beneficiaries. Fund shares held by an Account as to which no instructions have
been received will be voted for or against any proposition, or in abstention, in
the same proportion as the shares of that Account as to which instructions have
been received. Fund shares held by an Account that are not attributable to
Contracts or Policies will also be voted for or against any proposition in the
same proportion as the shares for which voting instructions are received by the
Account. If the Participating Insurance Company determines, however, that it is
permitted to vote any such shares of the Fund in its own right, it may elect to
do so, subject to the then current interpretation of the 1940 Act and the rules
thereunder.
PERFORMANCE INFORMATION
From time to time the Fund may advertise certain information about its
performance. The Fund may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Fund may make available information as to their
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Funds published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A.
Today or The New York Times or other industry or financial publications.
Performance information presented for the Fund 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 Fund's performance and would reduce an investor's
return under the annuity contract or life policy.
The Fund's performance information is historical, will fluctuate and should not
be considered as representative of future results. The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Quotations of the Fund's performance will
not reflect charges levied at the Account level.
COUNSEL; INDEPENDENT ACCOUNTANTS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York, serves
as counsel to the Company. Price Waterhouse LLP serves as the independent
accountants to the Company. Price Waterhouse LLP is located at 1177 Avenue of
the Americas, New York, New York 10036.
25
<PAGE>
APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of the Company's Funds may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the
A-1
<PAGE>
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
A-2
<PAGE>
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-3
<PAGE>
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
------------------------
A-4
<PAGE>
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether a Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-5
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
A-6
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. JULY 29, 1997
- -------------------------------------------------------------------------------
OFFITBANK VIF-EMERGING MARKETS FUND
================================================================================
OFFITBANK VIF - Emerging Markets Fund (the "Fund") is an investment portfolio of
the OFFITBANK Variable Insurance Fund, Inc. (the "Company"), an open-end,
management investment company consisting of ten separate investment portfolios.
The Fund's investment objective is to seek to provide investors with a
competitive total investment return by focusing on current yield and
opportunities for capital appreciation primarily by investing in corporate and
sovereign debt securities of emerging market countries. Under normal
circumstances, the Fund will invest at least 80% of its total assets in debt
instruments, but may invest up to 20% of its total assets in equity securities.
THE FUND MAY INVEST PRIMARILY IN HIGH YIELD, HIGH RISK CORPORATE DEBT SECURITIES
AND SOVEREIGN DEBT OBLIGATIONS WHICH ARE CONSIDERED SPECULATIVE AND SUBJECT TO
CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE AND POLICIES" AND "SPECIAL RISK
CONSIDERATIONS." There can be no assurance that the Fund's investment objective
will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Fund's investment adviser (the "Adviser"). The Adviser currently
manages in excess of $8.4 billion in assets. The address of the Company is 125
West 55th Street, New York, New York 10019. Yield and other information
regarding the Funds may be obtained by calling 1-800-618-9510.
SHARES OF THE FUND ARE SOLD ONLY TO CERTAIN LIFE INSURANCE COMPANIES
(COLLECTIVELY, "PARTICIPATING COMPANIES") AND THEIR SEPARATE ACCOUNTS
(COLLECTIVELY, THE "ACCOUNTS") TO FUND BENEFITS UNDER VARIABLE ANNUITY CONTRACTS
("CONTRACTS") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF ONE OR MORE OF THE
FUNDS IN ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND
POLICY OWNERS ("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH
ALLOCATION RIGHTS ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS.
SHARES ARE REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE
CONTRACTS AND POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated January 31, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus. INVESTORS ARE ADVISED THAT (A) THE
COMPANY IS NOT AUTHORIZED TO ENGAGE IN THE BUSINESS OF BANKING AND (B) SHARES OF
THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY,
OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR ARE THEY FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. ------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WHAT YOU NEED TO KNOW
---------------------
Highlights................................................................ 2
Financial Highlights...................................................... 3
The Company............................................................... 4
Investment Objective and Policies......................................... 4
Investment Policies and Techniques........................................ 6
Special Risk Considerations............................................... 12
Limiting Investment Risks................................................. 21
Management................................................................ 22
About Your Investment..................................................... 23
How the Company Values Its Shares......................................... 23
How Distributions are Made: Tax Information............................... 24
Shareholder Communications ............................................... 24
Performance Information................................................... 25
Counsel; Independent Accountants.......................................... 26
Appendix A............................................................... A-1
<PAGE>
HIGHLIGHTS
INTRODUCTION
OFFITBANK VIF-Emerging Markets Fund (the "Fund") is one of ten separate
investment portfolios of the OFFITBANK Variable Insurance Fund, Inc. (the
"Company") an open-end, management investment company. The Fund's investment
objective is to provide a competitive total investment return by focusing on
current yield and opportunities for capital appreciation.
FUND MANAGEMENT
OFFITBANK, a New York State chartered trust company, serves as the Fund's
Adviser.
SHARES OF THE FUND
Shares of the Fund are sold only to certain life insurance companies
(collectively, "Participating Companies") and their separate accounts
(collectively, the "Accounts") to fund benefits under variable annuity contracts
("Contracts") and variable life insurance policies ("Policies") to be offered by
the Participating Companies. The Accounts invest in shares of the Fund in
accordance with allocation instructions received from Contract and Policy owners
("Contract Owners" or "Policy Owners," as appropriate). Such allocation rights
are further described in the accompanying Account Prospectus. Shares are
redeemed to the extent necessary to provide benefits under the Contracts and
Policies.
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc., the Fund's Underwriter, to the Accounts without any sales or
other charge, at the Fund's net asset value on each day on which the New York
Stock Exchange ("NYSE") is open for business. The Company will effect orders to
purchase or redeem shares of the Fund, that are based on premium payments,
surrender and transfer requests and any other transaction requests from Contract
and Policy Owners, annuitants and beneficiaries, at the Fund's net asset value
per share next computed after the Account receives such transaction request.
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above.
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset value. See "About Your Investment."
RISK FACTORS
Investment in the Fund is subject to certain risks, as set forth in detail under
"Special Risk Considerations". The Fund will invest at least 80% of its assets
in debt instruments, but may invest up to 20% of its total assets in equity
securities. See "Investment Objective and Policies" and "Special Risk
Considerations".
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights of the Fund for the period ended March 31, 1997. The
information below has been derived from financial statements included in the
Annual Report to Shareholders for the period ended March 31, 1997. Such
information has been audited by Price Waterhouse LLP, independent auditors for
the Company. The Annual Report is incorporated by reference into the Statement
of Additional Information. The information set forth below is for a share of the
Fund outstanding for the period indicated. Further information about the
performance of the Company is included in the Annual Report to Shareholders
which may be obtained by calling 1-800-618-9510.
<TABLE>
<CAPTION>
VIF-EMERGING
MARKETS FUND
For the period August
Selected ratios and data for a share of capital stock outstanding 28, 1996* through
through the period: March 31, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.................................... $10.00
------
Net investment income.............................................. 0.48
Net realized and unrealized gains on investments................... 0.34
-----
Total from investment operations.................................. 0.82
-----
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.............................................. (0.48)
Realized Gains..................................................... (0.04)
------
Total dividends and distributions.................................. (0 .52)
-------
NET ASSET VALUE, END OF PERIOD.......................................... $10.30
TOTAL INVESTMENT RETURN+............................................... 8.29%
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.............................................. 8.04%(1)
PORTFOLIO TURNOVER RATE................................................. 96%
</TABLE>
* Commencement of Operations.
(1) Annualized
(2) If the Fund had borne all expenses that were assumed or waived by the
Adviser and Administrator, the above expense ratio would have been 4.87%
for the Fund.
+ Total return is based on the change in net asset value during the period
and assumes reinvestment of all dividends and distributions.
- 3 -
<PAGE>
THE COMPANY
The Company, a Maryland corporation formed on July 1, 1994, is designed to serve
as a funding vehicle for Contracts and Policies offered by the Accounts of
Participating Companies. Shares of the Fund are offered only to the Accounts
through OFFIT Funds Distributor, Inc. (the "Distributor"), the principal
underwriter for the Company. The Fund is a no-load, separate, non-diversified
investment portfolio of the Company, an open-end management investment company.
The Company is not authorized to engage in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Funds, which could possibly force the Company to sell portfolio securities
at disadvantageous prices. The Company's Directors intend to monitor events in
order to identify any material irreconcilable conflicts that may possibly arise
and to determine what action, if any, should be taken in response thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an objective which it pursues through investment policies as
described below. The objectives and policies of the Fund can be expected to
affect the return of the Fund and the degree of market and financial risk to
which the Fund is subject. For more information about the investment strategies
employed by the Fund, see "Investment Policies and Techniques." The investment
objective and policies of the Fund may, unless otherwise specifically stated, be
changed by the Directors of the Company without a vote of the shareholders. As a
matter of policy, the Directors would not materially change the investment
objective of the Fund without shareholder approval. There is no assurance that
the Fund will achieve its objective.
Additional portfolios may be created from time to time with different investment
objectives and policies for use as funding vehicles for the Accounts or for
other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Fund, with the classes being subject to different charges and expenses and
having such other different rights as the Directors may prescribe.
The Fund may utilize many of the same investment techniques and invest in
similar securities. Investors should note, however, that the Fund will invest
their assets in accordance with their respective investment objectives and
policies described below. Accordingly, the Adviser expects that the Fund's
investment portfolios will be distinct, notwithstanding their ability to invest
in comparable instruments.
The investment objective of the Fund is to provide a competitive total
investment return by focusing on current yield and opportunities for capital
appreciation. The Fund will seek to achieve its objective by investing primarily
in corporate and sovereign debt instruments of emerging market countries. Under
normal circumstances, the Fund will invest at least 80% of its total assets in
debt instruments, but may invest up to 20% of its total assets in equity
securities. As used in this Prospectus, an "emerging market country" is any
country that is considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (the "World Bank") or the
International Finance Corporation, or is determined by the Adviser to have per
capita gross domestic product below $7,500 (in 1994 dollars). Under normal
circumstances, the Fund will invest at least 25% of its total assets in
securities of issuers whose primary business activity is in the banking
industry. The Fund will not invest 25% or more of its total assets in
obligations issued by any one country, its agencies, instrumentalities or
political subdivisions. See "Special Risk Considerations - Concentration" and
"Limiting Investment Risks."
- 4 -
<PAGE>
The Fund seeks to benefit from investment opportunities deriving from long-term
improving economic and political conditions, and other positive trends and
developments in emerging market countries. Accordingly, the Fund is intended
primarily for long-term investors and should not be considered as a vehicle for
trading purposes. The continuation of a long-term international trend
encouraging greater market orientation and economic growth may result in local
or international political, economic or financial developments that could
benefit the capital markets in emerging market countries.
An "emerging market country" debt instrument or equity security, as used in this
Prospectus, means an instrument or security (a) of an issuer organized or with
more than 50% of its business activities in such emerging market country; (b)
denominated in such country's currency or with a primary trading market in such
emerging market country; (c) of a company which derives at least 50% of its
gross revenues from goods produced, sales made, services performed or
investments in such emerging market country; or (d) issued or guaranteed by the
government of such emerging market country, its agencies, political subdivisions
or instrumentalities, or the central bank of such country. Determinations as to
eligibility will be made by the Adviser based on publicly available information
and inquiries made to companies. See "Special Risk Considerations--Foreign
Securities" in this Prospectus and "Additional Risk Considerations--Non-Uniform
Corporate Disclosure Standards and Governmental Regulation" in the Statement of
Additional Information for a discussion of the nature of publicly available
information for non-U.S.
companies.
