Registration Nos. 33-81748
811-8640
As filed via EDGAR with the Securities and Exchange Commission on February
13, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 7
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 8
(Check appropriate box or boxes)
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
(Exact name of Registrant as specified in charter)
237 Park Avenue
New York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 618-9510
Stephen Brent Wells, Esq.
OFFITBANK
520 Madison Avenue
New York, New York 10022
(Name and Address of Agent for Service)
with a copy to:
Carl Frischling, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on _______ pursuant to paragraph (b)
[ ] on _______ pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on _______ pursuant to paragraph (a)(ii) of rule 485
[ ] 60 days after filing pursuant to paragraph (a)(i)
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
The Registrant has registered an indefinite number or amount of its
shares of common stock for each of its seven series of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940 on July 20, 1994. The Registrant intends to file a Rule 24f-2 Notice on
or about May 30, 1997.
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THE OFFITBANK VARIABLE INSURANCE FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A Item No. Location
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Part A Prospectus Caption
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Item 1. Cover Page Cover Page
Item 2. Synopsis Not Applicable
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description of
Registrant The Company; Investment
Objectives and Policies;
Investment Policies and
Techniques; Special Risk
Considerations; Limiting
Investment Risks; Appendix A
Item 5. Management of the Fund Management
Item 5A. Management's Discussion of
Fund Performance Not Applicable
Item 6. Capital Stock and Other
Securities How Distributions Are
Made; Tax Information;
Shareholder Communication
Item 7. Purchase of Securities
Being Offered About Your Investment;
How the Company Values
Its Shares
Item 8. Redemption or Repurchase About Your Investment;
Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
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Statement of Additional
Part B Information Caption
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Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not Applicable
Item 13. Investment Objectives and
Policies Additional Information on
Portfolio Instruments and
Techniques; Additional
Risk Considerations;
Investment Limitations
Item 14. Management of the Registrant Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities General Information
Item 16. Investment Advisory and
Other Services Management of the Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices
Item 18. Capital Stock and Other
Securities General Information
Item 19. Purchase, Redemption and
Pricing of Securities Management of the Fund;
Being Offered Purchase of Shares;
Redemption of Shares;
Item 20. Tax Status Additional Information
Concerning Taxes
Item 21. Underwriters Distributor
Item 22. Calculation of Performance
Data Performance Calculations
Item 23. Financial Statements Report of Independent
Accountants; Financial
Statements
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Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
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PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. [_________,] 1997
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OFFITBANK VIF-LATIN AMERICA EQUITY FUND
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OFFITBANK VIF-Latin America Equity Fund (the "Fund") is one of eleven separate
non-diversified investment portfolios of the OFFITBANK Variable Insurance Fund,
Inc. (the "Company"), an open-end, management investment company. The Fund's
investment objective is capital appreciation. Investment income is a secondary
objective of the Fund. The Fund will seek to achieve its objective by investing
primarily in equity securities of Latin American issuers. Under normal
circumstances, the Fund will invest at least 80% of its total assets in equity
securities of Latin American issuers and may invest up to 20% of its total
assets in debt securities (including convertible debt securities) of Latin
American issuers. The Fund's investments may be denominated in any currency,
including U.S. dollars. All or a portion of the Fund's total assets may be
invested in below investment grade debt securities.
THE FUND'S INVESTMENTS ARE CONSIDERED SPECULATIVE AND ARE SUBJECT TO CERTAIN
RISKS, INCLUDING INVESTMENT RISKS ASSOCIATED WITH INVESTING IN SECURITIES OF
LATIN AMERICAN ISSUERS. THE FUND MAY ENGAGE IN CURRENCY HEDGING TRANSACTIONS
WHICH ARE SUBJECT TO RISKS THAT ARE DIFFERENT FROM RISKS RELATED TO OTHER
PORTFOLIO TRANSACTIONS. 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 billion in assets principally invested in global fixed
income securities. The address of the Company is 125 West 55th Street, New York,
New York 10019. Yield and other information regarding the Fund 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 THE FUND IN
ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND POLICY OWNERS
("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH ALLOCATION RIGHTS
ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS. SHARES ARE
REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE CONTRACTS AND
POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated [__________,] 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
INVESTORS ARE ADVISED THAT SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR
ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THE COMPANY IS NOT AUTHORIZED TO
ENGAGE IN THE BUSINESS OF BANKING.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WHAT YOU NEED TO KNOW
The Company.......................................................2
Investment Objective and Policies.................................2
Investment Policies and Techniques................................4
Special Risk Considerations......................................10
Limiting Investment Risks........................................18
Management.......................................................19
About Your Investment............................................19
How the Company Values Its Shares................................20
How Distributions are Made: Tax Information......................20
Shareholder Communications ......................................21
Performance Information..........................................21
Counsel; Independent Accountants.................................22
Appendix A......................................................A-1
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THE COMPANY
The Company is designed to serve as a funding vehicle for Contracts and Policies
offered by the Accounts of Participating Companies. Shares of the Fund are
offered only to the Accounts through OFFIT Funds Distributor, Inc. (the
"Distributor"), the principal underwriter for the Company. The Fund is a
no-load, separate, non-diversified investment portfolio of the Company, a newly
organized, open-end management investment company. The Company is not authorized
to engage in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Fund, which could possibly force the Company to sell portfolio securities at
disadvantageous prices. The Company's Directors intend to monitor events in
order to identify any material irreconcilable conflicts that may possibly arise
and to determine what action, if any, should be taken in response thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an investment objective which it pursues through investment
policies as described below. The objective and policies of the Fund can be
expected to affect the return of the Fund and the degree of market and financial
risk to which the Fund is subject. For more information about the investment
strategies employed by the Fund, see "Investment Policies and Techniques." The
investment objective 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 as other investment portfolios of the Company. Investors
should note, however, that the Fund will invest its assets in accordance with
its investment objective and policies described below. Accordingly, the Adviser
expects that the Fund's investment portfolios will be distinct, notwithstanding
its ability to invest in comparable instruments.
The Latin America Equity Fund's investment objective is capital appreciation.
Investment income is a secondary objective of the Fund. The Fund will seek to
achieve its objective by investing, under normal market conditions, at least 80%
of its total assets in equity securities of Latin American issuers, as defined
below. Up to 20% of the Fund's total assets may be invested in debt securities
(including convertible debt securities) of Latin American issuers.
The Latin America Total Return Fund is actively managed to seek to benefit from
investment opportunities deriving from long-term improving economic and
political conditions and other positive trends and developments in Latin
American countries. The Fund's equity strategy is "top down" oriented seeking to
invest in those countries that offer the best economic growth perspectives.
Stock selection is designed to identify companies in high growth industries that
are attractively valued based on their future earnings potential. Accordingly,
the Fund is intended primarily for long-term investors and should not be
considered as a vehicle for trading purposes. The Adviser believes that the
continuation of a long-term international trend encouraging greater market
orientation and economic growth may result in local or international
political,economic or financial developments that could benefit the capital
markets in Latin American countries.
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For purposes of this Prospectus, Latin American issuers are: (i) companies
organized under the laws of a Latin American country; (ii) companies whose
securities are principally traded in Latin American countries; (iii)
subsidiaries of companies described in clause (i) or (ii) above that issue debt
securities guaranteed by, or securities payable with (or convertible into) the
stock of companies described in clause (i) or (ii); (iv) companies that derive
at least 50% of their revenues from either goods produced or services performed
in Latin America or sales made in Latin America; and (v) the government of any
Latin American country and its agencies and instrumentalities and any public
sector entity fully or partly owned by any such government, agency or
instrumentality. For purposes of this Prospectus, "Latin America" currently
consists of the countries of Argentina, the Bahamas, Barbados, Belize, Bolivia,
Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El
Salvador, French Guiana, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico,
the Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad
and Tobago, Uruguay and Venezuela.
The Latin America Total Return Fund's assets will be allocated among the
countries in Latin America in accordance with the Adviser's judgment as to where
the best investment opportunities exist. The Fund is not limited with respect to
the proportion of its total assets that may be invested in the securities of
issuers located in any one Latin American country.
The governments of some Latin American countries, to varying degrees, have been
engaged in programs of selling part or all of their stakes in government-owned
or government-controlled enterprises ("privatizations"). The Adviser believes
that privatizations may offer investors opportunities for significant capital
appreciation and intends to invest assets of the Fund in privatizations in
appropriate circumstances. The ability of foreign persons, such as the Fund, to
participate in privatizations in certain Latin American countries may be limited
by local law, or the terms on which the Fund may be permitted to participate may
be less advantageous than those for local investors. There can be no assurance
that privatization programs will continue or be successful.
In selecting equity investments for the Fund, the Adviser seeks to identify and
invest in companies it believes offer potential for long-term capital
appreciation. In evaluating prospective investments, the Adviser will utilize
internal financial, economic and credit analysis resources as well as
information obtained from other sources. In selecting industries and companies
for investment, the Adviser will consider factors such as overall growth
prospects, competitive position in domestic and export markets, technology,
research and development, productivity, labor costs, raw material costs and
sources, profit margins, return on investment, capital resources, government
regulation and management.
Up to 20% of the total assets of the Fund may be invested at any one time in
debt securities of Latin American issuers. In selecting particular debt
securities for the Fund, the Adviser intends to consider the same factors as for
the Emerging Markets Fund. All or a substantial amount of debt securities in
which the Fund may invest will be high yield, high risk debt securities which
are unrated and comparable in quality to debt securities rated below investment
grade (i.e., rated BB or lower by S&P and D&P, or Ba or lower by Moody's, or if
unrated, of comparable quality as determined by the Adviser). See Appendix A to
this Prospectus for a description of ratings of S&P, Moody's and D&P.
Investments in high yield, high risk debt securities are considered to be
speculative and involve comparatively greater risks, including price volatility
and the risk of default in the timely payment of interest and principal, than
investment grade securities or securities of comparable value. Some of such
investments may be non-performing securities or securities in default when
purchased. See "Special Risk Considerations--High Yield, High Risk Debt
Securities."
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INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES. The Fund will 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."
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 leveraged for
purposes of the limitations placed on the extent of the Fund's assets that may
be used for borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 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
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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.
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 $120 billion (face amount) of
Brady Bonds have been issued by the governments of Argentina, Brazil, Costa
Rica, Mexico, Nigeria, the Philippines, Uruguay and Venezuela, the largest
proportion having been issued by Argentina, Brazil, Mexico and Venezuela. Brady
Bonds have been issued only recently, and accordingly, they do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market.
The 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 one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds which have been issued to date are rated BB or
B by S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.
CONVERTIBLE SECURITIES
GENERAL. The Fund may invest in traditional convertible securities and synthetic
convertible securities. Set forth below is additional information concerning
traditional convertible securities and "synthetic" convertible securities.
Convertible securities are issued and traded in a number of securities markets.
It is expected that ordinarily a substantial portion of the convertible
securities held by the Fund will be denominated in U.S. dollars. However, 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. The Fund may enter into foreign currency hedging
transactions in which they may seek to reduce the impact of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent there are changes in interest rates or yields of similar non-convertible
securities, the investment value of the convertible security typically will
fluctuate. However, at the same time, the value of the convertible security will
be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock. If, because of a low price of the underlying common stock, the
conversion value is below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.
Holders of convertible securities have a claim on the assets of the issuer prior
to the common stockholders but may be subordinated to similar non-convertible
debt securities of the same issuer. A convertible security may be subject
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to redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security.
SYNTHETIC CONVERTIBLE SECURITIES. "Synthetic" convertible securities are created
by combining separate securities that possess the two principal characteristics
of a true convertible security, i.e., fixed income ("fixed-income component")
and the right to acquire equity securities ("convertibility component"). The
fixed-income component is achieved by investing in nonconvertible fixed income
securities such as nonconvertible bonds, preferred stocks and money market
instruments. The convertibility component is achieved by investing in warrants,
exchanges or NASDAQ listed call options or stock index call options granting the
holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case of
stock index options.
A warrant is an instrument issued by a corporation that gives a holder the right
to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of the
security underlying the warrant may not exceed the exercise price of the warrant
and the warrant may expire without any value. See "--Hedging and Derivatives"
below for a discussion of call options and stock index call options.
A synthetic convertible security differs from a traditional convertible security
in several respects. Unlike a traditional convertible security, which is a
single security having a unitary market value, a synthetic convertible security
is comprised of two or more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security is the sum of
the values of its fixed-income component and its converti-bility component. For
this reason, the values of a synthetic convertible security and a traditional
convertible security will respond differently to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible security
than in the purchase of a convertible security. Synthetic convertible securities
may be selected where the two components represent one issuer or are issued by a
single issuer, thus making the synthetic convertible security similar to a
traditional convertible security. Alternatively, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers which will be used when the Adviser believes that such a combination
would better promote the Fund's investment objective. A synthetic convertible
security also is a more flexible investment in that its two components may be
purchased or sold separately. For example, the Fund may purchase a warrant for
inclusion in a synthetic convertible security but temporarily hold short-term
investments while postponing the purchase of a corresponding bond pending
development of more favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline in the
price of the stock or the level of the index involved in the convertibility
component, causing a decline in the value of the call option or warrant. Should
the price of the stock fall below the exercise price and remain there throughout
the exercise period, the entire amount paid for the call option or warrant would
be lost. Since a synthetic convertible security includes the fixed-income
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument.
HEDGING AND OTHER STRATEGIC TRANSACTIONS. The Fund may use, as a portfolio
management strategy, cross currency hedges, interest rate transactions,
commodity futures contracts in the form of futures contracts on securities,
securities indices and foreign currencies, and related options transactions. The
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
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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 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 anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets. See "Illiquid Securities" below.
MORTGAGE-RELATED SECURITIES. The Fund may invest in mortgage-related securities,
consistent with its investment objective 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 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.
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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 its 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 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 a foreign
currency, it may enter into a forward purchase contract to buy that foreign
currency for a fixed dollar amount ("position hedge"). In this situation, the
Fund may, in the alternative, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Fund believes that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the currency
in which portfolio securities of the Fund are denominated ("cross-hedge"). The
Fund's custodian will place cash not available for investment or U.S. government
securities or other high quality debt securities in a segregated account having
a value equal to the aggregate amount of the Fund's commitments under forward
contracts entered into with respect to position hedges, cross-hedges and
transaction hedges, to the extent they do not already own the security subject
to the transaction hedge. If the value of the securities placed in a segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Fund may purchase a call
option permitting the Fund to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the forward contract
price or the Fund may purchase a put option permitting the Fund to sell the
amount of foreign currency subject to a forward purchase contract at a price as
high or higher than the forward contract price. Unanticipated changes in
currency prices may result in poorer overall performance for 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.
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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 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 Fund may also invest in commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as the Fund who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other institutional
investors like the Fund through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus providing
liquidity. The Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES. 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
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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.
SHORT SALES. The Fund may make short sales of securities "against the box." A
short sale is a transaction in which the Fund sells a security it does not own
in anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, the Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.
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 objective, the Adviser may employ a temporary defensive
investment strategy if it determines such a strategy is warranted. Under such a
defensive strategy, the Fund temporarily may hold cash (U.S. dollars, foreign
currencies or multinational currency units) and/or invest up to 100% of its
assets in high quality debt securities or money market instruments of U.S. or
foreign issuers, and most or all of the Fund's investments may be made in the
United States and denominated in U.S. dollars.
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. It is not anticipated that,
under normal conditions, the portfolio turnover rate for the Fund will exceed
100% 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
securities held by the Fund generally fluctuates, to varying degrees, based on,
among other things, (1) interest rate movements, (2) changes in the actual and
perceived creditworthiness of the issuers of such securities, (3) changes in any
applicable foreign currency exchange rates, (4) social, economic or political
factors, (5) factors affecting the industry in which the issuer operates, such
as competition or technological advances and (6) factors affecting the issuer
directly, such as management changes or labor relations. There is no assurance
that the Fund will achieve its investment objective.
NON-DIVERSIFIED FUND
The Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. 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.
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FOREIGN SECURITIES
The Fund will invest in the securities of non-U.S. issuers. Investors should
recognize that investing in securities of non-U.S. issuers involves certain
risks and special considerations, including those set forth below, which are not
typically associated with investing in securities of U.S. issuers. Further,
certain investments that the Fund may make, and investment techniques in which
they may engage, involve risks, including those set forth below.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many countries in which the Fund will
invest may be subject to a substantially greater degree of social, political and
economic instability than is the case in the United States, Japan and Western
European countries. Such instability may result from, among other things, some
or all of the following: (i) authoritarian governments or military involvement
in political and economic decision-making, and changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies
and terrorist activities; (iv) hostile relations with neighboring countries; and
(v) drug trafficking. Social, political and economic instability could
significantly disrupt the principal financial markets in which the Fund invests
and adversely affect the value of the Fund's assets.
Individual foreign economies in general may differ favorably or unfavorably and
significantly from the U.S. economy in such respects as the rate of growth of
gross domestic product or gross national product, rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency, structural
unemployment and balance of payments position. Governments of many of these
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. In some cases, the government owns or
controls many companies, including some of the largest in the country.
Accordingly, government actions in the future could have a significant effect on
economic conditions in many countries, including emerging market countries,
which could affect private sector companies and the 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 were 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 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 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.
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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 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 Fund 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.
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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 it 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.
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" below.
HIGH YIELD SECURITIES
GENERAL. The Fund may invest 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.
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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.
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 Fund 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.
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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" 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 the Fund makes any representation as to the
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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 objective 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 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
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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.
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
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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.
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.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may not invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there is
no limitation with respect to investment in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
2. The Fund may not borrow money (except that it may enter into reverse
repurchase agreements) except from banks for temporary or emergency
purposes; provided, that (a) the amount of such borrowing may not
exceed 20% of the value of the Fund's total assets and (b) the Fund
will not purchase portfolio securities while such outstanding
borrowing exceeds 5% of the value of 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) 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
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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 a fee from the Fund, computed daily and paid monthly, at
the annual rate of .90% of the Fund's average daily net assets.
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 billion in assets and serves as investment
adviser to fifteen other registered investment companies (or portfolios
thereof). The principal address of the Adviser is 520 Madison Avenue, New York,
New York 10022.
PORTFOLIO MANAGER. ________________________ will serve as the portfolio manager
for the Fund.
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. 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 125 West 55th Street,
New York, New York 10019. The principal business address of The Bank of New York
is 90 Washington Street, New York, New York 10286.
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,
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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.
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 and distribute dividends from net investment income and
will distribute its net capital gains, if any, at least annually. Such income
and capital gains distributions will be made in shares of the Fund.
TAX MATTERS
THE 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 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), or deemed to be received in accordance
with certain provisions of the Code.
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
20
<PAGE>
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuity contracts,
respectively, under the Code. If the foregoing requirements are not met, then
the Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of the Fund are the investment vehicle,
reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 a.m. and 6:00 p.m., New York time. Specially trained
representatives will answer questions and provide information about Contract and
Policy Owners' accounts.
Each Account owning shares of the 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 its
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Fund published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A. Today or The New York Times or other industry or
financial publications.
The 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
21
<PAGE>
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.
22
<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 the Fund
may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
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 modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
A-1
<PAGE>
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
A-2
<PAGE>
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
A-3
<PAGE>
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative 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.
------------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether the Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. __________, 1997
- --------------------------------------------------------------------------------
OFFITBANK VIF-CVO GREATER CHINA FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFITBANK VIF-CVO Greater China Fund (the "Fund") is one of eleven separate
non-diversified investment portfolios of the OFFITBANK Variable Insurance Fund,
Inc. (the "Company"), an open-end, management investment company. The Fund's
investment objective is to achieve capital appreciation and income generation
from investment in publicly-traded equity securities of companies which, in the
opinion of the Adviser, will benefit from the economic development and growth of
the People's Republic of China, Hong Kong, Taiwan and Singapore (collectively
the "Greater China Region"). Under normal circumstances, the Fund will invest at
least 65% of its total assets in equity securities (i) traded in securities
markets located in the Greater China Region, or (ii) issued by companies whose
business significantly relates to the Greater China Region (as measured by
assets, revenues, or profit). See "The Fund's Investment Objectives and
Policies."
THE FUND'S INVESTMENTS ARE CONSIDERED SPECULATIVE AND ARE SUBJECT TO CERTAIN
RISKS, INCLUDING INVESTMENT RISKS ASSOCIATED WITH MAKING INVESTMENTS IN
COUNTRIES OPERATING IN THE GREATER CHINA REGION. THE FUND MAY ENGAGE IN CURRENCY
HEDGING TRANSACTIONS WHICH ARE SUBJECT TO RISKS THAT ARE DIFFERENT FROM RISKS
RELATED TO OTHER PORTFOLIO TRANSACTIONS. SEE "SPECIAL RISK CONSIDERATIONS."
THERE CAN BE NO ASSURANCE THAT THE FUND'S INVESTMENT OBJECTIVE WILL BE ACHIEVED.
CVO Greater China Partners, L.P. serves as the Fund's investment adviser (the
"Adviser"). The Adviser's key investment professionals are based in San
Francisco. The Adviser is controlled by its two general partners: OFFITBANK
Greater China, Inc., a New York Corporation established in 1994 as a
wholly-owned subsidiary of OFFITBANK, a New York State chartered trust company
("OFFITBANK"), and ChinaVest Public Equities, LLC, a California Limited
Liability Corporation established in 1995 as a wholly-owned subsidiary of
ChinaVest Financial Services, Ltd., a Cayman Islands corporation ("ChinaVest,
Ltd."). OFFITBANK currently manages in excess of $8 billion in assets and serves
as investment adviser to sixteen registered investment companies (or portfolios
thereof). The address of the Company is 125 West 55th Street, New York, New York
10019. Yield and other information regarding the Fund 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 THE FUND IN
ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND POLICY OWNERS
("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH ALLOCATION RIGHTS
ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS. SHARES ARE
REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE CONTRACTS AND
POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated __________, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
INVESTORS ARE ADVISED THAT SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR
ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THE COMPANY IS NOT AUTHORIZED TO
ENGAGE IN THE BUSINESS OF BANKING.
------------------------
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
The Company..............................................................2
Investment Objective and Policies........................................2
Investment Policies and Techniques.......................................4
Investment in the Greater China Region...................................5
Special Risk Considerations.............................................11
Special Risks of Certain Fund Investments...............................16
Special Investment Techniques...........................................19
Limiting Investment Risks...............................................24
Management..............................................................24
About Your Investment...................................................25
How the Company Values Its Shares.......................................26
How Distributions are Made: Tax Information.............................26
Shareholder Communications .............................................27
Performance Information.................................................27
Counsel; Independent Accountants........................................28
Appendix A.............................................................A-1
Appendix B.............................................................B-1
<PAGE>
THE COMPANY
The Company is designed to serve as a funding vehicle for Contracts and
Policies offered by the Accounts of Participating Companies. Shares of the Fund
are offered only to the Accounts through OFFIT Funds Distributor, Inc. (the
"Distributor"), the principal underwriter for the Company. The Fund is a
no-load, separate, non-diversified investment portfolio of the Company, a newly
organized, open-end management investment company. The Company is not authorized
to engage in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies
that may not be affiliated with each other. The Participating Companies and
their Accounts may be subject to insurance regulation that varies between states
and to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Fund, which could possibly force the Company to sell portfolio securities at
disadvantageous prices. The Company's Directors intend to monitor events in
order to identify any material irreconcilable conflicts that may possibly arise
and to determine what action, if any, should be taken in response thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an investment objective which it pursues through investment
policies as described below. The objective and policies of the Fund can be
expected to affect the return of the Fund and the degree of market and financial
risk to which the Fund is subject. For more information about the investment
strategies employed by the Fund, see "Investment Policies and Techniques." The
investment objective 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 as other investment portfolios of the Company. Investors
should note, however, that the Fund will invest its assets in accordance with
its investment objective and policies described below. Accordingly, the Adviser
expects that the Fund's investment portfolios will be distinct, notwithstanding
its ability to invest in comparable instruments.
The Fund's investment objective is to achieve capital appreciation and
income generation from investment in publicly-traded equity securities of
companies which, in the opinion of the Adviser, will benefit from the economic
development and growth of the People's Republic of China, Hong Kong, Taiwan and
Singapore (collectively, the "Greater China Region"). More specifically, under
normal market conditions and subject to temporary defensive investments (as
defined below), at least 65% of the Fund's assets will be invested in equity
securities (i) traded in securities markets located in the Greater China Region,
or (ii) issued by companies whose business significantly relates to the Greater
China Region (as measured by assets, revenues or profit). The securities issued
by such companies may be listed on stock markets in countries outside the
Greater China Region. The investment objective of the Fund is fundamental and
may not be changed without the affirmative vote of a majority of the Shares of
the Fund. See "Management of the Fund" for further information. In addition,
investments in issuers doing business in the Greater China Region involve
possible risks not typically associated with issuers in the United States. See
"Risks Associated with the Fund" for further information. There is no assurance
that the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective through investing in a
selected and managed portfolio consisting primarily of publicly-traded equity
securities of companies that operate in the Greater China Region. The decisions
of the Adviser as to which specific publicly-traded securities will be acquired
by the Fund will be based on a general strategy of selecting those issuers which
it believes will show a high rate of capital appreciation in future years. See
"Special Risk Considerations."
2
<PAGE>
The Fund will, under normal market conditions and subject to temporary
defensive investments (as defined below), invest at least 65% of its total
assets in publicly-traded equity securities issued by companies (a) whose
securities are principally traded in a Greater China Region country, or (b)
having at least 50% of their assets in one or more Greater China Region
countries or (c) that have derived at least 50% of their gross revenues or
profits from providing goods or services to or from within one or more Greater
China Region countries. Such securities are referred to in this Prospectus as
"Greater China Investments." Greater China Investments are typically, but not
necessarily, listed on stock exchanges or traded in the over-the-counter market
in countries in the Greater China Region. The principal offices of the issuers
of Greater China Investments may be located outside the Greater China Region.
The Fund may invest up to 90% of its total assets in the securities of issuers
whose equity securities are either (i) traded in securities markets located in a
single country in the Greater China Region, or (ii) issued by companies whose
business principally relates to a single country in the Greater China Region.
During the first six months of the Fund's operations, the Fund may not achieve
its investment objective. The Fund expects during the first 18 months of its
operations to invest more than 50% of its total assets in issuers whose equity
securities are listed in Hong Kong, Singapore and Taiwan, but has not identified
any other market in which it currently intends to invest to this extent. After
the Fund's initial investments in the Greater China Region are established, the
Fund will not invest more than 10% of its total assets in any country outside
the Greater China Region, except for temporary defensive investment purposes and
investments in obligations issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities. The Fund expects to achieve its 65%
investment objective within six months after the Fund commences operations.
Equity securities, for purposes of the 65% policy, will be limited to
common and preferred stocks; direct equity interests in trusts, partnerships,
joint ventures and other unincorporated entities or enterprises; special classes
of shares available only to foreign persons in such markets as restrict the
ownership of certain classes of equity to nationals or residents of the country;
convertible preferred stocks; depository receipts for any of the foregoing;
listed country funds, i.e., investment funds investing in publicly-traded stock,
where the investment fund is either open-ended or itself trades in public
markets; stock options and warrants to purchase stock; stock index futures; and
convertible debt instruments. Within the confines of the 65% investment policy,
stock options and warrants to purchase stock may comprise more than 5% of such
investment.
Equity securities will be considered "publicly-traded" for purposes of the
65% policy if the exchanges or over-the-counter markets on which the Fund may
purchase securities in the Greater China Region provide sufficiently liquid
markets so that the securities acquired by the Fund on such markets need not be
considered illiquid securities. Such exchanges currently include: People's
Republic of China--The Shanghai Securities Exchange and The Shenzhen Stock
Exchange; Hong Kong--The Stock Exchange of Hong Kong Limited; Taiwan--The Taiwan
Stock Exchange Corp.; and Singapore--The Singapore Stock Exchange, Stock
Exchange of Singapore Dealing and Automated Quotations Board ("SESDAQ") and
Central Limit Order Board International ("CLOB"). As of the date of this
Prospectus, the People's Republic of China is planning to establish a new stock
exchange in Beijing.
In addition to its investments in equity securities, the Portfolio may
invest up to 35% of its net assets in other types of transactions described
below under "Special Investment Techniques." These types of transactions will be
used for hedging and other secondary and supplemental investment objectives,
including income generation. See "Special Investment Techniques."
In general, the Fund's board of directors have established as a
nonfundamental policy that the Fund may not purchase the securities of any one
issuer (other than obligations issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities) if, as a result of such purchase (a)
more than 25% of the total assets of the Fund (taken at current value) would be
invested in the securities of such issuer, or (b) the Fund would hold more than
10% of the outstanding voting securities of such issuer. It is a fundamental
policy that the Fund may not purchase any security if, as a result of such
purchase, 25% or more of the total assets of the Fund (taken at current value)
would be invested in the securities of issuers having their principal business
activities in the same industry (the electric, gas and telephone utility
industries being treated as separate industries for the purpose of this
restriction); provided that there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities.
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It is a fundamental policy of the Fund that it will not invest more than 5%
of its total assets in any listed country fund, nor more than 10% of its total
assets in all listed country funds taken together; and that the Fund's
investment in any listed country fund will not exceed 3% of that fund's total
assets. Listed country funds are intended to be used primarily for
Taiwan-related investments, until Taiwanese foreign investment restrictions are
liberalized. The Fund's investments in listed country funds will be subject to
advisory and other fees set by its sponsor, in addition to the advisory and
other fees payable by the Fund.
It is a fundamental policy of the Fund that it will not invest more than 5%
of its net assets in convertible debt securities which are less than investment
grade. A security is investment grade if it is rated BBB or above by Standard &
Poor's Corporation or Baa or above by Moody's Investors Service, Inc. or
determined to be of comparable quality in the sole discretion of the Adviser.
Securities rated BBB or Baa have speculative characteristics. The Fund will
dispose of any security or instrument that, subsequent to its acquisition by the
Fund, is rated (or determined by the Adviser to be of comparable quality to)
below investment grade in an orderly manner, if the Fund's total holdings in
below investment grade debt would otherwise exceed 5% of its net assets. The
Fund's primary purpose in investing in convertible debt, whether or not
investment grade, will be to participate in the value of the equity security
underlying the conversion right.
Other fundamental and nonfundamental investment limitation policies of the
Fund are described in "Investment Limitations" in the Statement of Additional
Information.
INVESTMENT POLICIES AND TECHNIQUES
DEPOSITORY RECEIPTS. In achieving the 65% investment policy, the Fund may
hold equity securities of foreign issuers in the form of sponsored or
unsponsored American Depository Receipts ("ADRs"), American Depository Shares
("ADSs") and Global Depository Receipts ("GDRs"), or other securities
convertible into securities of eligible issuers. ADRs and ADSs typically are
issued by an American bank or trust company which evidences ownership of
underlying securities issued by a foreign corporation. Unsponsored depository
receipts may not present material information to potential investors because
such information is unavailable. GDRs are receipts issued by foreign banks and
trust companies that evidence ownership of either foreign or U.S. securities.
Generally, ADRs and ADSs in registered form are designed for use in U.S.
securities markets and GDRs in bearer form are designed for use in securities
markets outside the U.S.
Depository receipts may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted. The value of an
ADR, ADS and GDR will fluctuate with the value of the underlying security and
changes in exchange rates, and involve risks associated with investing in
foreign securities. There may be less information available about foreign
issuers of an unsponsored ADR, ADS or GDR.
For purposes of the Fund's investment policies, the Fund's investments in
ADRs, ADSs, and GDRs will be deemed to be investments in the underlying equity
securities representing securities of foreign issuers into which they may be
converted.
CONVERTIBLE DEBT INSTRUMENTS. The 65% investment policy also includes debt
instruments convertible into equity securities. Although the Fund will purchase
such convertible debt securities primarily on account of the underlying equity
securities, the value of the Fund's holding could also be significantly affected
by changes in market interest rates and the issuer's credit standing. A
significant portion of any convertible debt holdings are expected to consist of
instruments originally issued in the Euroconvertible market. Euroconvertibles
may be denominated in U.S. dollars, but may also be denominated in European or
other currencies. If a Euroconvertible is denominated in a non-U.S. currency,
the value of the Fund's holding, expressed in U.S. dollars, could also be
significantly affected by changes in currency conversion rates.
ILLIQUID INVESTMENTS. The Fund will not invest more than 15% of the value
of its net assets in illiquid investments. Illiquid investments are assets which
may not be sold or disposed of by the Fund in the ordinary course of business
within seven days at approximately the value that the Fund has valued the
investment. See "Special Risks of Certain Fund Investments--Illiquid and
Restricted Securities." Securities that can be sold within seven days of their
acquisition are generally not deemed illiquid for purposes of this limitation,
irrespective of any
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legal or contractual restrictions on resale. See "Special Risks of Certain Fund
Investments--Illiquid and Restricted Securities."
REPURCHASE AGREEMENTS. Under a repurchase agreement the Fund buys a
security from a bank or broker-dealer at one price and simultaneously promises
to sell that same security back to the seller at a higher price. The repurchase
date is usually within seven days of the original purchase date. The Fund may
enter into repurchase agreements with respect to its permitted investments with
counterparties that it deems creditworthy. The seller under a repurchase
agreement will be required to maintain the value of the securities subject to
the agreement at not less than the repurchase price. Default by the seller would
expose the Fund to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations. For purposes of
the 15% limitation that applies to illiquid investments, repurchase agreements
which mature in more than seven days will be considered illiquid securities.
Repurchase agreements are deemed to be loans under the Investment Company Act of
1940, as amended (the "1940 Act").
TEMPORARY DEFENSIVE INVESTMENTS. The Fund's policy is that it may, for
temporary defensive purposes and during the initial structuring of the Fund's
portfolio, invest up to 100% of its total assets in debt securities of foreign
companies (including companies that are not operating in the Greater China
Region), United States companies, foreign governments and the U.S. Government
(and their respective agencies, instrumentalities, political subdivisions and
authorities), as well as in money market instruments denominated in U.S. dollars
or a foreign currency. These money market instruments include, but are not
limited to, negotiable or short-term deposits with domestic or foreign banks
with net worth of at least $50 million; high quality commercial paper, and
repurchase agreements maturing within seven days with domestic or foreign
dealers, banks and other financial institutions deemed to be creditworthy under
guidelines approved by the Board of Directors of the Fund. The commercial paper
in which the Fund may invest will, at the time of purchase, be rated P-1 or
better by Moody's or A-1 or better by S&P or, if unrated, will be of comparable
high quality as determined by the Adviser.
OTHER INVESTMENTS. For descriptions about other types of investments that
the Fund may invest in and the risks related to those investments, see "Special
Investment Techniques," "Risks Associated with the Fund--Special Risks of
Certain Fund Investments" and 'Additional Information on Portfolio Instruments"
in the Statement of Additional Information.
PORTFOLIO TURNOVER. It is the policy of the Fund to seek capital
appreciation. The Fund will effect portfolio transactions without regard to its
holding period if, in the judgment of the Adviser, such transactions are
advisable. It is anticipated that the turnover rate will be under 300% during
the first fiscal year which will reflect initial structuring of the Fund's
portfolio and that, thereafter, the annual rate for Greater China Investments
and other investments is generally expected to be under 100%, consistent with
the turnover rates of similar funds. In the event that the turnover rate exceeds
100%, there is an increased likelihood of short term capital gains and losses
and increased transaction costs for the Fund.
INVESTMENT IN THE GREATER CHINA REGION
THE FOLLOWING IS A GENERAL DISCUSSION OF THE ECONOMICS AND SECURITIES
MARKETS IN WHICH THE FUND WILL PRINCIPALLY INVEST. There can be no assurance
that the Fund will be able to capitalize on the factors described herein.
Securities markets in the Greater China Region are smaller and offer fewer
investment alternatives than the equity securities markets in Europe and the
United States. Opinions expressed herein are the good faith opinions of the
Adviser. Unless otherwise indicated, all amounts are expressed in United States
dollars.
PEOPLE'S REPUBLIC OF CHINA
For many centuries, China's economy was largely closed, by geography as
well as by government policy, to the outside world. (As used in this section,
"China" refers to the People's Republic of China.) Large-scale foreign
involvement in China's economy began during the middle of the 19th century and
was curtailed after 1949 when the Communist government barred foreign
investment. China's trade with foreign nations began to develop rapidly again
after 1978 when Deng Xiaoping launched the process of economic reform and
modernization. By 1995, total foreign capital committed to investments in China
reached $91 billion and China's total trade approached $281 billion, making
China one of the world's largest trading economies.
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Economic reform in China, designed to replace Communist-style central
planning with the market mechanism, has proceeded largely by trial and error
aimed at achieving the fastest possible change with the minimum social
dislocation. Two forces drive these policy initiatives. The first is the need to
create jobs for a workforce that is expanding by 30-50 million a year, according
to some estimates. The second is the need to restructure money-losing state
industries and to pump capital into those enterprises that have the potential to
be internationally competitive.
The reform process has not always been even. The general direction,
however, has tended to be towards greater openness and increased
decentralization of economic decision-making. As a result, according to some
estimates, as much as two-thirds of the economy is now outside direct state
ownership and control, which compares favorably with a number of western
European economies.
China's broad economic policy is currently set out, more in terms of
ambition than of prescription, in two overlapping plans, the 20-Year Plan
(1981-2000) and the current Five-Year Economic Plan (1996-2000). The 20- Year
Plan calls for an average 7% growth in GNP over the entire 20-year period. In
the 1980's, China's growth rates averaged 9.4%. The previous Five-Year Economic
Plan envisaged 6% annual growth starting in 1991; this, however, was surpassed
with 10.5% growth being achieved between 1991 and 1995. China's GDP grew by
13.2% in 1992,13.4% in 1993,11.8% in 1994 and 10.2% in 1995. By contrast, in
Hong Kong and Taiwan real GDP grew by 4.6% and 6.3%, respectively, in 1995. To
put this into perspective, in 1993 the World Bank projected that given these
growth rates for China, on a purchasing power parity basis China would overtake
the United States as the world's largest economy early in the next century.
China's program of economic reforms has evolved under the leadership of
Deng Xiaoping and his political allies. While there is a broad base of support
for these reforms within the country's political elite, China lacks a tested
institutionalized framework for political succession and, thus, the possibility
exists that the political transition upon Deng's death could bring significant
changes in economic, trade and investment policies.
FOREIGN INVESTMENT IN CHINA. To attract foreign investment, China set up
four Special Economic Zones in 1978 (Shenzhen, Shantou and Zhuhai in Guangdong
Province, and Xiamen in Fujian Province). Hainan Island, which itself is a
province, became the fifth Special Economic Zone in 1988. Each zone was created
to provide special investment incentives and tax concessions to foreign
investors. Other areas of China near coastal cities and border zones have been
designated as eligible for investment incentives. These policies reflect a
consensus in China's government that China should continue to open its economy
to the world economy.
The contracted value of foreign investment in China was approximately $91
billion in 1995, an increase of 10% from 1994. Hong Kong, which invested $68
billion by the end of June 1995, accounted for around 60% of this total. Exports
from China continue to rise strongly, although, like other developing countries,
China's economy remains vulnerable to global economic conditions as well as the
potential for trade friction over market access, protection of intellectual
property and human rights. Imports into China are also expected to rise. See
"Special Risk Considerations--Foreign Investment Restrictions."
SECURITIES MARKETS. Two stock exchanges are officially recognized in
China--The Shanghai Securities Exchange which opened in December 1990 and The
Shenzhen Stock Exchange which opened in July 1991. Two types of shares are
traded on both exchanges: `A' shares which can be traded only by resident
Chinese and `B' shares which can be traded only by individuals and corporations
not resident in China. As of the date of this Prospectus, a new Beijing stock
exchange was being planned by the Chinese government, although there is no
assurance that such an exchange will ever be established.
On the Shanghai exchange, all "B" Shares are denominated in Chinese
renminbi ("RMB") but all transactions in "B" Shares must be settled in U.S.
dollars, and all distributions made on "B" Shares are payable in U.S. dollars
(the exchange rate being the weighted average exchange rate for the U.S. dollar
as published by the Shanghai Foreign Exchange Adjustment Centre).
On the Shenzhen exchange, the purchase and sale prices for "B" Shares are
quoted in Hong Kong dollars. Dividends and other lawful revenue derived from "B"
Shares are calculated in RMB and are payable in Hong Kong dollars, the rate of
exchange being the average rate published by the Shenzhen Foreign Exchange
Adjustment Centre.
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Although the Chinese authorities have stated that full convertibility of
the RMB will occur by the year 2000, RMB are not freely convertible now. The
exchange rate of RMB against foreign currencies is regulated and published daily
by the State Administration of Exchange Control ("SAEC"). Over the last decade,
the RMB has been steadily revalued downward relative to the U.S. dollar, with
major adjustments made in the past few years including a devaluation of more
than 30% to RMB8.7 to US$1.0 in January 1994. In 1986, to address the foreign
exchange problems of foreign investors, China began establishing Foreign
Exchange Adjustment Centres, also referred to as "swap centers." These swap
centers provide an official forum where foreign investment enterprises may
engage in mutual adjustment of their foreign exchange surpluses and shortfalls
under the supervision and control of SAEC. Trading of RMB and foreign currencies
at the swap centers is conducted at a rate determined by supply and demand
rather than at an official exchange rate. Such market exchange rates can be
highly volatile and are subject to sharp fluctuations depending on market
conditions.
No exchange control approval is required for the Fund to acquire "B"
shares listed on stock exchanges. Dividends and capital gains from the sale of
securities purchased by the Fund in listed companies in China's securities
markets may be remitted outside China, subject to payment of any relevant taxes.
See "Tax Information" for more details.
Laws relating to companies limited by shares and regulations regarding the
issuing of shares by equity joint ventures have not vet been developed on a
national basis, although a provisional code of regulations was promulgated by
the national government in April 1993. The Shenzhen municipality issued
regulations in April 1993 relating to joint stock companies, and since then the
Shanghai municipality has also issued similar regulations. Regulations governing
the trading of securities on both the Shenzhen and the Shanghai stock exchanges
have been issued by each municipality. The China Securities Regulatory
Commission, a national agency, also participates in the regulatory development
process. Future national legislation, including a proposed permanent securities
law to replace the provisional code of regulations, may materially affect trade
policy and the operation of China's securities markets.