DEBT INSTRUMENTS. The Fund intends to invest in debt instruments including
bonds, notes, bills, debentures, convertible securities, debt with attached
warrants, bank obligations, short-term paper, loan participations and
assignments, trust and partnership interests, money market instruments and other
similar instruments. Such instruments may be issued or guaranteed by the
governments of emerging market countries, their agencies, instrumentalities or
political subdivisions, international organizations or business entities located
in such countries, including financial institutions, or companies located in
emerging market countries that are subsidiaries of multinational business
entities. Such obligations may be payable in U.S. dollars, Eurocurrencies or
other currencies (including currencies of emerging market countries which may be
indexed to the U.S. dollar). The Adviser will be free to invest in debt
securities of any maturity and duration and the interest rates on such
securities may be fixed or floating. The Fund's debt instruments may or may not
be listed or traded on a securities exchange.
In selecting particular debt instruments for the Fund, the Adviser intends to
consider factors such as liquidity, price volatility, tax implications, interest
rate sensitivity, foreign currency exchange risks, counterparty risks and
technical market considerations. Debt instruments in which the Fund may invest
will not be required to meet a minimum rating standard and a substantial amount
of such instruments are expected to be non-investment grade securities (i.e.,
rated BB or lower by S&P or D&P, or Ba or lower by Moody's, or if unrated, of
comparable quality as determined by the Adviser). See Appendix A to this
Prospectus for a description of ratings of S&P, Moody's and D&P. Investments in
high yield, high risk debt securities involve comparatively greater risks,
including price volatility and the risk of default in the timely payment of
interest and principal, than higher rated securities. Some of such investments
may be non-performing when purchased. See "Special Risk Considerations--High
Yield Securities."
EQUITY SECURITIES. The Fund may invest up to 20% of its total assets in common
stocks, preferred stocks, detachable warrants and other equity securities that
may or may not be listed or traded on a recognized securities exchange. The Fund
intends that such investments in equity securities often will be related to the
Fund's investments in debt instruments, such as those equity securities received
upon the exercise of convertible debt instruments or attached warrants, or those
equity securities acquired pursuant to investment opportunities deriving from
the Fund's activities in emerging market debt markets. The equity securities
purchased by the Fund may include American Depositary Receipts, European
Depositary Receipts and interests in investment companies.
- 5 -
<PAGE>
GENERAL. As indicated above, the Fund is generally managed in the style similar
to other open-end investment companies which are managed by OFFITBANK and whose
shares are generally offered to the public. These other OFFITBANK Funds may,
however, employ different investment practices and may invest in securities
different from those in which their counterpart Fund invests, and, as such, may
not have identical portfolios or experience identical investment results.
INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. When the Fund invests in
foreign securities, they may be denominated in foreign currencies. Thus, the
Fund's net asset value will be affected by changes in exchange rates.
See "Special Risk Considerations."
BRADY BONDS
The Fund may invest in "Brady Bonds" which are debt securities issued or
guaranteed by foreign governments in exchange for existing external commercial
bank indebtedness under a plan announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989. To date, over $154 billion (face amount) of Brady
Bonds have been issued by the governments of 15 countries, the largest
proportion having been issued by Argentina, Brazil, Mexico and Venezuela. Brady
Bonds have been issued only recently, and accordingly, they do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market.
The Fund may invest in either collateralized or uncollateralized Brady Bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least six months of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds which have been issued to date are rated BB or
B by S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may use, as portfolio management strategies, cross currency hedges,
interest rate transactions, commodity futures contracts in the form of futures
contracts on securities, securities indices and foreign currencies, and related
options transactions. The Fund also may enter into forward foreign currency
contracts and options transactions to hedge in connection with currency and
interest rate positions and in order to enhance the Fund's income or gain.
See "Special Risk Considerations--Hedging and Other Strategic Transactions."
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign entity and one or more financial
institutions ("Lenders"). The majority of the Fund's investments in Loans in
emerging markets is expected to be in the form of participations
("Participations") in Loans and assignments ("Assignments") of portions of Loans
from third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower government.
The Fund will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the
- 6 -
<PAGE>
terms of the loan agreement relating to the loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by the Adviser
to be creditworthy. Creditworthiness will be judged based on the same credit
analysis performed by the Adviser when purchasing marketable securities. When
the Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Fund as the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Fund anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Funds' ability to dispose of particular
Assignments or Participations when necessary to meet the Funds' liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets, respectively. See "Illiquid Securities" below.
STRUCTURED PRODUCTS
The Fund may invest in interests in entities organized and operated solely for
the purpose of restructuring the investment characteristics of certain debt
obligations. This type of restructuring involves the deposit with or purchase by
an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("structured products") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured products to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to structured products is dependent on the extent
of the cash flow on the underlying instruments. The Fund may invest in
structured products which represent derived investment positions based on
relationships among different markets or asset classes.
The Fund may also invest in other types of structured products, including among
others, inverse floaters, spread trades and notes linked by a formula to the
price of an underlying instrument or currency. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent) (the "reference
rate"). As an example, inverse floaters may constitute a class of collateralized
mortgage obligations with a coupon rate that moves inversely to a designated
index, such as LIBOR (London Interbank Offered Rate) or the Cost of Funds Index.
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
A spread trade is an investment position relating to a difference in the prices
or interest rates of two securities or currencies where the value of the
investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities or
currencies. When the Fund invests in notes linked to the price of an underlying
instrument or currency, the price of the underlying security or the exchange
rate of the currency is determined by a multiple (based on a formula) of the
price of such underlying security or exchange rate of such currency. Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security. Total return on the
structured product is derived by linking return to one or
- 6 -
<PAGE>
more characteristics of the underlying instrument. Although the Fund's purchase
of structured products would havea similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leverage for purposes of the limitations placed on the extent of the Fund's
assets that may be used for borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). As a result, the Fund's investment in these structured products may
be limited by the restrictions contained in the 1940 Act. See "Other Investment
Companies" below. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which the Fund invests may
be deemed illiquid and subject to the 15% limitation described below under
"Illiquid Securities."
DEPOSITORY RECEIPTS AND DEPOSITORY SHARES
The Fund may invest in American Depository Receipts ("ADRs") or other similar
securities, such as American Depository Shares and Global Depository Shares,
convertible into securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. Generally, ADRs
in registered form are designed for use in U.S. securities markets. As a result
of the absence of established securities markets and publicly-owned corporations
in certain foreign countries as well as restrictions on direct investment by
foreign entities, the Fund may be able to invest in such countries solely or
primarily through ADRs or similar securities and government approved investment
vehicles. The Adviser expects that the Fund, to the extent of its investment in
ADRs, will invest predominantly in ADRs sponsored by the underlying issuers. The
Fund, however, may invest in unsponsored ADRs. Issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, which are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
have several unique investment characteristics such as (1) higher yields than
common stocks, but lower yields than comparable nonconvertible securities, (2) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) the potential for capital appreciation if
the market price of the underlying common stock increases.
The Fund has no current intention of converting any convertible securities they
may own into equity securities or holding them as an equity investment upon
conversion, although they may do so for temporary purposes. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by the Fund is called for redemption, the Fund may be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-related securities, consistent with their
respective investment objectives and policies, that provide funds for mortgage
loans made to residential homeowners. These include securities which represent
interests in pools of mortgage loans made by lenders such as savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled for sale to investors (such as the Fund) by various
governmental, government-related and private organizations. Interests in pools
of mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in
- 8 -
<PAGE>
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide amonthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Prepayments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payments in such pools. However, timely payment of
interest and/or principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool or hazard
insurance. There can be no assurance that the private insurers can meet their
obligations under the policies. The Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experience
and practices of the poolers the Adviser determines that the securities meet the
Fund's investment criteria. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
The Adviser expects that governmental, governmental-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-term fixed rate mortgages. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with the Fund's investment objective and policies, consider
making investments in such new types of securities. For additional information
regarding mortgage-related securities and the risks associated with investment
in such instruments, see "Additional Information on Portfolio Instruments -
Mortgage-Related Securities" in the Statement of Additional Information.
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities in accordance with its investment
objective and policies. Asset-backed securities represent an undivided ownership
interest in a pool of installment sales contracts and installment loans
collateralized by, among other things, credit card receivables and automobiles.
In general, asset-backed securities and the collateral supporting them are of
shorter maturity than mortgage loans. As a result, investment in these
securities should result in greater price stability for the Fund.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional Information.
The Fund will not limit their investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally traded on a
national securities exchange, such securities are widely traded by brokers and
dealers, and to such extent will not be considered illiquid for the purposes of
the Fund's limitation on investment in illiquid securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge"). Additionally, for example,
when the Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward sale contract to sell an
amount of
- 9 -
<PAGE>
that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in suchforeign currency. Conversely, when the
Fund believes that the U.S. dollar may suffer a substantial decline against
foreign currency, it may enter into a forward purchase contract to buy that
foreign currency for a fixed dollar amount ("position hedge"). In this
situation, the Fund may, in the alternative, enter into a forward contract to
sell a different foreign currency for a fixed U.S. dollar amount where such Fund
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which portfolio securities of the Fund are denominated
("cross-hedge"). The Fund's custodian will place cash not available for
investment or U.S. government securities or other high quality debt securities
in a segregated account having a value equal to the aggregate amount of the
Fund's commitments under forward contracts entered into with respect to position
hedges, cross-hedges and transaction hedges, to the extent they do not already
own the security subject to the transaction hedge. If the value of the
securities placed in a segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to such
contracts. As an alternative to maintaining all or part of the segregated
account, the Fund may purchase a call option permitting such Fund to purchase
the amount of foreign currency being hedged by a forward sale contract at a
price no higher than the forward contract price or the Fund may purchase a put
option permitting the Fund to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the forward contract
price. Unanticipated changes in currency prices may result in poorer overall
performance for the Fund than if it had not entered into such contracts. If the
party with which the Fund enters into a forward contract becomes insolvent or
breaches its obligation under the contract, then the Fund may lose the ability
to purchase or sell a currency as desired.
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund would sell portfolio securities to financial
institutions, such as banks and broker-dealers, and agree to repurchase them at
an agreed upon date, price and interest payment. When effecting reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. A reverse repurchase agreement involves the risk that
the market value of the portfolio securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, which price is
fixed at the time the Fund enters into such agreement.
SECURITIES LOANS, REPURCHASE AGREEMENTS, WHEN-ISSUED AND FORWARD COMMITMENTS
TRANSACTIONS
The Fund may lend portfolio securities in an amount up to 30% of its assets to
broker-dealers, major banks or other recognized domestic institutional borrowers
of securities. The Fund may also enter into repurchase agreements with dealers,
domestic banks or recognized financial institutions which, in the opinion of the
Adviser, present minimal credit risks. These transactions must be fully
collateralized at all times, but involve some risk to the Fund if the other
party should default on its obligations and the Fund is delayed or prevented
from recovering the collateral. The Fund may also purchase securities on a
when-issued basis or for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of the securities
declines prior to the settlement date.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS
The Fund may invest in zero coupon securities and pay-in-kind bonds and a
substantial portion of the Fund's sovereign debt securities may be acquired at a
discount. These investments involve special risk considerations. Zero coupon
securities are debt securities that pay no cash income but are sold at
substantial discounts from their value at maturity. When a zero coupon security
is held to maturity, its entire return, which consists of the amortization of
discount, comes from the difference between its purchase price and its maturity
value. This difference is known at the time of purchase, so that investors
holding zero coupon securities until maturity know at the time of their
investment what the return on their investment will be. Certain zero coupon
securities also are sold at substantial discounts from their maturity value and
provide for the commencement of regular interest payments at a deferred date.
The Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a
portion of their interest in the form of debt or equity securities. The Fund may
receive payments from pay-in-kind
- 10 -
<PAGE>
bonds in the form of both debt and equity securities provided such equity
securities do not cause the Fund to exceed its 20% investment limitation in such
securities. Zero coupon securities and pay-in-kind bonds may be issued by a wide
variety of corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Fund is required to accrue as income each year the value of
securities received in respect of pay-in-kind bonds and a portion of the
original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Fund will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Fund may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements.
ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities which are not readily marketable, time
deposits and repurchase agreements not terminable within seven days. Illiquid
assets are assets which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment. Securities that have readily available market quotations
are not deemed illiquid for purposes of this limitation (irrespective of any
legal or contractual restrictions on resale). The Fund may purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Rule 144A securities generally must be sold
to other qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% limitation on investment in illiquid securities. The ability to
sell Rule 144A securities to qualified institutional buyers is a recent
development and it is not possible to predict how this market will mature. The
Adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES
The Fund reserves the right to invest up to 10% of its total assets in the
securities of other investment companies. The Fund may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company. The Fund
does not intend to invest in such investment companies unless, in the judgment
of the Adviser, the potential benefits of such investment justify the payment of
any premium to net asset value of the investment company or of any sales charge.
The Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by investment companies in which it invests in addition to
the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the Fund's investment
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
- 11 -
<PAGE>
quality debt securities or money market instruments of U.S. or foreign issuers,
and most or all of the Fund's investments may be made in the United States and
denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.
PORTFOLIO TURNOVER
The Fund will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because emerging markets can be
especially volatile, securities of emerging markets countries may at times be
held only briefly. It is not anticipated that, under normal conditions, the
portfolio turnover rates for the Fund will exceed 200% in any one year. A high
rate of portfolio turnover (100% or more) involves correspondingly greater
brokerage commission expenses and/or markups and markdowns, which will be borne
directly by the Fund and indirectly by the Fund's shareholders. High portfolio
turnover may also result in the realization of substantial net capital gains.
SPECIAL RISK CONSIDERATIONS
GENERAL
The Fund's net asset value will fluctuate, reflecting fluctuations in the market
value of its portfolio positions and its net currency exposure. The value of the
Fund's fixed income securities generally fluctuates inversely with interest rate
movements and fixed income securities with longer maturities tend to be subject
to increased volatility.
There is no assurance that the Fund will achieve its investment objective.
The Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of their
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk of
loss with respect to its portfolio securities as compared to a diversified fund.
The Fund, however, intends to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code") applicable
to segregated asset accounts underlying variable products under section 817(h)
of the Code and to regulated investment companies under Subchapter M of the
Code.
HIGH YIELD SECURITIES
GENERAL. The Fund may invest all or substantially all of its assets in high
yield, high risk debt securities, commonly referred to as "junk bonds."
Securities rated below investment grade and comparable unrated securities offer
yields that fluctuate over time, but generally are superior to the yields
offered by higher rated securities. However, securities rated below investment
grade also involve greater risks than higher rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which the Fund may invest may have, or be
considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's, S&P or D&P (i.e., rated C
by Moody's or CCC or lower by S&P or D&P). Under rating agency guidelines, these
securities are considered to have extremely poor prospects of ever attaining any
real investment standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay principal
when due in the event of adverse business, financial or economic conditions,
and/or to be in default or not current in the payment of interest or principal.
Such securities are considered speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. Unrated securities deemed comparable to these lower- and
lowest-rated securities will have similar characteristics. Accordingly, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by the Fund with a commensurate effect on
- 12 -
<PAGE>
the value of their respective shares. Therefore, an investment in the Fund
should not be considered as a complete investment program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on
the Fund's ability to dispose of particular portfolio investments and may limit
its ability to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If the Fund is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Company's Board of Directors to value the Fund's
portfolio securities and the Company's Directors may have to use a greater
degree of judgment in making such valuations. Furthermore, adverse publicity and
investor perceptions about lower-rated securities, whether or not based on
fundamental analysis, may tend to decrease the market value and liquidity of
such lower-rated securities. Less liquid secondary markets may also affect the
Fund's ability to sell securities at their fair value. In addition, the Fund may
invest up to 15% of its net assets, measured at the time of investment, in
illiquid securities, which may be more difficult to value and to sell at fair
value. If the secondary markets for high yield, high risk debt securities
contract due to adverse economic conditions or for other reasons, certain
previously liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may increase.
The ratings of fixed income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
PORTFOLIO RATINGS. During the fiscal period ended March 31, 1997, the percentage
of average annual assets of the Fund, calculated on a dollar-weighted basis,
which was invested in securities within the various ratings categories (based on
the higher of Standard & Poor's Corporation and Moody's Investor Service, Inc.
ratings as described in Appendix A), and in unrated securities determined to be
of comparable quality, was as follows:
BB/Ba.............................. 26.88%
B/B................................ 13.34%
Unrated............................ 39.17%
Cash/Cash Equivalents............... 20.61%
------
Total Average Annual Assets: ........... 100%
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them, so
that their ability to service their debt obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. The risk
of loss due to default in payment of interest or principal by such issuers is
significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
Many fixed income securities, including certain U.S. corporate fixed income
securities in which the Fund may invest, contain call or buy-back features which
permit the issuer of the security to call or repurchase it. Such securities may
present risks based on payment expectations. If an issuer exercises such a "call
option" and redeems the security, the Fund may have to replace the called
security with a lower yielding security, resulting in a decreased rate of return
for the Fund.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose
the Fund to the direct or indirect consequences of political, social or economic
changes in the developing and emerging countries that issue the securities. The
ability and willingness of sovereign obligors in developing and emerging
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt
- 13 -
<PAGE>
when due may depend on general economic and political conditions within the
relevant country. Countries such as those in which the Funds may invest have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations, trade difficulties
and extreme poverty and unemployment. Many of these countries are also
characterized by political uncertainty or instability. Additional factors which
may influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than U.S. dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign sovereign
obligor cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks and multilateral organizations, and inflows of
foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. These obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Fund may invest will not be
subject to similar defaults or restructuring arrangements which may adversely
affect the value of such investments. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
In addition to high yield foreign sovereign debt securities, the Fund may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Foreign Securities" below.
- 14 -
<PAGE>
FOREIGN SECURITIES
Most of the Fund's assets will be invested in the securities of non-U.S.
issuers. Investors should recognize that investing in securities of non-U.S.
issuers involves certain risks and special considerations, including those set
forth below, which are not typically associated with investing in securities of
U.S. issuers. Further, certain investments that the Fund may purchase, and
investment techniques in which it may engage, involve risks, including those set
forth below.
Social, Political and Economic Factors. Many countries in which the Fund will
invest, and the emerging market countries in particular, may be subject to a
substantially greater degree of social, political and economic instability than
is the case in the United States, Japan and Western European countries. Such
instability may result from, among other things, some or all of the following:
(i) authoritarian governments or military involvement in political and economic
decision-making, and changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies and terrorist activities; (iv)
hostile relations with neighboring countries; and (v) drug trafficking. Social,
political and economic instability could significantly disrupt the principal
financial markets in which the Funds invest and adversely affect the value of
the Fund's assets.
Individual foreign economies in general, and those of emerging market countries
in particular, may differ favorably or unfavorably and significantly from the
U.S. economy in such respects as the rate of growth of gross domestic product or
gross national product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, structural unemployment and balance of
payments position. Governments of many of these countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In some cases, the government owns or controls many companies, including
some of the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in many countries,
including emerging market countries, which could affect private sector companies
and the Fund, and on market conditions, prices and yields of securities in the
Fund's portfolio. There may be the possibility of nationalization or
expropriation of assets, or future confiscatory levels of taxation affecting the
Fund. In the event of nationalization, expropriation or other confiscation, the
Fund may not be fairly compensated for its loss and could lose its entire
investment in the country involved.
Investment and Repatriation Restrictions. Investment by the Fund in non-U.S.
issuers may be restricted or controlled to varying degrees. These restrictions
may limit or preclude investment in certain of such issuers or countries and may
increase the costs and expenses of the Fund. For example, certain countries
require governmental approval prior to investments by foreign persons in the
country or in a particular company or industry sector or limit investment by
foreign persons to only a specific class of securities of a company which may
have less advantageous terms (including price) than securities of the company
available for purchases by nationals. Certain countries may also restrict or
prohibit investment opportunities in issuers or industries deemed important to
national interests. As a result of investment restrictions, the Fund may, in
certain countries (such as Mexico) invest through intermediary vehicles or
trusts. In addition, the repatriation of both investment income and capital from
some of these countries requires governmental approval and if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose temporary restrictions on foreign capital remittances abroad. Even
where there is no outright restriction on repatriation of capital, the mechanics
of repatriation may affect certain aspects of the operation of the Fund.
The Fund could be adversely affected by delays in, or a refusal to grant any
required governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, the Fund was unable to distribute
substantially all of its net investment income and long-term capital gains
within applicable time periods, the Fund could be subject to U.S. federal income
and excise taxes which would not otherwise be incurred and may cease to qualify
for the favorable tax treatment
- 15 -
<PAGE>
afforded to regulated investment companies under the Code, in which case it
would become subject to U.S. federal income tax on all of its income and gains.
Currency Fluctuations. Because the Fund may invest a substantial portion of its
assets in the securities of foreign issuers which are denominated in foreign
currencies, the strength or weakness of the U.S. dollar against such foreign
currencies will account for part of the Fund's investment performance. A decline
in the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of the Fund's holdings of securities
denominated in such currency and, therefore, will cause an overall decline in
the Fund's net asset value and any net investment income and capital gains to be
distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.
Inflation. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and emerging
market countries in particular. In an attempt to control inflation, wage and
price controls have been imposed at times in certain countries.
Market Characteristics; Differences in Securities Markets. The securities
markets in many countries, and in emerging markets in particular generally have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies listed on such markets may be less liquid and more
volatile than equity securities of U.S. companies of comparable size. Some of
the stock exchanges outside of the United States and in emerging market
countries, to the extent that established securities markets even exist, are in
the earlier stages of their development. A high proportion of the shares of many
foreign companies may be held by a limited number of persons, which may limit
the number of shares available for investment by the Fund. A limited number of
issuers in most, if not all, of these securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
In addition, the application of certain 1940 Act provisions may limit the Fund's
ability to invest in certain non-U.S. issuers and to participate in public
offerings in these countries. The limited liquidity of certain non-U.S.
securities markets may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country
- 16 -
<PAGE>
may trade at price-earning multiples higher than those of comparable companies
trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
Trading practices in certain foreign securities markets are also significantly
different from those in the United States. Brokerage commissions and other
transaction costs on the securities exchanges in many countries are generally
higher than in the United States. In addition, securities settlements and
clearance procedures in certain countries, and, in particular, in emerging
market countries, are less developed and less reliable than those in the United
States and the Fund may be subject to delays or other material difficulties and
could experience a loss if a counterparty defaults. Delays in settlement could
result in temporary periods when assets of the Funds are uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. The inability to dispose of a portfolio security due
to settlement problems could result either in losses to the Fund due to
subsequent declines in the value of such portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
Non-U.S. Subcustodians. Rules adopted under the 1940 Act permit the Fund to
maintain its non-U.S. securities and cash in the custody of certain eligible
non-U.S. banks and securities depositories. Certain banks in non-U.S. countries
may not be eligible subcustodians for the Fund, in which event the Fund may be
precluded from purchasing securities in which they would otherwise invest, and
other banks that are eligible subcustodians may be recently organized or
otherwise lack extensive operating experience. At present, custody arrangements
complying with the requirements of the Securities and Exchange Commission (the
"Commission") are available in each of the countries in which the Adviser
intends to invest. In certain countries in which the Fund may make investments,
there may be legal restrictions or limitations on the ability of the Fund to
recover assets held in custody by subcustodians in the event of the bankruptcy
of the subcustodian.