As of February 29, 1996, there were 188 companies listed on The Shanghai
Securities Exchange, of which 36 were "B" Shares. The total market
capitalization of the "B" Shares at that date (which includes equities and
bonds) was approximately US$1,474 million.
As of February 29, 1996, there were 130 companies listed on The Shenzhen
Stock Exchange, of which 34 were "B" Shares. The total market capitalization of
the "B" Shares at that date was approximately US$869 million.
Certain market and market capitalization risks related to investments in
the stock exchanges in China are described in "Special Risk Considerations." See
Appendix A for more information about economic performance results and the
historical performance of stock markets in China.
HONG KONG
Hong Kong's economy has been linked to China's since the establishment of
the colony in 1841. Hong Kong is China's largest trade partner. In the first
eight months of 1995, visible trade between Hong Kong and China amounted to
HK$640 billion, an 18% increase from 1994.
The structure of Hong Kong's economy has changed significantly over the
last two decades as the service sector outpaced manufacturing. During the 1980s
this process gained momentum. With land and labor costs rising, Hong Kong
manufacturers began shifting production out of the Territory into southern China
such that by the early 1990s, according to some estimates, more than 90% of
manufacturing companies had China operations. As a result, roughly half of the
jobs in the Hong Kong manufacturing sector were lost, with the slack being taken
up by the burgeoning service sector. Estimates now put the number employed in
China by Hong Kong manufacturers at more than 3 million. A second consequence of
this transition was the growth in scale and sophistication of Hong Kong
manufacturers as compared to the 1970s or early 1980s.
CHINA'S INVESTMENTS IN HONG KONG. There has been considerable growth in
investment from China into Hong Kong during the last five years. Chinese
investment in Hong Kong typically involves the purchase of stakes in existing
companies. This has traditionally been in the banking and import/export sectors,
but investment in
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property, manufacturing and infrastructure projects has also increased. As China
has become the manufacturing capital for Hong Kong companies, Hong Kong is the
primary funding center for the development of China through direct investment,
syndicated loans, commercial paper and share issuances in Hong Kong by Chinese
companies.
CHINA'S RESUMPTION OF SOVEREIGNTY. The United Kingdom and China signed the
Joint Declaration in 1984 which provides that sovereignty over Hong Kong will be
transferred from the United Kingdom to China on June 30, 1997, at which time
Hong Kong will become a Special Administrative Region ("SAR") of China. Under
the Joint Declaration and the China law implementing certain commitments (the
"Basic Law"), the current social and economic systems in Hong Kong are to remain
unchanged for at least 50 years, and Hong Kong is to enjoy a high degree of
autonomy except in foreign and defense affairs. The SAR will be vested with
executive, legislative and judicial power. Laws currently in force, as amended
by the SAR Legislature, are to remain in force except to the extent they
contravene the Basic Law or China constitutional law. China may not levy taxes
on the SAR, the Hong Kong dollar is to remain fully convertible, and Hong Kong
is to remain a free port. Under the Basic Law, Hong Kong's current social
freedoms, including freedoms of speech, press, assembly, travel and religion,
are not to be affected. It cannot be predicted how future developments in Hong
Kong and China may affect the implementation of the Basic Law after the transfer
of sovereignty in 1997.
Relations between the United Kingdom and China over Hong Kong have been
uneven over the past five years and this pattern is likely to continue through
1997. Fundamental differences exist in the perception of priorities. Where the
British have been inclined to see a need for political change, the Chinese
emphasize continuity and stability. Relations deteriorated after October 1992
when the Hong Kong Governor proposed wide-ranging electoral changes for Hong
Kong's Legislature. The Chinese understood these proposals to be a violation of
previous British agreements. Cooperation slowed on economic issues relating to
the transition in government on June 30, 1997, to which Chinese consent is
deemed essential, including approval of the financing package for the
Territory's proposed new airport. Although the Governor's proposals were
eventually enacted in mid-1994, the Chinese moved to improve cooperation in
order to reach key decisions on major infrastructure projects. The Legislative
Council ("Legco") election in September 1995 was won by the Democratic Party and
its allies, which have been campaigning for a more democratic Hong Kong. This
victory was not regarded favorably by the Chinese leadership and in response,
the Chinese leadership reiterated their determination to abolish the elected
Legco after the handover of Hong Kong in June 1997.
SECURITIES MARKETS. The Stock Exchange of Hong Kong Ltd. ("HKSE") was
formed by merging four existing Hong Kong stock exchanges and commenced trading
in April 1986. The HKSE is now the second largest stock market in Asia as
measured by market capitalization. As of January 31, 1996, 543 companies and
1,010 securities were listed on the HKSE. Market capitalization as of the same
date was approximately HK$2,677,394 million, an increase of approximately 14%
from December 31, 1995.
The HKSE is regulated by the Hong Kong Securities and Futures Commission
("HKSFC"), which was established in May 1989 as an autonomous statutory body
external to the civil service. The HKSFC administers securities laws and
ordinances governing the protection of investors, disclosure of interests and
insider transactions. In addition, the HKSE promulgates its own rules governing
share trading and disclosure of information to shareholders and investors.
Companies listed on the HKSE must enter into an agreement with the exchange to
provide interim and annual accountings to their shareholders.
The total number of listed companies on the HKSE as of January 31, 1996 was
543, compared to 529 at the beginning of 1995. Average daily turnover on the
HKSE for January 1996 was HK$7,086 million compared with HK$3,424 million from
July 1995 to December 1995, and HK$3,268 million from January 1995 to June 1995.
Hong Kong has no regulations governing foreign investment or exchange
control within its borders. Investors in Hong Kong markets therefore have great
flexibility in the repatriation of profits and deployment of capital.
Certain market and market capitalization risks related to investments in
the Hong Kong stock market are described in "Special Risk Considerations." See
Appendix A for more information about economic performance results and
historical performance of stock markets in Hong Kong.
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TAIWAN
Taiwan has one of the world's largest foreign exchange reserves with $90
billion as of February 29, 1996. Between 1960 and 1995, Taiwan's GNP grew from
less than $2 billion to $264 billion. This economic growth has been accompanied
by a transformation of domestic production from labor intensive to capital
intensive industries during the past two decades. As was the case with Hong
Kong, rising land and labor costs during the 1980s gradually compelled more
Taiwan manufacturers to look abroad for resources. The effective relaxation at
the end of the decade of the barriers to doing business in China brought a
dramatic increase in investment flows, and in 1995, official Taiwanese
government figures showed direct investment in China of $1.09 billion, while
unofficial investment is estimated to be five times higher. Taiwanese companies
should continue to be attracted to invest in China because of the links of
language and culture. the comparatively low costs of land and labor and the less
rigid environmental rules.
Although relations between China and Taiwan began improving during the
1980s, significant problems persist and are likely to continue to prove
disruptive. Taiwan has nonetheless become a significant investor in China and
trade between China and Taiwan totaled $21 billion in 1995. The Taiwan
government has announced that it will have proposals for direct cross-straits
communications prepared in one year. The primary obstacle to greater investment
between the two countries has been the prohibition by the Taiwanese authorities
of direct investment in China.
Relations between China and Taiwan deteriorated beginning in 1995, as a
result of increasing political sentiment among Taiwan voters in favor of
renouncing any claim to the mainland and declaring Taiwan a fully independent
nation, and as a result of the United States' decision to grant the President of
Taiwan, Lee Teng-Hsui, a visa to visit the United States. Chinese missile tests
and other military exercises near Taiwan during Taiwan's Presidential election
in early 1996 reflect the increased level of tensions between Taiwan and China.
SECURITIES MARKETS. The Taiwan Stock Exchange (the "TSE"), the sole stock
exchange in Taiwan, is owned by government controlled enterprises and private
banks. Many listed companies on the TSE invest indirectly in China, primarily in
the textiles, food and rubber industries. Currently, a company cannot apply for
listing on the TSE unless it has conducted business in Taiwan for a minimum of
five years.
In 1968, the Securities and Exchange Law was enacted and the TSE has been
regulated since that time by the Taiwan Securities and Exchange Commission (the
"TSEC") which is supervised by the Ministry of Finance. The Central Bank of
China is also responsible for supervising certain aspects of the Taiwan
securities market. Certain risks related to market volatility in Taiwan and
market capitalization in Taiwan are described in "Special Risk Considerations."
After falling 79.5% from 12,450 to 2,750 between February and October,
1990, the TSE Index then stabilized between 3,000 and 6,000 for the next two
years, before rising from 3,130 to 7,184 over the course of the two years ending
on December 31, 1994. Since then, the Index has fallen back to approximately
4,500, primarily due to the effect of increased tension between Taiwan and China
on investor confidence. The effect of this sharp fall and the strong growth in
the earnings of export-related companies, particularly electronics and
petrochemicals, has been to reduce the valuation of the market from over 35
times earnings in 1991-92 to a forecast 11.5 times for 1996. This is the lowest
valuation that the TSE Index has reached since 1988.
FOREIGN INVESTMENT RESTRICTIONS. Foreign investors were not permitted to
invest directly in securities listed on the TSE until 1990. Currently, qualified
foreign institutional investors (QFIIs) must meet certain guidelines promulgated
by the TSEC and must be approved by the TSEC, the Ministry of Finance and the
Central Bank of China to be permitted to invest in TSE listed securities. QFIIs
must meet the following conditions (among others):
a) Banks must be ranked amongst the top 1,000 banks in the free world (in
terms of total assets);
b) Insurance companies must have been in business for last least three
years with total funds under management of at least $300 million;
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c) Fund management companies must also have been in business for at least
three years with at least $200 million under management;
d) Securities firms must have a net worth of over $100 million and be
experienced in international securities.
The Managers are taking action to enable the Fund to invest directly in TSE
listed companies, either as a QFII or as a non-QFII using a registered
securities brokerage house. The Fund intends to make Taiwan-related investments
in global depository receipts ("GDRs"), Euro-Convertible Bonds ("ECBs") and
listed beneficiary certificates ("LBCs") that represent, or are convertible
into, shares of Taiwan-based corporations. GDRs are generally described under
"Investment Policies and Techniques--Depository Receipts." Since 1992, fifteen
TSE listed companies have offered their shares in the form of GDRs to foreign
investors. Euro-Convertible Bonds and Preferred Shares are described under
"Investment Policies and Techniques--Convertible Debt Instruments." Since 1989,
thirty-three TSE-listed companies have issued ECBs, which have been convertible
into underlying shares since July 1995. The TSEC has also agreed to permit the
listing on the TSE of Taiwan Depository Receipts which will represent the shares
of foreign issuers. There are no Taiwan registration requirements that apply to
foreign investors who seek to make direct investments in GDRs or ECBs offered by
TSE-listed companies.
LBCs are certificates which represent the shares of closed-end funds which,
subject to TSEC and TSE approval, may be listed on the TSE. LBCs are issued only
by 15 securities investment trust companies in Taiwan for purposes of investing
in securities listed on the TSE. LBCs are traded on the TSE in the same manner
as other TSE-listed securities. As of September 30, 1994, there were 21
closed-end funds for which LBCs are traded. Each closed-end fund may invest in
the securities of issuers who are engaged in various types of businesses or
industries in Taiwan. Certain registration requirements apply before foreign
investors may invest in LBCS. The Fund is currently pursuing registration in
Taiwan to qualify for trading in LBCs that are listed on the TSE. If the Fund
qualifies for trading in LBCs, such trading would be included within the Fund's
65% investment policy. See "The Fund's Investment Objectives and Policies." The
Fund's purchase of LBCs will result in the duplication of management fees and
certain other expenses.
On February 29, 1996, the Taiwan government's cabinet approved a stock
market liberalization measure allowing foreign individual investors to
participate in the Taiwanese domestic stock market, effective March 8, 1996. The
maximum investment by all foreign investors in any listed firm would be
increased to 20% of the firm's total listed shares from the existing 15%.
Over time, the restrictions on investment in Taiwan may ease further to
permit greater and more flexible investment in securities listed on the TSE.
Certain market and market capitalization risks related to investments in the TSE
are described in "Special Risk Considerations." See Appendix A for more
information about economic performance results of Taiwan and the historical
performance of the TSE.
SINGAPORE
Singapore became an island colony of Great Britain in the early 1800's and
achieved independence in 1960. Its population of 3 million is comprised of 77.5%
Chinese, 14.2% Malay and 8.3% Indian and other groups. With foreign exchange
reserves of $66.8 billion (September 1995), Singapore has the highest level of
foreign exchange reserves per capita in the world. As the regional trading
center for the South East Asian region, Singapore has enjoyed a period of strong
growth over the last five years, averaging 8.6% annual compound growth in gross
domestic product (GDP), with the result that GDP per capita is estimated to have
exceeded $27,000 at the end of 1995, classifying Singapore as an "advanced
developing nation" under the OECD classification scheme.
Singapore has used its large foreign exchange reserves to invest in various
regional projects, including a number in China, where its $2 billion in pledged
investment in 1995 made it the fifth largest foreign investor. Its Suzhou
industrial township near Shanghai has already attracted $1.4 billion of
investment.
SECURITIES MARKETS. Formal trading of investment securities began in the
late nineteenth century and the Singapore Stockbrokers' Association was
incorporated in 1930. The Stock Exchange of Singapore (SES) was incorporated in
1973. The SES is now the seventh largest stock market in Asia, after Japan, Hong
Kong, Malaysia, Thailand, Korea and Taiwan, with a market capitalization at
January 31, 1996, of S$226.3 billion, an increase of
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approximately 10% from the previous year. From January 1, 1995 to December 31,
1995, there were 20 new listings of companies on the SES. Average monthly
turnover on the SES for 1995 was S$83,866 million, compared with S$123,520
million in 1994. As of December 31, 1995, 248 companies were listed on the SES
(212 Singaporean and 36 foreign), and a total of 495 securities. Another 46 were
listed on the second market, known as the Stock Exchange of Singapore Dealing
and Automated Quotations Board (SESDAQ), which had a market capitalization of
S$4.18 billion at December 31, 1995.
There is also the Central Limit Order Board International (CLOB), an
electronic over-the-counter order matching system which was established after
the separation of the Singapore and Kuala Lumpur Stock Exchanges on January 2,
1990, primarily to enable Malaysian shares to continue to be traded freely in
Singapore. As of December 31, 1995, there were 10 Hong Kong, 112 Malaysian and 7
other international stocks traded on CLOB.
Foreign investors in Singapore are restricted by ministerial limitations
from owning more than 49% of any strategic Singaporean company, or more than 40%
of any Singaporean bank. This has led to a two tier share holding structure,
with domestic and foreign registered shares, trading at different prices, with a
premium for foreign registered shares. There are no restrictions on investment
and remittances and no foreign exchange controls, although 27% corporate tax is
deducted from the gross dividends payable.
HISTORY. Singapore was a British colony until it obtained internal
self-government in 1959. In 1963, it joined the federation of Malaya, Sabah and
Sarawak to form Malaysia. It became a fully independent and sovereign state on
August 9, 1965 when it separated from Malaysia.
The post World War II history of Singapore until independence in 1965 was
marked by a growing anticolonial movement, struggles between the communists and
non-communists within this movement to shape the future of the island's merger
with Malaysia, and the political and communal problems which were associated
with it and the confrontation with Indonesia (1963-66).
The non-communists in the People's Action Party (PAP), led by Lee Kuan Yew,
were able to prevail over the communists and their supporters by 1963, and the
government was able to focus on the tasks of economic and social development and
nation-building.
Singapore's racially mixed population reflects its key strategic location
in the Straits of Johore, which provided the base flow of traffic for
Singapore's initial shipping and entrepot businesses. Today's modem
service-based and high-technology economy can be traced back to the vision of
Lee Kuan Yew, who as Prime Minister (1959-91) and Senior Minister (1991 onwards)
implemented a process of encouraging inbound investment and upgrading the skills
base of the population, which has resulted in Singapore achieving "advanced
developing nation" status.
SPECIAL RISK CONSIDERATIONS
THE FUND IS INTENDED FOR LONG-TERM INVESTORS WHO CAN ACCEPT THE RISKS
ASSOCIATED WITH INVESTING PRIMARILY IN GREATER CHINA INVESTMENTS AS WELL AS THE
SPECULATIVE RISKS ASSOCIATED WITH INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES.
The Fund's net asset value will fluctuate as the market value of its portfolio
positions and its net currency exposure changes. In addition, certain of the
Fund's potential investment and management techniques entail special risks.
These techniques include Hedging and Other Strategic Transactions and other
investments which are described below in "Special Investment Techniques" and
"Additional Information on Portfolio Instruments" and "Hedging and Other
Strategic Transactions" in the Statement of Additional Information. There is no
assurance that the Fund will achieve any of its investment objectives.
CURRENCY FLUCTUATION. Since the Fund will invest a substantial portion of
its assets in the securities of foreign issuers which are denominated in foreign
currencies or the currency of a single foreign country, the strength or weakness
of the U.S. dollar against such foreign currencies will account for part of the
Fund's investment performance. More than 50% of the Fund's total assets,
adjusted to reflect currency transactions and positions, may be denominated in
any single currency. A decline in the value of a particular foreign currency
against the U.S. dollar will cause a decline in the U.S. dollar value of the
Fund's holding of securities denominated in such currency and may 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.
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The rate of exchange between the U.S. dollar and other currencies is
determined by many factors including the supply and demand for particular
currencies, central bank efforts to support currencies, the movement of interest
rates 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 may 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 purchase and sell
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 the same currency to the same dealer.
FOREIGN SECURITIES. Investing in securities issued by foreign companies
involves considerations and possible risks not typically associated with
investing in securities issued by U.S. companies. The values of foreign
investments are affected by changes in currency rates or exchange control
regulations, application of foreign tax laws, including withholding taxes,
changes in governmental administration or economic or monetary policy (in this
country or abroad) or changed circumstances in dealings between nations. Costs
are incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions, and for funds holding foreign
securities, the custodial fees are generally higher than for funds holding
domestic securities, and foreign securities markets may be less liquid, more
volatile and less subject to governmental supervision than in the United States.
Investments in foreign issuers could be affected by other factors not present in
the United States, including expropriation, confiscatory taxation, currency
blockage, lack of uniform accounting and auditing standards, less publicly
available information about the foreign issuer and potential difficulties in
enforcing contractual obligations and judgments. Transactions in foreign
securities markets (including Greater China Region markets) are subject to
settlement and delivery risks and delays that are greater than those in U.S.
markets. The failure by a counterparty in a foreign securities market (including
Greater China Region markets) to pay for or deliver securities purchased or sold
by the Fund in a timely manner may result in financial loss to the Fund. See
"People's Republic of China--Securities Markets," "Hong Kong--Securities
Markets," "Taiwan--Securities Markets" and "Singapore--Securities Markets" under
the previous section entitled "The Fund's Investments in the Greater China
Region."
VOLATILITY OF SECURITIES MARKETS IN THE GREATER CHINA REGION. Since the
Fund will invest at least 65% of its total assets in Greater China Investments,
its investment performance will be especially affected by events affecting
companies that issue Greater China Investments. The value and liquidity of
Greater China Investments may be affected favorably or unfavorably by political,
economic, fiscal, regulatory or other developments in the Greater China Region
or neighboring regions. The extent of economic development, political stability
and market depth of different countries in the Greater China Region varies
widely. In general, fewer securities are available for trading and the trading
volume on stock exchanges in the Greater China Region are lighter than for stock
exchanges in the U.S. and the market capitalization of individual issuers and
the market as a whole is smaller. Moreover, foreigners investing in Greater
China Region securities markets, such as the Fund, may be subject to investment
restrictions that restrict the availability of securities to foreigners in such
markets, which can lead to higher investment costs for foreigners.
China is comparatively underdeveloped when compared to other countries in
the Greater China Region. Greater China Investments typically involve greater
potential for gain or loss than investments in securities of issuers in
developed countries. In comparison to the United States and other developed
countries, developing countries may have relatively unstable governments and
economies based on only a few industries. Given the Fund's investments, the Fund
will likely be particularly sensitive to changes in China's economy as the
result of a reversal of economic liberalization, political unrest or changes in
China's trading status.
The securities markets in the Greater China Region are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the number
of shares available for investment by the Fund. A limited number of issuers in
the Greater China Region securities markets may represent a disproportionately
large percentage of market capitalization and trading value compared to United
States securities markets. The limited liquidity of securities markets in the
Greater China Region may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so. Accordingly, during periods
of rising
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securities prices in the more illiquid Greater China Regions securities markets,
the Fund's ability to participate fully in such price increases may be limited
because the Fund cannot invest more than 15% of its net assets in illiquid
securities. Conversely, the Fund's inability to dispose fully and promptly of
positions in declining markets may cause the Fund's net asset value to decline
as the value of the unsold positions is marked to lower prices. In addition,
Greater China Region securities markets are susceptible to being influenced by
large investors trading significant blocks of securities.
The Chinese, Hong Kong, Taiwan and Singapore stock markets are undergoing a
period of growth and change which may result in trading volatility and
difficulties in the settlement and recording of transactions, and in
interpreting and applying the relevant law and regulations. In particular, the
securities industry in China is not well developed. China has no securities laws
of national applicability. The existing national code of regulations is new, and
provisional only. The municipal securities regulations adopted by Shanghai and
Shenzhen municipalities are also new, as are their respective securities
exchanges. The regulatory roles of the China Securities Regulatory Commission
and the two municipal governments are not well-established. Given the
still-developing nature of China's securities markets, changes in regulatory
policy can materially affect securities prices. In addition, Chinese
stockbrokers and other intermediaries may not perform as well as their
counterparts in the United States and other more developed securities markets.
The prices at which the Fund may acquire investments may be affected by trading
by persons with material non-public information and by securities transactions
by brokers in anticipation of transactions by the Fund in particular securities.
At this time, moreover, the Fund is not able to acquire possession of
securities listed on stock exchanges in China directly because it is not
possible to arrange for physical custody of such securities with the Fund's
custodian outside China.
ECONOMIC AND POLITICAL EVOLUTION. The Fund will invest in Greater China
Region countries with emerging economies and securities markets. Political and
economic structures in many of such countries may be undergoing significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristic of the United States. Certain of
such countries may have in the past failed to recognize private property rights
and have at times nationalized or expropriated the assets of private companies.
As a result, the risks described above, including the risks of nationalization
or expropriation of assets, may be heightened. In addition, unanticipated
political or social developments may affect the values of the Fund's investments
in those countries and the availability to the Fund of additional investments in
those countries.
ECONOMIES OF COUNTRIES IN THE GREATER CHINA REGION MAY DIFFER FAVORABLY OR
UNFAVORABLY FROM THE U.S. ECONOMY IN SUCH RESPECTS AS RATE OF GROWTH OF GROSS
NATIONAL PRODUCT, RATE OF INFLATION, CAPITAL REINVESTMENT, RESOURCE
SELF-SUFFICIENCY AND BALANCE OF PAYMENTS POSITION. As export-driven economies,
the economies of countries in the Greater China Region are affected by
developments in the economies of their principal trading partners. Revocation by
the United States of China's "Most Favored Nation" trading status, which the
U.S. President and Congress have reconsidered annually, would adversely affect
the trade and economic development of China and Hong Kong. In addition, Hong
Kong, Taiwan and Singapore have limited natural resources, resulting in
dependence on foreign sources for certain raw materials and economic
vulnerability to global fluctuations of price and supply.
CHINA'S LEGAL SYSTEM. Governmental actions in China can have a significant
effect on the economic conditions in the Greater China Region, which could
adversely affect the value and liquidity of the Fund's investments. Although the
Chinese government has recently begun to institute economic reform policies,
there can be no assurances that it will continue to pursue such policies or, if
it does, that such policies will succeed. China does not have a comprehensive
system of laws, although substantial changes have occurred in this regard in
recent years. The corporate form of organization has only recently been
permitted in China and national regulations governing corporations were
introduced only in May 1992. Prior to the introduction of such regulations
Shanghai had adopted a set of corporate regulations applicable to corporations
located or listed in Shanghai, and the relationship between the two sets of
regulations is not clear. Consequently, until a firmer legal basis is provided,
even such fundamental corporate law principles as the limited liability status
of Chinese issuers and their authority to issue shares remain open to question.
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Laws regarding fiduciary duties of officers and directors and the
protection of shareholders are not well developed. China's judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a
higher-than-usual degree of uncertainty as to the outcome of any litigation.
Even where adequate law exists in China, it may be impossible to obtain swift
and equitable enforcement of such law, or to obtain enforcement of the judgment
by a court of another jurisdiction. The bankruptcy laws pertaining to state
enterprises have rarely been used and are untried in regard to an enterprise
with foreign shareholders, and there can be no assurance that such shareholders,
including the Fund, would be able to realize the value of the assets of the
enterprise or receive payment in convertible currency. As the Chinese legal
system develops, the promulgation of new laws, changes to existing laws and the
preemption of local laws by national laws may adversely affect foreign
investors, including the Fund. The uncertainties faced by foreign investors in
China are exacerbated by the fact that many laws, regulations and decrees of
China are not publicly available, but merely circulated internally.
The Communist Party in China has in the past refused to recognize private
property rights and has nationalized or expropriated the assets of private
companies. However, during the 1990's the Chinese government has increasingly
encouraged private ownership of property and has recognized foreign ownership of
certain property located in China. In addition, although China does not
currently place limitations on repatriation of profits or currency with respect
to the acquisition or sale of "B" shares listed on its stock exchanges (subject
to the payment of any relevant taxes), any such limitations on repatriation may
result in a downward market trend in China that could adversely effect the
Fund's portfolio.
FOREIGN INVESTMENT RESTRICTIONS. Securities markets in the Greater China
Region are smaller and offer fewer investment alternatives than the equity
securities markets in Europe and the United States. Certain countries in the
Greater China Region prohibit or impose substantial restrictions on investments
in their capital markets, particularly their equity markets, by foreign entities
such as the Fund. 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.
Taiwan restricts foreign ownership of the shares of publicly-listed
companies to 10% and also requires that foreign investment institutions have
conducted business for at least 3 years and have under its management at least
$300 million in assets prior to being eligible to acquire ownership of
TSE-traded shares. See "Investment in the Greater China Region--Taiwan--Foreign
Investment Restrictions." Taiwan has limited repatriation of profits by private
companies. For example, ROC companies are allowed to repatriate up to $3 billion
raised abroad from issues of GDRs and overseas corporate bonds. Moreover, the
national policies of Taiwan may restrict investment opportunities in issuers or
industries deemed sensitive to national interests.
Taiwan requires governmental approval for the repatriation of investment
income, capital or the proceeds of securities sales by foreign investors. The
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 the Fund will not be
registered with the Securities and Exchange Commission ("SEC"), 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
the Fund than is available concerning U.S. issuers. In addition, where public
information is available, it may be less reliable than such information
regarding 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.
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TAX ISSUES. The Fund's investment income from foreign issuers may be
subject to non-U.S. withholding taxes, thereby reducing the Fund's net
investment income. See "Tax Information" and "Additional Information Concerning
Taxes" in the Statement of Additional Information.
Under Section 988 ("Section 988") of the Internal Revenue Code of 1986, as
amended (the "Code"), special rules are provided for certain transactions in a
foreign currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from forward contracts, from futures contracts
that are not "regulated futures contracts" and from unlisted options will be
treated as ordinary income or loss under Section 988. Also, certain foreign
exchange gains or losses derived with respect to foreign fixed-income securities
are also subject to Section 988 treatment. In general, therefore, Section 988
gains or losses will increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gain. Additionally, if Section 988 losses exceed other investment
company taxable income during a taxable year, the Fund may not be able to make
any ordinary dividend distributions and distributions paid during the year may
be characterized for tax purposes as a return of capital.
The Fund's transactions, if any, in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) may be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the Fund
(i.e., may affect whether gains or losses are ordinary or capital), accelerated
recognition of income to the Fund and defer Fund losses. These Code rules could
therefore affect the character, amount and timing of distributions to
shareholders. These rules also (a) could require the Fund to mark to market
certain types of positions in its portfolio (i.e., treat them as they were
closed out), and (b) may cause the Fund to recognize income without receiving
cash with which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise taxes.
The Fund may make investments which, for federal income tax purposes,
constitute investments in shares of foreign corporations. If the Fund purchases
shares in certain foreign passive investment entities described in the Code as
passive foreign investment companies ("PFIC"), the Fund will be subject to U.S.
federal income tax on a portion of any "excess distribution" (the Fund's ratable
share of distributions in any year that exceeds 125% of the average annual
distribution received by the Fund in the three preceding years or the Fund's
holding period, if shorter, and any gain from the disposition of such shares),
even if such income is distributed as a taxable dividend by the Fund to its
shareholders. Additional charges in the nature of interest may be imposed on the
Fund for deferred taxes arising from such "excess distributions." If the Fund
were to invest in a PFIC and elect to treat the PFIC as a "qualified electing
fund" under the Code (and if the PFIC were to comply with certain reporting
requirements), in lieu of the foregoing requirements the Fund would be required
to include in income each year its pro rata share of the PFIC's ordinary
earnings and net realized capital gains, whether or not such amounts were
actually distributed to the Fund. Such amount would be subject to the 90% and
calendar year distribution requirements described above.
For more information about tax risks related to the Fund, see "Tax
Considerations" and "Additional Information Concerning Dividends, Distributions
and Taxes" in the Statement of Additional Information.
PORTFOLIO TURNOVER. The Fund will not trade in securities with the
intention of generating short-term profits, but may effect portfolio
transactions without regard to the length of time a security is held if, in the
judgment of the Adviser, such transactions are advisable in light of a change in
circumstances of a particular company or within a particular industry, or in
general market, economic or political conditions. Accordingly, the Fund may
engage in short-term trading under such circumstances. After the initial
structuring of the Fund is completed, it is anticipated that the annual
portfolio turnover rate will be under 100%. (An annual turnover rate of 100%
occurs, for example, when all of such securities held by the Fund are replaced
in a period of one year.) A high rate of portfolio turnover (100% or more)
involves correspondingly greater expenses than a lower rate, which expenses must
be borne directly by the Fund, and indirectly by the Fund and its shareholders.
However, short-term trading may cause the portfolio turnover rate to exceed the
100% target. High portfolio turnover also may result in the realization of
substantial net short-term capital gains. To the extent net capital gains are
realized, any distributions derived from such gains on securities held for less
than one year are taxable at ordinary income rates for federal income tax
purposes. See "Distributions and Taxes." In order for the Fund to continue to
qualify as a regulated
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investment company for Federal tax purposes, no more than 30% of the annual
gross income of the Fund may be derived from the sale of securities (including
its share of gains from the sale of securities held by the Fund) held for less
than three months.
CERTAIN INVESTMENT POLICIES. The Fund has adopted certain fundamental
investment restrictions and policies which are explained in "The Fund's
Investment Objective and Policies" and "Investment Limitations" in the Statement
of Additional Information which, as described more fully in those sections, may
not be changed unless authorized by a shareholder vote and as permitted by law.
These investment restrictions may prevent the Fund from broadening its portfolio
to include other types of investments in the Greater China Region that may
generate greater total returns. Among these fundamental restrictions, the Fund
may not (1) borrow money except from banks or through reverse repurchase
agreements and in an amount not exceeding 10% of its total assets; or (2) invest
more than 25% of its total assets in the securities of any one issuer, other
than U.S. Government securities or, in the case of the Fund, interests in the
Fund's portfolio, or acquire more than 10% of the outstanding voting securities
of any one issuer. Except with respect to the Fund's borrowing limitation,
investment restrictions are considered at the time of acquisition of assets; the
sale of portfolio assets is not required in the event of a subsequent change in
circumstances. As a matter of fundamental policy the Fund will invest less than
25% of its total assets in the securities, other than U.S. Government
securities, of issuers in any one industry. However, the Fund is permitted to
invest 50% or more of its total assets in (i) the securities of issuers located
in the People's Republic of China, Hong Kong, Taiwan or Singapore and (ii)
assets denominated in the currency of any one country.
Except for the nonfundamental investment restrictions and policies
identified above and in the Statement of Additional Information, the investment
objectives and policies of the Fund are fundamental and accordingly may not be
changed by the Board of Directors of the Fund without obtaining the majority
approval of the shareholders of the Fund. See "Management of the Fund" for
further information. If any such changes were made, the Fund might have
investment objectives different from the objectives which an investor considered
appropriate at the time the investor became a shareholder in the Fund. As a
matter of fundamental policy, the Fund will not (i) borrow for leverage purposes
or purchase any securities if, at the time of such purchase, permitted borrowing
exceeds 10% of the value of the Fund's total assets, as the case may be, (ii)
invest more than 15% of its net assets in unmarketable securities,
over-the-counter options (and the segregated assets required to cover such
options are illiquid while such options are owned by the Fund), repurchase
agreements maturing in more than seven days and other illiquid securities, or
(iii) 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 speculative
positions in futures contracts or 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. See "Special Investment Techniques"
for more information about futures contracts and options.
SPECIAL RISKS OF CERTAIN FUND INVESTMENTS
LENDING OF FUND SECURITIES. The Fund may seek to earn income by lending
portfolio securities to broker-dealers or other institutional borrowers. Such
loans will be against collateral consisting of cash or securities which is equal
at all times to at least 100% of the value of the securities loaned. During the
existence of a loan, the Fund will continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and will also
receive a fee, on all or a portion of the interest on investment of the
collateral, if any. However, the Fund may at the same time pay a transaction fee
to such borrowers. Opportunities to engage in the lending of equity securities
listed in Greater China Region securities markets are restricted. For example,
Hong Kong permits such lending subject to a 14 day limit on the lending period.
As with other extensions of credit there are risks of delay in recovery or even
loss of rights in the securities loaned if the borrower of the securities fails
financially. However, the loans will be made only to organizations deemed by the
Adviser to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned from securities loans of this type justifies
the attendant risk. The financial condition of the borrower will be monitored by
the Adviser on an ongoing basis. If the Adviser decides to make securities
loans, it is intended that the value of the securities loaned would not exceed
one-third of the Fund's total assets.
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ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest up to 15% of its
net assets in illiquid securities, including repurchase agreements with
maturities in excess of seven days. See "The Fund's Investment Objectives and
Policies." Generally, the Fund's Board of Directors has the ultimate
responsibility for determining whether specific securities (including, without
limitation, Rule 144A securities as described below) 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
Board's guidelines take into account a number of factors in reaching liquidity
decisions, including, but not limited to: (i) the frequency of trading in the
security; (ii) the number of dealers who make quotes for the security; (iii) the
number of dealers who have undertaken to make a market in the security; (iv) the
number of other potential purchasers; and (v) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers are
solicited and the mechanics of transfer). The Adviser will monitor the liquidity
of securities in each Fund's portfolio and report periodically on such decisions
to the Board of Directors.
As one of many potential types of illiquid investments, the Fund may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "Act"), which can be sold to qualified institutional buyers in
accordance with Rule 144A under the Act ("Rule 144A securities"). Investing in
Rule 144A securities could have the effect of increasing the Fund's illiquidity
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities. If a particular investment in Rule
144A securities is not determined to have a readily available trading market,
such investment will be included within the 15% limitation on investment in
illiquid securities. The maximum percentage of Fund assets that may be invested
in liquid Rule 144A securities (i.e., those not included within the 15%
limitation) at any time is 20%.
The sale of restricted securities generally requires more time and may
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.
HEDGING AND OTHER STRATEGIC TRANSACTIONS. Within the Greater China Region
as well as domestic and other foreign markets, the Fund may be authorized to use
a variety of Hedging and Other Strategic Transactions as described in "Special
Investment Techniques" and "Hedging and Other Strategic Transactions" in the
Statement of Additional Information. These investment strategies are used by the
Fund to hedge various market risks (such as currency exchange rates, interest
rates, and broad or specific market movements) to seek to reduce the volatility
of the Fund's portfolio or to seek to increase the Fund's income. No more than
35% of the Fund's net assets (taking into account the Fund's net position in a
specific investment) may be used in connection with these types of transactions.
Subject to the limitations described above, the Fund may purchase and sell
(or write) Hedging and Other Strategic Transactions in its attempts 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, or to protect the Fund's unrealized gains in the value of its
securities. The Fund may use any or all types of Hedging and Other Strategic
Transactions which it is authorized to use at any time, and such use will based
on many variables, including market conditions. Such transactions are subject to
political, economic and legal risks similar to those applicable to investment in
foreign securities described under "Foreign Securities" above.
The ability of the Fund to use 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, and the accuracy of
such predictions cannot be assured. The skills needed to accurately predict such
market movements are different from those needed to select the Fund's
securities. Moreover, the use of options and futures by the Fund may fail as
hedging techniques in cases where the price movements of the securities
underlying the options and futures do not follow the price movements of the
portfolio securities subject to the hedge. Other risks associated with Hedging
and Other Strategic Transactions are described in "Hedging and Other Strategic
Transactions" in the Statement of Additional Information.
Hedging and Other Strategic Transactions have special risks associated with
them which are different from the risks associated with investments in
securities, including possible default by the counterparty to the transaction,
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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.
Currency hedging 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 without value, 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.
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 general, these
transactions involve: (1) liquidity risk that contractual positions cannot be
easily closed out in the event of market changes, (2) correlation risk that
changes in the value of hedging positions may not match the securities market
and foreign currency fluctuations intended to be hedged, (3) market risk that an
incorrect prediction of securities prices or exchange rates may cause the Fund
to perform less well than if such positions had not been entered into, and (4)
skills different from those needed to select Fund securities. The Fund's 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.
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.
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.
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. In China, the use of Hedging and
Other Strategic Transactions is in the early stages of development and these
transactions are not well regulated, exposing investors to greater risk of loss
than other types of securities investments in China. 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.
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See "Additional Information on Portfolio Instruments" in the Statement of
Additional Information for a discussion of risks associated with other
investments of the Fund.
SPECIAL INVESTMENT TECHNIQUES
IN ADDITION TO ITS INVESTMENTS IN EQUITY SECURITIES, THE FUND INTENDS TO
USE ACTIVE MANAGEMENT TECHNIQUES IN SELECTING OTHER FORMS OF INVESTMENTS. The
Fund will be authorized to use a variety of investment strategies within the
U.S. and the Greater China Region for hedging and other purposes, including
income generation. These investment strategies include the writing and the
purchase and sale of options on securities and indices, futures contracts and
options on futures, warrants, forward foreign currency exchange contracts, short
sales, options on currency, and currency swaps (collectively, these transactions
are referred to herein as "Hedging and Other Strategic Transactions"). The Fund
may invest up to 35% of its total assets in Hedging and Other Strategic
Transactions and no more than 35% of the Fund's total assets will be at risk
with respect to such transactions. This limit is not a fundamental policy of the
Fund and may be changed by the Fund's Board of Directors without shareholder
approval. When Hedging and Other Strategic Transactions are conducted outside
the U.S., these transactions will operate in a similar manner as in U.S.
securities markets but with greater risk. See "Special Risk
Considerations--Risks of Hedging and Other Strategic Transactions Outside the
United States." For general information about risks associated with Hedging and
Other Strategic Transactions, see "Special Risk Considerations--Special Risks of
Certain Fund Investments" above and "Hedging and Other Strategic Transactions"
in the Statement of Additional Information.
CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value. Currency
transactions include currency forward contracts, exchange-listed currency
futures contracts and options thereon, ex-change-listed options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies. The Fund may enter into
currency transactions only with counterparties that are deemed creditworthy by
the Adviser.
Generally, the Fund's dealings in forward currency contracts and other
currency transactions such as futures contracts, options, options on futures
contracts and swaps will be limited to hedging and other nonspeculative
purposes, including transaction hedging and position hedging. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of the Fund's portfolio securities or the receipt of income
from them. Position hedging is entering into a currency transaction with respect
to portfolio securities positions denominated or generally quoted in that
currency. The Fund will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held by the Fund that
are denominated or generally quoted in or currently convertible into the
currency, other than with respect to proxy hedging as described below.
The Fund may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, the Fund may also
engage in proxy hedging (i.e. using a hedging vehicle relating to a currency
whose fluctuations are tied closely to the currency to be hedged).
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Special Risk Considerations--Special
Risks of Certain Fund Investments." If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below under "Special Investment Techniques--Use of Segregated and
Other Special Accounts." See "Hedging and Other Strategic Transactions" in the
Statement of Additional Information for information about other types of
currency transactions that the Fund may engage in.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase up to
10% of its net assets in securities on a when-issued or delayed delivery basis.
Securities purchased on a when-issued or delayed delivery basis are
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purchased for delivery beyond the normal settlement date at a stated price and
yield. No income accrues to the purchaser of a security on a when-issued or
delayed delivery basis prior to delivery. Such securities are recorded as an
asset and are subject to changes in value based upon changes in the value of the
security prior to delivery. Purchasing a security on a when-issued or delayed
delivery basis may involve the risk that the market price at the time of
delivery may be lower than the agreed upon purchase price, in which case there
could be an unrealized loss at the time of delivery. The Fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but may sell them
before the settlement date if it is deemed advisable. The Fund will establish a
segregated account in which it will maintain liquid assets in an amount at least
equal in value to the Fund's commitments to purchase securities on a when-issued
or delayed delivery basis. If the value of these assets declines, the Fund will
place additional liquid assets in the account on a daily basis so that the value
of the assets in the account is equal to the amount of such commitments.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may purchase and
sell options that are traded on United States and foreign markets. The ability
to terminate over-the-counter options is more limited than with exchange-traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. The Fund will treat purchased
over-the-counter options and assets used to cover written over-the-counter
options as illiquid securities until such time as the staff of the Securities
and Exchange Commission changes its current position on such treatment.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. In the event of unanticipated
changes in securities prices, the Fund may recognize a loss of the premium on an
option it has purchased to the extent that the option cannot be profitably
exercised before its expiration. The successful use of options for hedging
purposes depends in part on the ability of the Adviser to predict future price
fluctuations and the degree of correlation between the options and securities
markets. The Fund pays brokerage commissions or spreads in connection with its
options transactions. The writing of options could significantly increase the
Fund's portfolio turnover rate.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular exchange-traded option or at any particular time.
If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts." The maximum
percentage of Fund assets that may be invested in futures and/or options at any
time is 10%.
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, currency or other instrument at the exercise price. The
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. The Fund's purchase of a call option on a
security, financial futures contract, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase the instrument. An "American" type 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.
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Exchange-listed options are typically issued by a regulated intermediary.
Exchange-listed options, with certain exceptions, generally settle by physical
delivery of the underlying security or currency. In the future, cash settlement
may become available. Frequently, rather than taking or making delivery of the
underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option.
The Fund's inability to close out its position as a purchaser or seller of
an 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 on
certain options, (2) restrictions on transactions imposed by the 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
exchange, (5) inadequacy of the facilities of an exchange 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.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains. The Fund may purchase and sell call options on securities that are
traded on U.S. and foreign securities exchanges, and on securities indices,
currencies and futures contracts. All call options sold by the Fund must be
"covered," that is, the Fund must own the securities subject to the call, must
own an offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
a loss, a call sold by the Fund will expose the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the Fund to hold
a security or instrument that it might otherwise have sold.
The Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
The Fund may purchase and sell put options on securities (whether or not it
holds the securities in its portfolio), securities indices, currencies and
futures contracts. In selling put options, the Fund faces the risk that it may
be required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. The Fund may trade financial futures contracts or purchase or sell
put and call options on those contracts as a hedge against anticipated interest
rate, currency or market changes, for duration management and for permissible
non-hedging purposes. Futures contracts are generally bought and sold on the
commodities exchanges on which they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to certain instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver that position.
The Fund's use of financial futures contracts and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC and generally will be entered
into only for bona fide hedging, risk management (including duration management)
or other permissible non-hedging
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purposes. Maintaining a futures contract or selling an option on a futures
contract will typically require the Fund to deposit with a financial
intermediary, as security for its obligations, an amount of cash or other
specified assets ("initial margin") that initially is from 1% to 10% of the face
amount of the contract (but may be higher in some circumstances). Additional
cash or assets ("variation margin") may be required to be deposited thereafter
daily as the mark-to-market value of the futures contract fluctuates. The
purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
The Fund will not enter into a futures contract or option thereon for
purposes other than bona fide hedging if, immediately thereafter, the sum of the
amount of its initial margin and premiums required to maintain permissible
non-hedging positions in futures contract 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."
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts), multiple interest
rate transactions and any combination of futures, options, currency and interest
rate transactions when, in the judgment of the Adviser, it is in the best
interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by the Fund based
on the Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase the risks or hinder
achievement of the portfolio management objective,
SHORT SALES "AGAINST THE BOX". The Fund may from time to time sell
securities short "against the box." If the Fund enters into a short sale against
the box, it will be required to set aside securities equivalent in kind and
amount to the securities sold short (or securities convertible or exchangeable
into such securities if the conversion or exchange occurs without the payment of
any additional consideration) and will be required to hold such securities while
the short sale is outstanding. The Fund will incur transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box. If the Fund engages in any short sales against the box,
it will incur the risk that the security sold short will appreciate in value
after the sale, with the result that the Fund will lose the benefit of any such
appreciation.
SHORT SALES. The Fund may enter into short sales with respect to stocks
underlying its security holdings. For example, if the Adviser anticipates a
decline in the price of the stock underlying a security that the Fund holds, it
may sell the stock short. If the stock price subsequently declines, the proceeds
of the short sale could be expected to offset all or a portion of the effect of
the stock's decline in value.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of up to 10% of the Fund's net asset value in cash, U.S. government
securities or other liquid high grade debt obligations. In addition, the Fund
will place up to 10% of the Fund's net asset value in a segregated account with
its custodian, or designated subcustodian, an amount of cash, U.S. government
securities or other liquid high grade debt obligations equal to the difference,
if any, between (a) the market value of the securities sold at the time that
they were sold short, and (b) any cash, U.S. government securities or other
liquid high grade debt obligations deposited as collateral with the broker in
connection with such short sale (not including the proceeds of the short sale).
Until it replaces the borrowed securities, the Fund will maintain the
segregated account daily at a level so that (i) the amount deposited in the
account plus the amount deposited with the broker (not including the proceeds of
the short sale) will equal 100% of the current market value of the securities
sold short, and (ii) the amount deposited in the account plus the amount
deposited with the broker (not including the proceeds from the short sale) will
not be less than the market value of the securities at the time that they were
sold short. A lesser amount of assets may
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be set aside by the Fund if it owns certain types of instruments, such as a call
option, on the securities sold short that would effectively cover the short
sale.
Short sales by the Fund involve certain special risk consideration from
purchase of a security because losses from short sales may be unlimited, whereas
losses from purchases are limited to the total amount invested.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. The 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 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 entire amount the Fund has at risk
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 put option on a security 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.
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 or equity securities or other acceptable
assets. The Fund will only enter into swaps on a gross basis, unless the swap
contract provides otherwise. 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.
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 contract 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.
The Fund will engage in transactions in futures contracts and options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986. as amended, for maintaining the qualification of
the Fund as a regulated investment company for Federal income tax purposes.
WARRANTS OR RIGHTS. Warrants or rights may be acquired be the Fund in
connection with other securities or separately, and provide the Fund with the
right to purchase at a later date other securities of the issuer. Unless they
become detached and traded, warrants or rights acquired by the Fund in units or
attached to securities will be deemed to be without value for purposes of the
35% restriction on the Fund's investments in Hedging and Other Strategic
Transactions.
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LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may not invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there is
no limitation with respect to investment in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
2. The Fund may not borrow money (except that it may enter into reverse
repurchase agreements) except from banks for temporary or emergency
purposes; provided, that (a) the amount of such borrowing may not
exceed 20% of the value of the Fund's total assets and (b) the Fund
will not purchase portfolio securities while such outstanding
borrowing exceeds 5% of the value of 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) 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
CVO Greater China Partners, L.P. (the "Adviser") provides day-to-day
management of the Fund's portfolio and renders investment advisory services to
the Fund pursuant to an Advisory Agreement with the Fund (the "Advisory
Agreement"). Subject to such policies as the Fund's Board of Directors may
determine, the Adviser makes investment decisions for the Fund. The Fund does
not have an operating history, and the Adviser has not had any prior experience
advising an investment company. 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 1.25% of the average daily net assets of the
Fund.
The Adviser is a Delaware limited partnership formed in September 1994 to
serve as the investment adviser to the Fund. The Adviser's key investment team
consists of experienced investment professionals based in San Francisco. The
Adviser's principal business is the rendering of discretionary investment
management services to the Fund. The Adviser's principal business address is 520
Madison Avenue, New York, NY 10022.
Control of the Adviser. The Adviser is controlled by its two general
partners: OFFITBANK Greater China, Inc., a New York corporation established in
August 1994 as a wholly-owned subsidiary of OFFITBANK a New York State chartered
trust company ("OFFITBANK"), and ChinaVest Public Equities, LLC, a California
limited liability corporation established in January 1995 as a wholly-owned
subsidiary of ChinaVest Financial Services, Ltd., a Cayman Islands corporation
("ChinaVest Ltd.").
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Under its charter, OFFITBANK 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. OFFITBANK's principal business
is the rendering of discretionary investment management services to high net
worth individuals and family groups, foundations, endowments and corporations.
OFFITBANK specializes in global fixed income asset management and offers its
clients a complete range of fixed income investments in capital markets
throughout the world. OFFITBANK currently manages in excess of $8 billion in
assets and serves as investment adviser to fifteen registered investment
companies (or portfolios thereof). The principal business address of OFFITBANK
is 520 Madison Avenue, New York, New York 10022.
The ChinaVest investment management group based in Hong Kong (the
"ChinaVest Group") was organized in 1985. The ChinaVest Group has ten years of
experience in managing private equity investments and shares certain common
control persons with ChinaVest Public Equities, LLC. The ChinaVest Group
currently manages in excess of $225 million in assets. The ChinaVest Group and
ChinaVest Public Equities, LLC have no previous experience as investment adviser
to a registered investment company. The ChinaVest Group is represented by
ChinaVest, Inc., whose principal business address is 160 Sansome Street, 18th
Floor, San Francisco, California 94104.
See "Management of the Fund" in the Statement of Additional Information for
more information about the directors and officers of the general partners of the
Adviser.
PORTFOLIO MANAGERS
The Fund's portfolio managers are Gavin B. Graham and John C. Wong, who
have held such responsibilities since March 1, 1996. From 1993 to 1995 Mr.
Graham was the Senior Investment Officer for Citibank Global Asset Management
(Asia) Ltd. in Hong Kong. Prior to that, from 1991 to 1993, he was the
Investment Director and a shareholder of Connaught Investments Ltd., also based
in Hong Kong. From 1994 to 1996, Mr. Wong was with Crosby Securities marketing
and selling Asian securities to North American institutions. From 1992 to 1994
Mr. Wong was with Lehman Brothers in its mortgage-backed securities department.
Both Mr. Graham and Mr. Wong are principals of the Fund.
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. 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 125
West 55th Street, New York, New York 10019. The principal business address of
The Bank of New York is 90 Washington Street, New York, New York 10286.
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,
25
<PAGE>
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.
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 and distribute dividends from net investment income
and will distribute its net capital gains, if any, at least annually. Such
income and capital gains distributions will be made in shares of the Fund.
TAX MATTERS
THE 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 Fund has current and accumulated earnings and profits. For additional
tax information, see "Additional Information Concerning Taxes" in the Statement
of Additional Information.
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), or deemed to be received in accordance
with certain provisions of the Code.
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally
will not result in gain or loss for the Accounts and will not result in gain or
loss for the Contract or Policy Owners.
26
<PAGE>
SUMMARY. The foregoing discussion of Federal income tax consequences is
based on tax laws and regulations in effect on the date of this Prospectus, and
is subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuity contracts,
respectively, under the Code. If the foregoing requirements are not met, then
the Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of the Fund are the investment vehicle,
reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 a.m. and 6:00 p.m., New York time. Specially trained
representatives will answer questions and provide information about Contract and
Policy Owners' accounts.
Each Account owning shares of the 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 its
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Fund published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A. Today or The New York Times or other industry or
financial publications.
The 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
27
<PAGE>
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.
28
<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 the Fund
may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
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 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.
A-1
<PAGE>
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
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.
A-2
<PAGE>
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
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.
A-3
<PAGE>
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
------------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether the Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-4
<PAGE>
APPENDIX B
OFFITBANK VIF--CVO GREATER CHINA FUND
APPENDIX B TO PROSPECTUS--GREATER CHINA REGION COUNTRIES
[TO BE UPDATED]
This Appendix describes certain economic and political developments related
to the operation of the securities markets in the People's Republic of China
("China"), Hong Kong, Taiwan and Singapore. The information set forth in this
Appendix has been extracted from various government and private publications.
The Fund and the Fund's Board of Directors make no representation as to the
accuracy of the information, nor has the Fund or the Fund's Board of Directors
attempted to verify any of it.
PEOPLE'S REPUBLIC OF CHINA
Demographics and Government
China's population, estimated at 1.2 billion, is the highest of any country
in the world and represents one-fifth of the human race. The most populated
sections of China are located in the north eastern half of the country where
flatter terrain and proximity to the coast and major river basins provide more
abundant resources for the cultivation of the land. The country is divided in 23
provinces, three municipalities (Beijing, Shanghai and Tianjin) and five
autonomous regions. The capital and political center of China is Beijing.
Shanghai is the largest city and is also the main commercial and financial hub.
The Chinese state originated as far back as the second millennium B.C.
Although initially quasi-feudal in nature, gradually a highly centralized,
bureaucratic system evolved, which came to characterize the Chinese political
structure and which still influences the nature and style of administration
today. In the traditional Chinese polity, the emperor was the font of authority
and sovereignty. A succession of indigenous and invader dynasties reigned until
1911 when the last dynasty collapsed. A period of political instability and
civil war ensued as the Kuomintang (Nationalist Party) first attempted to wrest
control over the country from regional warlords, then battled the emerging
Chinese Communist Party. Although this conflict eased in the face of Japanese
invasion in the 1930s, the Chinese Community Party was better able to move into
the vacuum created by Japan's surrender in 1945. Over the next four years the
Communists defeated the Kuomintang forces, who subsequently fled to Taiwan. The
Communist Party established the People's Republic of China in 1949.
For much of the next three decades the Communist government tended to veer
back and forth from rather pragmatic state socialist plans of the Russian style
to grandiose crash programs, such as the "Great Leap Forward," which not only
fell far short of its goal of jump-starting the economy into modernity but cost
millions of lives in the resulting famine. In 1966, the "Cultural Revolution"
began as a limited campaign within the party leadership but soon mushroomed out
of control, at times disrupting the economy and occasionally breaking into
virtual civil war. Quite apart from the economic damage and human suffering, the
Cultural Revolution undermined the prestige and, therefore, the authority of the
Communist Party, which has had an impact on the formulation and authority of
policy ever since.
Two years after the official end of the Cultural Revolution in 1976, the
surviving members of the Party establishment led by Deng Xiaoping, launched the
country on the path to economic reform. Although the resulting economic
transition has not always been even or free of social dislocations--as evidenced
by the student demonstrations in 1986 and 1989--reform has begun to deliver
rising living standards and a better quality of life to large parts of the
country. Despite the forceful suppression of political dissent in 1989 at
Tiananmen Square, the government has not backed away from continued economic
reform, but instead has steadily expanded the horizon to include the
establishment of securities markets, privatization of state enterprises, reform
of the banking sector and a progressive opening of the economy to foreign
investment.
China currently has diplomatic ties with approximately 140 nations. It is a
charter member of the United Nations and is seeking admission to the World Trade
Organization.
B-1
<PAGE>
The Chinese Economy
China established a centrally planned economy in 1949. In 1978 the
government implemented an economic reform program to create a more mixed economy
by opening it to limited foreign investment. Currently these economic reforms
allow managers of enterprises in China more autonomy in carrying on business,
including the planning of production, marketing, use of funds and employment of
staff.
The current economy in China consists of three sectors: state, cooperative,
and private. The state sector, though decreasing from 76% of GNP in 1980 to
approximately 50% in 1991, continues to constitute the largest share of the
economy. In recent years, however, the economy has been significantly
restructured through the abolition of the commune system in rural areas and the
relaxing of government authority in the day-to-day operations in both
agricultural and industrial enterprises. Although there has been a progressive
lifting of price controls, the government still sets the prices for a number of
essential goods which it controls and distributes; but any goods produced by
suppliers of government-controlled goods above the quotas that are set by the
state may be sold at floating prices, negotiated prices or free prices. As the
government assumes more of a regulatory and supervisory role and less of a
direct management role, market forces have been allowed to operate. This has
resulted in increased productivity and rising incomes.
Over the past decade, China has achieved annual growth in real gross
national product (GNP) averaging 9%. GNP in 1991 had increased to over 2.5 times
the GNP in 1980. However, as is to be expected in such a high growth
environment, there have been wide swings in the annual growth rates, with major
booms in 1984 and 1988, for example; and "growth recessions" in 1981 and 1989.
In 1988, the Chinese Government instituted an austerity program which slowed the
Chinese economy in the following year. However, growth rates increased after
1989, achieving 5.2% in 1990 and 7% in 1991, as compared to only 3.9% in 1989.
China's economic policy is set out in two overlapping plans, the 20-Year
Plan (1981-2000) and the current Five-Year Economic Plan (1996-2000). China's
first Five-Year Economic Plan was set forth in 1953 to stimulate economic growth
and development. Currently, China is in its third year of its eighth Five-Year
Economic Plan.
The 20-Year Plan calls for an average 7% growth in GNP over the entire
20-year period; the initial decade was to be a period of reorganization, with
the second decade one of rapid economic progress. The 7% mark was exceeded in
the initial decade, with growth rates averaging 9.4%. The second decade growth,
thus far, is in step with the desired growth of the 20-Year Plan. The previous
Five-Year Economic Plan called for 6% annual growth, starting in 1991; this
however, was surpassed with 10.5% growth being achieved between 1991 and 1995.
The following table sets forth selected data regarding the Chinese economy.
<TABLE>
MAJOR ECONOMIC INDICATORS
<CAPTION>
1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Domestic Product (%
annual real growth)............. 4.3 3.9 8.0 13.6 13.4 11.8 10.2
Per Capita GNP (U.S. $)............ 300.0 298.0 312.0 379.0 N/A 447.0 534.0
Industrial Production (% annual
growth)......................... 6.8 6.0 14.2 20.4 23.6 17.5 14.0
Inflation (retail price index, %
annual growth).................. 17.8 2.1 3.0 6.2 13.4 21.7 14.8
Money Supply (M2, % annual
growth)......................... 18.7 28.9 27.6 29.5 N/A 34.4 29.5
Government Budget
Surplus/Deficit (U.S. $
billion)........................ (1.9) (2.7) (3.9) (7.8) (2.37) (66.9) (66.8)
</TABLE>
B-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Exports (U.S. $ billion) 52.5 62.1 71.9 85.1 92.0 121.0 148.8
(% annual growth)................ 10.2 17.9 15.8 18.3 8.0 31.9 23.1
Imports (U.S. $ billion) 59.1 53.3 68.8 80.8 104.0 115.7 132.1
(% annual growth)................ 6.8 (9.8) 191.5 26.6 29.0 11.3 14.2
Trade Balance (U.S. billion)........ (6.6) 8.6 8.1 4.3 (12.0) 5.3 16.7
Exchange Rate (RMB/U.S. $).......... 4.72 5.22 5.43 9.84 8.59 8.8 8.3
</TABLE>
- ---------------------
* Translated at the respective exchange rate for each year shown in the table.
N/A--Not Available
Sources: China Statistical Yearbook, State Statistical Bureau of the People's
Republic of China, Baring Securities.
Financial Reguation
The Ministry of Finance is responsible for overseeing state finances
and the collection of revenue and taxation. The banking system is managed by
China's central bank, the People's Bank of China ("PBOC"). The PBOC, like the
Ministry of Finance, is a state administrative body under the leadership of the
State Council. Its primary functions include the formulation of national
financial regulations and policies; the issuance of currency and regulation of
its circulation; the coordination and implementation of credit plans; overseeing
the establishment and operation of financial institutions and financial markets,
including stock exchanges; administration of China's foreign exchange and gold
reserves and adjustment of exchange rates against foreign currencies; and
administration of China's securities markets.
Foreign Trade
As a result of the economic reforms commenced in 1978, China's foreign
trade has grown considerably in value, range of products and number of trading
partners. A major goal of China's trade policy is to increase the percentage of
manufactured goods in the country's total exports. Gradual progress has been
made in recent years with the aid of the imported foreign technology. China's
trade balance has fluctuated over the last five years. In 1995 China's foreign
trade yielded a foreign trade surplus of U.S. $16.7 billion, with exports of
U.S. $148.8 billion in 1995 representing an increase of 22.9% over 1994. Exports
were U.S. $121.0 billion in 1994, an increase of 31.9% over that of 1993.
Imports reached U.S. $132.1 billion by the end of 1995, representing a 14.2%
increase over 1994. For 1994, imports stood at U.S. $115.7 billion, an increase
of 11.2% over the 1993 figure.
Total trade for 1995 was approximately U.S. $280.9 billion,
representing an 18.6% increase over 1994. In 1994 total trade stood at U.S.
$236.7 billion, up 20.9% over 1995. From 1990 through 1992 and 1994 to 1995,
China experienced trade surpluses. In contrast, the country experienced trade
deficits of $7.8 billion and $6.6 billion, respectively, in 1988 and 1989.
Hong Kong is the leading destination for Chinese exports, accounting
for over 40% of total export volume. Hong Kong is also a major re-export center
for Chinese goods. Other large export markets for China include Japan, the
United States, and Germany. Over the past few years, China's imports have
continued to expand and diversify. Hong Kong, Japan and the United States are
China's top three suppliers. Other major suppliers include Germany and Italy.
The following table lists China's top ten trading partners, along with
the U.S. dollar value of the trade between China and each country for the years
1992, 1993 and 1994.
B-3
<PAGE>
<TABLE>
MAJOR TRADING PARTNERS
(U.S. $ MILLION)
<CAPTION>
TOTAL TRADE EXPORTS FROM CHINA IMPORTS TO CHINA
----------------------- --------------------- ----------------------
1992 1993 1994 1992 1993 1994 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hong Kong........... 58,050 32,496 41,821 37,512 22,050 32,364 20,538 10,446 9,457
Japan............... 25,380 39,065 47,894 11,699 15,777 21,573 13,681 23,289 26,321
United States....... 17,494 27,652 35,432 8,594 16,965 21,461 8,900 10,687 13,970
Germany............. 6,471 10,008 11,898 2,448 3,968 4,762 4,023 6,041 7,137
U.S.S.R./Russia..... 5,862 7,673 5,077 2,336 2,692 1,581 3,526 4,981 3,496
Singapore........... 3,267 4,891 5,040 2,031 2,245 2,558 1,236 2,646 2,482
Italy............... 2,843 4,042 4,659 1,095 1,305 1,591 1,748 2,738 3,068
France.............. 2,260 2,931 3,363 764 1,290 1,424 1,496 1,641 1,939
Australia........... 2,332 3,010 3,940 661 1,061 1,488 1,671 1,949 2,452
United Kingdom...... 1,936 3,588 4,184 923 1,924 2,414 1,014 1,664 1,770
</TABLE>
Exchange Rate and Foreign Exchange Control
There is centralized control and unified management of foreign exchange
in China. The State Administration of Exchange Control (the "SAEC") is
responsible for matters relating to foreign exchange administration, while the
Bank of China (the "BOC") is in charge of foreign exchange operations.
Cooperating closely with the BOC, the SAEC fixes the official daily exchange
rate of RMB against major foreign currencies.
There is only one type of monetary instrument in China today, the RMB.
In the past, a second type of instrument, called a Foreign Exchange Certificate
("FE") was also used, but has been withdrawn from circulation by the government.
The RMB is the official currency in China and is currently not convertible into
foreign exchange unless converted with express written authorization from the
SAEC.
While foreign investment enterprises are able to remit from China any
profits earned in foreign exchange, RMB earnings within China cannot be freely
converted into foreign exchange except at the foreign exchange adjustment
("swap") centers established by the SAEC. In order to provide some relief from
the controls imposed by the earlier foreign exchange legislation, the State
Council promulgated on January 15, 1986 the "Regulations Concerning the Balance
of Foreign Exchange Income and Expenditure of Chinese-Foreign Equity Joint
Ventures," which provide for a number of mechanisms to allow foreign investment
enterprises to balance their foreign exchange income and expenditure. These
mechanisms include the sale of joint venture products within China for foreign
exchange, the export of products purchased with RMB from Chinese enterprises to
generate foreign exchange, short-term loans and the swapping of RMB for foreign
exchange with other foreign investment enterprises and Chinese enterprises,
among others.
The exchange rate fluctuates from time to time and from swap center to
swap center depending on supply and demand. The RMB has been devalued
progressively in recent years, depreciating by almost 70% against the U.S.
dollar between 1981 and 1990. During the 1990s, this general trend of
depreciation has continued.
B-4
<PAGE>
Securities Markets
Prior to 1949, China had established rudimentary forms of securities
exchanges in Beijing, Shanghai and Tianjin. When the Chinese communist party
assumed power in 1949, China's securities markets were closed and all securities
were abolished. The Beijing, Shanghai and Tianjin securities exchanges reopened
briefly in 1950 and 1949, respectively, but were closed again in 1952.
Securities markets were nonexistent in China until the early 1980s when they
reemerged in various cities following initiation of China's economic reform
program in 1978. There currently are two officially recognized exchanges in
China, the Shanghai Securities Exchange ("SHSE"), which commenced trading on
December 19,1990, and the Shenzhen Stock Exchange ("SZSE"), which commenced
trading on July 3, 1991. A number of organized securities markets exist in other
cities in China, but these are primarily over-the-counter markets. Initially,
shares on both exchanges were made available only to Chinese investors and were
traded only in RMB, thus avoiding the issues of repatriation of profits and the
remittance of foreign currency that would arise with the participation of
foreign investors in the market. Recently, however, these issues have been
addressed in legislation concerning a special class of shares, commonly referred
to as "B" shares, which are denominated in RMB and are offered exclusively for
investment by foreign investors and such other investors as the authorities may
approve. The first issues of "B" shares were listed and traded on the SHSE on
February 21, 1992, and on the SZSE on February 28, 1992.
Regulation and Operation of the Chinese Securities Markets
Prior to the establishment of the SHSE and SZSE, trading of securities
in China was conducted in over the-counter ("OTC") markets in a number of major
cities, including Shanghai, Chongqing, Wuhan, Guangzhou and Shenyang. The OTC
markets have no fixed location for trading; transactions are negotiated by
telephone or similar means. The SHSE and SZSE confine trading of listed shares
to the two exchanges, while unlisted stocks continue to be traded in the OTC
markets. In addition to the two exchanges and the OTC markets, a nationwide
computer system for trading of treasury bills and bonds, the Securities Trading
Automated Quotations System ("STAQ"), commenced operations on December 5, 1990
and currently links 54 licensed trading corporations in 16 cities.
Currently, trading of treasury bills constitutes the majority of the
activity in the Chinese securities markets, while trading of equity securities
constitutes only a small portion of the trading activity. The OTC markets trade
only treasury bills and equity securities that are not listed on the SHSE or the
SZSE. The SHSE and the SZSE trade both treasury bills and shares of listed
companies. Shares are divided into four types based on the type of entity
holding them: (1) State shares held by designated State entities on behalf of
the State; (2) shares held by Chinese corporations; (3) shares held by Chinese
individuals; and (4) shares held by foreign investors. The first three
categories are generally referred to as "A" shares. The fourth category is
referred to as "B" shares. State shares cannot be sold or transferred without
the approval of the State asset administrative departments. "A" shares are
quoted and traded in RMB, while "B" shares are quoted in RMB but traded in
foreign currencies (currently Hong Kong dollars and U.S. dollars).
China has not yet promulgated a national securities law. Although the
State Council has promulgated interim Regulations for Administration of
Enterprise Bonds, these regulations apply only to bonds issued by State-owned
enterprises. At the local level, however, many cities and provinces have
promulgated securities rules and regulations.
The People's Bank of China (the "PBOC"), China's central bank, is
authorized to regulate stocks, bonds and other negotiable instruments and
administer China's financial markets, and it exercises this authority through
its local branches. The State Commission for Restructuring the Economic System
has, in practice, assumed the principal role of formulating policies for the
development of the securities markets. In addition, the Stock Exchange Executive
Council, a nongovernmental organization, plays an important advisory role in the
formulation of a regulatory framework for the national securities markets.
B-5
<PAGE>
Corporate Law in China
There is no national legislative framework in China providing for
regulations governing joint stock companies. However, there have been in force
in Shenzhen since February 1992 the Provisional Rules for Joint Stock Companies
in Shenzhen (the "Shenzhen Provisional Rules"). The Shenzhen Provisional Rules
include provisions governing the formation of Shenzhen joint stock companies,
issuance of shares and debentures, ownership and dealings in shares, reduction
of capital, shareholders' rights and obligations, meetings and resolutions,
directors, financial accounting, distribution and liquidation. More recently,
the Provisional Regulations for Shanghai Municipality Joint Stock Limited
Companies came into force on June 1, 1992, covering broadly the same areas as
the Shenzhen Provisional Rules.
Shenzhen Stock Exchange
The SZSE was established in April 1991, and officially opened in July
1991. As of February 29, 1996, 130 companies had shares listed on the SZSE, of
which 34 also had "B" shares listed. Prices of "A" shares were subject to a
price fluctuation limit, but all such limits have been removed except for the
Shenzhen Champaign Company. The Shenzhen authorities have established a
regulatory fund, funded from proceeds of new issues of "A" shares, to buy and
sell shares on the open market in an attempt to minimize fluctuations of the
prices of "A" shares. In the issuance of "A" shares by the first company to
which this regulatory fund was introduced, an amount equal to 5% of the
aggregate "A" share premium was required to be paid into the fund. It is
expected that a similar percentage will be required for future new issues.
Market Index. The performance of the "B" shares on SZSE is measured by
the Shenzhen Stock Exchange B Index. This index stood at 111.87 on December 31,
1992, and at 141.44 on December 31, 1993. Since December 31, 1993, the Index has
declined to 86.66 on December 31, 1994, and 59.48 on December 31, 1995. This
fluctuation reflects the volatility of the market accentuated by the credit
tightening policy in China and the illiquidity of the market.
Membership. The SZSE operates on a membership system. Membership is
restricted to securities institutions approved by PBOC. As of February 29, 1996,
there were 554 members admitted to SZSE and on December 31, 1994 there were 550
members, consisting of banks, finance companies, securities companies, insurance
companies and trust and investment companies. All are either Shenzhen local
companies or Shenzhen branches of national companies. Securities institutions in
Shenzhen may join the Joint Meeting of Shenzhen Securities Institutions, whether
or not they are members of the SZSE. This self-governing organization was formed
in August of 1990 to facilitate communication among securities institutions and
to strengthen self-discipline among members.
Regulation. The SZSE is regulated by the PBOC, Shenzhen Special
Economic Zone Branch and the local government in Shenzhen. The Shenzhen
Municipal People's Government promulgated the Provisional Measures of Shenzhen
Municipality for Administration of the Issue and Trading of Shares (the "SZSE
Measures"), which became effective on June 15, 1991 and govern the establishment
of the SZSE and the issuance and trading of shares in Shenzhen. The issuance and
trading of "B" shares in Shenzhen are governed by the Provisional Measures of
Shenzhen Municipality for Administration of Special Renminbi-denominated Shares,
which became effective on December 16, 1991. These measures are supplemented by
a set of Detailed Implementing Rules which also became effective on December 16,
1991. In addition, Provisional Rules of Shenzhen Municipality for Registration
of Special Renminbi-denominated Shares were promulgated by the Shenzhen
Securities Registrars Co., Ltd. on January 29, 1992, and Operating Rules of the
Shenzhen Securities Exchange for Trading and Clearing of "B" shares were
promulgated by the SZSE on January 31 1992. These rules provide detailed
regulations relating to the issuance, trading, settlement and registration of
"B" shares.
B-6
<PAGE>
New Issues and Listing Criteria. Shares of local Shenzhen companies may
either be listed on the SZSE or traded on the OTC markets. In accordance with
the SZSE Measures and the Shenzhen Provisional Rules, an issuer must meet the
following requirements when making a public share issue: (i) it must have
obtained prior approval from the relevant authorities to be and have been
established as or converted into a joint stock company; (ii) its production and
operations must comply with Shenzhen's industrial policies; (iii) it must have a
good financial and business record and net assets of at least RMB 10 million;
(iv) for the year prior to applying for authorization to issue shares, the value
of its net tangible assets must have accounted to no less than 25% of its gross
tangible assets; (v) its promoters must subscribe for at least RMB 5 million
worth of shares, representing no less than 35% of its total share capital; (vi)
the number of shares to be issued to the public, i.e., investors other than
specially designated individuals, must be equal to at least 25% of its total
share capital; (vii) it must have a minimum of 800 shareholders following the
issue; (viii) within three years prior to the proposed issue neither the company
nor its promoters may have any record of illegal activities or activities
counter to the public interest; and (ix) the shares subscribed by the employees
of the company cannot exceed 10% of the shares issued to the public and such
shares are not assignable for a period of one year, thereafter, assignment of
such shares may not exceed 10% of the shareholder's holding during any half year
period.
All public share issues must be handled by securities distributors.
Issues of over RMB 30 million must be distributed by a syndicate made up of at
least three members. Issues of over RMB 50 million must be distributed by a
syndicate made up of at least five members.
In order to qualify for listing on the SZSE, companies must meet
additional requirements which are more stringent than those for public share
issues. Such additional requirements include: (i) the total par value of shares
of common stock actually issued must be more than RMB 20 million; (ii) there
must have been a minimum return on capital of more than 10% in the year
preceding listing and more than 8% over the two years prior to the year
preceding the listing; (iii) the number of registered shareholders must exceed
1,000, and the total number of shares held by shareholders holding less than
0.5% of the company's shares must account for more than 25% of the total paid-up
share capital; (iv) the company must have a continuous record of making profits
and must have a business record of more than three years; and (v) for the year
prior to applying for listing, the value of the net tangible assets must have
accounted for more than 38% of its gross tangible assets and there must be no
accumulated losses.
Application for a public share issue must be made to the PBOC, Shenzhen
Special Economic Zone Branch. Application for listing on the SZSE must be made
to the PBOC, Shenzhen Special Economic Zone Branch and the SZSE. A company's
prospectus for initial share issue must be published in a newspaper or other
publication approved by the PBOC, Shenzhen Special Economic Zone Branch, ten
days prior to the scheduled issuance date, which must include: (i) the name and
domicile of the company; (ii) the scope of the company's production and
business; (iii) resumes of the promoters or directors and the managers; (iv) the
reason for and purpose of the share issue; (v) the total amount, class(es) and
number of shares to be issued, and the par value and selling price of each
share; (vi) the method of issue; (vii) the investors to whom the issue is
marketed; (viii) the name(s) of the securities distributor(s), the total value
of the shares to be distributed and the method of distribution; (ix) details of
the company's history and conditions for future development, its main business
and financial situation, and the total amount and composition of its assets and
liabilities; and (x) a certified profit forecast.
A company applying for a further issue of shares must satisfy the
relevant authorities that the following conditions have been met: (i) its
business record since the time of the last issue must have been good, and its
utilization of capital must be above average in its fine of business; (ii) not
less than one year must have elapsed since its last share issue; (iii) the
amount of shares it is applying to issue must not exceed the amount of its
existing shares; (iv) its application of the proceeds of the issue must conform
to the industrial Policies of Shenzhen; and (v) the issue will be beneficial to
the healthy development of the Shenzhen securities markets. Applications for
approval to issue shares for the purpose of attracting foreign investment are
not bound by (ii) and (iii).
B-7
<PAGE>
For a discussion of recent developments in the securities markets in
China, see "The Fund's Investments in the Greater China Region--People's
Republic of China--Securities Markets" in the Prospectus.
New Issues Criteria for "B" Shares in Shenzhen. A company wishing to
issue "B" shares in Shenzhen must comply with the following requirements: (i) it
must fulfill the issue requirements specified in the SZSE Measures, (ii) it must
obtain written consent from the relevant department of the State to utilize
foreign investment or to transform into a foreign investment enterprise, and its
use of proceeds from the "B" share issue must conform to the laws and
regulations of the State concerning the administration of foreign investment;
(iii) it must have a stable, adequate source of foreign exchange revenue
(sufficient to pay out the "B" share dividends and bonuses for each year); (iv)
the percentage of "B" shares (including promoters' share holdings) to the total
shares of the company must not exceed the upper limit set by the PBOC, Shenzhen
Special Economic Zone Branch; and (v) the company must have a business record of
three years or more, or have received special permission from the PBOC, Shenzhen
Special Economic Zone Branch. (Companies in high technology industries or other
special industries are not bound by this restriction.)
Subscription for "B" shares is carried out through authorized
securities institutions within Shenzhen Municipality. These institutions may
arrange for the participation of overseas securities institutions approved by
the PBOC, Shenzhen Special Economic Zone Branch. The holding by any foreign
investor of "B" shares of a joint stock company accounting for more than 5% of
such company's total shares must be reported to the PBOC, Shenzhen Special
Economic Zone Branch. Domestic securities institutions are not allowed to trade
"B" shares for their own accounts unless approved by the PBOC, Shenzhen Special
Economic Zone Branch.
The issuance of "B" shares through a syndicate underwriting on behalf
of the issuer must be managed by at least one authorized domestic securities
institution. The issue price of "B" shares may not be lower than the issue price
of "A" shares of the same company. During the distribution period, distributors
must sell the shares at the same pre-determined price.
An issuer may request private placement of its "B" shares with
institutions outside China with which it has close business connections,
provided that such institutions are approved by the PBOC, Shenzhen Special
Economic Zone Branch and the number of shares privately placed with them does
not exceed 15% of the total number of "B" shares in such issue.
Reporting Requirements. Within 60 days following the end of each half
of the fiscal year, an issuer is required to submit an interim financial report,
reviewed and approved by an accounting firm, or its annual financial report,
audited by an accounting firm, to the PBOC, Shenzhen Special Economic Zone
Branch and to publish the same in a newspaper or other publication approved by
the PBOC, Shenzhen Special Economic Zone Branch. Such financial reports must
also be submitted to the SZSE if the issuer's securities are already listed on
the SZSE.
Insider Trading Restrictions. All persons are prohibited from using
insider information when engaging in the purchase or sale of securities.
Shanghai Securities Exchange
The SHSE was established on November 26,1990 and officially opened on
December 19, 1990. Trading began on the SHSE during the later part of 1991.
Prior to the establishment of SHSE, an active OTC market in local stocks and
bonds existed in Shanghai.
Market Index. The performance of the "B" shares on the SHSE is measured
by the Shanghai Stock Exchange B Index. This Index stood at 66.22 on December
31, 1992, and at 103.15 on December 31, 1993, before falling to 62.80 on
December 31, 1994 and 47.69 on December 31, 1995. This fall reflects volatility
of the market accentuated by the credit tightening policy in China and the
illiquidity of the market.
B-8
<PAGE>
Membership. The SHSE operates on a membership system. Membership is
restricted to securities institutions approved by the PBOC. As of February 29,
1996, there were 553 members admitted to the SHSE, 60 of which are foreign
institutions. The SHSE members are comprised of securities companies, insurance
companies, trust and investment companies and open credit cooperatives. Members
of the SHSE must join the Securities Trade Association, which is a
self-governing trade organization whose articles of association specify such
matters as the purpose, nature, conditions for membership, rights and
obligations of members and accounting of the Association. The SHSE members may
be classified as (1) members who trade for others' accounts; (2) members who
trade for their own accounts only; or (3) members who trade both for their
clients and for their own accounts. No member may buy or sell any listed
securities outside the SHSE without permission.
Regulation. The SHSE is regulated by the local branch of the PBOC and
the local government in Shanghai. The Shanghai Municipal People's Government
adopted the Measures of Shanghai Municipality for Administration of the Trading
of Securities (the "SHSE Measures"), which came into effect on December 1, 1990
and govern the establishment of the SHSE and the issuance and trading of
securities in Shanghai. In November of 1991, special regulations contained in
the Measures of Shanghai Municipality for the Administration of Special
Renminbi-denominated Shares and their Detailed Implementing Rules were
promulgated by the PBOC and the Shanghai Municipal People's Government relating
to the issue of "B" shares in Shanghai. Special rules for the trading and
settlement of "B" shares were also enacted in February 1992.
New Issues and Listed Criteria. To issue new securities, an issuer must
file an application with the PBOC, Shanghai Branch, along with the issuer's
articles of association, a prospectus to be used in offering the securities
which meets the requirements of the SHSE Measures and other related documents.
Issues of shares, or bonds of a value of RMB 10 million or more, must be
distributed by a securities institution, unless otherwise provided by the State
or placed privately. Issues with a total distribution value of RMB 30 million or
more must be jointly distributed by a distribution syndicate formed and led by a
securities company. Distribution of securities includes the underwriting of
securities and the placement of securities by an agent.
Under the SHSE Measures, an issuer which intends to issue its shares
must submit: (i) the consent from the relevant authorities as to the
establishment or restructuring of the enterprise as a joint stock company; (ii)
in the case of a newly-established joint stock company, an investment
certificate evidencing that its organizers have subscribed for not less than 30%
of the total amount of shares; (iii) in the case of State-owned enterprise being
restructured as a joint stock company, a confirmation of asset valuation issued
by the Administration for State Assets with a report on the conclusions from the
asset valuation issued by the relevant asset valuation agency, or, in the case
of a non-State-owned enterprise being restructured as a joint stock company, a
report on the conclusions from the asset valuation issued by an accounting firm
and a registered accountant of that firm; (iv) in the case of an existing joint
stock company issuing shares in order to increase its capital, financial
statements of continuous profits during at least the preceding two years and the
preceding quarter of the current year, certified by an accounting firm and a
certified accountant of that firm, and a shareholders' resolution authorizing
the issue; and (v) an application for share issue to the PBOC, Shanghai Branch,
along with its articles of association, the prospectus to be used for the share
issue, a distribution contract entered into with a securities distributor and,
if the shares are to be issued to raise funds for fixed asset investment, the
approval document(s) from the relevant administrative department(s). In
addition, where the issuer also intends to list shares on the SHSE, it must
submit (i) an application for the listing of and permission to deal in
securities; (ii) a report on the listing of the securities; (iii) consent from
at least one securities house to assist in the trading of the securities; and
(iv) financial statements of continuous profits for at least two years,
certified by an accounting firm and a registered accountant of that firm.
For a discussion of recent developments in the securities markets in
China, see "The Fund's Investments in the Greater China Region--People's
Republic of China--Securities Markets" in the Prospectus.
New Issues and Listing Criteria or "B" Shares on the SHSE. A company
wishing to issue "B" shares to be listed on the SHSE must comply with the
following requirements: (i) it must be an approved joint stock company
B-9
<PAGE>
which has been registered with the relevant State authority or whose
establishment has been approved and has met all the listing requirements set
forth in the SHSE Measures; (ii) the proceeds from the issuance of the "B"
shares must be used in accordance with State policies and regulations on the
administration of foreign investment; (iii) it must have a stable, adequate
source of foreign exchange revenue (i.e. sufficient to pay out the "B" share
dividends); and (iv) the percentage of "B" shares among the total shares of a
former state-owned enterprise reorganized as a joint stock company must not
exceed the upper limit set by the PBOC, Shanghai Branch.
Subscription for "B" shares is carried out through approved securities
institutions. Approved domestic securities institutions may arrange for
participation by foreign securities institutions approved by the PBOC, Shanghai
Branch. Approval by the Shanghai Branch of the PBOC is required for the
subscription by a single investor for "B" shares which exceed 5% of the total
issued share capital of a company. In addition, "B" share trading must be
carried out by approved securities institutions and be processed through a
domestic securities house which is in the business of dealing in "B" shares.
Every investor dealing in "B" shares must open a "B" share securities account
with the SHSE. Domestic securities dealing organizations may open such "B" share
securities accounts on behalf of individuals and institutional investors outside
of China. Domestic securities institutions may not engage in "B" share business
for their own account.