Government Supervision; Legal Systems. Disclosure and regulatory standards in
certain foreign countries, including emerging market countries, are in many
respects less stringent than U.S. standards. There may be less government
supervision and regulation of securities exchanges, listed companies and brokers
in these countries than exists in the United States. Brokers in some countries
may not be as well capitalized as those in the United States, so that they may
be more susceptible to financial failure in times of market, political, or
economic stress, exposing the Fund to a risk of loss. Less information may be
available to the Fund than with respect to investments in the United States and,
in certain of these countries, less information may be available to the Fund
than to local market participants. In addition, existing laws and regulations
are often inconsistently applied. Foreign investors may be adversely affected by
new laws and regulations, changes to existing laws and regulations and
preemption of local laws and regulations by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Financial Information and Standards. Non-U.S. issuers may be subject to
accounting, auditing and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular,
the assets and profits appearing on the financial statements of certain non-U.S.
issuers may not reflect their financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting
rules may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Moreover,
substantially less information may be publicly available about non-U.S. issuers
than is available about U.S. issuers.
- 17 -
<PAGE>
In addition to the foreign securities listed above, the Fund may also invest in
foreign sovereign debt securities, which involve certain additional risks. See
"Sovereign Debt Securities" above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may be authorized to use a
variety of investment strategies to hedge various market risks (such as interest
rates, currency exchange rates and broad or specific market movements), to
manage the effective maturity or duration of debt instruments held by the Fund,
or, with respect to certain strategies, to seek to increase the Fund's income or
gain (such investment strategies and transactions are referred to herein as
"Hedging and Other Strategic Transactions"). Currently, the Fund may use, as
portfolio management strategies, cross currency hedges, interest rate
transactions, commodity futures contracts in the form of futures contracts on
securities, securities indices and foreign currencies, and related options
transactions. The Fund also may enter into forward foreign currency contracts
and options transactions to hedge in connection with currency and interest rate
positions and in order to enhance the Fund's income or gain.
A discussion of the risks associated with Hedging and Other Strategic
Transactions follows below. The Fund will not be obligated, however, to pursue
any of such strategies and Fund makes no representation as to the availability
of these techniques at this time or at any time in the future. In addition, the
Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable rules and regulations of the
Commodity Futures Trading Commission ("CFTC") thereunder and the federal income
tax requirements applicable to regulated investment companies which are not
operated as commodity pools. To the extent not otherwise restricted by the
Commission, the CFTC, the Code or its investment objectives and policies, the
Fund may utilize, without limitation, Hedging and Other Strategic Transactions.
For further information see "Additional Information on Investment Policies and
Techniques - Hedging and Other Strategic Transactions" and "Additional
Information Concerning Taxes" in the Statement of Additional Information.
IN GENERAL
Subject to the constraints described above, the Fund may (if and to the extent
so authorized) purchase and sell (or write) exchange-listed and over-the-counter
put and call options on securities, index futures contracts, financial futures
contracts and fixed income indices and other financial instruments, and enter
into financial futures contracts, interest rate transactions and currency
transactions (collectively, these transactions are referred to in this
Prospectus as "Hedging and Other Strategic Transactions"). The Fund's interest
rate transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Hedging and Other Strategic Transactions may generally be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The Fund may use any or all types
of Hedging and Other Strategic Transactions which it is authorized to use at any
time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any authorized Hedging and Other Strategic
Transaction will be a function of numerous variables, including market
conditions. The ability of the Fund to utilize Hedging and Other Strategic
Transactions successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select the Fund's
securities. The Fund is not a "commodity pool' (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Other Strategic Transactions involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging, and non-hedging purposes to the extent
permitted by CFTC regulations; provided that the Fund may enter into futures
contracts or options thereon for purposes other
- 18 -
<PAGE>
than bona fide hedging if immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts would not exceed 5% of the
liquidation value of the Fund's portfolio; provided further, than in the case of
an option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. The use of certain
Hedging and Other Strategic Transactions will require that the Fund segregate
cash, U.S. government securities or other liquid high grade debt obligations to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security, financial instrument or currency. A detailed
discussion of various Hedging and Other Strategic Transactions, including
applicable regulations of the CFTC and the requirement to segregate assets with
respect to these transactions, appears in the Statement of Additional
Information.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
Hedging and Other Strategic Transactions have special risks associated with
them, including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of the Hedging and Other Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options could result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, or cause the Fund to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses. Although the Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Losses resulting from the use of Hedging and Other Strategic Transactions will
reduce the Fund's net asset value, and possibly income, and the losses can be
greater than if Hedging and Other Strategic Transactions had not been used.
- 18 -
<PAGE>
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken as
part of non-U.S. Hedging and Other Strategic Transactions also could be
adversely affected by: (1) other complex foreign political, legal and economic
factors, (2) lesser availability of data on which to make trading decisions than
in the United States, (3) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Other Strategic Transactions by the Fund will require,
among other things, that the Fund segregate cash, liquid high grade debt
obligations or other assets with its custodian, or a designated sub- custodian,
to the extent the Fund's obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency. In
general, either the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by the Fund,
for example, will require the Fund to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid high grade debt obligations
equal to the excess of the index value over the exercise price on a current
basis. A put option on securities written by the Fund will require the Fund to
segregate liquid high grade debt obligations equal to the exercise price. Except
when the Fund enters into a forward contract in connection with the purchase or
sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency, liquid securities denominated in
that currency equal to the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when the Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option on a futures contract, the Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt securities or other acceptable assets. The
Fund will accrue the net amount of the excess, if any, of its obligations
relating to swaps over its entitlements with respect to each swap on a daily
basis and will segregate with its custodian, or designated sub-custodian, an
amount of cash or liquid high grade debt obligations having an aggregate value
equal to at least the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
- 20 -
<PAGE>
Hedging and Other Strategic Transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. The
Fund may also enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding obligation in
related options and Hedging and Other Strategic Transactions. The Fund could
purchase a put option, for example, if the strike price of that option is the
same or higher than the strike price of a put option sold by the Fund. Moreover,
instead of segregating assets if it holds a futures contracts or forward
contract, the Fund could purchase a put option on the same futures contract or
forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging and Other Strategic Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it terminates
prior to that time, assets equal to any remaining obligation would need to be
segregated.
CONCENTRATION
Under normal market conditions, the Fund may invest greater than 25% of its
assets in securities of issuers whose primary business activity is in the
banking industry (see "Limiting Investment Risks" below). As such, an investment
in the Fund should be made with an understanding of the characteristics of the
banking industry and the risks that such an investment may entail. Banks are
subject to extensive government regulations that may limit both the amounts and
types of loans and other financial commitments that may be made and the interest
rates and fees that may be charged. The profitability of this industry is
largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from financial
difficulties of borrowers might affect a bank's ability to meet its obligations.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic obligations. For a discussion of additional risks, see
"Foreign Securities" above.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there
is no limitation with respect to investment in obligations issued
or guaranteed by the U.S. government, its agencies or
instrumentalities; and provided further that, under normal market
conditions, this limitation shall not apply with respect to the
purchase of securities of issuers whose primary business activity
is in the banking industry.
2. The Fund may not borrow money (except that they may enter into
reverse repurchase agreements) except from banks for temporary or
emergency purposes; provided, that (a) the amount of such
borrowing may not exceed 20% of the value of the Fund's total
assets and (b) the Fund will not purchase portfolio securities
while such outstanding borrowing exceeds 5% of the value of its
total assets.
3. The Fund may not invest an amount equal to 15% or more of the
current value of its net assets in investments that are illiquid.
The foregoing investment limitations and certain of those described in the
Statement of Additional Information under "Investment Limitations" are
fundamental policies of the Fund that may be changed only when permitted by law
and approved by the holders of a "majority" of the Fund's outstanding shares. If
a percentage restriction on investment or use of assets contained in these
investment limitations or elsewhere in this Prospectus or Statement of
Additional Information is adhered to at the time a transaction is effected,
later changes in percentage resulting from any cause other than actions by the
Fund will not be considered a violation; provided, that the restrictions on
- 21 -
<PAGE>
borrowing described in (2) and the restrictions on illiquid investments
described in (3) above shall apply at all times. As used in this Prospectus and
in the Statement of Additional Information, the term "majority", when referring
to the approvals to be obtained from shareholders in connection with matters
affecting the Fund (e.g., approval of investment advisory contracts), means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting
if the holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. Shareholders are entitled to one vote for each full share held and
to fractional votes for fractional shares held.
MANAGEMENT
The business and affairs of the Fund are managed under the general direction and
supervision of the Company's Board of Directors. The Fund's day-to-day
operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK provides investment advisory services to the Fund pursuant to an
Investment Advisory Agreement with the Company (the "Advisory Agreement").
Subject to such policies as the Company's Board of Directors may determine, the
Adviser makes investment decisions for the Fund.
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive from the Fund a monthly fee at the annual rate of .85%
for the first $200,000,000 of assets and .75% for amounts in excess thereof
based upon the average daily net assets of the Fund. The investment advisory fee
for the Fund is higher than that paid by most investment companies, but is
comparable to that paid by other investment companies that have strategies
focusing on high yield and international investments.
The Adviser is a New York State chartered trust company. Under its charter, the
Adviser may neither accept deposits nor make loans except for deposits or loans
arising directly from its exercise of the fiduciary powers granted it under the
New York Banking Law. The Adviser's principal business is the rendering of
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. The Adviser specializes
in fixed income management and offers its clients a complete range of fixed
income investments in capital markets throughout the world. The Adviser
currently manages in excess of $8.4 billion in assets and serves as investment
adviser to twenty-one other registered investment companies (or portfolios
thereof). The principal business address of the Adviser is 520 Madison Avenue,
New York, New York 10022.
PORTFOLIO MANAGERS. Dr. Wallace Mathai-Davis and Richard M. Johnston serve as
portfolio managers of the Fund. Dr. Mathai-Davis is a Managing Director of the
Adviser and has been associated with the Adviser since 1986. Mr. Johnston is a
Managing Director of the Adviser and has been the director of Latin American
investments since 1992. From 1988 to 1992 Mr. Johnston was Vice President,
International Corporate Finance at Salomon Brothers Inc.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
serves as the Company's administrator and generally assists the Company in all
aspects of its administration and operation. The Chase Manhattan Bank, N.A.
serves as custodian of the assets of the Fund. BISYS Fund Services, Inc.
provides transfer agency services and dividend disbursing services for the Fund.
Pursuant to an Administration Agreement between the Company and BISYS, BISYS is
entitled to a monthly fee, based on an annual rate of .15% of aggregate average
daily net assets of the Company as compensation for its administrative services.
BISYS may waive this fee from time to time. The principal business address of
BISYS and BISYS Fund Services, Inc. is 3435 Stelzer Road, Columbus, Ohio 43219.
The principal business address of The Chase Manhattan Bank, N.A. is 4 Metrotech
Center, Brooklyn, New York 11245.