The issuance of "B" shares in Shanghai may be through a public offering
or a private placement. A public offering must be conducted on behalf of the
issuer by an approved securities institution. The issuance of "B" shares through
a distribution syndicate must be managed by a domestic securities institution.
The prospectus for an issue of "B" shares must be published in a newspaper or
other publication approved by and on dates designated by the PBOC, Shanghai
Branch.
Reporting Requirements. Once securities are approved for listing on the
SHSE, the issuer must publish the report on the listing of the securities and
certified financial statements showing continuous profits for at least two years
preceding the listing. Issuers of listed securities are required to submit
interim financial reports to the PBOC, Shanghai Branch in the middle of each
fiscal year. Issuers of securities traded on the OTC markets or the SHSE are
required to submit certified financial reports at the end of each fiscal year.
Such reports are required to be submitted within 45 days after the end of the
relevant period.
Within 15 days after the occurrence of any of the following situations,
an issuer of securities must submit a status report to the PBOC, Shanghai
Branch, and the SHSE if the securities of such issuer are listed on the SHSE:
(i) the conclusion with another party of a contract or agreement that will have
a material effect on the assets or liabilities of the enterprise or the rights
and interests of its shareholders; (ii) a major change in the business items or
forms of business of the enterprise; (iii) the making of a decision on a major
or relatively long-term investment; (iv) the incurring of major debts or losses;
(v) major losses of the assets of the enterprise; (vi) a major change in the
production or business environment; (vii) a change in the members of the board
of directors or senior management personnel; (viii) a change in the share
holdings of shareholders who hold 5% or more of the total amount of shares or a
change in the share holdings in the company of the members of the board of
directors or senior management personnel; (ix) involvement in a major lawsuit;
(x) the making of such major policy decisions as on merger, consolidation, etc.;
and (xi) commencement of liquidation or bankruptcy reorganization.
The trading and registration of transfer of registered shares will be
suspended 10 days before each announced date for payment of dividends or bonuses
or the issuance of new shares. Under the SHSE Measures, if the transfer
registration procedures are not completed within the specified time limits, the
dividends, bonuses and newly issued shares will be issued to the persons in
whose name the securities were registered at the time of such distribution or
issuance.
Insider Trading Restrictions. Certain persons involved in the issuance
of shares, such as relevant personnel of the PBOC, Shanghai Branch, who are
involved in securities administration, management personnel of the SHSE,
personnel of a securities house who are directly connected with the issue and
trading of shares and other insiders
B-10
<PAGE>
connected with the issue and trading of shares are prohibited from trading,
directly or indirectly, for their own account.
Trading and Regulation of Shares
Trading of "B" Shares on the SZSE. Trading on the SZSE is conducted in
blocks of 2,000 shares. Trading in "B" shares may only be conducted between
non-Chinese investors. Investors outside China must trade "B" Shares through
approved foreign brokers who in turn instruct approved Shenzhen brokers who
actually effect trades on the SZSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed. Trading on the SZSE is carried
out through a computerized automatic matching system which effects each
transaction based on price and time priority. Investors subscribing for or
buying "B" shares are required to produce their individual or corporate
identification documents, while individual investors must also pay a deposit
equal to 60% of the market price of the shares to be bought.
Commissions for transactions in B shares are fixed at 0.6% of the
purchase price. A stamp duty of 0.3% of the purchase price is also payable. In
addition, the SZSE imposes a transaction levy of 01% of the actual transaction
amount. A share transfer registration fee of 0.3% of the face value of the "B"
shares transferred is also payable by the buyer to the Official registrar of the
"B" shares. Certain other fees may also be payable to the clearing and
settlement bank and foreign brokers for their services.
Any single investor holding "B" shares amounting to more than 5% of the
total share capital of an issuer must rep on such holding to the PBOC, Shenzhen
Special Economic Zone Branch. Short selling of "B" shares is prohibited. Newly
purchased "B" shares may not be sold before the settlement and registration
procedures for their purchase are completed.
Trading of "B" Shares on the SHSE. In Shanghai, "B" shares are traded
in blocks having a total face value of RMB 1,000. "B" shares may only be traded
between non-Chinese investors. Investors outside of China must trade "B" shares
through approved foreign brokers who instruct approved Shanghai brokers who then
actually effect trades on the SHSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed.
Brokerage commissions for "B" share transactions are fixed at 0.6% of
the total amount of the transaction, with reduced rates of 0.5%, for
transactions with a value of RMB 500,000 and 0.4% with a value exceeding RMB
5,000,000. A stamp duty of 0.3% of the amount of the transaction is also
charged. The SHSE also levies a transaction fee on securities dealers equal to
0.03% of the amount of the transaction. A transfer fee of 0.1% of the face value
of the shares transferred is also payable by the investor. Certain other fees
may also be payable to the banks appointed to coordinate primary and secondary
clearing and settlement and to foreign brokers for their services. Fees are
calculated in renminbi and payable in U.S. dollars.
Any single investor (individual or institutional) purchasing "B" shares
of an amount exceeding 5% of the issuer's total share capital must obtain
approval for such purchase from the PBOC. Newly purchased "B" shares cannot be
sold before the transfer procedures for their purchase are completed.
Trading in "B" shares is executed using an automatic book-entry
transfer system. Orders are matched automatically by computer by price and time
priority. Market and trading information is transmitted through
telecommunication links by an international information agency from the SHSE to
overseas countries on a real time basis.
Clearing and Settlement of "B" shares. In both Shenzhen and Shanghai,
clearing and settlement of "B" share transaction are effected on the third day
after the trade date. All clearing and settlement of "B" shares are effected in
a scrip less manner, through a book-entry clearinghouse system. No such
certificates are issued to investors. Cash settlement is effected on a broker to
broker, transaction by transaction basis.
B-11
<PAGE>
All "B" share prices and all dividends, bonuses and other income on "B"
shares are calculated in RMB but paid in foreign currency (Hong Kong dollars or
U.S. dollars). RMB amounts are converted to Hong Kong dollars or U.S.A. dollars
at the weekly weighted average conversion rate as quoted by the Shanghai Foreign
Exchange Transaction Center or the Shenzhen Foreign Exchange Adjustment Center
(with the exception of share sale prices in Shenzhen which are converted at the
prior working day's Conversion rate).
HONG KONG
Hong Kong became an island colony of Great Britain in 1841. Since that
time, Hong Kong remains China's largest trade partner and its leading foreign
investor. In 1995, the value of trade between Hong Kong and China exceeded
HK$1,239 billion, representing a 15% increase over 1994. In 1994, visible trade
between Hong Kong and China exceeded HK$1,077 billion, representing a 15%
increase over 1993.
The structure of Hong Kong's economy has changed significantly over the
last two decades as the services sector outpaced manufacturing. Large numbers of
Hong Kong based companies have set up factories in the southern province of
China, where it is estimated that Hong Kong companies employ up to 3 million
resident Chinese workers.
China's Investments in Hong Kong
There has been considerable growth in Chinese investment in Hong Kong
in the last five years. Chinese investment in Hong Kong typically involves the
purchase of stakes in existing companies. Most of Hong Kong's manufacturing
investment has been in Guangdong Province, and more than 3 million workers are
now estimated to be employed in the Province by Hong Kong companies. 1992
figures reflect the extent to which Southeast China, and Guangdong Province in
particular, is ahead of the rest of the country in economic performance. Its
industrial output grew by over 32% during 1994; exports increased by more than
73% during 1994 following a 46% growth in 1993. In 1994 Guangdong Province
accounted for some 39% of total exports and for more than 9.4% of GDP although
having only 5.5% of the population.
In an effort to accommodate the colony's infrastructure to the
sustained 15% annual trade growth with southern China, the Hong Kong government
in 1989 unveiled PADS, the Port and Airport Development Strategy. The project,
initially estimated to cost $21 billion, is designed to allow Hong Kong's cargo
handling capacity to increase by four times between 1988 and 2011 and its air
traffic handling capacity to increase from 15 million passengers in 1988 to 50
million in 2011. In September 1991, Hong Kong and China concluded the
Sino-British Memorandum of Understanding, providing a framework for the PADS
project. The project is currently schedule to be completed by 1999.
Foreign Investment Restrictions
There are no regulations governing foreign investment in Hong Kong.
There are no exchange control regulations and investors have total flexibility
in the movement of capital and the repatriation of profits. Funds invested in
Hong Kong can be repatriated at will; dividends and interest are freely
remittable.
Hong Kong Securities Markets
Formal trading of investment securities was established in Hong Kong in
1891 when the Association of Stockbrokers in Hong Kong was formed. It was
renamed the Hong Kong Stock Exchange in 1914. In 1969, the Far East Exchange was
formed, followed by the Kam Ngan Stock Exchange in 1971 and the Kowloon Stock
Exchange in 1972. These four exchanges merged to form The Stock Exchange of Hong
Kong Ltd. ("Hong Kong Stock Exchange" or "HKSE"), which commenced trading on
April 2, 1986.
B-12
<PAGE>
The HKSE is now the second largest stock market in Asia, behind only
that of Japan. As of December 31, 1995, 542 companies and 1,033 securities
(including warrants and other derivative instruments) were listed on the HKSE.
Market capitalization as of the same date was approximately HK$2,348,310
million, an increase of approximately 13% from the previous year. Average daily
turnover on the HKSE for January 1996 was HK$7,086 million compared with
HK$3,424 million from July 1995 to December 1995, and HK$3,268 million from
January 1995 to June 1995.
In addition to an active stock market, Hong Kong has an active foreign
exchange market, an interbank money market, a large gold bullion market and a
futures exchange. Hong Kong is also one of the major Asian centers to venture
capital businesses, many of such businesses having their Asian head office in
Hong Kong.
The table below sets out selected data on the Hong Kong Stock Exchange
to each year since 1986, including the value to securities traded during each
year, and the number of companies and securities listed and the total market
capitalization as of December 31 of each year.
<TABLE>
<CAPTION>
SELECTED DATA ON THE HKSE
VALUE OF SECURITIES TRADED DECEMBER 31 MARKET CAPITALIZATION
------------------------------------ ----------------------------------
(H.K. $ (U.S. $ LISTED LISTED (H.K. $ (U.S. $
YEAR MILLION) MILLION) COMPANIES SECURITIES MILLION) MILLION)
- ---- ---------- ---------- --------- ---------- -------- ---------
<C> <C> <C> <C> <C> <C> <C>
1986................ 123,128 15,786 253 335 419,281 53,754
1987................ 371,406 47,616 276 412 419,612 53,796
1988................ 199,481 25,574 304 479 580,378 74,446
1989................ 299,147 38,352 298 479 605,010 77,565
1990................ 288,715 37,015 299 520 650,410 83,386
1991................ 334,104 42,834 357 597 1,052,012 134,873
1992................ 700,577 90,569 413 749 1,332,184 172,221
1993................ 1,222,675 156,753 477 891 2,975,379 381,459
1994................ 1,137,414 145,822 529 1,006 2,085,182 267,331
1995................ 826,801 106,000 542 1,033 2,348,310 301,065
</TABLE>
- -------------------
Source: HKSE.
Market Performance. The Hang Seng Index is the most widely followed
indicator of stock price performance in Hong Kong. The Hang Seng Index is an
arithmetic index based on the securities of 33 companies, weighted by their
respective market capitalizations, and is thus strongly influenced by large
capitalization stocks.
The following table sets out high, low and end of year close for the
Hang Seng Index for each year since 1986.
HANG SENG INDEX
% CHANGE
FROM PRIOR
YEAR HIGH LOW YEAR-END PERIOD-END
- ---- ------- ------- ------- ----------
1986................ 2,568.3 1,559.4 2,568.3 __
1987................ 3,949.7 1,894.7 2,302.8 (10.3)
1988................ 2,772.5 2,223.0 2,687.4 16.7
1989................ 3,309.6 2,093.6 2,836.5 5.5
1990................ 3,559.9 2,736.6 3,024.6 6.6
1991................ 4,297.3 2,984.0 4,297.3 42.1
B-13
<PAGE>
1992................ 6,447.1 4,301.8 5,512.4 28.3
1993................ 11,888.4 5,437.0 11,888.4 115.7
1994................ 12,201.1 7,702.8 8,191.0 (31.1)
1995................ 10,073.4 6,967.9 10,073.4 23.0
- -------------------
Source: HKSE.
The Hong Kong stock market can be volatile and is sensitive both to
developments in China and to the strength of other world markets. As an example,
in 1989, the Hang Seng Index rose to 3,310 in May from its previous year-end
level of 2,687, but fell to 2,094 in early June following the events at
Tianamnen Square. The Hang Seng Index gradually climbed in subsequent months,
but fell by 181 points on October 13, 1989 (approximately 6.5%) following a
substantial fall in the U.S. stock market, and at the year end closed at a level
of 2,837. The Hang Seng Index rose by 116% in 1993 amidst the bull market run in
Asia that year, but declined by 31% in 1994.
Trading. Trading on the HKSE is conducted through a computerized system
to convey bid and asked prices for securities. Trades are then effected on a
matched trade basis directly between buyers and sellers. All securities are
traded in board lots. The HKSE utilizes the Central Clearing Automated
Settlement System for 90% of the settlement of its executed trades. The
remaining 10% of trade settlement is settled by the delivery of physical stock
certificates. For most companies a board lot is 1,000 shares, although board
lots can vary in size from 100 to 5,000 shares. Odd lots are traded separately,
usually at a small discount to the board lot prices. Share certificates in board
lots, together with transfer deed, must be delivered on the day following the
transaction. Payment is due against delivery. As of June 1995, a brokerage
commission of not less than 0.25% (with a minimum of H.K $50) is standard, and
trades are subject to a transaction levy of 0.013% payable equally to the HKSE
and the Hong Kong Securities and Futures Commission (the "SFC") and a special
levy of 0.03%. The Hong Kong government charges (i) an ad valorum stamp duty of
H.K. $1.50 per HK $1,000 value of transaction, and (ii) a transfer deed stamp
duty of HK$5, payable by the seller on each new transfer deed issued in
connection with securities sold. A transfer fee of HK$2 per board lot of shares
is payable by the purchaser of securities for each new certificate issued.
Finally, effective July 1, 1994, a trade tariff of HK$0.50 is levied on each
HKSE transaction.
Regulation and Supervision. The SFC was established by the Hong Kong
government in May 1989 as an autonomous statutory body outside the civil service
which provides a general regulatory framework for the securities and lures
industries. The SFC administers certain elements of Hong Kong securities law
including those ordinances governing the protection of investors, disclosure of
interests and insider dealing.
The governing authority of the Hong Kong Stock Exchange is its Council,
which is comprised of 30 members. The Council is responsible for formulating
policies and oversees the operations of the HKSE through standing committees.
Eighteen Council members are representatives of the brokerage firms in Hong
Kong, nine are representatives of investment and merchant banking firms and two
are appointed by the Hong Kong government. The chief executive officer of the
HKSE serves on the Council on an ex-officio basis.
The HKSE promulgates its own rules governing share trading and
disclosure of information to shareholders and investors. Companies listed on the
HKSE enter into a listing agreement with the exchange which includes provisions
requiring that listed companies send interim and annual accounts to
shareholders. In addition, the Hong Kong Code on Takeovers and Mergers (used by
the SFC) provides guidelines for companies and their advisers contemplating, or
becoming involved in, takeovers and mergers.
B-14
<PAGE>
TAIWAN
Demographics and Government.
Taiwan is located approximately 90 miles east of the People's Republic
of China (for purposes of this section only, the "PRC"), 340 miles northeast of
Hong Kong. The island encompasses an area of approximately 13,900 square miles
with a total population estimated at 20.9 million as of December 31, 1993. With
an average of approximately 1,498 people per square mile, Taiwan is among the
most densely populated countries in the world. The largest cities are Taipei in
the north, with over 2.7 million people, and Kaohsiung, in the south, with over
1.37 million people. Mandarin is the official language.
The Republic of China ("ROC") was established in 1912 by the Kuomintang
(Nationalist Party) (the "KMT") in mainland China and remained there until 1949
when General Chiang Kai-Shek, the elected president at that time, moved the ROC
administration to Taiwan. Since that time, the ROC has maintained that it is the
sole legitimate government of all of mainland China, Taiwan and Mongolia, while
the PRC has also asserted the same claim.
The KMT is currently headed by Lee Teng-Hui, who was elected President
and Chairman in 1988. He was reelected in March 1990 and again in March 1996 for
another term as President. Taiwan maintains formal diplomatic relations with 30
countries. Taiwan is not a member of the United Nations and various other
international organizations, but is a member of the Asian Development Bank.
Taiwan has applied to rejoin the General Agreement of Tariffs and Trade
("GATT"), from which it withdrew in 1950. Taiwan joined the Asia-Pacific
Economic Cooperation group ("APEC") in November 1991. In August 1993,
disaffected members of the RMT created a new political party called the Chinese
New Party which seeks to return Taiwan to full membership in the international
community. Opposing political parties whose platforms are consistent with the
ROC constitution are officially recognized in Taiwan.
The United States Congress passed the Taiwan Relations Act in 1979 to
establish a new framework for U.S./Taiwan relations and since that time the U.S.
remains Taiwan's largest trading partner. Taiwan enjoyed a cumulative trade
surplus of US $7.9 billion and US $6.3 billion with the U.S. in 1993 and 1994,
respectively.
Economic Development. Taiwan's economic growth has been strong from
1984 to 1994, never falling below 5% during that period. In the 1990's, GNP
growth rates were 7.2%, 6.2%, 6.0%, 6.1% and 5.9% in 1991, 1992, 1993, 1994 and
1995, respectively. Domestic demand has increased in recent years, although
Taiwan's exports also continue to grow, reaching 10.3% in 1993 and 8.6% in 1994.
The following table provides details of the overall economic
performance of Taiwan from 1987 to 1995.
<TABLE>
<CAPTION>
EXCHANGE GDP TRADE TSE TSE MARKET
RATE AV. GROWTH SURPLUS YEAR-END CAPITAL (US
US $ (%) CPI (US $ BILL.) P/E CLOSING $ BILL.)
-------- ------ --- ------------ --- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1987............. 31.85 12.7 0.5 18.7 28.7 2,339 48.45
1988............. 28.57 7.8 1.3 11.0 68.9 5,119 120.1
1989............. 26.41 8.2 4.4 14.0 92.0 9,624 240.0
1990............. 26.39 5.4 4.1 12.5 33.0 4,530 112.4
1991............. 25.50 7.6 3.6 13.3 28.0 4,601 123.7
1992............. 25.20 6.8 4.5 9.5 30.1 3,377 100.1
1993............. 26.50 6.3 2.9 7.9 39.7 6,071 194.1
1994............. 26.45 6.5 4.1 11.9 33.5 7,125 247.0
1995............. 26.44 6.1 3.7 11.0 19.5 5,159 192.0
</TABLE>
B-15
<PAGE>
The major sources of Gross Domestic Product ("GDP") have been
manufacturing, commerce, finance, insurance, real estate and business services
and government services, which together accounted for roughly 76% of GDP in
1994. During the past decade, the most significant trends in the composition of
GDP have been (1) the decline in the agricultural and construction sectors as
percentages of the total economy, and (2) the growth until 1989 in the relative
importance of manufacturing and services.
The New Taiwan Dollar ("NT") is the official currency in China.
Taiwan's favorable trade balance and increased foreign exchange reserves since
1984 have caused appreciation of the NT. In 1987, the NT appreciated
approximately 24.4% against the U.S. Dollar, and further appreciated by 8.1%
between 1988 and 1994. Taiwan's exports to the U.S. have continued at high
levels during this period, in part because the appreciation of the NT has been
at relatively lower levels than the appreciation of the Japanese yen against the
U.S. Dollar.
Unemployment in Taiwan remained low in the 1990's, with an average rate
of approximately 1.5%, 1.6% and 1.8% in 1992, 1993, and 1994 respectively.
In 1994, the Taiwan government began exerting all efforts toward the
development of the "The Emerging industries": telecommunications, information,
consumer electronics, semiconductors, precision machinery and automation,
aerospace, advanced materials, fine chemicals and pharmaceutical, health care,
and pollution control. The production value of these 10 industries in projected
to rise from US $27.3 billion in 1992 to US $94.2 billion in 2000. These 10
industries accounted for 15.5% of all industrial production in 1992 and are
projected to reach 29.4% in 2000.
In 1995, the Taiwan government offered a blueprint for Asia-Pacific
Regional Operations Center. Development plans have been set for six specific
operations centers, including manufacturing center, sea transportation center,
air transportation center, financial center, telecommunications center and media
center. The key areas of macroeconomic adjustments to reach these goals include:
(1) liberalizing trade and investment to lower tariffs, remove non-tariff trade
barriers, and open up the service industry; (2) reducing entry and exit
restrictions on personnel to allow foreign professionals and specialists to
engage in short-term stay and work in Taiwan; (3) easing restrictions on capital
movement to liberalize foreign exchange control in stages; and (4) establishing
a modem legal environment for the information society. This includes allowing
free circulation of information and the use of government information,
protecting intellectual property rights, and preventing computer crimes.
Taiwan's Investments in Mainland China and Hong Kong
Indirect trade between Taiwan and mainland China has increased
significantly during the 1990s, despite Taiwan's policy of no official contact
with the PRC. In 1991, trade between Taiwan and PRC (primarily through Hong
Kong) increased 44% from the previous year, to US $14.4 billion. In 1992, there
was a 19.4% increase over the 1991 figure, and in 1993, trade increased 14.8% to
approximately US $20.2 billion. In 1994, trade increased 15.2% over the 1993
figure. In 1991, Taiwan established new procedures pursuant to which Taiwan
investors may register proposed investments in the mainland with the Ministry of
Economic Affairs, thereby making such Taiwan investments legally recognized in
China.
Taiwan Securities Markets
The TSE, Taiwan's only stock exchange, is a corporation owned 61% by
private banks and enterprises and 39% by government-operated banks and
enterprises. Selection of the TSE's top management is influenced by Taiwan
Securities and Exchange Commission ("Taiwan SEC"), which also monitors the TSE's
operations. The TSE commenced operations in 1962 with 18 listed companies. At
December 31, 1993, the aggregate market value of listed equity securities was
approximately US $223.2 billion with 313 listed companies. Debt securities are
traded in the TSE but remain small in terms of trading volume. Currently, there
are no foreign companies listed on the TSE.
B-16
<PAGE>
Under current regulations applicable to foreign investment funds, the
Fund is not permitted to invest directly in any securities listed on the TSE.
The Fund intends to invest in Taiwan corporations by obtaining ownership
interests in global depository receipts and listed beneficiary certificates
representing shares in such corporations.
New Securities Instruments. The instruments traded on the Taiwan
securities market have primarily been limited to common stock and bonds.
However, recent legislative revisions and the present attitude of the Taiwan SEC
regarding liberalization of the securities regulations have encouraged some
innovation. For example, in February 1988, a TSE-listed company issued bonds
exchangeable into shares of another TSE listed company in which it owned common
shares. This was the first offering of a convertible security by a company
listed on the TSE. The same company has made an offering of preferred shares
which are convertible into common shares. As of June 30, 1995, 28 additional
TSE-listed companies have issued similar convertible Eurobonds. The Taiwan SEC
is revising the relevant laws to expedite the process for converting Eurodollar
bonds into common shares of the issuer in the future. Sixteen TSE-listed
companies have issued domestic convertible bonds and the government is now
considering revising the relevant laws to expedite the process for converting
Eurodollar bonds into shares of the issuer. Another example of innovation is the
use of Global Depository Receipts ("GDRs") in raising capital. (For a general
discussion of GDRs, see "The Fund's Investment Objectives and
Policies--Depository Receipts" in the Prospectus.) The Taiwan SEC has also
agreed to permit the listing on the TSE of depositary receipts which would
represent shares of foreign issuers. Nine TSE-listed companies had issued GDRs
before 1994. Thirteen TSE-listed companies are scheduling to issue GDRs in 1995.
In addition, the Taiwan SEC established a domestic futures market in 1994, but
the trading volume is relatively small now.
Listed Beneficiary Certificates. Listed Beneficiary Certificates
("LBCs") are certificates which represent the shares of closed-end funds which,
subject to Taiwan SEC and TSE approval, may be listed on the TSE. LBCs are
issued only by 15 securities investment trust companies in Taiwan for purposes
of investing in securities listed on the TSE. Two new securities investment
trust companies had been approved by the Taiwan SEC in 1995, and two other new
securities investment trust companies are applying for approval by the Taiwan
SEC now. LBCs are traded on the TSE in the same manner as other TSE-listed
securities. As of August 31, 1995, there were 18 closed-end funds for which LBCs
are traded. Almost all of the domestic closed-end funds are currently trading at
discounts. As of August 31, 1995, 56 open-end funds were issued by the 15
securities investment trust companies.
Over-the-Counter Market. The Taiwan SEC helped to establish an
over-the-counter market in Taiwan in September 1982. The Fund does not intend to
invest in this market.
Mechanics of Trading on the TSE
Price and Volume Limits. In order to reduce market volatility, the TSE
has placed limits on large volume transactions and on the range of daily price
movements. Complex restrictions are imposed on transactions which include 500
trading lots or more. These restrictions are not expected to have a substantial
impact on the Fund. Currently, fluctuations in price are restricted to 7% above
and below the previous day's closing price in the case of stocks and 5% in the
case of bonds. Over the last few years, the restriction on stock price movements
has fluctuated, moving from 5% to 3% following the 1987 market crash, then back
to 5% and finally, in September 1989, from 5% to the current level of 7%.
Authorities have mentioned that the limits on stock price movements may be
further relaxed or abolished entirely.
Delivery and settlement are handled by the computerized TSE Clearing
Department. Sales of stock by brokers and traders are offset by purchases of the
same issue on the same day so that only net balances of stock are delivered and
only net balances of cash are computed and paid. The TSE has introduced a
certificate depositary system, operated by Taiwan Central Depositary Co., Ltd.,
which was established in November 1989.
B-17
<PAGE>
Commissions and Transaction Tax. On July 1, 1990, brokerage commissions
for stocks were reduced by 0.0075% to 0.1425%. The TSE takes 5% of the
commissions earned by brokerage firms on stock transactions. Commissions on bond
transactions remain at 0.1%. A securities transaction tax of 0.3% of the
transaction price for stocks an 0.1% for bonds and LBCs is levied on the seller.
Regulatory Environment
In 1983, the first fund permitting foreigners to invest in Taiwan
securities was approved. In 1986, approval was granted to three additional
foreign funds which raised a total of approximately US $75 million. At August
31, 1995, there were also 18 closed-end and 56 open-end domestic funds in
Taiwan, six of which are dedicated to investment outside Taiwan.
A major amendment (the "Amendment") of the Securities and Exchange Law
was enacted in January 1988 and resulted in significant changes to practices in
the securities industry. The Amendment was part of a government effort to make
securities supervision in Taiwan similar to that of advanced financial markets
and to modernize the securities markets to meet the growing need of investors.
The securities transactions tax was lowered on February 1, 1993 and
securities transactions are now taxed at a rate of 0.3% for stocks and 0.1% for
bonds and listed mutual fund shares, in both cases payable by the seller. The
Ministry of Finance announced in December 1993 that it was considering the
possibility of reimposing the capital gains tax but has not changed its position
as of August 31, 1995. Any reimposition is subject to legislative approval and
it cannot be predicted when or whether the Legislature will grant such approval.
On December 28, 1990, the Executive Yuan of Taiwan approved guidelines
drafted by the Taiwan SEC which allow direct investment in Taiwan securities by
certain qualified foreign institutional investors, subject to certain
restrictions. For a discussion of these guidelines, see "The Fund's Investments
in the Greater China Region--Taiwan-Foreign Investment Restrictions." At August
31, 1995, QFII had bought over NT$100 billion of Taiwan SEC listed securities.
In April 1992, the Taiwan SEC promulgated regulations permitting Taiwan
listed companies, upon approval by the Taiwan SEC, to sponsor the issue and sale
to foreigners of depositary receipts evidencing shares of such companies. The
approval by the Taiwan SEC will be granted in respect of a fixed number of
depositary receipts which, except in connection with stock dividends and
distributions and the exercise of pre-emptive rights by existing depositary
receipt holders in the event of capital increases for cash, may not be increased
without separate Taiwan SEC approval. The Taiwan SEC has also agreed to permit
the listing on the TSE of Taiwan depositary receipts which would represent
shares of foreign issuers. No TDR is listed in any Taiwan security market as of
August 30, 1995.
Financial Reporting
Since 1983, the Taiwan SEC, which administers the financial reporting
system, and the TSE have taken steps to improve the quality of financial
reporting and of internal financial controls in Taiwan-based companies.
The Securities and Exchange Law imposes criminal liability on
accountants who are knowingly involved in the preparation of fraudulent
financial reports. The Taiwan SEC promulgated regulations in July 1983 requiring
that financial reports of listed companies be audited by accounting firms
consisting of at least three certified public accountants and be signed by at
least two certified public accountants, and establishing standards for audit and
budget systems of listed companies.
B-18
<PAGE>
The Amendment, in an effort to improve further financial reporting
standards, established a new financial reporting system for corporate issuers.
Under this system, issuers are subject to more extensive disclosure requirements
than they have been in the past. For example, companies listed on the TSE are
required to submit audited semi-annual and annual financial reports and first
and third quarter financial reports that have significant impact on the
financial condition of the issuer.
SINGAPORE
Singapore had a population of only a few hundred Malays in 1819 when
Sir Thomas Stamford Raffles obtained a grant of land from the local Malay chief
to establish a new port. In 1826, Singapore was joined with Penang and Malacca
to form the Straits Settlements, which were ruled as a part of British India
until 1867, when they became a separate colony. The city grew in importance and
prosperity and was chosen as the main stronghold of British power in the Far
East in 1922. A large naval base was built on the north side of the island,
partly to protect Malaya. However, the Japanese invasion of Malaya in 1941 came
overland and the surrender of Singapore to the Japanese in February, 1942 was
one of the greatest defeats of allied arms during the Second World War.
Singapore was occupied by the Japanese until August, 1945.
Singapore became an island colony of Great Britain in the early 1800s
and achieved independence in 1960. Its population of 3 million is comprised of
77.5% Chinese, 14.2% Malay and 8.3% Indian and other groups. With foreign
exchange reserves of $66.8 billion (September 1995), Singapore has the highest
level of foreign exchange reserves per capita in the world. As the regional
trading center for the South East Asian region, Singapore has enjoyed a period
of strong growth over the last five years, averaging 8.6% annual compound growth
in gross domestic product (GDP), with the result that GDP per capita is
estimated to have exceeded $27,000 at the end of 1995, classifying Singapore as
an "advanced developing nation" under the OECD classification scheme.
Singapore has used its large foreign exchange reserves to invest in
various regional projects, including a number in China, where its $2 billion in
pledged investment in 1995 made it the fifth largest foreign investor. Its
Suzhou industrial township near Shanghai has already attracted $1.4 billion of
investment.
Securities Markets
Formal trading of investment securities began in the late nineteenth
century and the Singapore Stockbrokers' Association was incorporated in 1930.
The Stock Exchange of Singapore (SES) was incorporated in 1973. The SES is now
the seventh largest stock market in Asia, after Japan, Hong Kong, Malaysia,
Thailand, Korea and Taiwan, with a market capitalization at January 31, 1996, of
S$226.3 billion, an increase of approximately 10% from the previous year. From
January 1, 1995 to December 31, 1995, there were 20 new listings of companies on
the SES. Average monthly turnover on the SES for 1995 was S$83,866 million,
compared with S$123,520 million in 1994. As of December 31, 1995, 248 companies
were listed on the SES (212 Singaporean and 36 foreign), and a total of 495
securities. Another 46 were listed on the second market, known as the Stock
Exchange of Singapore Dealing and Automated Quotations Board (SESDAQ), which had
a market capitalization of S$4.18 billion at December 31, 1995.
There is also the Central Limit Order Board International (CLOB), an
electronic over-the-counter order matching system which was established after
the separation of the Singapore and Kuala Lumpur Stock Exchanges on 2nd January,
1990, primarily to enable Malaysian shares to continue to be traded freely in
Singapore. As of December 31, 1995, there were 10 Hong Kong, 112 Malaysian and 7
other international stocks traded on CLOB.
Foreign Investment Restrictions
Foreign investors in Singapore are restricted by ministerial
limitations from owning more than 49% of any strategic Singaporean company, or
more than 40% of any Singaporean bank. This has led to a two tier share
B-19
<PAGE>
holding structure, with domestic and foreign registered shares, trading at
different prices, with a premium for foreign registered shares. There are no
restrictions on investment and remittances and no foreign exchange controls,
although 27% corporate tax is deducted from the gross dividends payable.
Singapore Securities Market
Formal trading of investment securities began in the late nineteenth
century and the Singapore Stockbrokers' Association was incorporated in 1930.
The Stock Exchange of Singapore (SES) was incorporated on the 24th May, 1973.
The SES is now the seventh largest stock market in Asia, after Japan, Hong Kong,
Malaysia, Thailand, Korea and Taiwan, with a market capitalization at the 31st
January, 1996, of S$226.3 billion, an increase of approximately 10% from the
previous year. From January 1st, 1995 to December 31st, 1995, there were 20 new
listings of companies on the SES. Average monthly turnover on the SES for 1995
was S$83,866 million, compared with S$123,520 million in 1994. As of 31st
December, 1995, 248 companies were listed on the SSE (212 Singaporean and 36
foreign), and a total of 495 securities, and another 46 on the second market,
known as the Stock Exchange of Singapore Dealing and Automated Quotations Board
(SESDAQ), which had a market capitalization of S$4.18 billion at 31st December,
1995.
There is also the Central Limit Order Board International (CLOB), an
electronic over the counter order matching system which was established after
the separation of the Singapore and Kuala Lumpur Stock Exchanges on 2nd January,
1990, primarily to enable Malaysian shares to continue to be traded freely in
Singapore. As at 31st December, 1995, there were 10 Hong Kong, 112 Malaysian and
7 other international stocks traded on CLOB.
The table below sets out selected data on the Singapore Stock Exchange
in each year since 1990, including the value of securities traded during each
year, and the number of companies listed and the total market capitalization as
of December 31st each year and January 31, 1996.
<TABLE>
<CAPTION>
SELECT STATISTICS
1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
No. of Companies Listed........ 172 183 188 205 238 248 248
Market Capitalization (S$bn)... 59.8 77.7 80.3 213.4 195.5 209.4 226.3
Turnover Volume (m)............ 18,487 15,557 13,904 66,398 45,540 33,919 5,286
Value (S$m).................... 36,756 30,549 29,444 127,797 123,520 83,866 12,867
EPS Growth (OCBC).............. (5.7) 1.2 3.8 21.9 14.8 13.1 16.5
SESDAQ Market Cap (S$m)........ 409.2 528.8 1,032.4 3,833.0 3,228.3 4,178.9 1,167.6
SES Turnover Volume (m)........ 116.9 167.9 526.1 2,304.7 1,704.0 5,323.3 388.8
Value (S$m).................... 209.4 157.5 359.9 2,405.4 2,145.0 4,763.6 365.3
</TABLE>
Market Performance
The Straits Times Index (STI) is the most widely followed indicator of
stock price performance in Singapore. The STI is an arithmetic index based on 30
companies, weighted by their respective market capitalizations, and is thus
strongly influenced by large capitalization stocks.
The movements of the STI and other indices over the last six years
(December 31 for all years through 1995, January 31 for 1996) are as follows:
B-20
<PAGE>
<TABLE>
<CAPTION>
MARKET PERFORMANCE
1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STI Index
High.................. 1,607.12 1.565.58 1,545.92 2,426.85 2,471.90 2,287.58 2,449.15
Low................... 1,101.77 1,149.08 1,310.95 1,531.11 2,036.80 1,903.80 2,255.82
Close................. 1,154.48 1,490.70 1,524.40 2,425.68 2,239.56 2,266.54 2,449.15
OCBC 30.................... 362.48 464.37 452.56 638.53 522.07 585.17 635.76
DBS 50..................... 343.40 432.22 420.26 623.22 534.25 560.98 607.22
SESDAQ Index............... 69.36 61.74 53.17 154.15 80.30 100.26 99.99
</TABLE>
Trading
Trading on the SES is conducted through a computerized book based system to
convey bid and offer prices for securities affected by changes in book entries
in securities accounts that shareholders maintain with the Central Depositary
Pte Ltd., the SES' automated electronic central depositary. Trades are then
effected on a matched basis between buyers and sellers. Payment is against
delivery, and must be settled within 5 business days of the transaction.
Brokerage commission is on a sliding scale, starting at 1.00% for bargains of
less than $250,000, and falling gradually to 0.30% for those above S$1,500,000.
Brokerage on the CLOB International is negotiable subject to a minimum of 0.5%.
In addition, trades are subject to a transaction levy of 0.5% payable to the
SES, subject to a maximum of S$100. Finally, the Singaporean government charges
a stamp duty of .05% of the transaction price, and there is a Goods and Services
Tax (GST) of 3% on brokerage and clearing fees.
The SES is regulated by the Securities Industry Act of 1986 and supervised
through a set of rules and regulations enforced by the 9-member Stock Exchange
Committee.
B-21
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. __________, 1997
- --------------------------------------------------------------------------------
OFFITBANK VIF-MORTGAGE SECURITIES FUND
================================================================================
OFFITBANK VIF-Mortgage Securities Fund (the "Fund") is one of eleven separate
non-diversified investment portfolios of the OFFITBANK Variable Insurance Fund,
Inc. (the "Company"), an open-end, management investment company. The Fund's
investment objective is to maximize total return from a combination of current
income and capital appreciation. The Fund will seek to achieve its objective by
investing at least 80% of its total assets in investment grade or comparable
mortgage-related securities issued by the U.S. government, its agencies and
instrumentalities, by private entities in the U.S., and by foreign governments
and governmental and private entities and may invest up to 20% of its total
assets in U.S. Government securities and investment grade or comparable fixed
income securities of foreign issuers.
The investment characteristics of mortgage-related securities differ from
traditional debt securities. These differences may subject the Fund to certain
risks not associated with investments in traditional fixed-income securities.
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 billion in assets principally invested in global fixed
income securities. The address of the Company is 125 West 55th Street, New York,
New York 10019. Yield and other information regarding the Fund 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("") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF THE FUND IN
ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND POLICY OWNERS
("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH ALLOCATION RIGHTS
ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS. SHARES ARE
REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE CONTRACTS AND
POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated __________, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
INVESTORS ARE ADVISED THAT SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR
ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THE COMPANY IS NOT AUTHORIZED TO
ENGAGE IN THE BUSINESS OF BANKING.
----------
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
---------------------
The Company...............................................................2
Investment Objective and Policies.........................................2
Investment Policies and Techniques........................................5
Special Risk Considerations..............................................11
Limiting Investment Risks............................................... 15
Management...............................................................16
About Your Investment....................................................16
How the Company Values Its Shares........................................17
How Distributions are Made: Tax Information..............................17
Shareholder Communications ..............................................18
Performance Information..................................................18
Counsel; Independent Accountants.........................................19
Appendix A..............................................................A-1
<PAGE>
THE COMPANY
The Company is designed to serve as a funding vehicle for Contracts and Policies
offered by the Accounts of Participating Companies. Shares of the Fund are
offered only to the Accounts through OFFIT Funds Distributor, Inc. (the
"Distributor"), the principal underwriter for the Company. The Fund is a
no-load, separate, non-diversified investment portfolio of the Company, a newly
organized, open-end management investment company. The Company is not authorized
to engage in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Fund, which could possibly force the Company to sell portfolio securities at
disadvantageous prices. The Company's Directors intend to monitor events in
order to identify any material irreconcilable conflicts that may possibly arise
and to determine what action, if any, should be taken in response thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an investment objective which it pursues through investment
policies as described below. The objective and policies of the Fund can be
expected to affect the return of the Fund and the degree of market and financial
risk to which the Fund is subject. For more information about the investment
strategies employed by the Fund, see "Investment Policies and Techniques." The
investment objective 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 as other investment portfolios of the Company. Investors
should note, however, that the Fund will invest its assets in accordance with
its investment objective and policies described below. Accordingly, the Adviser
expects that the Fund's investment portfolios will be distinct, notwithstanding
its ability to invest in comparable instruments.
The investment objective of the Fund is to maximize total return from a
combination of current income and capital appreciation. The Mortgage Securities
Fund seeks to achieve this investment objective by investing at least 80% of the
value of its assets in a diversified portfolio of investment grade or comparable
mortgage-related securities.
Mortgage-related securities are securities that, directly or indirectly,
represent participations in, or are secured by and payable from, loans secured
by residential or commercial property. Mortgage-related securities include
mortgage pass-through securities, adjustable rate mortgage securities,
collateralized mortgage obligations and stripped mortgage-backed securities.
These mortgage-related securities include derivative mortgage securities.
The Fund's primary emphasis will be on mortgage-related securities representing
interests in residential property. Residential mortgage-related securities in
the U.S. fall into three categories: (a) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
Federal Home Loan Mortgage Corporation ("FHLMC"); (b) those issued by
non-governmental issuers that represent interests in, or are collateralized by,
mortgage-related securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and (c) those issued by non-governmental
issuers that represent an interest in, or are collateralized by, whole mortgage
loans or mortgage-related securities without a government guarantee
2
<PAGE>
but usually with over-collateralization or some other form of private credit
enhancement. Non-governmental issuers referred to in (b) and (c) above include
originators of and investors in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of the foregoing.
The residential mortgage pass-through securities in which the Fund will invest
provide for the pass-through to investors of their pro-rata share of monthly
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans. The Fund invests both in U.S.
Government pass-through securities issued by GNMA, FNMA and FHLMC, and in
pass-through securities issued by non-governmental issuers. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to certificate holders.
GNMA and FNMA guarantee timely distributions of scheduled principal. FHLMC
generally guarantees only ultimate collection of principal of the underlying
mortgage loans.
The Fund may also invest in adjustable rate mortgage securities ("ARMS"). ARMS
are pass-through mortgage securities collateralized by residential mortgages
with interest rates that are adjusted from time to time. The adjustments usually
are determined in accordance with a predetermined interest rate index and may be
subject to certain limits. While the values of ARMS, like other debt securities,
generally vary inversely with changes in market interest rates (increasing in
value during periods of declining interest rates and decreasing in value during
periods of increasing interest rates), the values of ARMS should generally be
more resistant to price swings than other debt securities because the interest
rates of ARMS move with market interest rates. The adjustable rate feature of
ARMS will not, however, eliminate fluctuations in the prices of ARMS,
particularly during periods of extreme fluctuations in interest rates. Also,
since many adjustable rate mortgages only reset on an annual basis, it can be
expected that the prices of ARMS will fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable rate mortgages.
Commercial mortgage-related securities are generally multi-class debt or
pass-through securities backed by a mortgage loan or pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties and
cooperative apartments, hotels and motels, nursing homes, hospitals and senior
living centers. The commercial loans underlying these securities are generally
not amortizing or not fully amortizing. At their maturity date, repayment of the
remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or the sale of the property. Unlike most single
family residential mortgages, commercial real property loans often contain
provisions which substantially reduce the likelihood that such securities will
be prepaid.
The market for commercial mortgage-related securities developed more recently
and in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential mortgage-related securities. Many of the
risks of investing in commercial mortgage-related securities reflect the risks
of investing in real estate securing the underlying mortgage loans. These risks
reflect the effect of local and other economic conditions such as real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-related securities
may be less liquid and exhibit greater price volatility than other types of
mortgage-related securities.
Mortgage-related securities issued by private issuers in the U.S. may entail
greater risk than mortgage-related securities that are guaranteed by the U.S.
Government, its agencies or instrumentalities. Privately-issued mortgage
securities are issued by private originators of, or investors in, mortgage
loans, including mortgage bankers, commercial banks, investment banks, savings
and loan associations and special purpose subsidiaries of the foregoing. Since
privately-issued mortgage certificates are not guaranteed by an entity having
the credit status of GNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations 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.
3
<PAGE>
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments of, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
The Fund may invest in collateralized mortgage obligations ("CMOs") issued by
the U.S. entities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. CMOs may be collateralized by GNMA, FNMA or
Freddie Mac Certificates, but also may be collateralized by whole loans or
private pass-throughs (such collateral collectively hereinafter referred to as
"Mortgage Assets"). Multiclass pass-through securities are interests in a trust
composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal and of interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full. The
Fund has no present intention to invest in CMO residuals.
The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designated to provide relatively predictable payment of principal provided that
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. Because of these features, PAC
Bonds generally are less subject to the risks of prepayment than are other types
of mortgage-related securities.
The Fund may purchase stripped mortgage securities which are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have
4
<PAGE>
greater volatility than other types of mortgage securities. Although stripped
mortgage securities are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, the market for
such securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid and to such extent, together with any other
illiquid investments, will be subject to the Fund's applicable restriction on
investments in illiquid securities.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only class), while the other class will receive all of the
principal ("PO" or principal only class). The yield to maturity on IOs, POs and
other mortgage securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization.
In addition to the stripped mortgage securities described above, the Fund may
invest in similar securities such as Super POs and Levered IOs which are more
volatile than POs and IOs. Risks associated with instruments such as Super POs
are similar in nature to those risks related to investments in POs. Risks
connected with Levered IOs are similar in nature to those associated with IOs.
The Fund may also invest in other similar instruments developed in the future
that are deemed consistent with its investment objective, policies and
restrictions. POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of cash to the
Fund.
Up to 20% of the Fund's assets may be invested in investment grade or comparable
fixed income securities, including mortgage-related securities of issuers
located in Canada, the United Kingdom, Denmark or other countries which may
develop a mortgage securities market. Any Fund investment denominated in a
foreign currency will be hedged against fluctuations in value versus the U.S.
dollar.
INVESTMENT POLICIES AND TECHNIQUES
GOVERNMENT MORTGAGE-BACKED SECURITIES. The principal governmental (i.e., backed
by the full faith and credit of the United States Government) guarantor of
mortgage-related securities is GNMA. GNMA is a wholly owned United States
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee with the full faith and credit of the United
States Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United
States Government) guarantors include FNMA and FHLMC. FNMA and FHLMC are
government-sponsored corporations owned entirely by private stockholders.
Pass-through securities issued by FNMA and FHLMC are guaranteed as to timely
payment of principal and interest by FNMA and FHLMC but are not backed by the
full faith and credit of the United States Government.
The investment characteristics of mortgage-related securities differ from
traditional debt securities. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. The major differences typically include more frequent
interest and principal payments, usually monthly, the adjustability of interest
rates, and the possibility that prepayments of principal may be made at any
time. Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors. During periods of
declining interest rates, prepayment rates can be expected to accelerate. Under
certain interest rate and prepayment rate scenarios, the Fund may fail to recoup
fully its investment in mortgage-backed securities (and incur capital losses)
notwithstanding a direct or indirect governmental or agency
5
<PAGE>
guarantee. In general, changes in the rate of prepayments on a mortgage-related
security will change that security's market value and its yield to maturity.
When interest rates fall, high prepayments could force the Fund to reinvest
principal at a time when investment opportunities are not attractive. Thus,
mortgage-backed securities may not be an effective means for the Fund to lock in
long-term interest rates. Conversely, during periods when interest rates rise,
slow prepayments could cause the average life of the security to lengthen and
the value to decline more than anticipated. However, during periods of rising
interest rates, principal repayments by mortgage-backed securities allows the
Fund to reinvest at increased interest rates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by certificates issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, but also may be collateralized by whole loans or private
pass-through securities (such collateral collectively referred to as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid on all classes of the CMOs on a monthly, quarterly or
semi-annual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a series of a CMO in innumerable ways. In
one structure, for example, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"). SMBS are derivative multiclass
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the principal from the Mortgage Assets, while the other
classes will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only class) while the other class will receive all of the
principal ("PO" or principal-only class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and a rapid rate of principal
payments may have a material adverse effect on such securities' yield to
maturity and result in a loss to the investor.
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 the Fund. In addition, the Staff of the
United States Securities and Exchange Commission (the "SEC") considers privately
issued SMBS to be illiquid securities.
U.S. GOVERNMENT SECURITIES. The Fund may invest in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association ("GNMA") and the
Export-Import Bank of the United States, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA") are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. No assurance
can be given that the U.S. Government will provide financial support to
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U.S. Government-sponsored agencies or instrumentalities if it is not obligated
to do so by law. The Fund will invest in the obligations of such agencies or
instrumentalities only when the Adviser believes that the credit risk with
respect thereto is minimal.
INVESTMENT GRADE FIXED-INCOME SECURITIES. The Fund may invest up to 20% of its
total assets in investment grade or comparable fixed income securities of
foreign issuers. Such investments may include mortgage related securities that
are not U.S. Government Securities, asset backed securities and fixed income
securities that are rated Baa or higher by Moody's or BBB or higher by S&P or
that are of comparable quality in the opinion of the Adviser. Fixed-income
securities rated Baa by Moody's or BBB by S&P are considered investment grade
obligations which lack outstanding investment characteristics and may have
speculative characteristics as well. See Appendix A for the descriptions of
these rating categories.
The ratings of fixed income securities by Moody's and S&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 dues 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 for a
description of such ratings.
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."
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 leveraged for
purposes of the limitations placed on the extent of the Fund's assets that may
be used for borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). As a result, the Fund's investment in these structured
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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. The
convertible securities that may be held by a Fund include any corporate debt
security or preferred stock that may be converted into underlying shares of
common stock and include both traditional convertible securities and synthetic
convertible securities. The common stock underlying convertible securities may
be issued by a different entity than the issuer of the convertible securities.
Convertible securities entitle the holder to receive interest payments paid on
corporate debt securities or the dividend preference on a preferred stock until
such time as the convertible security matures or is redeemed or until the holder
elects to exercise the conversion privilege. "Synthetic"convertible securities,
as such term is used herein, are created by combining separate securities which
possess the two principal characteristics of a true convertible security, fixed
income and the right to acquire equity securities. Convertible securities have
several unique investment characteristics such as (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.
HEDGING AND OTHER STRATEGIC TRANSACTIONS. The Fund may use, as a portfolio
management strategy, cross currency hedges, interest rate transactions,
commodity futures contracts in the form of futures contracts on securities,
securities indices and foreign currencies, and related options transactions. The
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 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
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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 anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets. See "Illiquid Securities" below.
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 its 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 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 a foreign
currency, it may enter into a forward purchase contract to buy that foreign
currency for a fixed dollar amount ("position hedge"). In this situation, the
Fund may, in the alternative, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Fund believes that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the currency
in which portfolio securities of the Fund are denominated ("cross-hedge"). The
Fund's custodian will place cash not available for investment or U.S. government
securities or other high quality debt securities in a segregated account having
a value equal to the aggregate amount of the Fund's commitments under forward
contracts entered into with respect to position hedges, cross-hedges and
transaction hedges, to the extent they do not already own the security subject
to the transaction hedge. If the value of the securities placed in a segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Fund may purchase a call
option permitting the Fund to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the forward contract
price or the Fund may purchase a put option permitting the Fund to sell the
amount of foreign currency subject to a forward purchase contract at a price as
high or higher than the forward contract price. Unanticipated changes in
currency prices may result in poorer overall performance for 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.
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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 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 Fund may also invest in commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as the Fund who agree that they are purchasing the paper for investment and not
with
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a view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper normally is resold to other institutional
investors like the Fund through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus providing
liquidity. The Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES. 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.
SHORT SALES. The Fund may make short sales of securities "against the box." A
short sale is a transaction in which the Fund sells a security it does not own
in anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, the Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.
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 objective, the Adviser may employ a temporary defensive
investment strategy if it determines such a strategy is warranted. Under such a
defensive strategy, the Fund temporarily may hold cash (U.S. dollars, foreign
currencies or multinational currency units) and/or invest up to 100% of its
assets in high quality debt securities or money market instruments of U.S. or
foreign issuers, and most or all of the Fund's investments may be made in the
United States and denominated in U.S. dollars.
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. It is not anticipated that,
under normal conditions, the portfolio turnover rate for the Fund will exceed
100% 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 securities held by the Fund generally fluctuates, to varying
degrees, based on, among other things, (1) interest rate movements, (2) changes
in the actual and perceived creditworthiness of the issuers of such securities,
(3) changes in any applicable foreign currency exchange rates, (4) social,
economic or political factors, (5) factors affecting the industry in which the
issuer operates, such as competition or technological advances and (6) factors
affecting the issuer directly, such as management changes or labor relations.
There is no assurance that the Fund will achieve its investment objective.
MORTGAGE SECURITIES. The investment characteristics of mortgage-related
securities differ from traditional debt securities. These differences can result
in significantly greater price and yield volatility than is the case with
traditional fixed income securities. The major differences typically include
more frequent interest and principal
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payments, usually monthly, the adjustability of interest rates, and the
possibility that prepayments of principal may be made at any time. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic, social and other factors. During periods of declining
interest rates, prepayment rates can be expected to accelerate. Under certain
interest rate and prepayment rate scenarios, the Fund may fail to recoup fully
its investment in mortgage-backed securities (and incur capital losses)
notwithstanding a direct or indirect governmental or agency guarantee. In
general, changes in the rate of prepayments on a mortgage-related security will
change that security's market value and its yield to maturity. When interest
rates fall, high prepayments could force the Fund to reinvest principal at a
time when investment opportunities are not attractive. Thus, mortgage-backed
securities may not be an effective means for the Fund to lock in long-term
interest rates. Conversely, during periods when interest rates rise, slow
prepayments could cause the average life of the security to lengthen and the
value to decline more than anticipated. However, during periods of rising
interest rates, principal repayments by mortgage-backed securities allows the
Fund to reinvest at increased interest rates.
NON-DIVERSIFIED FUND. The Fund is classified as a "non-diversified" fund under
the 1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. 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.
FOREIGN SECURITIES. The Fund may invest in mortgage-related or other
fixed-income securities of non-U.S. issuers. Investors should recognize that
investing in securities of non-U.S. issuers involves certain risks and special
considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. issuers. Further, certain
investments that the Fund may make, and investment techniques in which they may
engage, involve risks, including those set forth below.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Some countries in which the Fund may
invest may be subject to a substantially greater degree of social, political and
economic instability than is the case in the United States, Japan and Western
European countries. Such instability may result from, among other things, some
or all of the following: (i) authoritarian governments or military involvement
in political and economic decision-making, and changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies
and terrorist activities; (iv) hostile relations with neighboring countries; and
(v) drug trafficking. Social, political and economic instability could
significantly disrupt the principal financial markets in which the Fund invests
and adversely affect the value of the Fund's assets.
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.
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INFLATION. Inflation and rapid fluctuations in inflation rates may have very
negative effects on the economies and securities markets of countries in which
the Fund may invest. In an attempt to control inflation, wage and price controls
have been imposed at times in certain countries.
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" below.
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 the Fund makes any 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 objective 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 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
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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.
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.
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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.
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.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may not invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there is
no limitation with respect to investment in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
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2. The Fund may not borrow money (except that it may enter into reverse
repurchase agreements) except from banks for temporary or emergency
purposes; provided, that (a) the amount of such borrowing may not
exceed 20% of the value of the Fund's total assets and (b) the Fund
will not purchase portfolio securities while such outstanding
borrowing exceeds 5% of the value of its total assets.
3. The 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) 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 a fee from the Fund, computed daily and paid monthly, at
the annual rate of .90% of the Fund's average daily net assets.
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 billion in assets and serves as investment
adviser to fifteen other registered investment companies (or portfolios
thereof). The principal address of the Adviser is 520 Madison Avenue, New York,
New York 10022.
PORTFOLIO MANAGER. ________________________ will serve as the portfolio manager
for the Fund.
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. 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 125 West 55th Street, New York, New York
10019. The principal business address of The Bank of New York is 90 Washington
Street, New York, New York 10286.
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
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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.
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 and distribute dividends from net
investment income and will distribute its net capital gains, if any, at least
annually. Such income and capital gains distributions will be made in shares of
the Fund.
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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 Fund has current and accumulated earnings and profits. For additional
tax information. please see "Additional Information Concerning Taxes" in the
statement of Additional Information.
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), or deemed to be received in accordance
with certain provisions of the Code.
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuity contracts,
respectively, under the Code. If the foregoing requirements are not met, then
the Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of the Fund are the investment vehicle,
reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 a.m. and 6:00 p.m., New York time. Specially trained
representatives will answer questions and provide information about Contract and
Policy Owners' accounts.
Each Account owning shares of the 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 its
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula.
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<PAGE>
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 Fund published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A.
Today or The New York Times or other industry or financial publications.
The Fund's performance information is historical, will fluctuate and should not
be considered as representative of future results. The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Quotations of the Fund's performance will
not reflect charges levied at the Account level.
COUNSEL; INDEPENDENT ACCOUNTANTS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York, serves
as counsel to the Company. Price Waterhouse LLP serves as the independent
accountants to the Company. Price Waterhouse LLP is located at 1177 Avenue of
the Americas, New York, New York 10036.
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APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which the Fund
may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
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 modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
A-1
<PAGE>
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
A-2
<PAGE>
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
A-3
<PAGE>
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative 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.
------------------------
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether the Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
237 Park Avenue, Suite 910
New York, New York 10017
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
______________, 1997
The OFFITBANK Variable Insurance Fund, Inc. (the "Company") is a no load mutual
fund consisting of eleven portfolios whose shares are available to participating
life insurance companies ("Participating Companies") and their separate accounts
("Accounts") to fund benefits under variable annuity contracts ("Contracts") and
variable life insurance policies ("Policies") issued by the Participating
Companies. The portfolios are OFFITBANK VIF-High Yield Fund, OFFITBANK
VIF-Investment Grade Global Debt Fund, OFFITBANK VIF-Emerging Markets Fund,
OFFITBANK - DJG Value Equity Fund, OFFITBANK VIF-U.S. Government Securities
Fund, OFFITBANK VIF-U.S. Small Cap Fund, OFFITBANK VIF-Global Convertible Fund
Income Fund, OFFITBANK VIF-Total Return Fund, OFFITBANK VIF-Latin America Equity
Fund, OFFITBANK VIF-CVO Greater China Fund, and OFFITBANK VIF-Mortgage
Securities Fund. This Statement of Additional Information sets forth information
about the Company applicable to the following portfolios only: OFFITBANK
VIF-Latin America Equity Fund, OFFITBANK VIF-CVO Greater China Fund, and
OFFITBANK VIF-Mortgage Securities Fund (individually, a "Fund", and
collectively, the "Funds").
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Company's
Prospectus dated _____________, 1997 (the "Prospectus"). This Statement of
Additional Information contains additional information to that set forth in the
Prospectus and should be read in conjunction with the Prospectus, additional
copies of which may be obtained without charge by writing or calling the Company
at the address and telephone number set forth above.
<PAGE>
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TABLE OF CONTENTS
AGE
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND TECHNIQUES..................................................... 1
ADDITIONAL RISK CONSIDERATIONS..................................... 15
INVESTMENT LIMITATIONS............................................. 18
MANAGEMENT OF THE FUND............................................. 19
PORTFOLIO TRANSACTIONS............................................. 26
PURCHASE OF SHARES................................................. 27
REDEMPTION OF SHARES............................................... 27
PERFORMANCE CALCULATIONS........................................... 27
ADDITIONAL INFORMATION CONCERNING TAXES............................ 28
DETERMINATION OF NET ASSET VALUE................................... 32
GENERAL INFORMATION................................................ 33
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND
TECHNIQUES
The OFFITBANK VIF-Latin America Equity Fund's primary investment objective is
capital appreciation. A secondary investment objective of the Fund is current
income. The Fund will seek to achieve its objective by investing primarily in
equity securities of Latin American issuers.
The OFFITBANK VIF-Mortgage Securities Fund's primary investment objective is to
maximize total return from a combination of current income and capital
appreciation. The Fund will seek to achieve its objective by investing at least
80% of the value of its assets in investment grade or comparable
mortgage-related securities issued by the U.S. Government, its agencies and
instrumentalities, by private entities in the U.S., and by foreign governments
and governmental and private entities.
The OFFITBANK VIF-CVO Greater China Fund's investment objective is to achieve
capital appreciation and income generation. The Fund will seek to achieve its
objective by investing primarily in publicly-traded equity securities of
companies which, in the opinion of the Adviser, will benefit from the economic
development and growth of the People's Republic of China, Hong Kong, Taiwan and
Singapore (collectively, the "Greater China Region").
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 each Fund's Prospectus. The
following discussion of investment policies supplements the discussion of
investment objectives and policies set forth in the Prospectus.
<PAGE>
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. A Fund will enter into
repurchase agreements only with dealers, domestic banks or recognized financial
institutions which, in the opinion of the investment adviser of the Fund (the
"Adviser") based on guidelines established by the Company's Board of Directors,
present minimal credit risks. The Adviser to each Fund will monitor the value of
the securities underlying the repurchase agreement at the time the transaction
is entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always exceeds the repurchase price plus
accrued interest. In the event of default by the seller under the repurchase
agreement, a 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 reverse repurchase agreements 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 the Fund under
the 1940 Act.
DOLLAR ROLL TRANSACTIONS
If and to the extent authorized to do so, in order to enhance portfolio returns
and manage prepayment risks, 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.
3
<PAGE>
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
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. A Fund will not pay any additional fee for such
credit support. The existence of credit support may increase the market price of
the security.
4
<PAGE>
MORTGAGE-BACKED SECURITIES
If and to the extent authorized to do so, each Fund may invest in
mortgage-backed securities. Mortgage-backed securities are securities that
represent participations in, or are secured by and payable from, loans secured
by real property.
Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations
collateralized by certificates issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, but also may be collateralized by whole loans or private
pass-through securities (such collateral collectively referred to as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid on all classes of the CMOs on a monthly, quarterly or
semi-annual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a series of a CMO in innumerable ways. In
one structure, for example, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full.
Stripped Mortgage-Backed Securities ("SMBS"). SMBS are derivative multiclass
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the principal from the Mortgage Assets, while the other
classes will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only class) while the other class will receive all of the
principal ("PO" or principal-only class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and a rapid rate of principal
payments may have a material adverse effect on such securities' yield to
maturity and result in a loss to the investor.
5
<PAGE>
Under the Internal Revenue Code of 1986, as amended, POs may generate taxable
income from the current accrual of original issue discount, without a
corresponding distribution of cash to the 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 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
a Fund's investment policies, such 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
If and to the extent authorized to do so, warrants or rights may be acquired by
each 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, each Fund may make secured loans
of portfolio securities amounting to not more than 30% of its total assets.
Securities loans are made to broker/dealers or institutional investors pursuant
to agreements requiring that the loans continuously be secured by collateral at
least equal at all times to the value of the securities lent plus any accrued
interest, "marked to market" on a daily basis. The collateral received will
consist of cash, U.S. short-term government securities, bank letters of credit
or such other collateral as may be permitted under the Fund's investment program
and by regulatory agencies and approved by the Company's Board of Directors.
While the securities loan is outstanding, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities, as
well as interest on the investment of the collateral or a fee from the
6
<PAGE>
borrower. The Fund has a right to call each loan and obtain the securities on
five business days' notice. To the extent applicable, the Fund will not have the
right to vote equity securities while they are being lent, but it will call in a
loan in anticipation of any important vote. Opportunities to engage in the
lending of equity securities listed in Greater China Region securities markets
are restricted. For example, Hong Kong permits such lending subject to a 14 day
limit on the lending period. The risks in lending portfolio securities, as with
other extensions of secured credit, consist of possible delay in receiving
additional collateral or in the recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Loans only will
be made to firms deemed by the Adviser to be of good standing and will not be
made unless, in the judgment of the Adviser, the consideration to be earned from
such loans would justify the risk.
UNITED STATES GOVERNMENT OBLIGATIONS
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, a 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.
7
<PAGE>
BANK OBLIGATIONS
Subject to the investment limitations described in the Prospectus, bank
obligations that may be purchased by a Fund include certificates of deposit,
bankers' acceptances and fixed time deposits. A certificate of deposit is a
short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A banker's acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
The Funds do not consider fixed time deposits illiquid for purposes of the
restriction on investment in illiquid securities.
Banks are subject to extensive governmental regulations that may limit both the
amounts and types of loans and other financial commitments that may be made and
the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of funding lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by a Fund,
the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by the Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.
A Fund will not purchase securities which the Adviser to the Fund believes, at
the time of purchase, will be subject to exchange controls or foreign
withholding taxes; however, there can be no assurance that such laws may not
become applicable to certain of the Fund's investments. In the event unforeseen
exchange controls or foreign withholding taxes are imposed with respect to a
Fund's investments, the effect may be to reduce the income received by the Fund
on such investments.
8
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BORROWING
Each Fund is authorized to borrow money from banks for temporary or emergency
purposes, denominated in any currency in an amount up to 10% of its total assets
(including the amount borrowed).
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Special Risk Considerations - Hedging and
Other Strategic Transactions," each Fund may enter into transactions in options,
futures, and forward contracts on a variety of instruments and indexes, in order
to hedge various market risks, to manage the effective maturity or duration of
debt instruments held by the Fund, or, with respect to certain strategies, to
seek to increase the Fund's income or gain. The discussion below supplements the
discussion in the Prospectus.
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Hedging and Other Strategic Transactions involving options require
segregation of Fund assets in special accounts, as described below under "Use of
Segregated and Other Special Accounts".
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option)
9
<PAGE>
at the time the option is exercised. Frequently, rather than taking or making
delivery of the underlying instrument through the process of exercising the
option, listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
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
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<PAGE>
pursuant to an OTC option sold by the Fund (the cost of the sell-back plus the
in-the-money amount, if any) or the value of the assets held to cover such
options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
If and to the extent authorized to do so, each Fund may purchase and sell call
options on securities and on Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the OTC markets, and on securities indices,
currencies and futures contracts. All calls sold by the Fund must be "covered",
that is, the Fund must own the securities subject to the call, must own an
offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose the Fund during the term of the option
to possible loss of opportunity to realize appreciation in the market price of
the underlying security or instrument and may require the Fund to hold a
security or instrument that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, each 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, the Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, each Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate, currency or market changes, for duration
management and for permissible non-hedging purposes. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract and obligates the seller to deliver that position.
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
11
<PAGE>
contract or selling an option on a futures contract will typically require the
Fund to deposit with a financial intermediary, as security for its obligations,
an amount of cash or other specified assets ("initial margin") that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
A Fund will not enter into a futures contract or option thereon for purposes
other than bona fide hedging if, immediately thereafter, the sum of the amount
of its initial margin and premiums required to maintain permissible non-hedging
positions in futures contracts and options thereon would exceed 5% of the
liquidation value of the Fund's net assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below under "Use
of Segregated and Other Special Accounts".
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,
the Fund can achieve many of the same objectives it would achieve through the
sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
CURRENCY TRANSACTIONS
If and to the extent authorized to do so, 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,
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<PAGE>
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under "Swaps, Caps, Floors and Collars". A Fund may enter into currency
transactions only with Counterparties that are deemed creditworthy by the
Adviser.
Except as provided in the Prospectus, a Fund's dealings in forward currency
contracts and other currency transactions such as futures contracts, options,
options on futures contracts and swaps will be limited to hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. 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.
Each Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions. If a Fund enters into a currency hedging transaction, the Fund
will comply with the asset segregation requirements described in the Prospectus.
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 combination of futures,
options, currency and interest rate transactions, instead of a single
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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. A Fund will enter into these transactions primarily to
seek to preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities the 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 the Fund
may be obligated to pay. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). A currency swap is an agreement to
exchange cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling the cap to the
extent that a specified index exceeds a predetermined interest rate. The
purchase of an interest rate floor entitles the purchaser to receive payments of
interest on a notional principal amount from the party selling the interest rate
floor to the extent that a specified index falls below a predetermined interest
rate or amount. The purchase of a floor entitles the purchaser to receive
payments on a notional principal amount from the party selling the floor to the
extent that a specific index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that preserves a certain
return with a predetermined range of interest rates or values.
Provided the contract so permits, the Fund will usually enter into interest rate
swaps on a net basis, that is, the two payments streams are netted out in a cash
settlement on the payment date or dates specified in the instrument, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. No
Fund will not enter into any swap, cap, floor, collar or other derivative
transaction unless the Counterparty is deemed creditworthy by the Adviser. If a
Counterparty defaults, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized
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<PAGE>
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.
The liquidity of swap agreements will be determined by the Adviser based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 15% restriction on investments in securities that are not
readily marketable.
Each Fund will maintain cash and appropriate liquid assets (i.e., high grade
debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If a Fund enters into a swap agreement on a
net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If a
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts".
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, 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.
FOREIGN INVESTMENT RESTRICTIONS
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as the Funds. For example, certain countries require governmental approval
prior to investments by foreign persons, or limit
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<PAGE>
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. The Funds 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 the Funds 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
the Funds 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 the Fund are uninvested and no return
is earned thereon. The inability of any Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive
opportunities. Inability to dispose of a portfolio security due to settlement
problems either could result in losses to the 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.
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NON-U.S. WITHHOLDING TAXES
A Fund's net investment income from foreign issuers may be subject to non-U.S.
withholding taxes thereby reducing the Fund's net investment income. See
"Additional Information Concerning Taxes".
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. See
"Special Risks of Certain Fund Investments" in the Prospectus. The sale of
restricted or illiquid securities require more time and result in higher
brokerage charges or dealer discounts and other selling expenses than the sale
of securities eligible for trading on securities exchanges or in the
over-the-counter markets. Restricted securities often sell at a price lower than
similar securities that are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, are liquid or illiquid. The Board has delegated the
function of making day to day determinations of liquidity to the Adviser,
pursuant to guidelines reviewed by the Board. The Adviser takes into account a
number of factors in reaching liquidity decisions, including, but not limited
to: (i) the frequency of trading in the security; (ii) the number of dealers who
make quotes for the security; (iii) the number of dealers who have undertaken to
make a market in the security; (iv) the number of other potential purchasers;
and (v) the nature of the security and how trading is effected (e.g., the time
needed to sell the security, how offers are solicited and the mechanics of
transfer). The Adviser to each Fund will monitor the liquidity of securities in
that Fund's portfolio and report periodically on such decisions to the Board of
Directors.
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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 the Fund
may purchase and sell financial and currency futures contracts and
options thereon, and may purchase and sell currency forward contracts,
options on foreign currencies and may otherwise engage in transactions in
foreign currencies;
(2) make loans, except that the Fund may (a) (i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in
loans and participations in accordance with its investment objectives and
policies, (b) make loans of portfolio securities and (c) enter into
repurchase agreements with respect to portfolio securities;
(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 the 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 the
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 the 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; the 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;
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(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 the Fund's total assets are required as deposit to secure
obligations under such futures and/or options on futures contracts,
provided, however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
computing such 5%; and
(12) invest in puts, calls straddles or spreads, except as described in (11)
above.
If a percentage restriction on investment or use of assets set forth above is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
Investment restrictions (1) through (5) described above and those set forth in
the Prospectus under "Limiting Investment Risks" are fundamental policies of the
Fund which may be changed only when permitted by law and approved by the holders
of a majority of the Fund's outstanding voting securities, as described under
"General Information--Capital Stock". Restrictions (7) through (12) are
nonfundamental policies of the 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.
POSITION(S) PRINCIPAL
HELD WITH OCCUPATION(S)
NAME, ADDRESS AND AGE THE COMPANY PAST 5 YEARS
--------------------- ----------- ------------
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.
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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
OFFITBANK Treasurer (1986 - present)
520 Madison Avenue
New York, NY 10022
Bruce Treff, 30 Assistant Counsel, BISYS Fund Services,
BISYS Fund Services Secretary Inc. since September 1995.
3435 Stelzer Road Previously, Manager Alliance
Columbus, Ohio 43219 Capital Management, L.P.
Alaina Metz, 29 Assistant Chief Administrative Officer
BISYS Fund Services Secretary of BISYS Fund Services from June
3435 Stelzer Road 1995 to present. Previously,
Columbus, Ohio 43219 Supervisor of Blue Sky Department
at Alliance Capital Management,
May 1989 to June 1995.
20
<PAGE>
Carrie Zuckerman, 29 Assistant Manager, BISYS Fund Services
BISYS Fund Services Secretary form January 1997 to present.
3435 Stelzer Road Previously, Associate Director at
Columbus, Ohio 43219 Furman Selz LLC.
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.
<TABLE>
ESTIMATED DIRECTOR COMPENSATION
(FOR CALENDAR YEAR 1996)
<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> <C>
Morris W. Offit $ 0 0 N/A $ 0
Edward J. Landau $ 3,750 0 N/A $19,750
The Very Reverend $ 3,750 0 N/A $19,750
James Parks Morton
* For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.
</TABLE>
INVESTMENT ADVISER
CVO Greater China Partners, L.P. serves as investment adviser to the OFFIBANK
VIF-CVO Greater China Fund. OFFITBANK serves as investment adviser to the
OFFIBANIK VIF-Latin America Equity Fund and the OFFITBANK VIF-Mortgage
Securities Fund. As the term is hereinafter used, "Adviser" shall refer to the
investment adviser to each Fund, respectively.
21
<PAGE>
OFFITBANK
OFFITBANK, a New York State chartered trust company, acts as investment adviser
to OFFITBANK VIF-Latin America Equity Fund and OFFITBANK VIF-Mortgage Securities
Fund. The advisory agreement (the "Advisory Agreement") between the Adviser and
the Funds provides that the Adviser shall manage the operations of the Funds,
subject to policy established by the Board of Directors of the Company. Pursuant
to the Advisory Agreement, the Adviser manages the Funds' 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 .90% of
each 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 Fund will not be required to
reimburse the Adviser for any advisory fees waived.
Unless sooner terminated, the Advisory Agreement provides that it will continue
in effect as to a particular Fund until February 28, 1997 and for consecutive
one year terms thereafter, provided such continuance is approved at least
annually by the Company's Board of Directors or by a vote of a majority (as
defined under "General Information--Capital Stock") of the outstanding shares of
the 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.
CVO GREATER CHINA PARTNERS, L.P.
CVO Greater China Partners, L.P. provides day-to-day management of the OFFITBANK
VIF- CVO Greater China Fund's portfolio and renders investment advisory services
to the Fund pursuant to an Advisory Agreement with the Fund (the "Advisory
Agreement"). Subject to such policies as the Fund'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 1.25% of the average
daily net assets of the Fund.
The Adviser is a Delaware limited partnership formed in September 1994. The
Adviser's key investment team consists of experienced investment professionals
based in San Francisco. The Adviser's principal business is the rendering of
discretionary investment management services to the Fund. The Adviser's
principal business address is 520 Madison Avenue, New York, NY 10022.
22
<PAGE>
Control of the Adviser. The Adviser is controlled by its two general partners:
OFFITBANK Greater China, Inc., a New York corporation established in August 1994
as a wholly-owned subsidiary of OFFITBANK, a New York State chartered trust
company ("OFFITBANK"), and ChinaVest Public Equities, LLC, a California limited
liability corporation established in January 1995 as a wholly-owned subsidiary
of ChinaVest Financial Services, Ltd., a Cayman Islands corporation ("ChinaVest
Ltd.").
The ChinaVest investment management group based in Hong Kong (the "ChinaVest
Group") was organized in 1985. The ChinaVest Group has ten years of experience
in managing private equity investments and shares certain common control persons
with ChinaVest Public Equities, LLC. The ChinaVest Group currently manages in
excess of $225 million in assets. The ChinaVest Group is represented by
ChinaVest, Inc., whose principal business address is 160 Sansome Street, 18th
Floor, San Francisco, California 94104.
REGULATORY MATTERS
OFFITBANK is a trust company chartered under the New York Banking Law and is
supervised and examined thereunder by the New York Banking Department. OFFITBANK
is prohibited by its charter from accepting deposits other than deposits arising
directly from its exercise of the fiduciary powers granted under the New York
Banking Law and, accordingly, is not an insured depository institution for
purposes of the Federal Deposit Insurance Act or any other banking law or
regulation.
Banking laws and regulations, as currently interpreted by the New York Banking
Department, prohibit New York State chartered trust companies from controlling,
or distributing the shares of, a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit such trust
companies generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such trust companies from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. OFFITBANK believes that it may perform the services
described in this Prospectus with respect to the Company without violation of
such laws or regulations. OFFITBANK is not a member of the Federal Reserve
System and is not subject to the Glass-Steagall Act, the Bank Holding Company
Act of 1956 or any other federal banking law or regulation that might affect its
ability to perform such services.
If the Adviser were prohibited from performing the services described in any
Prospectus with respect to any Fund, it is expected that the Company's Board of
Directors would recommend to such 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.
23
<PAGE>
DISTRIBUTOR
OFFIT Funds Distributor, Inc., (the "Distributor"), a wholly-owned subsidiary of
BISYS Fund Services Limited Partnership, with its principal office at 125 West
55th Street, New York, New York 10019, distributes the shares of the Company.
Under a distribution agreement with the Company (the "Distribution Agreement"),
the Distributor is not obligated to sell any specific amount of shares of the
Company. The Distributor, as agent of the Company, agrees to use its best
efforts as sole distributor of the Company's shares.
The Distribution Agreement will continue in effect with respect to a particular
Fund from year to year if such continuance is approved at least annually by the
Company's Board of Directors and by a majority of the Directors who have no
direct or indirect financial interest in the Agreement ("Qualified Directors")
and who are not "interested persons" (as defined in the 1940 Act) of any party
by votes cast in person at a meeting called for such purpose. In approving the
continuance of the Distribution Agreement, the Directors must determine that the
Agreement is in the best interest of the shareholders of the Fund.
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY SERVICES
BISYS Fund Services Limited Partnership ("BISYS") provides the Company with
administrative and fund accounting services pursuant to an Administration
Agreement (the "Administration Agreement"). The Administration Agreement
continues in effect until February 28, 1997 and from year to year thereafter if
such continuance is approved at least annually by the Company's Board of
Directors and by a majority of the Directors who are not parties to such
Agreement or "interested persons" (as defined in the 1940 Act).
Pursuant to the Administration Agreement, BISYS performs certain administrative
and clerical services, including certain accounting services, facilitation of
redemption requests, exchange privileges, and account adjustments and
maintenance of certain books and records; and certain services to the Company's
shareholders, including assuring that investments and redemptions are completed
efficiently, responding to shareholder inquiries and maintaining a flow of
information to shareholders. BISYS also furnishes office space and certain
facilities reasonably necessary for the performance of its services under the
Administration Agreement, and provides the office space, facilities, equipment
and personnel necessary to perform the following services for the Company: SEC
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Company operations, including custodian,
accountants and counsel and other parties performing services or operational
functions for the Company. As compensation for its administrative services,
BISYS receives a monthly fee, based on an annual rate of .15% of aggregate
average daily net assets of the Funds plus an annual fee of $30,000 for each
Fund.
BISYS serves as the Company's Transfer Agent and Dividend Disbursing Agent
pursuant to a transfer agency agreement (the "Transfer Agency Agreement") with
the Company. Under the Transfer Agency Agreement, BISYS has agreed, among other
things, to: (i) issue and redeem shares of each Fund; (ii) transmit all
communications by each Fund to its shareholders of record, including reports to
shareholders, dividend and distribution notices and proxy materials for
24
<PAGE>
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 Fund's operations.
Each Fund pays BISYS such compensation as may be agreed upon from time to time.
The Transfer Agency Agreement continues in effect until February 28, 1997 and
from year to year thereafter if such continuance is approved at least annually
by the Company's Board of Directors and by a majority of the Directors who are
not "interested persons" (as defined in the 1940 Act) of any party, and such
Agreement may be terminated by either party on 60 days' written notice.
The Bank of New York (the "Custodian") serves as the Company's custodian
pursuant to a custodian agreement (the "Custodian Agreement") with the Company.
The Custodian is located at 90 Washington Street, New York, New York 10286.
Under the Custodian Agreement, the Custodian has agreed to (i) maintain a
segregated account or accounts in the name of each Fund; (ii) hold and disburse
portfolio securities on account of each Fund; (iii) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities; (iv) respond to correspondence relating to its duties; and (v) make
periodic reports to the Company's Board of Directors concerning each Fund's
operations. The Custodian is authorized under the Custodian Agreement to select
one or more banks or trust companies to serve as sub-custodian on behalf of a
Fund, provided that the Custodian remains responsible for the performance of all
of its duties under the Custodian Agreement. The Custodian is entitled to
receive such compensation from each Fund as may be agreed upon from time to
time.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by each Fund to the organizations retained to
provide services for the Fund may be waived from time to time in order to
increase the Fund's net investment income available for distribution to
shareholders.
Except as otherwise noted, OFFITBANK and BISYS pay all expenses in connection
with the performance of their advisory and administrative services respectively.
The Company bears the expenses incurred in its operations, including: taxes;
interest; fees (including fees paid to its directors who are not affiliated with
the Company); fees payable to the SEC; costs of preparing prospectuses for
regulatory purposes and for distribution; advisory and administration fees;
charges of its custodian and transfer agent; certain insurance costs; auditing
and legal expenses; fees of independent pricing services; costs of shareholders'
reports and shareholder meetings, including proxy statements and related
materials; and any extraordinary expenses. The Company also pays for brokerage
fees and commissions, if any, in connection with the purchase of portfolio
securities.
25
<PAGE>
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policy established
by the Company's Board of Directors, the Adviser is primarily responsible for
the Company's portfolio decisions and the placing of the Company's portfolio
transactions.
Portfolio securities normally will be purchased or sold from or to dealers
serving as market makers for the securities at a net price, which may include
dealer spreads and underwriting commissions. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission. In the
over-the-counter market securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While the Adviser generally seeks a
competitive price in placing its orders, the Company may not necessarily be
paying the lowest price available.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless the transaction is conducted in accordance with procedures established by
the Company's Board of Directors and complies in all other respects with certain
criteria or an exemptive order allowing such transactions is obtained from the
SEC. Affiliated persons of the Company, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for the
Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees and other remuneration received by other brokers in connection
with comparable transactions. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length agency
transaction.
Investment decisions for the Company are made independently from those for other
funds and accounts advised or managed by the Adviser. Such other funds and
accounts may also invest in the same securities as the Company. If those funds
or accounts are prepared to invest in, or desire to dispose of, the same
security at the same time as the Company, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Company or the price paid or received by the Company. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security. To the extent permitted by law, the Adviser may aggregate the
securities to 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.
26
<PAGE>
PURCHASE OF SHARES
The Company reserves the right, in its sole discretion, to (i) suspend the
offering of shares of its Funds, and (ii) reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interest of
the Company.
REDEMPTION OF SHARES
The Company may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange (the "NYSE") or the bond
market is closed, or trading on the NYSE is restricted as determined by the SEC,
(ii) during any period when an emergency exists as defined by the rules of the
SEC as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or fairly to determine the value of its
assets, and (iii) for such other periods as the SEC may permit.
Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of the Fund, such Fund may pay the
redemption price, in whole or in part, by a distribution in kind.
PERFORMANCE CALCULATIONS
The Company may from time to time quote various performance figures to
illustrate the past performance of its Funds. Performance quotations by
investment companies are subject to rules adopted by the SEC, which require the
use of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the SEC methods for computing performance follows.
TOTAL RETURN
A Fund's average annual total return is determined by finding the average annual
compounded rates of return over 1, 5 and 10 year periods (or, if sooner, the
period since inception of the Fund) that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The calculation assures that
all dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each 1, 5 and 10 year period
(or, if shorter, the period since inception of the Fund) and the deduction of
all applicable Fund expenses on an annual basis. Average annual total return is
calculated according to the following formula:
P (1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the stated period
27
<PAGE>
A Fund may also calculate total return on an aggregate basis which reflects the
cumulative percentage change in value over the measuring period. The formula for
calculating aggregate total return can be expressed as follows:
Aggregate Total Return = [( ERV ) - 1]
---
P
In addition to total return, each Fund may quote performance in terms of a
30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the SEC and can be expressed as follows:
Yield = 2 [ (a-b
--- +1)^6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the minimum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Fund at a discount or premium, the
formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations.
The performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or other independent services which monitor the performance data
of investment companies, and may be quoted in advertising in terms of their
rankings in each applicable universe. In addition, the Company may use
performance reported in financial and industry publications, 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 a 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.
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
28
<PAGE>
present a detailed explanation of the tax treatment of a 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,
the 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
the 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 Fund will be treated as adequately diversified under the Code
and Regulations.
For information concerning the federal income tax consequences to the holders of
variable annuity contracts and variable rate insurance policies, such holders
should consult the prospectuses used in connection with the issuance of their
particular contracts or policies.
FOREIGN TAX CREDITS
Dividends, interest and gains received by a Fund from foreign sources may
give rise to withholding and other taxes imposed by foreign countries. If a Fund
qualifies as a regulated investment company, if certain distribution
requirements are satisfied and if more than 50% of the value of the Fund's total
assets at the close of any taxable year consists of stocks or securities of
foreign corporations, the Fund may make an election for U.S. Federal income tax
purposes, to treat any foreign country's income or withholding taxes paid by the
Fund that can be treated as taxes on income under U.S. income tax principles, as
paid by its shareholders. In the absence of such an election, the Fund would
deduct such foreign taxes in computing the
29
<PAGE>
amount of its distributable income. The Fund intends to make such election for
the fiscal year ended May 31, 1997.
OTHER TAXATION
Distributions from the Funds may be subject to additional state, local and
foreign taxes depending on each shareholder's particular circumstances.
See "Additional Information Concerning Dividends, Distributions and Taxes"
in the Statement of Additional Information for more details about tax
consequences related to investment in the Fund.
ADDITIONAL TAX INFORMATION APPLICABLE TO OFFITBANK VIF-CVO GREATER CHINA FUND
TAXES IMPOSED BY CHINA
Income Taxes. Under the Income Tax Law of the People's Republic of China
Concerning Foreign Investment Enterprises and Foreign Enterprises, which took
effect on July 1, 1991, the Fund's income from dividends and profit
distributions of companies in China will be subject to a 20% income tax.
Pursuant to regulations issued by the State Council in 1984, the income tax rate
is reduced to 10% on income received from sources in Shanghai, Shenzhen, Zhuhai,
Xiamen, Shantou and the 14 special coastal port cities. Accordingly, if the "B"
shares listed on the Shanghai or Shenzhen stock exchanges are issued by
companies established in Shanghai, Shenzhen, Zhuhai, Xiamen, Shantou or the 14
special coastal port cities, the income tax levied on income earned by overseas
investors (who have not set up offices in China) from such sources will be
reduced to 10%. Effective August 1, 1993, dividends from "B" shares of companies
are temporarily exempt from income tax.
Any gains (whether of a capital or trading nature) realized by the Fund
from the sale of any "B" shares are temporarily not subject to any income tax in
China based on tax regulations issued in August 1993.
Transfer Taxes and Fees. The acquisition or sale by the Fund of "B" shares
in a Chinese company listed on the Shenzhen Stock Exchange is subject to a 0.3%
stamp tax and up to a 0.7% broker's commission on both the buyer and seller. The
0.7% broker's commission will be reduced to 0.5% and 0.4%, respectively, if the
transaction value exceeds RMB 500," and RMB 5,000,000, respectively. For the
Shenzhen Stock Exchange, a purchaser of "B" shares is also subject to a transfer
registration fee levied at 0.3% of the transaction amount of the "B" shares
traded. For the Shanghai Stock Exchange, a transaction fee of 0.1% of the actual
transaction amount is levied. Clearing fees are handled in accordance with the
relevant regulations of the clearing bank based upon the actual amount cleared.
As of August 1, 1994, bank clearance charges were approximately US$42 in
Shanghai, and ranged from HK$185 to HK$625 in Shenzhen.
30
<PAGE>
TAXES IMPOSED BY HONG KONG
Taxation of the Fund. The Fund will be subject to Hong Kong profits tax if
(i) it carries on business in Hong Kong, and (ii) its profits are derived from a
Hong Kong source. Profits or capital gains derived from the sale of share or
other securities of, or dividends received from, companies listed on stock
exchanges outside Hong Kong are not subject to Hong Kong profits tax.
Transfers of shares of Hong Kong companies require the payment of a stamp
duty of 0.3% on the amount of the transfer, comprised of a 0.15% stamp duty on
the purchaser and a 0.15% stamp duty on the seller.
Taxation of Shareholders. There is no tax in Hong Kong on capital gains
arising from the sale by an investor of shares of the Fund. However, for certain
investors (principally share traders, financial institutions and insurance
companies carrying on business in Hong Kong), such gains may be considered to be
part of the investor's normal business profits and in such circumstances will be
subject to Hong Kong profits tax at the rate of 16.5% for corporations and 15%
for individuals as of August 1, 1994.
Dividends which the Fund pays to its shareholders are not taxable in Hong
Kong (whether through withholding or otherwise) under current legislation and
practice.
TAXES IMPOSED BY TAIWAN
Under the Income Tax Law of Taiwan, dividend and interest income received
by the Fund from sources within Taiwan will be subject to income withholding
tax. The rate of withholding tax applicable to interest payments to a non-Taiwan
resident recipient is 20%. The rates of withholding tax applicable to dividend
payments to a non-Taiwan individual and a non-Taiwan corporate entity are 35%
and 25%, respectively. However, the rate of withholding tax applicable to
dividend payments to a qualified foreign institutional investor approved by the
TSEC or a non-resident investor approved by the Investment Commission of the
Ministry of Economic Affairs is 20%. Stock dividends are subject to an income
tax which is payable on receipt or. in certain cases, on disposal of the stock
dividends. Securities received as stock dividends will be treated for the
purposes of the capital gains income tax described below in the same way as
other securities held. Transactions in securities are not currently subject to
any capital gains tax, but there can be no assurance that a capital gains tax
will not be imposed in the future or that the Fund will continue to be exempt
from such tax.
Profits on sales of Fund shares effected by non-resident foreigners wholly
outside Taiwan will not be subject to Taiwan income tax. However, on any sale of
stock effected in Taiwan, a securities transaction tax is payable by the seller
of such stock at the rate of 0.3% of the transaction stock price.
31
<PAGE>
TAXES IMPOSED BY SINGAPORE
The corporate income tax rate in Singapore is currently 26%. Under the
Income Tax Law of Singapore, dividends received by the Fund from sources in
Singapore are not subject to withholding tax, but interest received by the Fund
will be subject to a 15% withholding tax.
There is no tax on capital gains. Where there is a series of transactions,
the tax authorities may take the view that a business is being carried on and
may attempt to assess the gains as trading profits of the corporation. However,
the government of Singapore has incentives for securities companies, trust
companies and fund managers, which include tax exemptions or concessionary tax
rates of 10% for qualifying income.
DETERMINATION OF NET ASSET VALUE
The Company values the shares of the Funds daily on each day the New York Stock
Exchange (the "NYSE") is open. Currently, the NYSE is closed Saturdays, Sundays
and the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, the Fourth of July, 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 the Fund are
priced as of their close of trading at 4:15 p.m.
Each Fund determines net asset value as follows: Securities for which market
quotations are readily available are valued at prices which, in the opinion of
the Directors, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sales price on or,
if no sales are reported (as in the case of some securities traded
over-the-counter) the last reported bid price, except that certain U.S.
government securities are stated at the mean between the reported bid and asked
prices. Short-term investments having remaining maturities of 60 days or less
are stated at amortized cost, which approximates market. All other securities
and assets are valued at their fair value following procedures approved by the
Directors. Liabilities are deducted from the total, and the resulting amount is
divided by the number of shares outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. Securities for which reliable
quotations are not readily available and all other assets will be valued at
their respective fair market value as determined in good faith by, or under
procedures established by, the Company's Board of Directors.
If any securities held by a Fund are restricted as to resale, their fair value
will be determined in good faith by, or under procedures established by, the
Company's Board of Directors. The Directors periodically review such valuations
and procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental
32
<PAGE>
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Fund in connection with such disposition). In addition, specific
factors are also generally considered, such as the cost of the investment, the
market value of any unrestricted securities of the same class (both at the time
of purchase and at the time of valuation), the size of the holding, the prices
of any recent transactions or offers with respect to such securities and any
available analysts' reports regarding the issuer.
Each Fund may invest in foreign securities, and as a result, the calculation of
a 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 the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by, or under procedures established
by, the Company's Board of Directors.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law. As
used in this Statement of Additional Information, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Company and all Funds, means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of more than 50% of the outstanding shares are present in person or by
proxy or (ii) more than 50% of the Company's outstanding shares. The term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting any single Fund (e.g., approval of Advisory
Agreements), means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy or (ii) more than 50% of
the outstanding shares of the Fund. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Each share of any 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 each Fund are
entitled to receive the assets allocable to that Fund which are available
33
<PAGE>
for distribution, and a proportionate distribution, based upon the relative net
assets of the Fund, of any general assets not belonging to the Fund which are
available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-accessible, fully transferable and redeemable at the
option of the holder.
As of the date of this Statement of Additional Information, OFFIT Funds
Distributor, Inc. was the record and beneficial owner of all of the outstanding
shares of the Company's common stock and thus may be deemed to "control" the
Company as that term is defined in the 1940 Act. The shares held by OFFIT Funds
Distributor, Inc. are intended to enable the Company to meet an initial
capitalization requirement imposed under the 1940 Act. OFFIT Funds Distributor,
Inc. has undertaken that the shares were purchased for investment purposes only
and that they will be sold only pursuant to a registration statement under the
Securities Act of 1933, as amended, or an applicable exemption from the
registration requirements thereof.
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 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.
34
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in the Prospectus:
Not Applicable
Included in the Statement of Additional Information :
Not Applicable
(b) Exhibits:
Exhibit
Number Description
------ -----------
Ex-99.B1(a) -- Registrant's Articles of Incorporation (4)
Ex-99.B1(b) -- Registrant's Articles of Amendment (4)
Ex-99.B2 -- Registrant's Amended and Restated By-Laws (4)
Ex-99.B3 -- None.
Ex-99.B4 -- Form of Specimen Share Certificates (4)
Ex-99.B5(a) -- Advisory Agreement between Registrant and OFFITBANK
(4)
Ex-99.B5(b) -- Form of Advisory Agreement between the Registrant and
David J. Greene and Company (2)
Ex-99.B5(c) -- Form of Investment Sub-Advisory Agreement
between OFFITBANK and Rockefeller & Co. Inc. (3)
EX-99.B5(d) -- Form of Investment Advisory Agreement between the
Registrant and CVO Greater China Partners, L.P. (6)
Ex-99.B6 -- Distribution Agreement between Registrant and OFFIT
Funds Distributor, Inc. (5)
Ex-99.B7 -- None.
Ex-99.B8(a) -- Form of Custodian Agreement between Registrant and The
Chase Manhattan Bank, N.A. (1)
EX-99.B8(b) -- Custody Agreement between Registrant and The Bank of
New York (5)
Ex-99.B9(a) -- Administration Agreement between Registrant and
BISYS Fund Services Limited Partnership (5)
Ex-99.B9(b) -- Transfer Agency Agreement between Registrant and
BISYS Fund Services, Inc. (5)
Ex-99.B9(c) -- Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITBANK, C.M. Life Insurance Company, Connecticut
Mutual Life Insurance Company and Connecticut Mutual
Financial Services, L.L.C. (4)
Ex-99.B9(d) -- Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor,
Inc., OFFITBANK and Security Equity Life Insurance
Company (4)
Ex-99.B9(e) -- Fund Accounting Agreement between the Registrant and
BISYS Fund Services, Inc. (5)
- --------------------------------
(1) Filed as an Exhibit to Registrant's Pre-Effective Amendment No. 1 on
March 6, 1995 and incorporated herein by reference.
(2) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 2 on
June 5, 1996 and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 4 on
August 16, 1996 and incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 6 filed
electronically on January 31, 1997, accession number 0000922423-97-
000053 and incorporated herein by reference.
(5) Filed herewith.
(6) To be filed by Amendment.
<PAGE>
Ex-99.B10 -- Opinion of Kramer, Levin, Naftalis, Nessen, Kamin &
Frankel (4)
Ex-99.B11(a) -- Consent of Kramer, Levin, Naftalis & Frankel (5)
Ex-99.B11(b) -- None.
Ex-99.B12 -- None.
Ex-99.B13 -- Purchase Agreement between Registrant and OFFIT Funds
Distributor, Inc. (4)
Ex-99.B14 -- None.
Ex-99.B15 -- None.
Ex-99.B16 -- None.
Ex-B. P of A -- Powers of Attorney (4)
Ex-27 -- Financial Data 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. 2 on
June 5, 1996 and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 4 on
August 16, 1996 and incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 6
filed electronically on January 31, 1997, accession number 0000922423-
97-000053 and incorporated herein by reference.
(5) Filed herewith.
(6) To be filed by Amendment.
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 26. Number of Holders of Securities
As of January 30, 1997
----------------------
OFFITBANK VIF-High Yield Fund 2
OFFITBANK VIF-Emerging Markets
Fund 2
OFFITBANK VIF-Total Return Fund 0
OFFITBANK VIF-Global Convertible
Fund 0
OFFITBANK VIF-U.S. Government
Securities Fund 0
OFFITBANK VIF-U.S. Small Cap Fund 0
OFFITBANK VIF-DJG Value Equity
Fund 0
Item 27. Indemnification
Reference is made to Article VII of Registrant's Articles of
Incorporation (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,
<PAGE>
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.
Principal Occupation or
Other Employment of a
Position with Substantial Nature During
Name OFFITBANK the Past Two Years
H. Furlong Baldwin Director Chairman of the Board,
Mercantile Safe Deposit & Mercantile Bankshares
Trust Co.
Two Hopkins Plaza
Baltimore, MD 21201
Morris, W. Offit, C.F.A. Director Chairman of the Board
OFFITBANK OFFITBANK
520 Madison Avenue
New York, N.Y. 10022
Marchese Alessandro Director Private Investor
di Montezemolo
200 Murray Place
Southampton, N.Y. 11969
David H. Margolis Director Chairman of the
Coltec Industries Inc. Executive Committee,
430 Park Avenue Coltec Industries Inc.
New York, N.Y. 10022
Harvey M. Meyerhoff Director Chairman of the Board,
Magna Holdings, Inc. Magna Holdings, Inc.
25 South Charles Street
Suite 2100
Baltimore, M.D. 21201
George Randolph Packard Director Dean, The Paul H. Nitze
4425 Garfield Street, N.W. School of Advanced
Washington, D.C. 20007 International Studies,
Johns Hopkins University
Edward V. Regan Director President, The Jerome
31 West 52nd Street Levy Economics Institute
17th floor of Bard College
New York, N.Y.
B. Lance Sauerteig Director Private Investor
130 Edgehill Road
New Haven, CT 06511
Herbert P. Sillman Director Private Investor
425 Harmon
Birmingham, MI 48009
<PAGE>
Ricardo Steinbruch Director
Grupo Vichuna
Rua Ltacolomi 412
Higlenopolis
Sao Paolo, S.P. Brazil
01239-020
Item 29. Principal Underwriters
(a) In addition to Registrant, OFFIT Funds Distributor, Inc.
currently acts as distributor for The OFFITBANK Investment Fund, Inc.
(b) The information required by this Item 29(b) with respect to
each director, officer or partner of OFFIT Funds Distributor, Inc. is
incorporated by reference to Schedule A of Form BD filed by OFFIT
Funds Distributor, Inc. pursuant to the Securities Exchange Act of
1934 (SEC File No. 8-46960).
(c) Not applicable.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of:
(1) The OFFITBANK Variable Insurance Fund, Inc.
237 Park Avenue, Suite 910
New York, New York 10017
(Records relating to the Company)
(2) OFFITBANK
520 Madison Avenue
New York, New York 10022
(advisory records)
(3) OFFIT Funds Distributor, Inc.
230 Park Avenue
New York, New York 10169
(records of principal underwriter)
(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.
<PAGE>
Item 32. Undertakings
(a) Not Applicable
(b) The Registrant, on behalf of OFFITBANK VIF-Latin America Equity
Fund, OFFITBANK VIF-CVO Greater China Fund and OFFITBANK VIF-
Mortgage Securities Fund, undertakes to file a Post-Effective
amendment containing reasonably current financial statements,
which need not be certified, within four to six months from the
later of the effective date of this Registration Statement or the
commencement of the public offering under the Securities Act of
1933.
(c) Not Applicable
<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 has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York, and
State of New York, on the 13th day of February, 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 Amendment to its Registration Statement has been signed below by the
following persons in the capacities indicated and on the 13th day of February,
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/ 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.B6 Distribution Agreement between the Registrant and OFFIT
Funds Distributor, Inc.
Ex-99.B8(b) Custody Agreement between the Registrant and The Bank
of New York.
Ex-99.B9(a) Administration Agreement between Registrant and BISYS
Fund Services Limited Partnership.
Ex-99.B9(b) Transfer Agency Agreement between Registrant and BISYS
Fund Services, Inc.
Ex-99.B9(e) Fund Accounting Agreement between the Registrant and
BISYS Fund Services, Inc.
Ex-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
DISTRIBUTION AGREEMENT
AGREEMENT made this 1st day of October, 1996, between THE OFFITBANK
VARIABLE INSURANCE FUND, INC. (the "Company"), a Maryland corporation, and
OFFIT FUNDS DISTRIBUTOR, INC. ("Distributor"), a Delaware corporation.
WHEREAS, the Company is an open-end management investment company,
organized as a Maryland corporation and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, it is intended that Distributor act as the distributor of the
units of beneficial interest ("Shares") of each of the investment portfolios of
the Company (such portfolios being referred to individually as a "Fund" and
collectively as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Distributor; Conversion to the Services.
1.1 Distributor (i) will act as agent for the distribution of the
Shares covered by the registration statement and prospectus of the Company then
in effect under the Securities Act of 1933, as amended (the "Securities Act")
and (ii) will perform such additional services as are provided in this Section 1
(collectively, the "Services"). In connection therewith, the Company agrees to
convert to the Distributor's data processing systems and software (the "BISYS
System"). The Company shall cooperate with the Distributor to provide the
Distributor with all necessary information and assistance required to
successfully convert to the BISYS System. The Distributor shall provide the
Company with a schedule relating to such conversion and the parties agree that
the conversion may progress in stages. The date upon which all Services shall
have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." The Distributor hereby accepts such engagement and agrees to
perform the Services commencing, with respect to each individual Service, on the
date that the conversion of such Service to the BISYS System has been completed.
The Distributor shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted. As used
in this Agreement, the term "registration statement" shall mean Parts A (the
prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term "prospectus"
shall mean each form of prospectus and Statement of Additional Information used
by the Funds for delivery to shareholders and prospective shareholders after the
effective dates of the above-referenced registration statements, together with
any amendments and supplements thereto.
<PAGE>
1.2 Distributor agrees to use appropriate efforts to solicit
orders for the sale of the Shares and will undertake such advertising and
promotion as it believes reasonable in connection with such solicitation. The
Company understands that Distributor is now and may in the future be the
distributor of the shares of several investment companies or series (together,
"Investment Companies") including Companies having investment objectives similar
to those of the Company. The Company further understands that investors and
potential investors in the Company may invest in shares of such other Investment
Companies. The Company agrees that Distributor's duties to such Investment
Companies shall not be deemed in conflict with its duties to the Company under
this paragraph 1.2.
Distributor shall, at its own expense, finance appropriate
activities which it deems reasonable, which are primarily intended to result in
the sale of the Shares, including, but not limited to, advertising, compensation
of underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current Shareholders, and the printing and mailing of
sales literature.
1.3 In its capacity as distributor of the Shares, all activities
of Distributor and its partners, agents, and employees shall comply with all
applicable laws, rules and regulations, including, without limitation, the 1940
Act, all rules and regulations promulgated by the Commission thereunder and all
rules and regulations adopted by any securities association registered under the
Securities Exchange Act of 1934.
1.4 Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Company.
1.5 Distributor will transmit any orders received by it for
purchase or redemption of the Shares to the transfer agent and custodian for the
Funds.
1.6 Whenever in their judgment such action is warranted by
unusual market, economic or political conditions, or by abnormal circumstances
of any kind, the Company's officers may decline to accept any orders for, or
make any sales of, the Shares until such time as those officers deem it
advisable to accept such orders and to make such sales.
1.7 Distributor will act only on its own behalf as principal if
it chooses to enter into selling agreements with selected dealers or others.
1.8 The Company agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
the Shares for sale in such states as Distributor may designate.
-2-
<PAGE>
1.9 The Company shall furnish from time to time, for use in
connection with the sale of the Shares, such information with respect to the
Funds and the Shares as Distributor may reasonably request; and the Company
warrants that the statements contained in any such information shall fairly show
or represent what they purport to show or represent. The Company shall also
furnish Distributor upon request with: (a) unaudited semi-annual statements of
the Funds' books and accounts prepared by the Company, (b) a monthly itemized
list of the securities in the Funds, (c) monthly balance sheets as soon as
practicable after the end of each month, and (d) from time to time such
additional information regarding the financial condition of the Funds as
Distributor may reasonably request.
1.10 The Company represents to Distributor that, with respect to
the Shares, all registration statements and prospectuses filed by the Company
with the Commission under the Securities Act have been carefully prepared in
conformity with requirements of said Act and rules and regulations of the
Commission thereunder. The registration statement and prospectus contain all
statements required to be stated therein in conformity with said Act and the
rules and regulations of said Commission and all statements of fact contained in
any such registration statement and prospectus are true and correct.
Furthermore, neither any registration statement nor any prospectus includes an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
to a purchaser of the Shares. The Company may, but shall not be obligated to,
propose from time to time such amendment or amendments to any registration
statement and such supplement or supplements to any prospectus as, in the light
of future developments, may, in the opinion of the Company's counsel, be
necessary or advisable. If the Company's counsel shall determine that such
amendment/amendments or supplement/supplements is/are necessary or advisable and
the Company shall not propose such amendment or amendments and/or supplement or
supplements within fifteen days after receipt by the Company of a written
request from Distributor to do so, Distributor may, at its option, terminate
this Agreement. The Company shall not file any amendment to any registration
statement or supplement to any prospectus without giving Distributor reasonable
notice thereof in advance; provided, however, that nothing contained in this
Agreement shall in any way limit the Company's right to file at any time such
amendments to any registration statement and/or supplements to any prospectus,
of whatever character, as the Company may deem advisable, such right being in
all respects absolute and unconditional.
1.11 The Company authorizes Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of the Shares. The Company agrees to indemnify, defend and hold Distributor, its
several partners and employees, and any person who controls Distributor within
the meaning of Section 15 of the Securities Act free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which Distributor, its partners
and employees, or any such controlling person, may incur under the Securities
Act or under
-3-
<PAGE>
common law or otherwise, arising out of or based upon any untrue statement, or
alleged untrue statement, of a material fact contained in any registration
statement or any prospectus or arising out of or based upon any omission, or
alleged omission, to state a material fact required to be stated in either any
registration statement or any prospectus or necessary to make the statements in
either thereof not misleading; provided, however, that the Company's agreement
to indemnify Distributor, its partners or employees, and any such controlling
person shall not be deemed to cover any claims, demands, liabilities or expenses
arising out of any statements or representations as are contained in any
prospectus and in such financial and other statements as are furnished in
writing to the Company by Distributor and used in the answers to the
registration statement or in the corresponding statements made in the
prospectus, or arising out of or based upon any omission or alleged omission to
state a material fact in connection with the giving of such information required
to be stated in such answers or necessary to make the answers not misleading;
and further provided that the Company's agreement to indemnify Distributor and
the Company's representations and warranties hereinbefore set forth in paragraph
1.10 shall not be deemed to cover any liability to the Company or its
Shareholders to which Distributor would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of Distributor's reckless disregard of its obligations and
duties under this Agreement. The Company's agreement to indemnify Distributor,
its partners and employees and any such controlling person, as aforesaid, is
expressly conditioned upon the Company being notified of any action brought
against Distributor, its partners or employees, or any such controlling person,
such notification to be given by letter or by telegram addressed to the Company
at its principal office in Columbus, Ohio and sent to the Company by the person
against whom such action is brought, within 10 days after the summons or other
first legal process shall have been served. The failure to so notify the Company
of any such action shall not relieve the Company from any liability which the
Company may have to the person against whom such action is brought by reason of
any such untrue, or allegedly untrue, statement or omission, or alleged
omission, otherwise than on account of the Company's indemnity agreement
contained in this paragraph 1.11. The Company will be entitled to assume the
defense of any suit brought to enforce any such claim, demand or liability, but,
in such case, such defense shall be conducted by counsel of good standing chosen
by the Company and approved by Distributor, which approval shall not be
unreasonably withheld. In the event the Company elects to assume the defense of
any such suit and retain counsel of good standing approved by Distributor, the
defendant or defendants in such suit shall bear the fees and expenses of any
additional counsel retained by any of them; but in case the Company does not
elect to assume the defense of any such suit, or in case Distributor reasonably
does not approve of counsel chosen by the Company, the Company will reimburse
Distributor, its partners and employees, or the controlling person or persons
named as defendant or defendants in such suit, for the fees and expenses of any
counsel retained by Distributor or them. The Company's indemnification agreement
contained in this paragraph 1.11 and the Company's representations and
warranties in this Agreement shall remain operative and in full force and effect
regardless of any investigation
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<PAGE>
made by or on behalf of Distributor, its partners and employees, or any
controlling person, and shall survive the delivery of any Shares.
This Agreement of indemnity will inure exclusively to
Distributor's benefit, to the benefit of its several partners and employees, and
their respective estates, and to the benefit of the controlling persons and
their successors. The Company agrees promptly to notify Distributor of the
commencement of any litigation or proceedings against the Company or any of its
officers or Directors in connection with the issue and sale of any Shares.
1.12 Distributor agrees to indemnify, defend and hold the
Company, its several officers and Directors and any person who controls the
Company within the meaning of Section 15 of the Securities Act free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands, or
liabilities and any counsel fees incurred in connection therewith) which the
Company, its officers or Directors or any such controlling person, may incur
under the Securities Act or under common law or otherwise, but only to the
extent that such liability or expense incurred by the Company, its officers or
Directors or such controlling person resulting from such claims or demands,
shall arise out of or be based upon any untrue, or alleged untrue, statement of
a material fact contained in information furnished in writing by Distributor to
the Company and used in the answers to any of the items of the registration
statement or in the corresponding statements made in the prospectus, or shall
arise out of or be based upon any omission, or alleged omission, to state a
material fact in connection with such information furnished in writing by
Distributor to the Company required to be stated in such answers or necessary to
make such information not misleading. Distributor's agreement to indemnify the
Company, its officers and Directors, and any such controlling person, as
aforesaid, is expressly conditioned upon Distributor being notified of any
action brought against the Company, its officers or Directors, or any such
controlling person, such notification to be given by letter or telegram
addressed to Distributor at its principal office in Columbus, Ohio, and sent to
Distributor by the person against whom such action is brought, within 10 days
after the summons or other first legal process shall have been served.
Distributor shall have the right of first control of the defense of such action,
with counsel of its own choosing, satisfactory to the Company, if such action is
based solely upon such alleged misstatement or omission on Distributor's part,
and in any other event the Company, its officers or Directors or such
controlling person shall each have the right to participate in the defense or
preparation of the defense of any such action. The failure to so notify
Distributor of any such action shall not relieve Distributor from any liability
which Distributor may have to the Company, its officers or Directors, or to such
controlling person by reason of any such untrue or alleged untrue statement, or
omission or alleged omission, otherwise than on account of Distributor's
indemnity agreement contained in this paragraph 1.12.
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<PAGE>
1.13 No Shares shall be offered by either Distributor or the
Company under any of the provisions of this Agreement and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Company if and so
long as the effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the Securities Act or if and so long as a current prospectus as required by
Section 10(b)(2) of said Act is not on file with the Commission; provided,
however, that nothing contained in this paragraph 1.13 shall in any way restrict
or have an application to or bearing upon the Company's obligation to repurchase
Shares from any Shareholder in accordance with the provisions of the Company's
prospectus, Articles of Incorporation, or Bylaws.
1.14 The Company agrees to advise Distributor as soon as
reasonably practical by a notice in writing delivered to Distributor or its
counsel:
(a) of any request by the Commission for amendments to the
registration statement or prospectus then in effect or for
additional information;
(b) in the event of the issuance by the Commission of any
stop order suspending the effectiveness of the registration
statement or prospectus then in effect or the initiation by
service of process on the Company of any proceeding for that
purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration statement
or prospectus then in effect or which requires the making of a
change in such registration statement or prospectus in order to
make the statements therein not misleading; and
(d) of all action of the Commission with respect to any
amendment to any registration statement or prospectus which may
from time to time be filed with the Commission.
For purposes of this section, informal requests by or acts
of the Staff of the Commission shall not be deemed actions of or requests by the
Commission.
1.15 Distributor agrees on behalf of itself and its partners and
employees to treat confidentially and as proprietary information of the Company
all records and other information relative to the Company and its prior, present
or potential Shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except, after prior notification to and approval in writing by the Company,
which approval shall not be unreasonably withheld and may not be withheld where
Distributor may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Company.
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<PAGE>
1.16 This Agreement shall be governed by the laws of the State of
New York.
2. Public Offering Price.
The public offering price of the Company's Shares shall be the
net asset value of such Shares. The net asset value of Shares shall be
determined in accordance with the provisions of the Articles of Incorporation
and Bylaws of the Company and the then-current prospectus of the Company.
3. Term, Duration and Termination.
The initial term of this Agreement shall be for a period
commencing on the date first written above and ending on the date that is one
year after the Conversion Date. Thereafter, if not terminated, this Agreement
shall continue with respect to a particular Fund automatically for successive
one-year terms, provided that such continuance is specifically approved at least
annually by the vote of the Company's Board of Directors or the vote of a
majority of the outstanding voting securities of such Fund. This Agreement is
terminable without penalty, on not less than sixty days' prior written notice,
by the Company's Board of Directors, by vote of a majority of the outstanding
voting securities of the Company or by the Distributor. This Agreement will also
terminate automatically in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the same meanings ascribed to
such terms in the 1940 Act.)
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
written above.
THE OFFITBANK VARIABLE OFFIT FUNDS DISTRIBUTOR, INC.
INSURANCE FUND, INC.
By: /s/ John J. Pileggi By: /s/ Stephen Mintos
- ----------------------------- -----------------------------
Title: Assistant Treasurer Title: Executive Vice President
Date: 10/1/96 Date: 10/1/96
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CUSTODY AGREEMENT
Agreement made as of this 17th day of July, 1996, between OFFITBANK
VARIABLE INSURANCE FUND, INC., a corporation organized and existing under the
laws of the State of Maryland having its principal office and place of business
at 520 Madison Avenue, New York, New York 10022-4213 (hereinafter called the
"Fund"), and THE BANK OF NEW YORK, a New York corporation authorized to do a
banking business, having its principal office and place of business at 48 Wall
Street, New York, New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "Book-Entry System" shall mean the Federal Reserve/Treasury
book-entry system for United States and federal agency securities, its successor
or successors and its nominee or nominees.
2. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually received by the Custodian and signed on behalf
of the Fund by any two Officers, and the term Certificate shall also include
instructions by the Fund to the Custodian communicated by a Terminal Link.
4. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian
<PAGE>
for an investment company, or any broker-dealer reasonably believed by the
Custodian to be such a clearing member.
5. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.
6. "Covered Call Option" shall mean an exchange traded option entitling
the holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.
7. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository" shall
further mean and include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Directors specifically approving deposits therein by the
Custodian.
8. "Financial Futures Contract" shall mean the firm commit- ment to buy
or sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at an
agreed upon price.
9. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
10. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
11. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System
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or the Depository shall be deemed to have been deposited in, or withdrawn from,
a Margin Account upon the Custodian's effecting an appropriate entry in its
books and records.
12. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentali-ties thereof, any tax, bond or revenue anticipation
note issued by any state or municipal government or public authority, commercial
paper, certificates of deposit and bankers' acceptances, repurchase agreements
with respect to the same and bank time deposits, where the purchase and sale of
such securities normally requires settlement in federal funds on the same day as
such purchase or sale.
13. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
14. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Treasurer, the Controller, any Assistant
Secretary, any Assistant Treasurer, and any other person or persons, whether or
not any such other person is an officer of the Fund, duly authorized by the
Board of Directors of the Fund to execute any Certificate, instruction, notice
or other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
15. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
16. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Officer or from a person reasonably believed
by the Custodian to be an Officer.
17. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
18. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
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<PAGE>
19. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or representing
any other rights or interest therein, or any property or assets.
20. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
21. "Series" shall mean the various portfolios, if any, of the Fund as
described from time to time in the current and effective prospectus for the Fund
and listed on Appendix B hereto as amended from time to time.
22. "Shares" shall mean the shares of capital stock of the Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.
23. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
24. "Stock Index Option" shall mean an exchange traded option entitling
the holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
25. "Terminal Link" shall mean an electronic data transmission link
between the Fund and the Custodian requiring in connection with each use of the
Terminal Link by or on behalf of
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<PAGE>
the Fund use of an authorization code provided by the Custodian and at least two
access codes established by the Fund.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian
of the Securities and moneys at any time owned by the Fund during the period of
this Agreement.
2. The Custodian hereby accepts appointments as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all moneys owed by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities and deliveries and returns of Securities collateral. Prior
to a deposit of Securities specifically allocated to a Series in the Depository,
the Fund shall deliver to the Custodian a certified resolution of the Board of
Directors of the Fund, substantially in the form of Exhibit B hereto, approving,
authorizing and instructing the Custodian on a continuous and ongoing basis
until instructed to the contrary by a Certificate actually received by the
Custodian to deposit in the Depository all Securities specifically allocated to
such Series eligible for deposit therein,
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<PAGE>
and to utilize the Depository to the extent possible with respect to such
Securities in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities, and deliveries and returns of Securities collateral.
Securities and moneys deposited in either the Book-Entry System or the
Depository will be represented in accounts which include only assets held by the
Custodian for customers, including, but not limited to, accounts in which the
Custodian acts in a fiduciary or representative capacity and will be
specifically allocated on the Custodian's books to the separate account for the
applicable Series. Prior to the Custodian's accepting, utilizing and acting with
respect to Clearing Member confirmations for Options and transactions in Options
for a Series as provided in this Agreement, the Custodian shall have received a
certified resolution of the Fund's Board of Directors, substantially in the form
of Exhibit C hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a Certificate
actually received by the Custodian, to accept, utilize and act in accordance
with such confirmations as provided in this Agreement with respect to such
Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all moneys received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and address
of the person to whom the payment is to be made, the Series account from which
payment is to be made and the purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of the expenses
and liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmation and a summary, on a per Series basis,
of all transfers to or from the account of the Fund for a Series, either
hereunder or with any co-custodian or sub-custodian appointed in accordance with
this Agreement during said day. Where Securities are transferred to the account
of the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominees) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least
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<PAGE>
monthly and from time to time, the Custodian shall furnish the Fund with a
detailed statement, on a per Series basis, of the Securities and moneys held by
the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the name
of any duly appointed registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or the
Depository any Securities which it may hold hereunder and which may from time to
time be registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in the
Book-Entry System or in the Depository in a separate account in the name of such
Series physically segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount payable upon such
Securities which are called, but only if either (i) the Custodian receives a
written notice of such call, or (ii) notice of such call appears in one or more
of the publications listed in Appendix C annexed hereto, which may be amended at
any time by the Custodian without the prior notification or consent of the Fund;
(c) Present for payment and collect the amount payable upon all
Securities which mature;
(d) Surrender Securities in temporary form for defini- tive
Securities;
(e) Execute, as custodian, any necessary declarations or
certificates of ownership under the Federal Income Tax Laws or the laws or
regulations of any other taxing authority now or hereafter in effect; and
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<PAGE>
(f) Hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the account of a
Series, all rights and similar securities issued with respect to any Securities
held by the Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) Execute and deliver to such persons as may be designated in
such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) Deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate in exchange for other Securities or
cash issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation or recapitalization of any corporation, or
the exercise of any conversion privilege and receive and hold hereunder
specifically allocated to such Series any cash or other Securities received in
exchange;
(c) Deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate to any protective committee,
reorganization committee or other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or sale of assets of any
corporation, and receive and hold hereunder specifically allocated to such
Series such certificates of deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Series
specified in such Certificate, and take such other steps as shall be stated in
such Certificate to be for the purpose of effectuating any daily authorized plan
of liquidation, reorganization, merger, consolidation or recapitalization of the
Fund; and
(e) Present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article which may
be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have been determined, or shall have
received a Certificate from the Fund stating, that any such instruments or
certificates are available.
-8-
<PAGE>
The Fund shall deliver to the Custodian such a Certificate no later than the
business day preceding the availability of any such instrument or certificate.
Prior to such availability, the Custodian shall comply with Section 17(f) of the
Investment Company Act of 1940, as amended, in connection with the purchase,
sale, settlement, closing out or writing of Futures Contracts, Options, or
Futures Contract Options by making payments or deliveries specified in
Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing out upon its receipt from a broker, dealer,
or futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by brokers,
dealers, or future commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be, confirming that such
Security is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or any nominee of
the Custodian) as custodian for the Fund, provided, however, that
notwithstanding the foregoing, payments to or deliveries from the Margin
Account, and payments with respect to Securities to which a Margin Account
relates, shall be made in accordance with the terms and conditions of the Margin
Account Agreement. Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this Agreement to the
contrary, make payment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are available only
against the delivery to the Custodian of such instrument or such certificate,
and deliver any Futures Contract, Option or Futures Contract Option for which
such instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount
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<PAGE>
purchased and accrued interest, if any; (d) the date of purchase and settlement;
(e) the purchase price per unit; (f) the total amount payable upon such
purchase; (g) the name of the person from whom or the broker through whom the
purchase was made, and the name of the clearing broker, if any; and (h) the name
of the broker to whom payment is to be made. The Custodian shall, upon receipt
of Securities purchased by or for the Fund, pay to the broker specified in the
Certificate out of the moneys held for the account of such Series the total
amount payable upon such purchase, provided that the same conforms to the total
amount payable as set forth in such Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a Certificate,
and (ii) with respect to each sale of Money Market Securities, a Certificate or
Oral Instructions, specifying with respect to each such sale: (a) the Series to
which such Securities were specifically allocated; (b) the name of the issuer
and the title of the Security; (c) the number of shares or principal amount
sold, and accrued interest, if any; (d) the date of sale; (e) the sale price per
unit; (f) the total amount payable to the Fund upon such sale; (g) the name of
the broker through whom or the person to whom the sale was made, and the name of
the clearing broker, if any; and (h) the name of the broker to whom the
Securities are to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified in the Certificate
against payment of the total amount payable to the Fund upon such sale, provided
that the same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund
shall deliver to the Custodian Certificate specifying with respect to each
Option purchased: (a) the Series to which such Option is specifically allocated;
(b) the type of Option (put or call); (c) the name of the issuer and the title
and number of shares subject to such Option or, in the case of a Stock Index
Option, the stock index to which such Option relates and the number of Stock
Index Options purchased; (d) the expiration date; (e) the exercise price; (f)
the dates of purchase and settlement; (g) the total amount payable by the Fund
in connection with such purchase; (h) the name of the Clearing Member through
whom such Option was purchased; and (i) the name of the broker to whom payment
is to be made. The Custodian shall pay, upon receipt of a Clearing Member's
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statement confirming the purchase of such Option held by such Clearing Member
for the account of the Custodian (or any duly appointed and registered nominee
of the Custodian) as custodian for the Fund, out of moneys held for the account
of the Series to which such Option is to be specifically allocated, the total
amount payable upon such purchase to the Clearing Member through whom the
purchase was made, provided that the same conforms to the total amount payable
as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant
to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the Clearing Member through whom the sale was
made. The Custodian shall consent to the delivery of the Option sold by the
Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall, upon receipt of the Securities underlying the Call Option
which was exercised, pay out of the moneys held for the account of the Series to
which such Call Option was specifically allocated the total amount payable to
the Clearing Member through whom the Call Option was exercised, provided that
the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Put Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the
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exercise price per share; (f) the total amount to be paid to the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such Put Option
was exercised. The Custodian shall, upon receipt of the amount payable upon the
exercise of the Put Option, deliver or direct the Depository to deliver the
Securities specifically allocated to such Series, provided the same conforms to
the amount payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund in
connection with such exercise; and (h) the Clearing Member from whom such
payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares for which
the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received. The Custodian shall
deliver or cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as may be
required by such receipts. Notwithstanding the foregoing, the Custodian has the
right, upon prior written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the
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return and/or cancellation of any receipts delivered pursuant to paragraph 6 of
this Article, the Custodian shall deliver, or direct the Depository to deliver,
the underlying Securities as specified in the Certificate against payment of the
amount to be received as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (e) the premium to be received by the Fund; (f) the date such Put Option
is written; (g) the name of the Clearing Member through whom the premium is to
be received and to whom a Put Option guarantee letter is to be delivered; (h)
the amount of cash, and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series; and (i) the amount of cash and/or the amount and kind
of Securities specifically allocated to such Series to be deposited into the
Collateral Account for such Series. The Custodian shall, after making the
deposits into the Collateral Account specified in the Certificate, issue a Put
Option guarantee letter substantially in the form utilized by the Custodian on
the date hereof, and deliver the same to the Clearing Member specified in the
Certificate against receipt of the premium specified in said Certificate.