- 22 -
<PAGE>
FUND EXPENSES
In addition to the fees described above with respect to the Investment Advisory
Agreement, the Fund will be responsible for expenses relating to administration,
custody, transfer agency, legal, audit and accounting, directors fees and other
miscellaneous expenses pursuant to written agreements with such service
providers or otherwise. Such expenses are subject to waiver by the relevant
service provider or reimbursement by the Adviser or Administrator.
ABOUT YOUR INVESTMENT
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc., the Fund's Principal Underwriter, to the Accounts without any
sales or other charge, at the Fund's net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for business. The Company will effect
orders to purchase or redeem shares of the Fund, that are based on premium
payments, surrender and transfer requests and any other transaction requests
from Contract and Policy Owners, annuitants and beneficiaries, at the Fund's net
asset value per share next computed after the Account receives such transaction
request. Any orders to purchase or redeem Fund shares that are not based on
actions by Contract or Policy Owners, annuitants, and beneficiaries will be
effected at the Fund's net asset value per share next computed after the order
is received by the Distributor. The Fund reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Individuals may not place orders directly with the Fund. Please refer to the
appropriate Account Prospectus of the Participating Company for more information
on the purchase of Portfolio shares.
REDEMPTION OF SHARES
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above. Shares redeemed are entitled to earn dividends, if
any, up to and including the day redemption is effected. There is no redemption
charge. Payment of the redemption price will normally be made within seven days
after receipt of such tender for redemption.
The right of redemption may be suspended or the date of payment may be postponed
for any period during which the NYSE is closed (other than customary weekend and
holiday closings) or during which the SEC determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
SEC) exists as a result of which disposal by the Fund of securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Company fairly to determine the value of the Fund's net assets, or for
such other periods as the SEC may by order permit for the protection of security
holders of the Company.
EXCHANGE PRIVILEGE
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset values.
HOW THE COMPANY VALUES ITS SHARES
The net asset value per share of the Fund is calculated once daily at 4:15 p.m.,
New York time, Monday through Friday, each day the NYSE is open. The net asset
value per share of the Fund is computed by dividing the value of the net assets
of the Fund by the total number of Fund shares outstanding. Equity securities
held by the Fund are valued at the last sale price on the exchange or in the
principal over-the-counter market in which such securities are traded, as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price. Debt securities held by the Fund
generally are valued based on quoted bid prices. Short-term debt investments
having maturities of 60 days or less are amortized to maturity based on their
cost, and if applicable, adjusted for foreign exchange translation. Foreign
securities are valued on the basis of quotations from
- 23 -
<PAGE>
the primary market in which they are traded and are translated from the local
currency into U.S. dollars using prevailing exchange rates.
Securities for which market quotations are not readily available are valued at
fair value determined in good faith by or under the direction of the Company's
Board of Directors (as may be delegated from time to time to a pricing committee
designated by the Board of Directors). Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics.
HOW DISTRIBUTIONS ARE MADE: TAX INFORMATION
DISTRIBUTIONS
The Fund will declare dividends daily and pay the dividends quarterly from net
investment income and will distribute its net capital gains, if any, at least
annually. Such income and capital gains distributions will be made in shares of
the Fund.
TAX MATTERS
THE FUND. The Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code, as
amended (the "Code"), concerning the diversification of assets, distribution of
income, and sources of income. When the Fund qualifies as a regulated investment
company and all of its taxable income is distributed in accordance with the
timing requirements imposed by the Code, the Fund will not be subject to Federal
income tax. If, however, for any taxable year the Fund does not qualify as a
regulated investment company, then all of its taxable income will be subject to
tax at regular corporate rates (without any deduction for distributions to the
Accounts), and the receipt of such distributions will be taxable to the extent
that the distributing Fund has current and accumulated earnings and profits.
FUND DISTRIBUTIONS. Distributions by the Fund are taxable, if at all, to the
Accounts, and not to Contract or Policy Owners. An Account will include
distributions in its taxable income in the year in which they are received
(whether paid in cash or reinvested).
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of one or more Funds are the investment
vehicle reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about
- 24 -
<PAGE>
the Fund and its operations. It is expected that the Company will pay a portion
of the cost of preparing certain of these reports. Contract and Policy Owners
may obtain information about their investment on any business day by calling
toll-free 1-800-618-9510 between 8:15 a.m. and 6:00 p.m., New York time.
Specially trained representatives will answer questions and provide information
about Contract and Policy Owners accounts.
Each Account owning shares of the Fund will vote its shares in accordance with
instructions received from Contract or Policy Owners, annuitants and
beneficiaries. Fund shares held by an Account as to which no instructions have
been received will be voted for or against any proposition, or in abstention, in
the same proportion as the shares of that Account as to which instructions have
been received. Fund shares held by an Account that are not attributable to
Contracts or Policies will also be voted for or against any proposition in the
same proportion as the
shares for which voting instructions are received by the Account. If the
Participating Insurance Company determines, however, that it is permitted to
vote any such shares of the Fund in its own right, it may elect to do so,
subject to the then current interpretation of the 1940 Act and the rules
thereunder.
PERFORMANCE INFORMATION
From time to time the Fund may advertise certain information about its
performance. The Fund may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Fund may make available information as to their
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Funds published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A.
Today or The New York Times or other industry or financial publications.
Performance information presented for the Fund 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 Fund's performance and would reduce an investor's
return under the annuity contract or life policy.
The Fund's performance information is historical, will fluctuate and should not
be considered as representative of future results. The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Quotations of the Fund's performance will
not reflect charges levied at the Account level.
- 25 -
<PAGE>
COUNSEL; INDEPENDENT ACCOUNTANTS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York, serves
as counsel to the Company. Price Waterhouse LLP serves as the independent
accountants to the Company. Price Waterhouse LLP is located at 1177 Avenue of
the Americas, New York, New York 10036.
-26-
<PAGE>
APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of the Company's Funds may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the
A-1
<PAGE>
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
A-2
<PAGE>
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-3
<PAGE>
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
------------------------
A-4
<PAGE>
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether a Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-5
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE>
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 July 29, 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.
<PAGE>
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.
2
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
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....................................................... 31
REDEMPTION OF SHARES..................................................... 31
PERFORMANCE CALCULATIONS................................................. 31
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 33
DETERMINATION OF NET ASSET VALUE......................................... 34
GENERAL INFORMATION...................................................... 35
FINANCIAL STATEMENTS..................................................... 38
- -------------------------------------------------------------------------------
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
3
<PAGE>
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
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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. Each Fund may make loans which are
short-term (nine months or less) or long-term. 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.
7
<PAGE>
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
8
<PAGE>
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,
9
<PAGE>
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.
10
<PAGE>
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
11
<PAGE>
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.
12
<PAGE>
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
13
<PAGE>
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
14
<PAGE>
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
15
<PAGE>
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
16
<PAGE>
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.
17
<PAGE>
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.
18
<PAGE>
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
19
<PAGE>
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
20
<PAGE>
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
Mike Sakala, 31 Assistant Vice President, BISYS
BISYS Fund Services Secretary Fund Services, April 1996 to
3435 Stelzer Road present.
Columbus, Ohio 43219
Ellen Stoutamire, 48 Assistant Vice President, Client Legal
BISYS Fund Services Secretary Services, BISYS Fund Services;
3435 Stelzer Road Associate Counsel, Franklin
Columbus, Ohio 43219 Templeton Mutual Funds; Vice
President and General Counsel,
Pioneer Western Corporation.
22
<PAGE>
Matthew Constancio, 32 Assistant Associate Manager, Client Legal
BISYS Fund Services Secretary Services, BISYS Fund Services
3435 Stelzer Road (November 1996 to present);
Columbus, Ohio 43219 Previously, Mutual Fund
Administrator, Payden & Rygel
Investment Group.
Alaina Metz, 30 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.
Kristine Kelly, 28 Assistant Manager, BISYS Fund Services
BISYS Fund Services Secretary from 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.
23
<PAGE>
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
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, 0.85% of the
first $200,000,000 and 0.75% 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. For the period ended March 31, 1997, the Adviser earned
and waived fees of $76,943 and $13,449 for the High Yield and Emerging Markets
Funds, respectively.
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
24
<PAGE>
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 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 June 30, 1997, Rockefeller & Co. managed over $4
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-
25
<PAGE>
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 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.
26
<PAGE>
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.
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. There is no
fee payable under the Distribution Agreement.
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
became effective on January 1, 1997 and 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
27
<PAGE>
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. From January 1, 1997 to March 31, 1997, BISYS earned administrative
services fees and fund accounting fees, amounting to $6,868 and $7,500,
respectively, for the High Yield Fund and $1,236 and $7,500, respectively, for
the Emerging Markets Fund. During the same period, BISYS waived the
administrative service fees for each Fund.
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. From January 1, 1997 to
March 31, 1997, BISYSn notice. earned transfer agent fees amounting to $170 for
the High Yield Fund and $124, respectively, for the Emerging Markets Fund.
From the inception of the High Yield Fund (April 1, 1996) and the Emerging
Markets Fund (August 26, 1996) through December 31, 1996, (collectively, the
"Relevant Periods") Furman Selz LLC ("Furman Selz") provided the Company with
Administrative, fund accounting, dividend disbursing and transfer agency
services pursuant to an administration agreement. During the Relevant Periods,
Furman Selz earned and waived fees of $6,710 for the High Yield Fund and $1,005
for the Emerging Markets Fund for administrative services rendered. 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.
During the Relevant Periods, Furman Selz earned fees of $22,500 for the High
Yield Fund and $7,500 for the Emerging Markets Fund. Furman Selz also acted as
Transfer Agent for the Funds and received reimbursement of certain expenses plus
a per account fee of $15.00 per year. During the Relevant Periods, Furman Selz
earned fees of $697 for the High Yield Fund and $414 for the Emerging Markets
Fund for dtrnasfer agency services.
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
28
<PAGE>
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 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.
29
<PAGE>
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 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.
Portfolio turnover may vary from year to year as well as within a year. The
turnover rate for the High Yield Fund for the period April 1, 1996 (commencement
of operations) through March 31, 1997 was 4%. The turnover rate for the Emerging
Markets Fund for the period August 28, 1996 (commencement of operations) through
March 31, 1997 was 96%.
30
<PAGE>
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.
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
31
<PAGE>
Fund expenses on an annual basis. Average annual total return is calculated
according to the following formula:
P (1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the stated period
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 total return of the High Yield Fund since April 1, 1996 (inception) through
March 31, 1997 was 11.90%. The total return of the Emerging Markets Fund since
August 28, 1996 (inception) through March 31, 1997 was 8.29%.
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,
32
<PAGE>
including Barron's, Business Week, Forbes, Fortune, Institutional Investor,
Money, Morningstar, Mutual Fund Values, The Wall Street Journal, The New York
Times and U.S.A. Today.
Performance information presented for 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.
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.
33
<PAGE>
For information concerning the federal income tax consequences to the holders of
variable annuity contracts and variable rate insurance policies, such holders
should consult the prospectuses used in connection with the issuance of their
particular contracts or policies.
DETERMINATION OF NET ASSET VALUE
The Company values the shares of each Fund daily on each day the New York Stock
Exchange (the "NYSE") is open. Currently, the NYSE is closed Saturdays, Sundays
and the following holidays: New Year's Day, Reverend Martin Luther King, Jr.'s
Day, President's Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Thanksgiving and Christmas. The Company determines net asset value as of the
close of the NYSE. However, equity options held by a Fund are priced as of the
close of trading at 4:10 p.m, and futures on U.S. government securities and
index options held by a Fund are priced as of their close of trading at 4:15
p.m.