Notwithstanding the foregoing, the Custodian shall be under no obligation to
issue any Put Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of shares subject to
the Put Option; (c) the Clearing Member from whom the underlying Securities are
to be received; (d) the total amount payable by the Fund upon such delivery; (e)
the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be withdrawn from the Collateral Account for such
Series and (f) the amount of cash and/or the amount and kind of Securities,
specifically allocated to such Series, if any, to be withdrawn from the Senior
Security Account. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian in connection with
such Put Option, the Custodian shall pay out of the moneys held for the account
of the Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as set forth
in such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
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10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the number
of options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Security Account for such
Series; (j) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Collateral Account
for such Series; and (k) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in a
Margin Account, and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium specified in the
Certificate, make the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such receipts, if any,
which the Custodian has specifically agreed to issue, which are in accordance
with the customs prevailing among Clearing Members in Stock Index Options and
make the deposits into the Collateral Account specified in the Certificate, or
(2) make the deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
such information as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the moneys held for the account of the Series to
which such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing
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Purchase Transaction" in order to liquidate its position as a writer of an
Option, the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to the Option being purchased: (a) that the transaction
is a Closing Purchase Transaction; (b) the Series for which the Option was
written; (c) the name of the issuer and the title and number of shares subject
to the Option, or, in the case of a Stock Index Option, the stock index to which
such Option relates and the number of Options held; (d) the exercise price; (e)
the premium to be paid by the Fund; (f) the expiration date; (g) the type of
Option (put or call); (h) the date of such purchase; (i) the name of the
Clearing Member to whom the premium is to be paid; and (j) the amount of cash
and/or the amount and kind of Securities, if any, to be withdrawn from the
Collateral Account, a specified Margin Account, or the Senior Security Account
for such Series. Upon the Custodian's payment of the premium and the return
and/or cancellation of any receipt issued pursuant to paragraphs 6, 8 or 10 of
this Article with respect to the Option being liquidated through the Closing
Purchase Transaction, the Custodian shall remove, or direct the Depository to
remove, the previously imposed restrictions on the Securities underlying the
Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein,
and upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with such expiration, exercise, or consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect to such
Futures Contract (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index or
financial instrument); (c) the number of identical Futures Contracts entered
into; (d) the delivery or settlement date of the Futures Contract(s); (e) the
date the Futures Contract(s) was (were) entered into and the maturity date; (f)
whether the Fund is buying (going long) or selling (going short) on such Futures
Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if
any, to be deposited in the Senior Security Account for such
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Series; (h) the name of the broker, dealer, or futures commission merchant
through whom the Futures Contract was entered into; and (i) the amount of fee or
commission, if any, to be paid and the name of the broker, dealer, or futures
commission merchant to whom such amount is to be paid. The Custodian shall make
the deposits, if any, to the Margin Account in accordance with the terms and
conditions of the Margin Account Agreement. The Custodian shall make payment out
of the moneys specifically allocated to such Series of the fee or commission, if
any, specified in the Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker,
dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying: (a)
the Futures Contract and the Series to which the same relates; (b) with respect
to a Stock Index Futures Contract, the total cash settlement amount to be paid
or received, and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the broker, dealer, or
futures commission merchant to or from whom payment or delivery is to be made or
received; and (d) the amount of cash and/or Securities to be withdrawn from the
Senior Security Account for such Series. The Custodian shall make the payment or
delivery specified in the Certificate, and delete such Futures Contract from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from
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the Senior Security Account for such Series as may be specified in such
Certificate. The withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying
with respect to such Futures Contract Option: (a) the Series to which such
Option is specifically allocated; (b) the type of Futures Contract Option (put
or call); (c) the type of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the Futures Contract
Option purchased; (d) the expiration date; (e) the exercise price; (f) the dates
of purchase and settlement; (g) the amount of premium to be paid by the Fund
upon such purchase; (h) the name of the broker or futures commission merchant
through whom such option was purchased; and (i) the name of the broker, or
futures commission merchant, to whom payment is to be made. The Custodian shall
pay out of the moneys specifically allocated to such Series, the total amount to
be paid upon such purchase to the broker or futures commissions merchant through
whom the purchase was made, provided that the same conforms to the amount set
forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) Series to
which such Futures Contract Option was specifically allocated; (b) the type of
Future Contract Option (put or call); (c) the type of Futures Contract and such
other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker of futures commission merchant through
whom the sale was made. The Custodian shall consent to the cancellation of the
Futures Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call)
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being exercised; (c) the type of Futures Contract underlying the Futures
Contract Option; (d) the date of exercise; (e) the name of the broker or futures
commission merchant through whom the Futures Contract Option is exercised; (f)
the net total amount, if any, payable by the Fund; (g) the amount, if any, to be
received by the Fund; and (h) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall make, out of the moneys and Securities specifically allocated to
such Series, the payments, if any, and the deposits, if any, into the Senior
Security Account as specified in the Certificate. The deposits, if any, to be
made to the Margin Account shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures Contract Option
was written; (b) the type of Futures Contract Option (put or call); (c) the type
of Futures contract and such other information as may be necessary to identify
the Futures Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the Fund; (g)
the name of the broker or futures commission merchant through whom the premium
is to be received; and (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the moneys and Securities specifically allocated to
such Series the deposits into the Senior Security Account, if any, as specified
in the Certificate. The deposits, if any, to be made on the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option excised; (c)
the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made on the Margin
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Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract underlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures Contract Option
is exercised; (e) the net total amount, if any, payable to the Fund upon such
exercise; (f) the net total amount, if any, payable by the Fund upon such
exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such Series, if any. The
Custodian shall, upon its receipt of the net total amount payable on the Fund,
if any, specified in the Certificate, make out of the moneys and Securities
specifically allocated to such Series, the payments, if any, and the deposits,
if any,into the Senior Security Account as specified in the Certificate. The
deposits to and/or withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical on
a previously written Futures Contract Option described in this Article in order
to liquidate its position as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
the Futures Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing transaction;
(c) the type of Future Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Option Contract; (d) the
exercise price; (e) the premium to be paid by the Fund; (f) the expiration date;
(g) the name of the broker or futures commission merchant to whom the premium is
to be paid; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior Security Account
specified in the Certificate. The withdrawals, if any, to be made from the
Margin Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased by
the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in
the case of an exercise such deposits into the Senior Security
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Account as may be specified in a Certificate. The deposits to and/or withdrawals
from the Margin Account, if any, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the
exercise of a Futures Contract Option described in this Article
shall be subject to Article VI hereof.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund
shall promptly deliver to the Custodian a Certificate specifying: (a) the Series
for which such short sale was made; (b) the name of the issuer and the title of
the Security; (c) the number of shares or principal amount sold, and accrued
interest or dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit; (f) the total amount credited to the Fund upon such sale,
if any, (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin Account and the name in which such Margin
Account has been or is to be established; (h) the amount of cash and/or the
amount and kind of Securities, if any, to be deposited in a Senior Security
Account; and (i) the name of the broker through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund upon such sale, if any,
as specified in the Certificate is held by such broker for the account of the
Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a
receipt or make the deposits into the Margin Account and the Senior Security
Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net total amount
payable to the broker upon such closing-out; (h) the amount of cash and the
amount and kind of Securities to be withdrawn, if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total
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amount payable to the Fund upon such closing-out, and the return and/or
cancellation of the receipts, if any, issued by the Custodian with respect to
the short sale being closed-out, pay out of the moneys held for the account of
the Fund to the broker the net total amount payable to the broker, and make the
withdrawals from the Margin Account and the Senior Security Account, as the same
are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate, or in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate or Oral Instructions
specifying: (a) the Series for which the Reverse Repurchase Agreement is
entered; (b) the total amount payable to the Fund in connection with such
Reverse Repurchase Agreement and specifically allocated to such Series; (c) the
broker or dealer through or with whom the Reverse Repurchase Agreement is
entered; (d) the amount and kind of Securities to be delivered by the Fund to
such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and
(f) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in Senior Security Account
for such Series in connection with such Reverse Repurchase Agreement. The
Custodian shall, upon receipt of the total amount payable to the Fund specified
in the Certificate, Oral Instructions, or Written Instructions make the delivery
on the broker or dealer, and the deposits, if any, to the Senior Security
Account, specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions to the Custodian specifying: (a)
the Reverse Repurchase Agreement being terminated and the Series for which same
was entered; (b) the total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be received by the Fund
and specifically allocated to such Series in connection with such termination;
(d) the date of termination; (e) the name of the broker or dealer with or
through whom the Reverse Repurchase Agreement is to be terminated; and (f) the
amount of cash and/or the amount and kind of Securities to be withdrawn from the
Senior Securities Account for such Series. The Custodian shall, upon receipt of
the amount and kind of Securities to be received by the Fund specified in the
Certificate or Oral Instructions, make the payment to the broker or dealer, and
the
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withdrawals, if any, from the Senior Security Account, specified in such
Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall deliver or
cause to be delivered to the Custodian a Certificate specifying with respect on
each such loan: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities; (c) the
number of shares or the principal amount loaned; (d) the date of loan and
delivery; (e) the total amount on be delivered to the Custodian against the loan
of the Securities, including the amount of cash collateral and the premium, if
any, separately identified; and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial institution to
which the loan was made upon receipt of the total amount designated as to be
delivered against the loan of Securities. The Custodian may accept payment in
connection with a delivery otherwise than through the Book-Entry System or
Depository only in the form of a certified or bank cashier's check payable to
the order of the Fund or the Custodian drawn on new York Clearing House funds
and may deliver Securities in accordance with the customs prevailing among
dealers in securities.
2. Promptly after each termination of the loan of Securities by the
Fund, the Fund shall deliver or cause to be delivered to the Custodian a
Certificate specifying with respect to each such loan termination and return of
Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned; (c) the number of shares or the principal amount to be returned; (d)
the date of termination; (e) the total amount to be delivered by the Custodian
including the cash collateral for such Securities minus any offsetting credits
as described in said Certificate); and (f) the name of the broker, dealer, or
financial institution from which the securities will be returned. The Custodian
shall receive all Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon receipt thereof shall
pay, out of the moneys held for the account of the Fund, the total amount
payable upon such return of Securities as set forth in the Certificate.
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ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the Custodian into, or withdrawn
from, a Senior Securities Account, the Custodian shall be under no obligation to
make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member in
whose name, or for whose benefit, the account was established as specified in
the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in
and to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
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specified in the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which
cash and/or Securities are maintained in a Collateral Account for any Series,
the Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding the
delivery to the Fund of such statement, the Fund shall furnish to the Custodian
a Certificate or Written Instructions specifying the then market value of the
Securities described in such statement. In the event such then market value is
indicated to be less than the Custodian's obligation with respect to any
outstanding Put Option guarantee letter or similar document, the Fund shall
promptly specify in a Certificate the additional cash and/or Securities to be
deposited in such Collateral Account to eliminate such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, either (i) setting forth with respect to the Series specified therein
the date of the declaration of a dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent on the payment
date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall pay out of
the moneys held for the account of each Series the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund with
respect to such Series.
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ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade date, and price;
and
(b) The amount of money to be received by the Custodian for the
sale of such Shares and specifically allocated to the separate account in the
name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian
shall credit such money to the separate account in the name of the Series for
which such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund desires the
Custodian to make payment out of the money held by the Custodian hereunder in
connection with a redemption of any Shares, it shall furnish to the Custodian a
Certificate specifying:
(a) The number of Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the moneys held in the separate account in
the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of any
Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by the Fund, the Custodian,
unless otherwise instructed by a Certificate, shall, upon receipt of an advice
from the Fund or its agent setting forth that the redemption is in good form for
redemption in accordance with the check redemption procedure, honor the check
presented as part of such check redemption privilege out
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of the moneys held in the separate account of the Series of the
Shares being redeemed.
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian should in its sole discretion advance funds on
behalf of any Series which results in an overdraft because the moneys held by
the Custodian in the separate account for such Series shall be insufficient to
pay the total amount payable upon a purchase of Securities specifically
allocated to such Series, as set forth in a Certificate or Oral Instructions, or
which results in an overdraft in the separate account of such Series for some
other reason, of if the Fund is for any other reason indebted to the Custodian
with respect to a Series, including any indebtedness to The Bank of New York
under the Fund's Cash Management and Related Services Agreement, (except a
borrowing for investment or for temporary or emergency purposes using Securities
as collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum (based on a
360-day year for the actual number of days involved) equal to 1/2% over
Custodian's prime commercial lending rate in effect from time to time, such rate
to be adjusted on the effective date of any change in such prime commercial
lending rate but in no event to be less than 6% per annum. In addition, the Fund
hereby agrees that the Custodian shall have a continuing lien and security
interest in and to any property specifically allocated to such Series at any
time held by it for the benefit of such Series or in which the Fund may have an
interest which is then in the Custodian's possession or control or in possession
or control of any third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any time to charge any such
overdraft or indebtedness together with interest due thereon against any balance
of account standing to such Series' credit on the Custodian's books. In
addition, the Fund hereby covenants that on each Business Day on which either it
intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from a
third party, or which next succeeds a Business Day on which at the close of
business the Fund had outstanding a Reverse Repurchase Agreement or such a
borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian,
in writing, of each such borrowing, shall specify the Series to which the same
relates, and shall not incur any indebtedness not so specified other than from
the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate
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agreement, the Custodian) from which it borrows money for investment or for
temporary or emergency purposes using Securities held by the Custodian hereunder
as collateral for such borrowings, a notice or undertaking in the form currently
employed by any such bank setting forth the amount which such bank will loan to
the Fund against delivery of a stated amount of collateral. The Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such borrowing: (a) the Series to which such borrowing relates, (b) the name of
the bank, (c) the amount and terms of the borrowing, which may be set forth by
incorporating by reference an attached promissory note, duly endorsed by the
Fund, or other loan agreement, (d) the time and date, if known, on which the
loan is to be entered into (e) the date on which the loan becomes due and
payable, (f) the total amount payable to the Fund on the borrowing date, (g) the
market value of Securities to be delivered as collateral for such loan,
including the name of the issuer, the title and the number of shares or the
principal amount of any particular Securities, and (h) a statement specifying
whether such loan is for investment purposes or for temporary or emergency
purposes and that such loan is in conformance with the Investment Company Act of
1940 and the Fund's prospectus. The Custodian shall deliver on the borrowing
date specified in a Certificate the specified collateral and the executed
promissory note, if any, against delivery by the lending bank of the total
amount of the loan payable, provided that the same conforms to the total amount
payable as set forth in the Certificate. The Custodian may, at the option of the
lending bank, keep such collateral in its possession, but such collateral shall
be subject to all rights therein given the lending bank by virtue of any
promissory note or loan agreement. The Custodian shall deliver such Securities
as additional collateral as may be specified in a Certificate to collateralize
further any transactions described in this paragraph. The Fund shall cause all
Securities released from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time such return of
collateral as may be tendered to it. In the event that the Fund fails to specify
in a Certificate the Series, the name of the issuer, the title and number of
shares or the principal amount of any particular Securities to be delivered as
collateral by the Custodian, the Custodian shall not be under any obligation to
deliver any Securities.
ARTICLE XV.
TERMINAL LINK
1. At no time and under no circumstances shall the Fund be obligated to
have or utilize the Terminal Link, and the provisions of this Article shall
apply if, but only if, the Fund in its sole
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and absolute discretion elects to utilize the Terminal Link to
transmit Certificates to the Custodian.
2. The Terminal Link shall be utilized by the Fund only for the purpose
of the Fund providing Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be applied to the payment
of dividends, distributions or redemptions of Fund Shares, and shall be utilized
by the Custodian only for the purpose of providing notices to the Fund. Such use
shall commence only after the Fund shall have delivered to the Custodian a
Certificate substantially in the form of Exhibit D and shall have established
access codes. Each use of the Terminal Link by the Fund shall constitute a
representation and warranty that the Terminal Link is being used only for the
purposes permitted hereby, that at least two Officers have each utilized an
access code, that such safekeeping procedures have been established by the Fund,
and that such use does not contravene the Investment Company Act of 1940, as
amended, or the rules or regulations thereunder.
3. The Fund shall obtain and maintain at its own cost and expense all
equipment and services, including, but not limited to communications services,
necessary for it to utilize the Terminal Link, and the Custodian shall not be
responsible for the reliability or availability of any such equipment or
services.
4. The Fund acknowledges that any data bases made available as part of,
or through the Terminal Link and any proprietary data, software, processes,
information and documentation (other than any such which are or become part of
the public domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential property
of the Custodian. The Fund shall, and shall cause others to which it discloses
the Information, to keep the Information confidential by using the same care and
discretion it uses with respect to its own confidential property and trade
secrets, and shall neither make nor permit any disclosure without the express
prior written consent of the Custodian.
5. Upon termination of this Agreement for any reason, the Fund shall
return to the Custodian any and all copies of the Information which are in the
Fund's possession or under its control, or which the Fund distributed to third
parties. The provisions of this Article shall not affect the copyright status of
any of the Information which may be copyrighted and shall apply to all
Information whether or not copyrighted.
6. The Custodian reserves the right to modify the Terminal Link from
time to time without notice to the Fund except that the Custodian shall give the
Fund notice not less than 75 days in advance of any modification which would
materially adversely affect
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the Fund's operation, and the Fund agrees that the Fund shall not modify or
attempt to modify the Terminal Link without the Custodian's prior written
consent. The Fund acknowledges that any software or procedures provided the Fund
as part of the Terminal Link are the property of the Custodian and, accordingly,
the Fund agrees that any modifications to the Terminal Link, whether by the
Fund, or by the Custodian and whether with or without the Custodian's consent,
shall become the property of the Custodian.
7. Neither the Custodian nor any manufacturers and suppliers it
utilizes or the Fund utilizes in connection with the Terminal Link makes any
warranties or representations, express or implied, in fact or in law, including
but not limited to warranties of merchantability and fitness for a particular
purpose.
8. The Fund will cause its Officers and employees to treat the
authorization codes and the access codes applicable to Terminal Link with
extreme care, and irrevocably authorizes the Custodian to act in accordance with
and rely on Certificates received by it through the Terminal Link. The Fund
acknowledges that it is its responsibility to assure that only its Officers use
the Terminal Link on its behalf, and that a Custodian shall not be responsible
nor liable for use of the Terminal Link on the Fund's behalf by persons other
than such persons or Officers, or by only a single Officer, nor for any
alteration, omission, or failure to promptly forward.
9.(a) Except as otherwise specifically provided in Section 9(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the direct result of the negligence of the Custodian
in an amount not exceeding for any incident $25,000 provided, however, that the
Custodian shall have no liability under this Section 9 if the Fund fails to
comply with the provisions of Section 11.
10.(b) The Custodian's liability for its negligence in executing or
failing to execute in accordance with a Certificate received through Terminal
Link shall be only with respect to a transfer of funds which is not made in
accordance with such Certificate after such Certificate shall have been duly
acknowledged by the Custodian, and shall be contingent upon the Fund complying
with the provisions of Section 12 of this Article, and shall be limited to (i)
restoration of the principal amount mistransferred, if and to the extent that
the Custodian would be required to make such restoration under applicable law,
and (ii) the lesser of (A) a Fund's actual pecuniary loss incurred by reason of
its loss of use of the mistransferred funds or the funds which were not
transferred, as the case may be, or (B) compensation for the loss of the use of
the mistransferred funds or the funds
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which were not transferred, as the case may be, at a rate per annum equal to the
average federal funds rate as computed from the Federal Reserve Bank of New
York's daily determination of the effective rate for federal funds, for the
period during which a Fund has lost use of such funds. In no event shall the
Custodian have any liability for failing to execute in accordance with a
Certificate a transfer of funds where the Certificate is received by the
Custodian through Terminal Link other than through the applicable transfer
module for the particular instructions contained in such Certificate.
11. Without limiting the generality of the foregoing, in no event shall
the Custodian or any manufacturer or supplier of its computer equipment,
software or services relating to the Terminal Link be responsible for any
special, indirect, incidental or consequential damages which the Fund may incur
or experience by reason of its use of the Terminal Link even if the Custodian or
any manufacturer or supplier has been advised of the possibility of such
damages, nor with respect to the use of the Terminal Link shall the Custodian or
any such manufacturer or supplier be liable for acts of God, or with respect to
the following to the extent beyond such person's reasonable control: machine or
computer breakdown or malfunction, interruption or malfunction of communication
facilities, labor difficulties or any other similar or dissimilar cause.
12. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, the Terminal Link as promptly
as practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, (ii) the Business Day on which discovery should have occurred
through the exercise of reasonable care and (iii) in the case of any error, the
date of actual receipt of the earliest notice which reflects such error, it
being agreed that discovery and receipt of notice may only occur on a business
day. The Custodian shall promptly advise the Fund whenever the Custodian learns
of any errors, omissions or interruption in, or delay or unavailability of, the
Terminal Link.
13. The Custodian shall verify to the Fund, by use of the Terminal
Link, receipt of each Certificate the Custodian receives through the Terminal
Link, and in the absence of such verification the Custodian shall not be liable
for any failure to act in accordance with such Certificate and the Fund may not
claim that such Certificate was received by the Custodian. Such verification,
which may occur after the Custodian has acted upon such Certificate, shall be
accomplished on the same day on which such Certificate is received.
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ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as
sub-custodian for each Series' Foreign Securities (as such term is defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as
amended) and other assets, the foreign banking institutions and foreign
securities depositories and clearing agencies designated on Schedule I hereto
("Foreign Sub-Custodians") to carry out their respective responsibilities in
accordance with the terms of the sub-custodian agreement between each such
Foreign Sub-Custodian and the Custodian, copies of which have been previously
delivered to the Fund and receipt of which is hereby acknowledged (each such
agreement, a "Foreign Sub-Custodian Agreement"). Upon receipt of a Certificate,
together with a certified resolution substantially in the form attached as
Exhibit E of the Fund's Board of Directors, the Fund may designate any
additional foreign sub-custodian with which the Custodian has an agreement for
such entity to act as the Custodian's agent, as its sub-custodian and any such
additional foreign sub-custodian shall be deemed added to Schedule I. Upon
receipt of a Certificate from the Fund, the Custodian shall cease the employment
of any one or more Foreign Sub-Custodians for maintaining custody of the Fund's
assets and such Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substantially in the
form previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities and other assets of such Series held
by each Foreign Sub-Custodian. At the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any claims by
the Fund or any Series against a Foreign Sub-Custodian as a consequence of any
loss, damage, cost, expense, liability or claim sustained or incurred by the
Fund or any Series if and to the extent that the Fund or such Series has not
been made whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the
terms of the applicable Foreign Sub-Custodian Agreement, use reasonable efforts
to arrange for the independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as such books and
records relate to the performance of such Foreign Sub-Custodian under its
agreement with the Custodian on behalf of the Fund.
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5. The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Series held by Foreign Sub-Custodians, including but not limited to, an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually agreed
upon, information concerning the Foreign Sub-Custodians employed by the
Custodian. Such information shall be similar in kind and scope to that furnished
to the Fund in connection with the Fund's initial approval of such Foreign
Sub-Custodians and, in any event, shall include information pertaining to (i)
the Foreign Sub-Custodians' financial strength, general reputation and standing
in the countries in which they are located and their ability to provide the
custodial services required, and (ii) whether the Foreign Sub-Custodians would
provide a level of safeguards for safekeeping and custody of securities not
materially different from those prevailing in the United States. The Custodian
shall monitor the general operating performance of each Foreign Sub-Custodian
and at least annually obtain and review the annual financial report published by
such Foreign Sub-Custodian to determine that it meets the financial criteria of
an "Eligible Foreign Custodian" under Rule 17f-5(c)(2)(i) or (ii). The Custodian
will promptly inform the Fund in the event that the Custodian learns that a
Foreign Sub-Custodian no longer satisfies the financial criteria of an "Eligible
Foreign Custodian" under such Rule. The Custodian agrees that it will use
reasonable care in monitoring compliance by each Foreign Sub-Custodian with the
terms of the relevant Foreign Sub-Custodian Agreement and that if it learns of
any breach of such Foreign Sub-Custodian Agreement believed by the Custodian to
have a material adverse effect on the Fund or any Series it will promptly notify
the Fund of such breach. The Custodian also agrees to use reasonable and
diligent efforts to enforce its rights under the relevant Foreign Sub-Custodian
Agreement.
7. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market
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in which the transaction occurs, including, without limitation, delivery of
securities to the purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
9. The Custodian shall be liable to the Fund for the acts or omissions
of each Foreign Sub-Custodian, provided such acts or omissions of such Foreign
Sub-Custodian constitute a breach of its subcustodian agreement with the
Custodian as determined by the law governing such agreement. Notwithstanding the
foregoing, in no event shall the Custodian be liable for: (a) the acts or
omissions of any Foreign Sub-Custodian which is a foreign securities depository
or a clearing agency; (b) losses or damages resulting from holding Foreign
Securities, foreign currency, or other property in any particular country,
including but not limited to, losses or damages resulting from nationalization,
expropriation or other governmental actions, regulation of banking or securities
industries, currency controls or restrictions, devaluations or fluctuations, or
market conditions which prevent the orderly execution of securities transactions
or affect the value of Foreign Securities, foreign currency, or other
properties; (c) any Foreign Sub-Custodian selected by the Fund; or (d) the
continued use by the Fund of any Foreign Sub-Custodian selected by the Custodian
after the Fund has been notified of the Custodian's intention to replace such
Foreign Sub-Custodian. Notwithstanding the foregoing, however, the Custodian
shall promptly notify the Fund whenever the Custodian obtains actual knowledge
of any breach by a foreign securities depository or clearing agency of its
subcustodian agreement with the Custodian believed by the Custodian to have a
material adverse effect on the Fund, or of losses or damages suffered by the
Fund as a direct result of actions described in clauses (a) or (b) of the
preceding sentence, and the Custodian shall be liable for direct money damages
suffered by the Fund as the direct result of the failure by the Custodian to
provide such prompt notice.
ARTICLE XVII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI
neither the Custodian nor its nominee shall be liable for any loss or damage,
including counsel fees, resulting from its action or omission to act or
otherwise, either hereunder or under any Margin Account Agreement, except for
any such loss or damage arising out of its own negligence or willful misconduct.
In no event shall the Custodian be liable to the Fund or any third party for
special, indirect or consequential damages or lost profits or loss of business,
arising under or in connection with this
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Agreement, even if previously informed of the possibility of such damages and
regardless of the form of action. The Custodian may, with respect to questions
of law arising hereunder or under any Margin Account Agreement, apply for and
obtain the advice and opinion of counsel to the Fund or of its own counsel, at
the expense of the Fund, and shall be fully protected with respect to anything
done or omitted by it in good faith in conformity with such advice or opinion.
The Custodian shall be liable to the Fund for any loss or damage resulting from
the use of the Book-Entry System or any Depository arising by reason of any
negligence or willful misconduct on the part of the Custodian or any of its
employees or agents.
2. Without limiting the generality of the foregoing, the Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold,
or written by or for the Fund, the legality of the purchase, sale or writing
thereof, or the propriety of the amount paid or received therefor;
(b) The legality of the sale or redemption of any Shares, or the
propriety of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any dividend by
the Fund;
(d) The legality of any borrowing by the Fund using Securities as
collateral;
(e) The legality of any loan of portfolio Securities, nor shall
the Custodian be under any duty or obligation to see to it that any cash
collateral delivered to it by a broker, dealer, or financial institution or held
by it at any time as a result of such loan of portfolio Securities of the Fund
is adequate collateral for the Fund against any loss it might sustain as a
result of such loan. The Custodian specifically, but not by way of limitation,
shall not be under any duty or obligation periodically to check or notify the
Fund that the amount of such cash collateral held by it for the Fund is
sufficient collateral for the Fund, but such duty or obligation shall be the
sole responsibility of the Fund. In addition, the Custodian shall be under no
duty or obligation to see that any broker, dealer or financial institution to
which portfolio Securities of the Fund are lent pursuant to Article X of this
Agreement makes payment to it of any dividends or interest which are payable to
or for the account of the Fund during the period of such loan or at the
termination of such loan, provided, however, that the Custodian shall promptly
notify the Fund in the event that such dividends or interest are not paid and
received when due; or
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<PAGE>
(f) The sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or Collateral
Account in connection with transactions by the Fund. In addition, the Custodian
shall be under no duty or obligation to see that any broker, dealer, futures
commission merchant or Clearing Member makes payment to the Fund of any
variation margin payment or similar payment which the fund may be entitled to
receive from such broker, dealer, futures commission merchant or Clearing
Member, to see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount the Fund is
entitled to receive, or to notify the Fund of the Custodian's receipt or
non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the Fund
until the Custodian actually receives and collects such money directly or by the
final crediting of the account representing the Fund's interest at the
Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable
for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held in
the Depository, unless the Custodian shall have actually received timely notice
from the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action, suit or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or liability, unless
indemnity satisfactory to it against all expense and liability be furnished as
often as may be required. 5. The Custodian shall not be under any duty or
obligation to take action to effect collection of any amount due to the Fund
from the Transfer Agent of the Fund nor to take any action to effect payment or
distribution by the Transfer Agent of the Fund of any amount paid by the
Custodian to the Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount, if the Securities upon which such
amount is payable are in default, or if
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<PAGE>
payment is refused after due demand or presentation, unless and until (i) it
shall be directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction of reimbursement of its costs and expenses in
connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XVI appoint one or more banking institutions
as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as
Co-Custodian or Co-Custodians including, but not limited to, banking
institutions located in foreign countries, of Securities and moneys at any time
owned by the Fund, upon such terms and conditions as may be approved in a
Certificate or contained in an agreement executed by the Custodian, the Fund and
the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to
ascertain whether any Securities at any time delivered to, or held by it or by
any Foreign Sub-Custodian, for the account of the Fund and specifically
allocated to a Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or (b) to ascertain
whether any transactions by the Fund, whether or not involving the Custodian,
are such transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian all out-of-pocket expenses and such compensation as may be
agreed upon from time to time between the Custodian and the Fund. The Custodian
may charge such compensation and any expenses with respect to a Series incurred
by the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be entitled to charge against any money held by it for the account of a
Series such Series' pro rata share (based on such Series' net asset value at the
time of the charge to the aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the provisions of this
Agreement. The expenses for which the Custodian shall be entitled to
reimbursement hereunder shall include, but are not limited to, the expenses of
sub-custodians and foreign branches of the Custodian incurred in settling
outside of New York City transactions involving the purchase and sale of
Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral
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<PAGE>
Instructions actually received by the Custodian hereinabove provided for. The
Fund agrees to forward to the Custodian a Certificate or facsimile thereof
confirming such Oral Instructions in such manner so that such Certificate or
facsimile thereof is received by the Custodian, whether by hand delivery,
telecopier or other similar device, or otherwise, by the close of business of
the same day that such Oral Instructions are given to the Custodian. The Fund
agrees that the fact that such confirming instructions are not received, or that
contrary instructions are received, by the Custodian shall in no way affect the
validity of the transactions or enforceability of the transactions hereby
authorized by the Fund. The Fund agrees that the Custodian shall incur no
liability to the Fund in acting upon Oral Instructions given to the Custodian
hereunder concerning such transactions provided such instructions reasonably
appear to have been received from an Officer.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
-37-
<PAGE>
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI the Custodian may deliver and
receive Securities, and receipts with respect to such Securities, and arrange
for payments to be made and received by the Custodian in accordance with the
customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XVIII.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving
to the other party a notice in writing specifying the date of such termination,
which shall be not less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it shall be accompanied
by a copy of a resolution of the Board of Directors of the Fund, certified by
the Secretary or any Assistant Secretary, electing to terminate this Agreement
and designating a successor custodian or custodians, each of which shall be a
bank or trust company having not less than $2,000,000 aggregate capital, surplus
and undivided profits. In the event such notice is given by the Custodian, the
Fund shall, on or before the termination date, deliver to the Custodian a copy
of a resolution of the Board of Directors of the Fund, certified by the
Secretary or any Assistant Secretary, designating a successor custodian or
custodians. In the absence of such designation by the
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<PAGE>
Fund, the Custodian may designate a successor custodian which shall be a bank or
trust company having not less than $2,000,000 aggregate capital, surplus and
undivided profits. Upon the date set forth in such notice this Agreement shall
terminate, and the Custodian shall upon receipt of a notice of acceptance by the
successor custodian on that date deliver directly to the successor custodian all
Securities and moneys then owed by the Fund and held by it as Custodian, after
deducting all fees, expenses and other amounts for the payment or reimbursement
of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund be deemed to be its own custodian and the Custodian shall thereby be
relieved of all duties and responsibilities pursuant to this Agreement, other
than the duty with respect to Securities held in the Book Entry System which
cannot be delivered to the Fund to hold such Securities hereunder in accordance
with this Agreement.
ARTICLE XIX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Officers of the Fund under its corporate seal, setting forth the names
and the signatures of the present Officers of the Fund. The Fund agrees to
furnish to the Custodian a new Certificate in similar form in the event any such
present Officer ceases to be an Officer of the Fund, or in the event that other
or additional Officers are elected or appointed. Until such new Certificate
shall be received, the Custodian shall be fully protected in acting under the
provisions of this Agreement upon the signatures of the Officers as set forth in
the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its office at the address for the
Fund first above
-39-
<PAGE>
written, or at such other place as the Fund may from time to time designate in
writing.
4. This Agreement may not be amended or modified in any manner except
by a written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Directors of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Directors.
6. This Agreement shall be construed in accordance with the laws of the
State of New York without giving effect to conflict of laws principles thereof.
Each party hereby consents to the jurisdiction of a state or federal court
situated in New York City , New York in connection with any dispute arising
hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
-40-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate Officers, thereunto duly authorized nd
their respective corporate seals to be hereunto affixed, as of the day and year
first above written.
OFFITBANK VARIABLE
INSURANCE FUND, INC.
[SEAL] By:/s/ Gordon Forrester
------------------------
Attest: Gordon Forrester
/s/ Carrie Zuckerman
- --------------------
THE BANK OF NEW YORK
[SEAL] By:/s/ Stephen E. Grunston
------------------------
Name: Vincent Blazewicz Stephen E. Grunston
Title: Vice President Vice President
Attest:
/s/ Vincent Blazewicz
- -------------------------
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<PAGE>
APPENDIX A
I, Gordon Forrester, and I, Joan J. Fiore, of OFFITBANK VARIABLE
INSURANCE FUND, INC., a Maryland corporation (the "Fund"), do hereby certify
that:
The following individuals serve in the following positions with the
Fund and each has been duly elected or appointed by the Board of Directors of
the Fund to each such position and qualified therefor in conformity with the
Fund's Articles of Incorporation and By-Laws, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
Gordon Forrester Assistant Treasurer /s/ Gordon Forrester
- -------------------- -------------------- --------------------
Joan V. Fiore Assistant Secretary /s/ Joan V. Fiore
- -------------------- -------------------- --------------------
<PAGE>
APPENDIX B
SERIES
OFFITBANK VIF HIGH YIELD FUND
<PAGE>
APPENDIX C
I, Vincent Blazewicz, a Vice President with THE BANK OF NEW YORK do
hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, Gordon Forrester, hereby certifies that he or she is
the duly elected and acting Assistant Treasurer of OFFITBANK VARIABLE INSURANCE
FUND, INC., a Maryland corporation (the "Fund"), and further certifies that the
following resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on July 17, 1996, at which a quorum was at all times present
and that such resolution has not been modified or rescinded and is in full force
and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of July 17, 1996
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis to deposit in the Book-Entry System, as defined in the Custody
Agreement, all securities eligible for deposit therein, regardless of the Series
to which the same are specifically allocated, and to utilize the Book-Entry
System to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
OFFITBANK VARIABLE INSURANCE FUND, INC. as of the 14th day of August, 1996.
/s/ Gordon Forrester
-----------------------------
[SEAL]
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, Gordon Forrester, hereby certifies that he or she is
the duly elected and acting Assistant Treasurer of OFFITBANK VARIABLE INSURANCE
FUND, INC., a Maryland corporation (the "Fund"), and further certifies that the
following resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on July 17, 1996, at which a quorum was at all times present
and that such resolution has not been modified or rescinded and is in full force
and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of July 17, 1996
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary to deposit in the Depository, as defined in
the Custody Agreement, all securities eligible for deposit therein, regardless
of the Series to which the same are specifically allocated, and to utilize the
Depository to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
OFFITBANK VARIABLE INSURANCE FUND, INC. as of the 14th day of August, 1996.
/s/ Gordon Forrester
-----------------------------
[SEAL]
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, Gordon Forrester, hereby certifies that he or she is
the duly elected and acting Assistant Treasurer of OFFITBANK VARIABLE INSURANCE
FUND, INC., a Maryland corporation (the "Fund"), and further certifies that the
following resolution was adopted by the Board of Trustees of the Fund at a
meeting duly held on July 17, 1996, at which a quorum was at all times present
and that such resolution has not been modified or rescinded and is in full force
and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
a Custody Agreement between The Bank of New York and the Fund dated as
of July 17, 1996 (the "Custody Agreement") is authorized and instructed
on a continuous and ongoing basis until such time as it receives a
Certificate, as defined in the Custody Agreement, to the contrary to
deposit in the Participants Trust Company as Depository, as defined in
the Custody Agreement, all securities eligible for deposit therein,
regardless of the Series to which the same are specifically allocated,
and to utilize the Participants Trust Company to the extent possible in
connection with its performance thereunder, including, without
limitation, in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
OFFITBANK VARIABLE INSURANCE FUND, INC. as of the 14th day of August, 1996.
/s/ Gordon Forrester
-----------------------------
[SEAL]
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, Gordon Forrester, hereby certifies that he or she is
the duly elected and acting Assistant Treasurer of OFFITBANK VARIABLE INSURANCE
FUND, INC., a Maryland corporation (the "Fund"), and further certifies that the
following resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on July 17, 1996, at which a quorum was at all times present
and that such resolution has not been modified or rescinded and is in full force
and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of July 17, 1996
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary, to accept, utilize and act with respect to
Clearing Member confirmations for Options and transaction in Options, regardless
of the Series to which the same are specifically allocated, as such terms are
defined in the Custody Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
OFFITBANK VARIABLE INSURANCE FUND, INC. as of the 14th day of August, 1996.
/s/ Gordon Forrester
-----------------------------
[SEAL]
<PAGE>
EXHIBIT D
The undersigned, Gordon Forrester, hereby certifies that he or she is
the duly elected and acting Assistant Treasurer of OFFITBANK VARIABLE INSURANCE
FUND, INC., a Maryland corporation (the "Fund"), and further certifies that the
following resolutions were adopted by the Board of Directors of the Fund at a
meeting duly held on July 17, 1996, at which a quorum was at all times present
and that such resolutions have not been modified or rescinded and are in full
force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to the
Custody Agreement between The Bank of New York and the Fund dated as of July 17,
1996 (the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis to act in accordance with, and to rely on Certificates (as defined
in the Custody Agreement) given by the Fund to the Custodian by a Terminal Link
(as defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant use of
such access codes only to Officers of the Fund as defined in the Custody
Agreement, shall establish internal safekeeping procedures to safeguard and
protect the confidentiality and availability of such access codes, shall limit
its use of the Terminal Link to those purposes permitted by the Custody
Agreement, shall require at least two such Officers to utilize their respective
access codes in connection with each such Certificate, and shall use the
Terminal Link only in a manner that does not contravene the Investment Company
Act of 1940, as amended, or the rules and regulations thereunder.
RESOLVED, that Officers of the Fund shall, following the establishment
of such access codes and such internal safekeeping procedures, advise the
Custodian that the same have been established by delivering a Certificate, as
defined in the Custody Agreement, and the Custodian shall be entitled to rely
upon such advice.
IN WITNESS WHEREOF, I hereunto set my hand and the seal of OFFITBANK
VARIABLE INSURANCE FUND, INC. as of the 14th day of August, 1996.
/s/ Gordon Forrester
-----------------------------
[SEAL]
<PAGE>
EXHIBIT E
The undersigned, Gordon Forrester, hereby certifies that he or she is
the duly elected and acting Assistant Treasurer of OFFITBANK VARIABLE INSURANCE
FUND, INC., a Maryland corporation (the "Fund"), and further certifies that the
following resolutions were adopted by the Board of Directors of the Fund at a
meeting duly held on July 17, 1996, at which a quorum was at all times present
and that such resolutions have not been modified or rescinded and are in full
force and effect as of the date hereof.
RESOLVED, that the maintenance of the Fund's assets in each country
listed in Schedule I hereto be, and hereby is, approved by the Board of
Directors as consistent with the best interests of the Fund and its
shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the foreign
branches of The Bank of New York (the "Bank") listed in Schedule I located in
the countries specified therein, and with the foreign sub-custodians and
depositories listed in Schedule I located in the countries specified therein be,
and hereby is, approved by the Board of Directors as consistent with the best
interest of the Fund and its shareholders; and further
RESOLVED, that the Sub-Custodian Agreements presented to this meeting
between the Bank and each of the foreign sub-custodians and depositories listed
in Schedule I providing for the maintenance of the Fund's assets with the
applicable entity, be and hereby are, approved by the Board of Directors as
consistent with the best interests of the Fund and its shareholders; and further
RESOLVED, that the appropriate officers of the Fund are hereby
authorized to place assets of the Fund with the aforementioned foreign branches
and foreign sub-custodians and depositories as hereinabove provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of them,
are authorized to do any and all other acts, in the name of the Fund and on its
behalf, as they, or any of them, may determine to be necessary or desirable and
proper in connection with or in furtherance of the foregoing resolutions.
IN WITNESS WHEREOF, I hereunto set my hand and the seal of OFFITBANK
VARIABLE INSURANCE FUND, INC. as of the 14th day of August, 1996.
/s/ Gordon Forrester
-----------------------------
[SEAL]
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
OFFICER'S CERTIFICATE
The undersigned hereby certifies that the following resolutions were
duly adopted by the Board of Directors of The OFFITBANK Variable Insurance Fund,
Inc., at the Board of Directors Meeting held on October 27, 1994:
RESOLVED, that, in addition to the Company's officers, any one
of the following individuals be, and each of them hereby is, authorized
as an "Authorized Person" to give "Oral Instructions" on behalf of the
Company to the Custodian under the Custodian Agreement between the
Company and the Custodian, provided that no person shall be authorized
or permitted to withdraw Company investments or assets upon his/her
mere receipt:
See Attached List
RESOLVED, that, in addition to the Company's officers, any one
of the individuals named above be, and each of them hereby is,
authorized as "Authorized Persons" to give "Written Instructions" to
the Custodian under such Custodian Agreement; however, [See Attached
List] are authorized to give written instructions only if such
instructions are also signed by another Authorized Person, and provided
further that no one or more persons shall be authorized or permitted to
withdraw Company investments or assets upon his/her or their mere
receipt;
RESOLVED, that, in addition to the Company's officers, any one
of the following individuals be, and each of them hereby is, authorized
as an "Authorized Person" to give Oral Instructions on behalf of the
Company to the Transfer Agent under the proposed Transfer Agent
Agreement between the Company and Furman Selz:
See Attached List
RESOLVED, that, in addition to the Company's officers, any one
of the individuals named above be, and each of them hereby is,
authorized as "Authorized Persons" to give "Written
<PAGE>
Instructions" on behalf of the Company to the Transfer Agent under such
Transfer Agency Agreement.