Each Fund determines net asset value as follows: Securities for which market
quotations are readily available are valued at prices which, in the opinion of
the Directors, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sales price on or,
if no sales are reported (as in the case of some securities traded
over-the-counter) the last reported bid price, except that certain U.S.
government securities are stated at the mean between the reported bid and asked
prices. Short-term investments having remaining maturities of 60 days or less
are stated at amortized cost, which approximates market. All other securities
and assets are valued at their fair value following procedures approved by the
Directors. Liabilities are deducted from the total, and the resulting amount is
divided by the number of shares outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. Securities for which reliable
quotations are not readily available and all other assets will be valued at
their respective fair market value as determined in good faith by, or under
procedures established by, the Company's Board of Directors.
If any securities held by a Fund are restricted as to resale, their fair value
will be determined in good faith by, or under procedures established by, the
Company's Board of Directors. The Directors periodically review such valuations
and procedures. The fair value of such securities is generally determined as the
amount which 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
34
<PAGE>
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 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. Similarly, market movements can occur with
respect to foreign securities on days on which an investor does not have access
to the Fund.
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.
35
<PAGE>
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.
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.
36
<PAGE>
As of July 22, 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 444,527.892 84.310%*
c/o Continuum
301 West 11th Street
Kansas City, Missouri 64105-1634
Security Equity Life Insurance Co. 79,412.718 15.060%*
84 Business Park Drive
Armonk, New York 10504-1711
HIGH YIELD FUND:
C M Life 2,025,842.143 76.940%*
c/o Continuum
301 West 11th Street
Kansas City, Missouri 64105-1634
Security Equity Life Insurance Co. 603,750.980 22.930%
84 Business Park Drive
Armonk, New York 10504-1711
DJG VALUE EQUITY FUND:
Security Equity Life Insurance Co. 106,706.737 100%*
84 Business Park Drive
Armonk, New York 10504-1711
U.S. SMALL CAP FUND:
Security Equity Life Insurance Co. 80,030.056 100%*
84 Business Park Drive
Armonk, New York 10504-1711
- ----------
* May be deemed to "control" the Fund as that term is defined under the 1940
Act.
37
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements for the OFFITBANK VIF-Emerging Markets Fund and
the OFFITBANK VIF-High Yield Fund for the period ended March 31, 1997 are
incorporated herein by reference to the Company's Annual Report to Shareholders
dated March 31, 1997. The March 31, 1997 financial statements are incorporated
herein in reliance upon the report of Price Waterhouse LLP, independent
accountants, given on the authority of such firm as experts in auditing and
accounting.
38
<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 March 31, 1997
for the OFFITBANK VIF - Emerging Markets Fund and
OFFITBANK VIF - High Yield Fund (audited).
With respect to the OFFITBANK VIF - Emerging Markets Fund
series and the High Yield Fund series of the Registrant
only, included in the 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 May 31, 1997 (Accession Number 0000922423-97-000479):
(1) Portfolio of Investments dated March 31, 1997
(audited).
(2) Statements of Assets and Liabilities dated March 31,
1997 (audited).
(3) Statements of Operations for the period ended March 31,
1997 (audited).
(4) Statement of Changes in Net Assets for the period ended
March 31, 1997 (audited).
(5) Financial Highlights for the period ended March 31,
1997 (audited).
(6) Notes to Financial Statements dated March 31, 1997
(audited).
<PAGE>
(b) Exhibits:
Exhibit
Number Description
------ -----------
Ex-99.B1(a) -- Registrant's Articles of Incorporation (2)
Ex-99.B1(b) -- Registrant's Articles of Amendment (2)
Ex-99.B2 -- Registrant's Amended and Restated By-Laws (2)
Ex-99.B3 -- None.
Ex-99.B4 -- Form of Specimen Share Certificates (2)
Ex-99.B5(a) -- Advisory Agreement between Registrant and OFFITBANK
(2)
Ex-99.B5(b) -- Advisory Agreement between the Registrant and
David J. Greene and Company (4)
Ex-99.B5(c) -- Investment Management Agreement between
OFFITBANK, the Registrant and Rockefeller & Co. Inc. (4)
EX-99.B5(d) -- Form of Investment Advisory Agreement between the
Registrant and CVO Greater China Partners, L.P. (5)
Ex-99.B6 -- Distribution Agreement between Registrant and OFFIT
Funds Distributor, Inc. (3)
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 (3)
Ex-99.B9(a) -- Administration Agreement between Registrant and BISYS
Fund Services Limited Partnership (3)
Ex-99.B9(b) -- Transfer Agency Agreement between Registrant and BISYS
Fund Services, Inc. (3)
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. (2)
Ex-99.B9(d) -- Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITBANK and Security Equity Life Insurance Company
(2)
Ex-99.B9(e) -- Fund Accounting Agreement between the Registrant and
BISYS Fund Services, Inc. (3)
Ex-99.B10 -- Opinion of Kramer, Levin, Naftalis, Nessen, Kamin &
Frankel (2)
Ex-99.B11(a) -- Consent of Kramer, Levin, Naftalis & Frankel (4)
Ex-99.B11(b) -- Consent of Price Waterhouse LLP (4)
Ex-99.B12 -- None.
Ex-99.B13 -- Purchase Agreement between Registrant and OFFIT Funds
Distributor, Inc. (2)
Ex-99.B14 -- None.
Ex-99.B15 -- None.
Ex-99.B16 -- Schedules for Computation of performance quotation for
the VIF-High Yield Fund and VIF-Emerging Markets Fund.
(4)
Ex-B. P of A -- Powers of Attorney (2)
Ex-27 -- Financial Data Schedules (4)
- --------------------------------
(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. 6 filed
electronically on January 31, 1997, accession number 0000922423-97-
000053 and incorporated herein by reference.
(3) 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.
(4) Filed herewith.
(5) 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 July 22, 1997
OFFITBANK VIF-High Yield Fund 3
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
OFFITBANK VIF-Latin America Equity Fund N/A
OFFITBANK VIF-CVO Crester China Fund N/A
OFFITBANK VIF-Mortgage Securities Fund N/A
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.
125 West 55th Street
New York, New York 10019
(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) None.
(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. 9 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 28th day of July, 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 28th day of July, 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.B5(a) Investment Management Agreement between the
Registrant and David J. Greene and Company
EX-99.B5(b) Investment Management Agreement between
OFFITBANK, the Registrant and Rockefeller & Co., Inc.
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
EX-99.B11(b) Consent of Price Waterhouse LLP
Ex-99.B16 Schedules for Computation of performance quotation for
the VIF-High Yield Fund and VIF-Emerging Markets Fund.
EX-27 Financial Data Schedules
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
AND
DAVID J. GREENE & COMPANY
AGREEMENT made as of the the 3rd day of September, 1996 by and between
The OFFITBANK Variable Insurance Fund, Inc., a Maryland corporation which may
issue one or more series of shares (hereinafter the "Company"), and David J.
Greene and Company, a New York partnership (hereinafter the "Adviser").
1. STRUCTURE OF AGREEMENT. The Company is entering into this Agreement
on behalf of the Company's DJG Value Equity Fund series (the "Fund") severally
and not jointly with respect to the other series portfolios of the Company. The
responsibilities and benefits set forth in this Agreement shall relate solely to
the Fund and no other series portfolio of the Company shall have any
responsibility for any obligation arising out of this Agreement. Without
otherwise limiting the generality of the foregoing,
(a) any breach of any term of this Agreement regarding the Company with
respect to the Fund shall not create a right or obligation with
respect to any other series portfolio of the Company;
(b) under no circumstances shall the Adviser have the right to set off
claims relating to the Fund by applying property of any other series
portfolio of the Company; and
(c) the business and contractual relationships created by this Agreement,
consideration for entering into this Agreement, and the consequences
of such relationship and consideration relate solely to the Company
and the Fund.
2. DELIVERY OF DOCUMENTS. The Company has delivered to the Adviser
copies of each of the following documents and will deliver to it all future
amendments and supplements thereto, if any:
(a) The Company's Articles of Incorporation (the "Articles");
(b) The By-Laws of the Company;
<PAGE>
(c) Resolutions of the Board of Directors of the Company authorizing the
execution and delivery of this Agreement;
(d) The Company's Registration Statement under the Securities Act of 1933,
as amended (the "1933 Act"), and the Investment Company Act of 1940,
as amended (the "1940 Act"), on Form N-1A as filed with the Securities
and Exchange Commission (the "Commission") on July 20, 1994 and all
subsequent amendments thereto relating to the Fund (the "Registration
Statement");
(e) Notification of Registration of the Company under the 1940 Act on Form
N-8A as filed with the Commission; and
(f) The Prospectus and Statement of Additional Information of the Fund
(collectively, the "Prospectus").
3. INVESTMENT ADVISORY SERVICES. The Company hereby appoints the
Adviser, and the Adviser hereby undertakes, to act as investment adviser of the
Fund and, subject to the supervision of the Company's Board of Directors, to (a)
make investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets, (c) place purchase and sale orders on behalf
of the Fund and (d) provide continuous supervision of the Fund's investment
portfolio. The Adviser shall, subject to review by the Board of Directors,
furnish such other services as the Adviser shall from time to time determine to
be necessary or useful to perform its obligations under this Agreement.
As manager of the Fund's assets, the Adviser shall make investments for
the Fund's account in accordance with the investment objectives and limitations
set forth in the Articles, the Prospectuses, the 1940 Act, the provisions of the
Internal Revenue Code of 1986, as amended, including Subchapters L and M,
relating to variable contracts and regulated investment companies, respectively,
and policy decisions adopted by the Company's Board of Directors from time to
time. The Adviser shall advise the Company's officers and Board of Directors, at
such times as the Company's Board of Directors may specify, of investments made
for the Fund's account and shall, when requested by the Company's officers or
Board of Directors, supply the reasons for making such investments.
The Adviser is authorized on behalf of the Company, from time to time
when deemed to be in the best interests of the Company and to the extent
permitted by applicable law, regulations and public positions of the Securities
and Exchange Commission, to aggregate the securities to be sold or purchased for
the Fund with those sold or purchased for other accounts advised or managed by
the Adviser, including proprietary accounts, in order to obtain best execution
provided that the Fund is not disadvantaged vis a vis any other account, in
accordance with the Fund's Code of Ethics. The Adviser is further authorized, to
the extent
-2-
<PAGE>
permitted by applicable law, to select brokers for the execution of trades for
the Company, which broker may be the adviser or an affiliate of the Adviser,
subject to best execution.
4. EXPENSES. (a) The Adviser shall, at its expense, provide the Fund
with office space, furnishings and equipment and personnel required by it to
perform the services to be provided by the Adviser pursuant to this Agreement.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including, but not
limited to, taxes; interest; fees (including fees paid to its directors who are
not affiliated with the Adviser or any of its affiliates); fees payable to the
Securities and Exchange Commission; state securities qualification fees; costs
of preparing and printing Prospectuses for regulatory purposes and for
distribution to existing shareholders; advisory and administration fees; charges
of the custodian and transfer agent; insurance premiums; auditing and legal
expenses; costs of shareholders' reports and shareholders' meetings; any
extraordinary expenses; and brokerage fees and commissions, if any, in
connection with the purchase or sale of portfolio securities.
5. COMPENSATION. In consideration of the services to be rendered by the
Adviser under this Agreement, the Company shall pay the Adviser monthly fees on
the first Business Day (as defined in the Prospectuses) of each month based upon
the average daily net assets of the Fund during the preceding month (as
determined on the days and at the time set forth in the Prospectus for
determining net asset value per share) at the annual rate of 0.80%. If the fees
payable to the Adviser pursuant to this paragraph begin to accrue before the end
of any month or if this Agreement terminates before the end of any month, the
fees for the period from such date to the end of such month or from the
beginning of such month to the date of termination, as the case may be, shall be
calculated based on the average daily net assets of the days of the month that
the agreement was in effect. For purposes of calculating each such monthly fee,
the value of the Fund's net assets shall be computed in the manner specified in
the Prospectus and the Articles for the computation of the value of the Fund's
net assets in connection with the determination of the net asset value of shares
of the Fund's capital stock.
If the aggregate expenses incurred by, or allocated to, the Fund in any
fiscal year shall exceed the lowest expense limitation, if applicable to the
Fund, imposed by state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Adviser shall
reimburse the Fund for such excess. The Adviser's reimbursement obligation will
be limited to the amount of fees it received under this Agreement during the
period in which such expense limitations were exceeded, unless otherwise
required by applicable laws or regulations. With respect to portions of a fiscal
year in which this Agreement shall be in effect, the foregoing limitations shall
be prorated according to the proportion which that portion of the fiscal year
bears to the full fiscal year. Any payments required to be made by this
paragraph shall be made once a year promptly after the end of the Company's
fiscal year.
-3-
<PAGE>
In consideration of the Adviser's undertaking to render the services
described in this Agreement, the Company agrees that the Adviser shall not be
liable under this Agreement for any error of judgment or mistake of law or for
any loss suffered by the Company in connection with the performance of this
Agreement, provided that nothing in this Agreement shall be deemed to protect or
purport to protect the Investment Adviser against any liability to the Company
or its stockholders to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of the
Adviser's duties under this Agreement or by reason of the Adviser's reckless
disregard of its obligations and duties hereunder.
6. NON-EXCLUSIVE SERVICES. Except to the extent necessary to perform
the Investment Adviser's obligations under this Agreement, nothing herein shall
be deemed to limit or restrict the right of the Adviser, or any affiliate of the
Adviser, including any employee of the Adviser, to engage in any other business
or to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other corporation, firm, individual or association.
7. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall
become effective on the date hereof, provided that it shall have been approved
by a majority of the outstanding voting securities of the Fund, in accordance
with the requirements of the 1940 Act, or such later date as may be agreed by
the parties following such shareholder approval (the "Effective Date").
(a) Subject to prior termination as provided in sub-paragraph (d) of
this paragraph, this Agreement shall continue in force for two years from the
Effective Date and indefinitely thereafter, but only so long as the continuance
after such date shall be specifically approved at least annually by vote of the
Directors of the Company or by vote of a majority of the outstanding voting
securities of the Fund.
(b) This Agreement may be modified by mutual consent, such consent on
the part of the Company to be authorized by vote of a majority of the
outstanding voting securities of the Fund.
(c) In addition to the requirements of sub-paragraphs (a) and (b) of
this paragraph, the terms of any continuance or modification of this Agreement
must have been approved by the vote of a majority of those Directors of the
Company who are not parties to this Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval.
(d) Either party hereto may, at any time on thirty (30) days prior
written notice to the other, terminate this Agreement, without payment of any
penalty, by action of its Trustees or Board of Directors, as the case may be, or
by action of its authorized officers or, with
-4-
<PAGE>
respect to a Fund, by vote of a majority of the outstanding voting securities of
the Fund. This Agreement shall terminate automatically in the event of its
assignment.
8. USE OF NAME. Upon expiration or earlier termination of this
Agreement, the Company shall, as to any reference to "David J. Greene and
Company" or "DJG" (hereinafter, collectively, "DJG") as promptly as practicable
change the name of the Fund so as to eliminate all reference to "DJG", and
thereafter the Fund shall cease transacting business in any corporate name using
the words "DJG" or any other reference to the Adviser or "DJG". The foregoing
rights of the Adviser and obligations of the Company shall not deprive the
Adviser, or any affiliate thereof which has "DJG" in its name, of, but shall be
in addition to, any other rights or remedies to which the Adviser and any such
affiliate may be entitled in law or equity by reason of any breach of this
Agreement by the Company, and the failure or omission of the Adviser to request
a change of the Fund's name or a cessation of the use of the name of "DJG" as
described in this paragraph shall not under any circumstances be deemed a waiver
of the right to require such change or cessation at any time thereafter for the
same or any subsequent breach.
9. CERTAIN DEFINITIONS. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
10. INDEPENDENT CONTRACTOR. The Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Company, from time
to time, have no authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund.
11. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Maryland, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
12. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
13. NOTICES. Notices of any kind to be given to the Adviser hereunder
by the Company shall be in writing and shall be duly given if mailed or
delivered to the Adviser at 599 Lexington Avenue, 12th Floor, New York, New York
10022 or at such other address or to such individual as shall be so specified by
the Adviser to the Company. Notices of any kind
-5-
<PAGE>
to be given to the Company hereunder by the Adviser shall be in writing and
shall be duly given if mailed or delivered to the Company at 237 Park Avenue,
Suite 910, New York, New York 10017 or at such other address or to such
individual as shall be so specified by the Company to the Adviser. Notices shall
be effective upon delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, and their
respective seals to be hereunto affixed, all as of the date written above.
THE OFFITBANK VARIABLE INSURANCE DAVID J. GREENE & COMPANY
FUND, INC.
By: /s/Morris W. Offit By: /s/ Alan I. Greene
------------------------- -------------------------
Morris W. Offit Alan I. Greene
President Co-Managing Partner
-6-
INVESTMENT MANAGEMENT AGREEMENT
BETWEEN
OFFITBANK,
OFFITBANK VARIABLE INSURANCE FUND, INC.
AND
ROCKEFELLER & CO., INC.
AGREEMENT made as of the 3rd day of September, 1996, by and between
OFFITBANK, a New York State chartered trust company (the "Adviser"), Rockefeller
& Co., Inc., a New York corporation and a wholly-owned subsidiary of Rockefeller
Financial Services, Inc. (the "Sub-Adviser") and The OFFITBANK Variable
Insurance Fund, Inc. a Maryland corporation (the "Company"), an open-end,
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act").
WHEREAS, the Adviser provides investment advisory services to the VIF-
U.S. Small Cap Fund series of the Company which serves as the underlying
investment for certain variable annuity contracts issued by insurance company
separate accounts, pursuant to an Investment Advisory Agreement dated as of
March 1, 1995 (the "Advisory Agreement"); and
WHEREAS, the Sub-Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment subadvisory services in connection with the VIF-U.S. Small Cap Fund
series of the Company (the "Fund"), and the Sub-Adviser represents that it is
willing and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Adviser hereby appoints the Sub-Adviser to
act as investment subadviser to the Fund for the period and on the terms set
forth in this Agreement. The Sub-Adviser accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
2. DELIVERY OF DOCUMENTS. The Adviser has delivered to the
Sub-Adviser copies of each of the following documents along with all amendments
thereto through the date hereof, and will promptly deliver to it all future
amendments and supplements thereto, if any:
(a) the Company's Articles of Incorporation;
(b) the By-Laws of the Company;
(c) resolutions of the Board of Directors of the Company
authorizing the execution and delivery of the Advisory
Agreement and this Agreement;
<PAGE>
(d) the most recent Post-Effective Amendment to the Company's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Company under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the currently effective Prospectus and Statement of Additional
Information of the Fund.
3. INVESTMENT ADVISORY SERVICES. The Sub-Adviser hereby undertakes to
act as investment subadviser to the Fund and, subject to the supervision of the
Company's Board of Directors and the Adviser, to (a) make investment strategy
decisions for the Fund, (b) manage the investing and reinvesting of the Fund's
assets, (c) place purchase and sale orders on behalf of the Fund and (d) provide
continuous supervision of the Fund's investment portfolio. The Sub-Adviser
shall, subject to review by the Board of Directors and the Adviser, furnish such
other services as the Sub-Adviser shall from time to time determine to be
necessary or useful to perform its obligations under this Agreement.
As manager of the Fund's assets, the Sub-Adviser shall make investments
for the Fund's account in accordance with the investment objective and
limitations set forth in the Articles, the Prospectus, the 1940 Act, the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
including Subchapters L and M, relating to variable contracts and regulated
investment companies, respectively, and policy decisions adopted by the
Company's Board of Directors and the Adviser from time to time. The Sub-Adviser
shall advise the Company's officers, Board of Directors and the Adviser, at such
times as the Company's Board of Directors or Adviser may specify, of investments
made for the Fund's account and shall, when requested by the Company's officers,
Board of Directors or Adviser, supply the reasons for making such investments.
The Sub-Adviser is authorized on behalf of the Company, from time to
time when deemed to be in the best interests of the Company and to the extent
permitted by applicable law, to purchase and/or sell securities in which the
Adviser, Sub-Adviser or any respective affiliates thereof underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Sub-Adviser is further authorized,
to the extent permitted by applicable law, to select brokers for the execution
of trades for the Company, which broker may be an affiliate of the Sub-Adviser
or Adviser, provided that the best competitive execution price is obtained at
the time of the trade execution.
Pursuant to applicable law, the Sub-Adviser shall keep the Fund's books
and records required to be maintained by, or on behalf of, the Fund with respect
to subadvisory services rendered hereunder. The Sub-Adviser agrees that all
records which it maintains for the Fund are the property of the Fund and it will
promptly surrender any of such records to the Fund upon the Fund's request. The
Sub-Adviser further agrees to preserve for the periods
-2-
<PAGE>
prescribed by Rule 31a-2 under the 1940 Act any such records of the Fund
required to be preserved by such Rule.
4. REPRESENTATIONS AND WARRANTIES.
(a) The Sub-Adviser hereby represents and warrants to the Adviser
as follows:
(i) The Sub-Adviser is a corporation duly organized and in
good standing under the laws of the State of New York and is fully authorized to
enter into this Agreement and carry out its duties and obligations hereunder.
(ii) The Sub-Adviser is registered as an investment adviser
with the Commission under the Advisers Act. The Sub-Adviser shall maintain such
registration in effect at all times during the term of this Agreement.
(iii) The Sub-Adviser at all times shall provide its best
judgment and effort to the Adviser in carrying out the Sub-Adviser's obligations
hereunder.
(b) The Adviser hereby represents and warrants to the Sub-Adviser
as follows:
(i) The Adviser is a trust company duly organized and in good
standing under the laws of the State of New York and is fully authorized to
enter into this Agreement and carry out its duties and obligations hereunder.
(ii) The Company has been duly organized as a corporation
under the laws of the State of Maryland.
(iii) The Company is registered as an investment company with
the Commission under the 1940 Act, and shares of the Fund are registered for
offer and sale to the public under the 1933 Act and all applicable state
securities laws where currently sold. Such registrations will be kept in effect
during the term of this Agreement.
5. EXPENSES. (a) The Sub-Adviser shall, at its expense, provide
the Fund with office space, furnishings and equipment and personnel required by
it to perform the services to be provided by the Sub-Adviser pursuant to this
Agreement.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including, but not
limited to, taxes; interest; fees (including fees paid to its directors who are
not affiliated with the Adviser, Sub-Adviser or any of their respective
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing Prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian and transfer agent; insurance
premiums; auditing and legal expenses; costs of shareholders' reports and
shareholders' meetings; any extraordinary expenses; and brokerage fees and
commissions, if any, in connection with the purchase or sale of portfolio
securities.
-3-
<PAGE>
6. COMPENSATION. In consideration of the services to be rendered by the
Sub-Adviser under this Agreement, the Adviser shall pay the Sub-Adviser (or
cause to be paid by the Company directly to the Sub-Adviser) monthly fees on the
first Business Day (as defined in the Prospectus) of each month based upon the
average daily net assets of the Fund during the preceding month (as determined
on the days and at the time set forth in the Prospectus for determining net
asset value per share) at the annual rate of 1.00%. If the fees payable to the
Sub-Adviser pursuant to this paragraph begin to accrue before the end of any
month or if this Agreement terminates before the end of any month, the fees for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Fund's net assets shall be computed in the manner
specified in the Prospectus and the Articles for the computation of the value of
the Fund's net assets in connection with the determination of the net asset
value of shares of the Fund's capital stock.
If the aggregate expenses incurred by, or allocated to, the Fund in any
fiscal year shall exceed the lowest expense limitation, if applicable to the
Fund, imposed by state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Sub-Adviser shall
reimburse the Fund for such excess. The Sub-Adviser's reimbursement obligation
will be limited to the amount of fees it received under this Agreement during
the period in which such expense limitations were exceeded, unless otherwise
required by applicable laws or regulations. With respect to portions of a fiscal
year in which this Agreement shall be in effect, the foregoing limitations shall
be prorated according to the proportion which that portion of the fiscal year
bears to the full fiscal year. Any payments required to be made by this
paragraph shall be made once a year promptly after the end of the Company's
fiscal year.
7. STANDARD OF CARE.
The Sub-Adviser shall exercise its best judgment in rendering the
services described in this Agreement. The Sub-Adviser shall not be liable for
any error of judgment or mistake of law or for any act or omission or any loss
suffered by the Company or the Fund in connection with the matters to which this
Agreement relates, provided that nothing herein shall be deemed to protect or
purport to protect the Sub-Adviser against any liability to the Fund, the
Company or its shareholders to which the Sub-Adviser would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement ("disabling conduct").
The Adviser will indemnify the Sub-Adviser against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses
(including reasonable counsel fees and expenses), including any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, relating to
the Fund, arising out of or resulting from any action or inaction on the part of
the Adviser which constitutes a breach of a covenant or representation
-4-
<PAGE>
contained in this Agreement or the Advisory Agreement and not resulting from
disabling conduct by the Sub-Adviser.
The Sub-Adviser will indemnify the Adviser against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses
(including reasonable counsel fees and expenses), including any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, relating to
the Fund, arising out of or resulting from any action or inaction on the part of
the Sub-Adviser which constitutes a breach of a covenant or representation
contained in this Agreement and not resulting from disabling conduct by the
Adviser.
No party shall be liable under this indemnification provision unless
the indemnified party shall have notified the indemnifying party in writing
within a reasonable time after the summons or first legal process giving
information of the nature of the claim shall have been served upon the
indemnified party (or after the indemnified party shall have received notice of
such service on any designated agent), but failure to notify the indemnifying
party of any such claim shall not relieve the indemnifying party from any
liability it may have to the indemnified party against whom such action is
brought otherwise than on account of this indemnification provision. In case any
such action is brought against an indemnified party, the indemnifying party
shall be entitled to participate, at its own expense, in the defense of such
action. The indemnifying party shall also be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action. After
notice from the indemnifying party to such named party of the indemnifying
party's election to assume the defense thereof, the indemnified party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to such named party under this
indemnification provision for any legal or other expenses subsequently incurred
by such named party independently in connection with the defense thereof other
than reasonable costs of investigation.
8. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall
become effective on the date hereof provided that it shall have been approved by
a majority of the outstanding voting securities of the Fund, in accordance with
the requirements of the 1940 Act, or such later date as may be agreed by the
parties following such shareholder approval (the "Effective Date").
(a) Subject to prior termination as provided in sub-paragraph (d) of
this paragraph, this Agreement shall continue in force for two years from the
Effective Date and indefinitely thereafter, but only so long as the continuance
after such date shall be specifically approved at least annually by vote of the
Directors of the Company or by vote of a majority of the outstanding voting
securities of the Fund.
(b) This Agreement may be modified by mutual consent, such consent on
the part of the Company to be authorized by vote of a majority of the
outstanding voting securities of the Fund.
(c) In addition to the requirements of sub-paragraphs (a) and (b) of
this paragraph, the terms of any continuance or modification of this Agreement
must have been approved by the vote of a majority of those Directors of the
Company who are not parties to this
-5-
<PAGE>
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval.
(d) Either the Company, or the Sub-Adviser or the Fund may, at any time
on sixty (60) days prior written notice to the other, terminate this Agreement,
without payment of any penalty, by action of its Board of Directors or by action
of its authorized officers or, with respect to the Fund, by vote of a majority
of the outstanding voting securities of the Fund. This Agreement shall terminate
automatically in the event of its assignment or in the event of an assignment or
termination of the Advisory Agreement.
9. CERTAIN DEFINITIONS. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
10. INDEPENDENT CONTRACTOR. The Sub-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Directors of the
Company, from time to time, have no authority to act for or represent the Fund
in any way or otherwise be deemed an agent of the Fund.
11. STRUCTURE OF AGREEMENT. The Adviser and Sub-Adviser hereby
recognize that the Fund is a separate series portfolio of the Company. The
Adviser and Sub-Adviser are entering into this Agreement with regard to the Fund
severally and not jointly with respect to other series portfolios of the
Company. The responsibilities and benefits set forth in this Agreement shall be
deemed to be effective as between the Adviser and Sub-Adviser in connection with
the Fund severally and not jointly and not jointly with respect to other series
portfolios of the Company. This Agreement is intended to govern only the
relationships between the Adviser, on the one hand, and the Sub-Adviser, on the
other hand, and is not intended to and shall not govern (i) the relationship
between the Adviser or Sub-Adviser and any other series portfolio, or (ii) the
relationships among the respective series portfolios.
12. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Maryland, provided that nothing herein shall be construed in a
manner inconsistent with the 1940 Act or the Advisers Act.
13. SEVERABILITY. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby and, to this extent,
the provisions of this Agreement shall be deemed to be severable.
14. NOTICES. Notices of any kind to be given to the Adviser
hereunder by the Sub- Adviser shall be in writing and shall be duly given if
mailed or delivered to the Adviser at 520 Madison Avenue, New York, New York
10022-4213 or at such other address or to such individual as shall be so
specified by the Adviser to the Sub-Adviser. Notices of any kind to
-6-
<PAGE>
be given to the Sub-Adviser hereunder by the Adviser shall be in writing and
shall be duly given if mailed or delivered to the Sub-Adviser at 30 Rockefeller
Plaza, New York, New York 10112 or at such other address or to such individual
as shall be so specified by the Sub-Adviser to the Adviser. Notices shall be
effective upon delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
OFFITBANK ROCKEFELLER & CO., INC.
By: /s/ Stephen B. Wells By: /s/ Laird I. Grant
-------------------------------- --------------------------------
Name: Stephen B. Wells Name: Laird I. Grant
Title: Managing Director Title: President, Chief Executive
Officer, Chief Investment
Officer
THE OFFITBANK VARIABLE INSURANCE
FUND, INC.
By: /s/ Carrie Zuckerman
--------------------------------
Name: Carrie Zuckerman
Title: Assistant Secretary
-7-
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 Maria T. Jones
Mark J. Headley Scott S. Rosenblum Maxwell M. Rabb
Robert M. Heller Michele D. Ross James Schreiber
Philip S. Kaufman Howard J. Rothman Counsel
Peter S. Kolevzon Max J. Schwartz _____
Kenneth P. Kopelman Mark B. Segall
Michael Paul Korotkin Judith Singer M. Frances Buchinsky
Shari K. Krouner Howard A. Sobel Abbe L. Dienstag
Kevin B. Leblang Jeffrey S. Trachtman Ronald S. Greenberg
David P. Levin Jonathan M. Wagner Debora K. Grobman
Ezra G. Levin Harold P. Weinberger Christian S. Herzeca
Larry M. Loeb E. Lisk Wyckoff, Jr. Jane Lee
Pinchas Mendelson
Lynn R. Saidenberg
Special Counsel
-----
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
July 28, 1997
The OFFITBANK Variable Insurance Fund, Inc.
125 West 55th Street
New York, New York 10019
Re: Post-Effective Amendment No. 9 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
------------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting part of this Post-Effective Amendment No. 9
to the registration statement on Form N-1A (the "Registration Statement") of our
report dated May 9, 1997, relating to the financial statements and financial
highlights of The OFFITBANK Variable Insurance Fund, Inc., which are also
incorporated by reference in such Statement of Additional Information. We also
consent to the references to us under the headings "Independent Accountants" and
"Financial Statements" in such Statement of Additional Information and to the
references to us under the headings "Financial Highlights" and "Counsel;
Independent Accountants" in the Prospectuses for VIF-High Yield Fund and
VIF-Emerging Markets Fund, each of which also constitutes part of this
Registration Statement.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
July 25, 1997
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
HIGH YIELD FUND
EXHIBIT 16
TOTAL RETURN
AGGREGATE ANNUAL TOTAL RETURN
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ERV = REDEEMABLE VALUE AT THE END OF THE PERIOD OF A
HYPOTHETICAL $1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD
P = A HYPOTHETICAL INITIAL INVESTMENT OF $1,000
EXAMPLE:
SINCE INCEPTION: ( 04/01/96 TO 03/31/97 ):
( 1,119.00 /1,000) -1 = 11.90%
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
EMERGING MARKETS FUND
EXHIBIT 16
TOTAL RETURN
AGGREGATE ANNUAL TOTAL RETURN
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ERV = REDEEMABLE VALUE AT THE END OF THE PERIOD OF A
HYPOTHETICAL $1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD
P = A HYPOTHETICAL INITIAL INVESTMENT OF $1,000
EXAMPLE:
SINCE INCEPTION: ( 08/28/96 TO 03/31/97 ):
( 1,082.90 /1,000) -1 = 8.29%
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> OFFITBANK VIF-HIGH YIELD FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 17877
<INVESTMENTS-AT-VALUE> 17876
<RECEIVABLES> 779
<ASSETS-OTHER> 7453
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26108
<PAYABLE-FOR-SECURITIES> 878
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 116
<TOTAL-LIABILITIES> 994
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25082
<SHARES-COMMON-STOCK> 2421
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 25
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1)
<NET-ASSETS> 25114
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 782
<OTHER-INCOME> 0
<EXPENSES-NET> 105
<NET-INVESTMENT-INCOME> 677
<REALIZED-GAINS-CURRENT> 25
<APPREC-INCREASE-CURRENT> (1)
<NET-CHANGE-FROM-OPS> 701
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 677
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2459
<NUMBER-OF-SHARES-REDEEMED> 107
<SHARES-REINVESTED> 65
<NET-CHANGE-IN-ASSETS> 25081
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 77
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 205
<AVERAGE-NET-ASSETS> 9186
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.78
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> 0.78
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.37
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> OFFITBANK VIF-EMERGING MARKETS FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 8-MOS
<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> 497
<ASSETS-OTHER> 441
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4447
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 101
<TOTAL-LIABILITIES> 101
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4273
<SHARES-COMMON-STOCK> 422
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 12
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11
<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> 29
<APPREC-INCREASE-CURRENT> 50
<NET-CHANGE-FROM-OPS> 200
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 121
<DISTRIBUTIONS-OF-GAINS> 12
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 408
<NUMBER-OF-SHARES-REDEEMED> 1
<SHARES-REINVESTED> 12
<NET-CHANGE-IN-ASSETS> 4312
<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> 73
<AVERAGE-NET-ASSETS> 2353
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.34
<PER-SHARE-DIVIDEND> 0.48
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.30
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