/s/ Gordon Forrester
-----------------------------
Gordon Forrester
Assistant Treasurer
[SEAL]
ADMINISTRATION AGREEMENT
THIS AGREEMENT is made as of this 1st day of October, 1996, by and
between THE OFFITBANK VARIABLE INSURANCE FUND, INC., a Maryland corporation (the
"Company"), and BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a BISYS FUND
SERVICES (the "Administrator"), an Ohio limited partnership.
WHEREAS, the Company is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), consisting of several series of shares of common stock ("Shares"); and
WHEREAS, the Company desires the Administrator to provide, and the
Administrator is willing to provide, management and administrative services to
such series of the Company as the Company and the Administrator may agree on
("Portfolios") and as listed on Schedule A attached hereto and made a part of
this Agreement, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Company and the Administrator hereby agree as
follows:
ARTICLE 1. Retention of the Administrator; Conversion to the Services.
The Company hereby engages the Administrator to act as the administrator of the
Portfolios and to furnish the Portfolios with the management and administrative
services as set forth in Article 2 below (collectively, the "Services"), and, in
connection therewith, the Company agrees to convert to the Administrator's data
processing systems and software (the "BISYS System") as necessary in order to
receive the Services. The Company shall cooperate with the Administrator to
provide the Administrator with all necessary information and assistance required
to successfully convert to the BISYS System. The Administrator shall provide the
Company with a schedule relating to such conversion and the parties agree that
the conversion may progress in stages. The date upon which all Services shall
have been converted to the BISYS System shall be referred to herein as the
"Conversion Date." The Administrator hereby accepts such engagement and agrees
to perform the Services commencing, with respect to each individual Service, on
the date that the conversion of such Service to the BISYS System has been
completed. The Administrator shall determine in accordance with its normal
acceptance procedures when the applicable Service has been successfully
converted.
The Administrator shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Company in any way and shall
not be deemed an agent of the Company.
ARTICLE 2. Administrative Services. The Administrator shall perform or
supervise the performance by others of administrative services in connection
with the operations of the
<PAGE>
Portfolios, and, on behalf of the Company, will investigate, assist in the
selection of and conduct relations with custodians, depositories, accountants,
legal counsel, underwriters, brokers and dealers, corporate fiduciaries,
insurers, banks and persons in any other capacity deemed to be necessary or
desirable for the Portfolios' operations. The Administrator shall provide the
Directors of the Company with such reports regarding investment performance as
they may reasonably request but shall have no responsibility for supervising the
performance by any investment adviser or sub-adviser of its responsibilities.
The Administrator shall provide the Company with regulatory reporting,
all necessary office space, equipment, personnel, compensation and facilities
(including facilities for meetings of shareholders ("Shareholders") and
directors of the Company) for handling the affairs of the Portfolios and such
other services as the Administrator shall, from time to time, determine to be
necessary to perform its obligations under this Agreement. In addition, at the
request of the Board of Directors, the Administrator shall make reports to the
Company's Directors concerning the performance of its obligations hereunder.
Without limiting the generality of the foregoing, the Administrator
shall:
(a) calculate contractual Company expenses and control all
disbursements for the Company, and as appropriate compute the
Company's yields, total return, expense ratios, portfolio turnover
rate and, if required, portfolio average dollar-weighted maturity;
(b) prepare and file with the SEC Post-Effective Amendments to
the Company's Registration Statement, Notices of Annual or Special
Meetings of Shareholders and Proxy materials relating to such
meetings; accumulate information for and, subject to the approval by
the Company's Treasurer, prepare reports to the Company's shareholders
of record and the SEC including, but not necessarily limited to, the
preparation and filing of (i) Semi-Annual Reports on Form N-SAR and
(ii) Notices pursuant to Rule 24f-2;
(c) prepare such reports, applications and documents (including
reports regarding the sale and redemption of Shares as may be required
in order to comply with Federal and state securities law) as may be
necessary or desirable to register the Company's Shares with state
securities authorities, monitor the sale of Company Shares for
compliance with state securities laws, and file with the appropriate
state securities authorities the registration statements and reports
for the Company and the Company's Shares and all amendments thereto,
as may be necessary or convenient to register and keep effective the
Company and the Company's Shares with state securities authorities to
enable the Company to make a continuous offering of its Shares;
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<PAGE>
(d) review and provide advice and counsel on all sales literature
(e.g., advertisements, brochures and shareholder communications) with
respect to each of the Portfolios;
(e) administer contracts on behalf of the Company with, among
others, the Company's investment adviser, distributor, custodian,
transfer agent and fund accountant;
(f) supervise the Company's transfer agent with respect to the
payment of dividends and other distributions to Shareholders;
(g) calculate performance data of the Portfolios for
dissemination to information services covering the investment company
industry;
(h) coordinate and supervise the preparation and filing of the
Company's tax returns;
(i) examine and review the operations and performance of the
various organizations providing services to the Company or any
Portfolio of the Company, including, without limitation, the
Company's investment adviser, distributor, custodian, fund
accountant, transfer agent, outside legal counsel and independent
public accountants, and at the request of the Board of Directors,
report to the Board on the performance of organizations;
(j) assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and printing of the
Company's semi-annual and annual reports to Shareholders;
(k) assist with the design, development, and operation of the
Portfolios, including new classes, investment objectives, policies and
structure;
(l) provide individuals reasonably acceptable to the Company's
Board of Directors to serve as officers of the Company, who will be
responsible for the management of certain of the Company's affairs as
determined by the Company's Board of Directors;
(m) advise the Company and its Board of Directors on matters
concerning the Company and its affairs;
(n) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the Company in
accordance with the requirements of Rules 17g-1 and 17d-1(d)(7) under
the 1940 Act as such bonds and policies are approved by the Company's
Board of Directors;
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<PAGE>
(o) monitor and advise the Company and its Portfolios on their
regulated investment company status under the Internal Revenue Code of
1986, as amended;
(p) perform all administrative services and functions of the
Company and each Portfolio to the extent administrative services and
functions are not provided to the Company or such Portfolio pursuant
to the Company's or such Portfolio's investment advisory agreement,
distribution agreement, custodian agreement, transfer agent agreement
and fund accounting agreement;
(q) furnish advice and recommendations with respect to other
aspects of the business and affairs of the Portfolios as the Company
and the Administrator shall determine desirable; and
(r) assist in monitoring and developing compliance procedures for
each Portfolio which will include, among other matters, procedures to
monitor compliance with each Portfolio's investment objective,
policies, restrictions, tax matters and applicable laws and
regulations;
(s) monitor the Company's arrangements with respect to services
provided by financial institutions which are, or wish to become,
shareholder servicing agents for the Company ("Shareholder Servicing
Agents"). With respect to Shareholding Servicing Agents, the
Administrator shall specifically monitor and review the services
rendered by the Shareholder Servicing Agents to their customers, who
are the beneficial owners of Shares, pursuant to agreements between
the Company and such Shareholder Servicing Agents ("Shareholder
Servicing Agreements"), including, among other things, reviewing the
qualifications of financial institutions wishing to be Shareholder
Servicing Agents, assisting in the execution and delivery of
Shareholder Servicing Agreements, reporting to the Board of Directors
with respect to the amounts paid or payable by the Company from time
to time under the Shareholder Servicing Agreements and the nature of
the services provided by Shareholder Servicing Agents, and maintaining
appropriate records in connection with its monitoring duties; and
(t) provide legal advice and counsel to the Company with respect
to regulatory matters including: monitoring regulatory and legislative
developments which may affect the Company and assisting in the
strategic response to such developments, counseling and assisting the
Company in routine regulatory examinations or investigations of the
Company, and working closely with outside counsel to the Company in
response to any litigation or non-routine regulatory matters.
In performing its duties as administrator of the Company, the
Administrator (i) will act in accordance with the Articles of Incorporation,
By-Laws and prospectuses of the Company and with the instructions and directions
of the Board of Directors of the Company and will conform to and comply with the
requirements of the 1940 Act and all other applicable federal or state
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<PAGE>
laws and regulations and (ii) will consult with legal counsel to the Company, as
necessary and appropriate.
The Administrator shall perform such other services for the Company
that are mutually agreed upon by the parties from time to time. Such services
may include performing internal audit examinations; mailing the annual reports
of the Portfolios; preparing an annual list of Shareholders; and mailing notices
of Shareholders' meetings, proxies and proxy statements, for all of which the
Company will pay the Administrator's out-of-pocket expenses.
ARTICLE 3. Allocation of Charges and Expenses.
(A) The Administrator. The Administrator shall furnish at its own
expense the executive, supervisory and clerical personnel necessary to perform
its obligations under this Agreement. The Administrator shall also provide the
items which it is obligated to provide under this Agreement, and shall pay all
compensation, if any, of officers of the Company as well as all Directors of the
Company who are affiliated persons of the Administrator or any affiliated
corporation of the Administrator; provided, however, that unless otherwise
specifically provided, the Administrator shall not be obligated to pay the
compensation of any employee of the Company retained by the Directors of the
Company to perform services on behalf of the Company.
(B) The Company. The Company assumes and shall pay or cause to be paid
all other expenses of the Company not otherwise allocated herein, including,
without limitation, taxes; interest; fees (including fees paid to its Directors
who are not affiliated with the investment 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.
ARTICLE 4. Compensation of the Administrator.
(A) Administration Fee. For the services to be rendered, the facilities
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Company shall pay to the Administrator compensation at an annual
rate specified in Schedule A attached hereto. Such compensation shall be
calculated and accrued daily, and paid to the Administrator monthly.
If the Conversion Date occurs subsequent to the first day of a
month or termination of this Agreement occurs before the last day of a month,
the Administrator's compensation for that part of the month in which this
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fees as set forth above. Payment of the Administrator's
compensation for the preceding month shall be made promptly.
-5-
<PAGE>
(B) Survival of Compensation Rights. All rights of compensation under
this Agreement for services performed as of the termination date shall survive
the termination of this Agreement.
ARTICLE 5. Limitation of Liability of the Administrator. The duties of
the Administrator shall be confined to those expressly set forth herein, and no
implied duties are assumed by or may be asserted against the Administrator
hereunder. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any act or omission in carrying
out its duties hereunder, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder, except as may otherwise be
provided under provisions of applicable law which cannot be waived or modified
hereby. (As used in this Article 5, the term "Administrator" shall include
partners, officers, employees and other agents of the Administrator as well as
the Administrator itself.)
So long as the Administrator acts in good faith and with due diligence
and without negligence or reckless disregard of its obligations hereunder, the
Company assumes full responsibility and shall indemnify the Administrator and
hold it harmless from and against any and all actions, suits and claims, whether
groundless or otherwise, and from and against any and all losses, damages,
costs, charges, reasonable counsel fees and disbursements, payments, expenses
and liabilities (including reasonable investigation expenses) arising directly
or indirectly out of the Administrator's actions taken or nonactions with
respect to the performance of services hereunder. The Administrator agrees to
indemnify and hold harmless the Company, its employees, agents, Directors,
officers and nominees from and against any and all actions, suits and claims,
whether groundless or otherwise, and from and against any and all judgements,
liabilities, losses, damages, costs, charges, reasonable counsel fees and other
expenses of every nature and character arising out of or in any way relating to
the Administrator's bad faith, willful misfeasance, negligence or reckless
disregard by it of its obligations and duties, with respect to the performance
of services under this Agreement. The indemnity and defense provisions set forth
herein shall indefinitely survive the termination of this Agreement.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case the indemnifying party may be asked to indemnify
or hold the other party harmless, the indemnifying party shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the indemnified party will use all reasonable
care to identify and notify the indemnifying party promptly concerning any
situation which presents or appears likely to present the probability of such a
claim for indemnification against the indemnifying party, but failure to do so
in good faith shall not affect the rights hereunder.
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<PAGE>
The indemnifying party shall be entitled to participate at its own
expense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this indemnity provision. If the indemnifying
party elects to assume the defense of any such claim, the defense shall be
conducted by counsel chosen by the indemnifying party and satisfactory to the
other party, whose approval shall not be unreasonably withheld. In the event
that the indemnifying party elects to assume the defense of any suit and retain
counsel, the indemnified party shall bear the fees and expenses of any
additional counsel retained by it. If the indemnifying party does not elect to
assume the defense of a suit, it will reimburse the other party for the
reasonable fees and expenses of any counsel retained by the other party.
The Administrator may apply to the Company at any time for instructions
and may consult counsel for the Company or its own counsel and with accountants
and other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with such
instructions or with the opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. The Administrator will not be held to have
notice of any change of authority of any officers, employees or agents of the
Company until receipt of written notice thereof from the Company.
ARTICLE 6. Activities of the Administrator. The services of the
Administrator rendered to the Company are not to be deemed to be exclusive. The
Administrator is free to render such services to others and to have other
businesses and interests. It is understood that directors, officers, employees
and Shareholders are or may be or become interested in the Administrator, as
officers, employees or otherwise and that partners, officers and employees of
the Administrator and its counsel are or may be or become similarly interested
in the Company, and that the Administrator may be or become interested in the
Company as a Shareholder or otherwise.
ARTICLE 7. Duration of this Agreement. The Term of this Agreement shall
be as specified in Schedule A hereto.
ARTICLE 8. Assignment. This Agreement shall not be assignable by either
party without the written consent of the other party; provided, however, that
the Administrator may, at its expense, subcontract with any entity or person
concerning the provision of the services contemplated hereunder. The
Administrator shall not, however, be relieved of any of its obligations under
this Agreement by the appointment of such subcontractor and provided further,
that the Administrator shall be responsible, to the extent provided in Article 5
hereof, for all acts of such subcontractor as if such acts were its own. This
Agreement shall be binding upon, and
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<PAGE>
shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
ARTICLE 9. Amendments. This Agreement may be amended by the parties
hereto only if such amendment is specifically approved (i) by the vote of a
majority of the Directors of the Company, and (ii) by the vote of a majority of
the Directors of the Company who are not parties to this Agreement or interested
persons of any such party, cast in person at a Board of Directors meeting called
for the purpose of voting on such approval.
For special cases, the parties hereto may amend such procedures set
forth herein as may be appropriate or practical under the circumstances, and the
Administrator may conclusively assume that any special procedure which has been
approved by the Company does not conflict with or violate any requirements of
its Articles of Incorporation or then current prospectuses, or any rule,
regulation or requirement of any regulatory body.
ARTICLE 10. Certain Records. The Administrator shall maintain customary
records in connection with its duties as specified in this Agreement. Any
records required to be maintained and preserved pursuant to Rules 31a-1 and
31a-2 under the 1940 Act which are prepared or maintained by the Administrator
on behalf of the Company shall be prepared and maintained at the expense of the
Administrator, but shall be the property of the Company and will be made
available to or surrendered promptly to the Company on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Company and follow the
Company's instructions as to permitting or refusing such inspection; provided
that the Administrator may exhibit such records to any person in any case where
it is advised by its counsel that it may be held liable for failure to do so,
unless (in cases involving potential exposure only to civil liability) the
Company has agreed to indemnify the Administrator against such liability.
ARTICLE 11. Definitions of Certain Terms. The terms "interested person"
and "affiliated person," when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
ARTICLE 12. Notice. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice to the
other party at the following address: if to the Administrator, to it at 3435
Stelzer Road, Columbus, Ohio 43219; if to the Company, to it at 125 West 55th
Street, New York, NY 10019, or at such other address as such party may from time
to time specify in writing to the other party pursuant to this Section.
ARTICLE 13. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of New York and the applicable provisions
of the 1940 Act. To the extent
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<PAGE>
that the applicable laws of the State of New York, or any of the provisions
herein, conflict with the applicable provisions of the 1940 Act, the latter
shall control.
ARTICLE 14. Multiple Originals. This Agreement may be executed in two
or more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
THE OFFITBANK VARIABLE
INSURANCE FUND, INC.
By: /s/John J. Pileggi
----------------------------
Title: Assistant Treasurer
-------------------------
BISYS FUND SERVICES LIMITED
PARTNERSHIP
BY: BISYS FUND SERVICES, INC.
GENERAL PARTNER
By: /s/Stephen Mintos
----------------------------
Title: Executive Vice President
-------------------------
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<PAGE>
SCHEDULE A
TO THE ADMINISTRATION AGREEMENT
DATED AS OF OCTOBER 1, 1996
BETWEEN THE OFFITBANK VARIABLE INSURANCE FUND, INC.
AND
BISYS FUND SERVICES LIMITED PARTNERSHIP
Portfolios: This Agreement shall apply to all Portfolios of the Company,
either now or hereafter created (collectively, the
"Portfolios"). The current portfolios of the Company are set
forth below:
OFFITBANK VIF - High Yield Fund
OFFITBANK VIF - Emerging Markets Fund
OFFITBANK VIF - Total Return Fund
OFFITBANK VIF - U.S. Small Cap Fund
OFFITBANK VIF - Government Securities Fund
OFFITBANK DJG - Value Equity Fund
Fees: Pursuant to Article 4, in consideration of services rendered
and expenses assumed pursuant to this Agreement, the Company
will pay the Administrator on the first business day of each
month, or at such time(s) as the Administrator shall request
and the parties hereto shall agree, a fee computed daily at
the annual rate of:
Fifteen one-hundredths of one percent (.15%) of the
Company's average daily net assets.
The fee for the period from the day of the month upon which
the Conversion Date occurs until the end of that month shall
be prorated according to the proportion which such period
bears to the full monthly period. Upon any termination of
this Agreement before the end of any month, the fee for such
part of a month shall be prorated according to the
proportion which such period bears to the full monthly
period and shall be payable upon the date of termination of
this Agreement.
For purposes of determining the fees payable to the
Administrator, the value of the net assets of a particular
Portfolio shall be computed in the manner described in the
Company's Articles of Incorporation or in the Prospectus or
Statement of Additional Information respecting that
Portfolio as from time to time is in effect for the
computation of the value of such net assets in connection
with the determination of the liquidating value of the
shares of such Portfolio.
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<PAGE>
The parties hereby confirm that the fees payable hereunder
shall be applied to each Portfolio as a whole, and not to
separate classes of shares within the Portfolios.
Term: The initial term of this Agreement (the "Initial Term")
shall be for a period commencing on the date this Agreement
is executed by both parties and ending on the date that is
one year after the Conversion Date. Thereafter, unless
otherwise terminated as provided herein, this Agreement
shall be renewed automatically for successive one-year
periods ("Rollover Periods"). This Agreement may be
terminated without penalty (i) by provision of 60 days
advance written notice of nonrenewal to the other party
prior to the end of the Initial Term or the then-current
Rollover Period, (ii) by mutual agreement of the parties,
(iii) for "cause," as defined below, upon the provision of
60 days advance written notice by the party alleging cause,
or (iv) by provision of 90 days advance written notice of
termination during a Rollover Period.
For purposes of this Agreement, "cause" shall mean (a)
willful misfeasance, bad faith, gross negligence or reckless
disregard on the part of the party to be terminated with
respect to its obligations and duties set forth herein; (b)
multiple negligent acts on the part of the party to be
terminated which in the aggregate constitute a serious
failure to perform satisfactorily that party's obligations
hereunder; (c) a material breach of this Agreement that has
not been remedied for 45 days following receipt of written
notice of such breach from the nonbreaching party; or (d) a
"service standard deficiency," as defined below.
For purposes of this Agreement, a service standard
deficiency shall be defined as (i) any pattern of
substandard performance over a 60-day period with respect to
such service standards as the parties shall agree upon
relating to the duties and obligations of the Administrator
herein or to the duties and obligations of the Administrator
or an affiliate of the Administrator pursuant to any other
service agreement with the Company ("Service Standards") or
(ii) any "asset withdrawal," as defined below, by a
Shareholder which, in the aggregate, exceeds $1 million,
that can be reasonably attributed to a failure on the part
of the Administrator or an affiliate of the Administrator to
meet one or more Service Standards. For purposes of this
Agreement, "asset withdrawal" shall include any combination
of (i) a redemption of Company Shares and/or (ii) a
withdrawal of assets from any non-mutual fund account or
other mutual fund account held by a Company Shareholder that
is advised by the Company's investment adviser or an
affiliate of such investment adviser. A copy of the current
Service Standards that have been agreed upon by the parties
is attached hereto and made a part hereof.
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<PAGE>
Notwithstanding the foregoing, after such termination, for
so long as the Administrator, with the written consent of
the Company, in fact continues to perform any one or more of
the services contemplated by this Agreement or any schedule
or exhibit hereto, the provisions of this Agreement,
including without limitation the provisions dealing with
indemnification, shall continue in full force and effect.
Compensation due the Administrator and unpaid by the Company
upon such termination shall be immediately due and payable
upon and notwithstanding such termination.
If, during the first six months of the Initial Term, for any
reason other than cause, as defined herein, the
Administrator is replaced as fund manager and administrator,
or if a third party is added to perform all or a part of the
services provided by the Administrator under this Agreement
(excluding any sub- administrator appointed by the
Administrator as provided in Article 7 hereof), then the
Company shall make a one-time cash payment, as liquidated
damages, to the Administrator equal to the balance due the
Administrator for the remainder of such Initial Term,
assuming for purposes of calculation of the payment that the
asset level of the Company on the date the Administrator is
replaced, or a third party is added, will remain constant
for the balance of such term.
If, during the second six months of the Initial Term, for
any reason other than cause, as defined herein, the
Administrator is replaced as fund manager and administrator,
or if a third party is added to perform all or a part of the
services provided by the Administrator under this Agreement
(excluding any sub- administrator appointed by the
Administrator as provided in Article 7 hereof), then the
Company shall make a one-time cash payment, as liquidated
damages to the Administrator equal to one-half of the
balance due the Administrator for the remainder of such
Initial Term, assuming for purposes of calculation of the
payment that the asset level of the Company on the date the
Administrator is replaced, or a third party is added, will
remain constant for the balance of such term.
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TRANSFER AGENCY AGREEMENT
AGREEMENT made this 1st day of October, 1996, between THE OFFITBANK VARI-
ABLE INSURANCE FUND, INC. (the "Company"), a Maryland corporation, and BISYS
FUND SERVICES, INC. ("BISYS"), a Delaware corporation.
WHEREAS, the Company desires that BISYS perform certain services for each
series of the Company (individually referred to herein as a "Fund" and
collectively as the "Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Retention of BISYS; Conversion to the Services.
The Company hereby engages BISYS to act as the transfer agent for
the Funds to perform (i) the transfer agent services set forth in Schedule A
hereto (the "Initial Services"), (ii) such special services (the "Special
Services") incidental to the performance of such services as may be agreed to by
the parties from time to time (for such fees as the parties may agree as
aforesaid) and (iii) such additional services (collectively with the Initial
Services and the Special Services, the "Services"), as may be agreed to by the
parties from time to time and set forth in an amendment to said Schedule A (for
such fees as the parties may agree as aforesaid), and, in connection therewith,
the Company agrees to convert to BISYS' data processing systems and software
(the "BISYS System") as necessary in order to receive the Services. The Company
shall cooperate with BISYS to provide BISYS with all necessary information and
assistance required to successfully convert to the BISYS System. BISYS shall
provide the Company with a schedule relating to such conversion and the parties
agree that the conversion may progress in stages. The date upon which all
Initial Services shall have been converted to the BISYS System shall be referred
to herein as the "Conversion Date." BISYS hereby accepts such engagement and
agrees to perform the Services commencing, with respect to each individual
Service, on the date that the conversion of such Service to the BISYS System has
been completed. BISYS shall determine in accordance with its normal acceptance
procedures when the applicable Service has been successfully converted.
BISYS may, in its discretion, appoint in writing other parties
qualified to perform transfer agency services reasonably acceptable to the
Company (individually, a "Sub-transfer Agent") to carry out some or all of its
responsibilities under this Agreement with respect to a Fund; provided, however,
that the Sub-transfer Agent shall be the agent of BISYS and not the agent of the
Company or such Fund, and that BISYS shall be fully responsible for the acts of
<PAGE>
such Sub-transfer Agent and shall not be relieved of any of its responsibilities
hereunder by the appointment of such Sub-transfer Agent.
2. Fees.
The Company shall pay BISYS for the services to be provided by
BISYS under this Agreement in accordance with, and in the manner set forth in,
Schedule B hereto. Fees for any additional services to be provided by BISYS
pursuant to an amendment to Schedule A hereto shall be subject to mutual
agreement at the time such amendment to Schedule A is proposed.
3. Reimbursement of Expenses.
In addition to paying BISYS the fees described in Section 2
hereof, the Company agrees to reimburse BISYS for BISYS' out-of-pocket expenses
in providing services hereunder, including without limitation, the following:
(a) All freight and other delivery and bonding charges
incurred by BISYS in delivering materials to and from the Company
and in delivering all materials to shareholders;
(b) All direct telephone, telephone transmission and
telecopy or other electronic transmission expenses incurred by
BISYS in communication with the Company, the Company's investment
adviser or custodian, dealers, shareholders or others as required
for BISYS to perform the services to be provided hereunder;
(c) Costs of postage, couriers, stock computer paper,
statements, labels, envelopes, checks, reports, letters, tax
forms, proxies, notices or other form of printed material which
shall be required by BISYS for the performance of the services to
be provided hereunder;
(d) The cost of microfilm or microfiche of records or other
materials; and
(e) Any expenses BISYS shall incur at the written direction
of an officer of the Company thereunto duly authorized.
4. Effective Date.
This Agreement shall become effective as of the date first written
above (the "Effective Date").
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<PAGE>
5. Term.
The initial term of this Agreement (the "Initial Term") shall be
for a period commencing on the date this Agreement is executed by both parties
and ending on the date that is one year after the Conversion Date. Thereafter,
unless otherwise terminated as provided herein, this Agreement shall be renewed
automatically for successive one-year periods ("Rollover Periods"). This
Agreement may be terminated without penalty (i) by provision of 60 days advance
written notice of nonrenewal to the other party prior to the end of the Initial
Term or the then-current Rollover Period, (ii) by mutual agreement of the
parties, (iii) for "cause," as defined below, upon the provision of 60 days
advance written notice by the party alleging cause, or (iv) by provision of 90
days advance written notice of termination during a Rollover Period.
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence or reckless disregard on the part of
the party to be terminated with respect to its obligations and duties set forth
herein; (b) multiple negligent acts on the part of the party to be terminated
which in the aggregate constitute a serious failure to perform satisfactorily
that party's obligations hereunder; (c) a material breach of this Agreement that
has not been remedied for 45 days following receipt of written notice of such
breach from the nonbreaching party; or (d) a "service standard deficiency," as
defined below.
For purposes of this Agreement, a service standard deficiency
shall be defined as (i) any pattern of substandard performance over a 60-day
period with respect to such service standards as the parties shall agree upon
relating to the duties and obligations of BISYS herein or to the duties and
obligations of BISYS or an affiliate of BISYS pursuant to any other service
agreement with the Company ("Service Standards") or (ii) any "asset withdrawal,"
as defined below, by a Shareholder which, in the aggregate, exceeds $1 million,
that can be reasonably attributed to a failure on the part of BISYS or an
affiliate of BISYS to meet one or more Service Standards. For purposes of this
Agreement, "asset withdrawal" shall include any combination of (i) a redemption
of Company Shares and/or (ii) a withdrawal of assets from any non-mutual fund
account or other mutual fund account held by a Company Shareholder that is
advised by the Company's investment adviser or an affiliate of such investment
adviser. A copy of the current Service Standards that have been agreed upon by
the parties is attached hereto and made a part hereof.
Notwithstanding the foregoing, after such termination, for so long
as BISYS, with the written consent of the Company, in fact continues to perform
any one or more of the services contemplated by this Agreement or any schedule
or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Compensation due BISYS and unpaid by the Company upon such
termination shall be immediately due and payable upon and notwithstanding such
termination.
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<PAGE>
If, during the first six months of the Initial Term, for any
reason other than cause, as defined herein, BISYS is replaced as transfer agent,
or if a third party is added to perform all or a part of the services provided
by BISYS under this Agreement (excluding any sub-transfer agent appointed by
BISYS as provided in Section 1 hereof), then the Company shall make a one-time
cash payment, as liquidated damages, to BISYS equal to the balance due BISYS for
the remainder of such Initial Term, assuming for purposes of calculation of the
payment that the asset level of the Company on the date BISYS is replaced, or a
third party is added, will remain constant for the balance of such term.
If, during the second six months of the Initial Term, for any
reason other than cause, as defined herein, BISYS is replaced as transfer agent,
or if a third party is added to perform all or a part of the services provided
by BISYS under this Agreement (excluding any sub-transfer agent appointed by
BISYS as provided in Section 1 hereof), then the Company shall make a one-time
cash payment, as liquidated damages to BISYS equal to one-half of the balance
due BISYS for the remainder of such Initial Term, assuming for purposes of
calculation of the payment that the asset level of the Company on the date BISYS
is replaced, or a third party is added, will remain constant for the balance of
such term.
6. Uncontrollable Events.
BISYS assumes no responsibility hereunder, and shall not be liable
for any damage, loss of data, delay or any other loss whatsoever caused by
events beyond its reasonable control.
7. Legal Advice.
BISYS shall notify the Company at any time BISYS believes that it
is in need of the advice of counsel (other than counsel in the regular employ of
BISYS or any affiliated companies) with regard to BISYS' responsibilities and
duties pursuant to this Agreement; and after so notifying the Company, BISYS, at
its discretion, shall be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Company or
Funds unless relating to a matter involving BISYS' willful misfeasance, bad
faith, gross negligence or reckless disregard with respect to BISYS'
responsibilities and duties hereunder and BISYS shall in no event be liable to
the Company or any Fund or any shareholder or beneficial owner of the Company
for any action reasonably taken pursuant to such advice.
8. Instructions.
Whenever BISYS is requested or authorized to take action hereunder
pursuant to instructions from a shareholder, or a properly authorized agent of a
shareholder ("shareholder's agent"), concerning an account in a Fund, BISYS
shall be entitled to rely upon any certificate, letter or other instrument or
communication, believed by BISYS to be genuine and to have been properly made,
signed or authorized by an officer or other authorized agent of the Company or
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<PAGE>
by the shareholder or shareholder's agent, as the case may be, and shall be
entitled to receive as conclusive proof of any fact or matter required to be
ascertained by it hereunder a certificate signed by an officer of the Company or
any other person authorized by the Company's Board of Directors or by the
shareholder or shareholder's agent, as the case may be.
As to the services to be provided hereunder, BISYS may rely
conclusively upon the terms of the Prospectuses and Statement of Additional
Information of the Company relating to the Funds to the extent that such
services are described therein unless BISYS receives written instructions to the
contrary in a timely manner from the Company.
9. Standard of Care; Reliance on Records and Instructions; Indemnification.
BISYS shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Company
for any action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. The Company agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or nonactions with respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information, records, instructions or requests given or
made to BISYS by the Company, the investment adviser and on any records provided
by any fund accountant or custodian thereof; provided that this indemnification
shall not apply to actions or omissions of BISYS in cases of its own bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties; and further provided that prior to confessing any claim
against it which may be the subject of this indemnification, BISYS shall give
the Company written notice of and reasonable opportunity to defend against said
claim in its own name or in the name of BISYS.
BISYS agrees to indemnify and hold harmless the Company, its
employees, agents, Directors, officers and nominees from and against any and all
actions, suits and claims, whether groundless of otherwise, and from and against
any and all judgements, liabilities, losses, damages, costs, charges, reasonable
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' bad faith, willful misfeasance, negligence or
reckless disregard by it of its obligations and duties, with respect to the
performance of services under this Agreement provided, that, prior to confessing
any claim against it which may be the subject of this indemnification, the
Company shall give BISYS written notice of and a reasonable opportunity to
defend against said claim in its own name or in the name of the Company.
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<PAGE>
10. Record Retention and Confidentiality.
BISYS shall keep and maintain on behalf of the Company all books
and records which the Company or BISYS is, or may be, required to keep and
maintain pursuant to any applicable statutes, rules and regulations, including
without limitation Rules 31a-1 and 31a-2 under the Investment Company Act of
1940, as amended (the "1940 Act"), relating to the maintenance of books and
records in connection with the services to be provided hereunder. BISYS further
agrees that all such books and records shall be the property of the Company and
to make such books and records available for inspection by the Company or by the
Securities and Exchange Commission (the "Commission") at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Company and its shareholders, except when requested to divulge
such information by duly-constituted authorities or court process, or requested
by a shareholder or shareholder's agent with respect to information concerning
an account as to which such shareholder has either a legal or beneficial
interest or when requested by the Company, the shareholder, or shareholder's
agent, or the dealer of record as to such account.
11. Reports.
BISYS will furnish to the Company and to its properly-authorized
auditors, investment advisers, examiners, distributors, dealers, underwriters,
salesmen, insurance companies and others designated by the Company in writing,
such reports at such times as are prescribed in Schedule C attached hereto, or
as subsequently agreed upon by the parties pursuant to an amendment to Schedule
C.
12. Rights of Ownership.
All computer programs and procedures developed to perform services
required to be provided by BISYS under this Agreement are the property of BISYS.
All records and other data except such computer programs and procedures are the
exclusive property of the Company and all such other records and data will be
furnished to the Company in appropriate form as soon as practicable after
termination of this Agreement for any reason.
13. Return of Records.
BISYS may at its option at any time, and shall promptly upon the
Company's demand, turn over to the Company and cease to retain BISYS' files,
records and documents created and maintained by BISYS pursuant to this Agreement
which are no longer needed by BISYS in the performance of its services or for
its legal protection. If not so turned over to the Company, such documents and
records will be retained by BISYS for six years from the year of creation. At
the end of such six-year period, such records and documents will be turned over
to the Company unless the Company authorizes in writing the destruction of such
records and documents.
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<PAGE>
14. Bank Accounts.
The Company and the Funds shall establish and maintain such bank
accounts with such bank or banks as are selected by the Company, as are
necessary in order that BISYS may perform the services required to be performed
hereunder. To the extent that the performance of such services shall require
BISYS directly to disburse amounts for payment of dividends, redemption proceeds
or other purposes, the Company and Funds shall provide such bank or banks with
all instructions and authorizations necessary for BISYS to effect such
disbursements.
15. Representations of the Company.
The Company certifies to BISYS that: (a) as of the close of
business on the Effective Date, each Fund which is in existence as of the
Effective Date has authorized unlimited shares, and (b) by virtue of its
Articles of Incorporation, shares of each Fund which are redeemed by the Company
may be sold by the Company from its treasury, and (c) this Agreement has been
duly authorized by the Company and, when executed and delivered by the Company,
will constitute a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
16. Representations of BISYS.
BISYS represents and warrants that: (a) BISYS has been in, and
shall continue to be in, substantial compliance with all provisions of law,
including Section 17A(c) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), required in connection with the performance of its duties under
this Agreement; and (b) the various procedures and systems which BISYS has
implemented with regard to safekeeping from loss or damage attributable to fire,
theft or any other cause of the blank checks, records, and other data of the
Company and BISYS' records, data, equipment, facilities and other property used
in the performance of its obligations hereunder are adequate and that it will
make such changes therein from time to time as are required for the secure
performance of its obligations hereunder.
17. Insurance.
BISYS shall notify the Company should its insurance coverage with
respect to professional liability or errors and omissions coverage be canceled
or reduced. Such notification shall include the date of change and the reasons
therefor. BISYS shall notify the Company of any material claims against it with
respect to services performed under this Agreement, whether or not they may be
covered by insurance, and shall notify the Company from time to time as may be
appropriate of the total outstanding claims made by BISYS under its insurance
coverage.
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<PAGE>
18. Information to be Furnished by the Company and Funds.
The Company has furnished to BISYS the following:
(a) Copies of the Articles of Incorporation of the Company and of
any amendments thereto, certified by the proper official of the state
in which such Declaration has been filed.
(b) Copies of the following documents:
1. The Company's By-Laws and any amendments thereto.
2. Certified copies of resolutions of the Board of Directors
covering the following matters:
A. Approval of this Agreement and authorization of a
specified officer of the Company to execute and deliver this
Agreement and authorization for specified officers of the
Company to instruct BISYS hereunder; and
B. Authorization of BISYS to act as Transfer Agent for
the Company on behalf of the Funds.
(c) A list of all officers of the Company, together with specimen
signatures of those officers, who are authorized to instruct BISYS in
all matters.
(d) Two copies of the following (if such documents are employed
by the Company):
1. Prospectuses and Statement of Additional Information;
2. Distribution Agreement; and
3. All other forms commonly used by the Company or its
Distributor with regard to their relationships and transactions
with shareholders of the Funds.
(e) A certificate as to shares of beneficial interest of the
Company authorized, issued, and outstanding as of the Effective Date
of BISYS' appointment as Transfer Agent (or as of the date on which
BISYS' services are commenced, whichever is the later date) and as to
receipt of full consideration by the Company for all shares
outstanding, such statement to be certified by the Treasurer of the
Company.
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<PAGE>
19. Information Furnished by BISYS.
BISYS has furnished to the Company the following:
(a) BISYS' Articles of Incorporation.
(b) BISYS' By-Laws and any amendments thereto.
(c) Certified copies of actions of BISYS covering the following
matters:
1. Approval of this Agreement, and authorization of a
specified officer of BISYS to execute and deliver this Agreement;
2. Authorization of BISYS to act as Transfer Agent for the
Company.
(d) A copy of the most recent independent accountants' report
relating to internal accounting control systems as filed with the
Commission pursuant to Rule 17Ad-13 under the Exchange Act.
20. Amendments to Documents.
The Company shall furnish BISYS written copies of any amendments
to, or changes in, any of the items referred to in Section 18 hereof forthwith
upon such amendments or changes becoming effective. In addition, the Company
agrees that no amendments will be made to the Prospectuses or Statement of
Additional Information of the Company which might have the effect of changing
the procedures employed by BISYS in providing the services agreed to hereunder
or which amendment might affect the duties of BISYS hereunder unless the Company
first obtains BISYS' approval of such amendments or changes.
21. Reliance on Amendments.
BISYS may rely on any amendments to or changes in any of the
documents and other items to be provided by the Company pursuant to Sections 18
and 20 of this Agreement and the Company hereby indemnifies and holds harmless
BISYS from and against any and all claims, demands, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character which may result from actions or omissions on the
part of BISYS in reasonable reliance upon such amendments and/or changes.
Although BISYS is authorized to rely on the above-mentioned amendments to and
changes in the documents and other items to be provided pursuant to Sections 18
and 20 hereof, BISYS shall be under no duty to comply with or take any action as
a result of any of such amendments or changes unless the Company first obtains
BISYS' written consent to and approval of such amendments or changes.
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<PAGE>
22. Compliance with Law.
Except for the obligations of BISYS set forth in Section 10
hereof, the Company assumes full responsibility for the preparation, contents,
and distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act, and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS shall have no obligation to take
cognizance of any laws relating to the sale of the Company's shares. The Company
represents and warrants that no shares of the Company will be offered to the
public until the Company's registration statement under the 1933 Act and the
1940 Act has been declared or becomes effective.
23. Notices.
Any notice provided hereunder shall be sufficiently given when sent by
registered or certified mail to the party required to be served with such notice
at the following address: if to the Company, to it at 125 West 55th Street, New
York, New York 10019; if to BISYS, to it at 3435 Stelzer Road, Columbus, Ohio
43219, or at such other address as such party may from time to time specify in
writing to the other party pursuant to this Section.
24. Headings.
Paragraph headings in this Agreement are included for convenience
only and are not to be used to construe or interpret this Agreement.
25. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable by either of the parties hereto except by the specific written
consent of the other party. This Section 25 shall not limit or in any way affect
BISYS' right to appoint a Sub-transfer Agent pursuant to Section 1 hereof. This
Agreement shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
26. Governing Law.
This Agreement shall be governed by and provisions shall be
construed in accordance with the laws of the State of New York.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
THE OFFITBANK VARIABLE
INSURANCE FUND, INC.
By: /s/ John J. Pileggi
-------------------
Title: Assistant Treasurer
BISYS FUND SERVICES, INC.
By: /s/ Stephen Mintos
------------------
Title: Executive Vice President
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<PAGE>
Dated: October 1, 1996
SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENCY SERVICES
1. Shareholder Transactions
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend option,
taxpayer identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10 under the
Securities Exchange Act of 1934, as amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new
shares, through dividend reimbursement.
2. Shareholder Information Services
a. Make information available to shareholder servicing unit and
other remote access units regarding trade date, share price, current holdings,
yields, and dividend information.
b. Produce detailed history of transactions through duplicate or
special order statements upon request.
c. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements or marketing material to current shareholders.
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<PAGE>
3. Compliance Reporting
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers and the States in which the Fund is
registered.
b. Prepare and distribute appropriate Internal Revenue Service
forms for corresponding Fund and shareholder income and capital gains.
c. Issue tax withholding reports to the Internal Revenue Service.
4. Dealer/Load Processing (if applicable)
a. Provide reports for tracking rights of accumulation and
purchases made under a Letter of Intent.
b. Account for separation of shareholder investments from
transaction sale charges for purchase of Fund shares.
c. Calculate fees due under 12b-1 plans for distribution and
marketing expenses.
d. Track sales and commission statistics by dealer and provide for
payment of commissions on direct shareholder purchases in a load Fund.
5. Shareholder Account Maintenance
a. Maintain all shareholder records for each account in the
Company.
b. Issue customer statements on scheduled cycle, providing
duplicate second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
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<PAGE>
SCHEDULE B
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENT FEES
Effective as of the Conversion Date, the Transfer Agent shall receive an account
maintenance fee of $15.00 per year for each account which is in existence at any
time during the month for which payment is made, such fee to be paid in equal
monthly installments. The Transfer Agent shall be entitled to this account
maintenance fee on all accounts maintained in its records during the year,
including those accounts which have a zero balance during any portion of the
year.
Additional Services:
Additional services such as IRA processing, development of interface
capabilities, servicing of 403(b) and 408(c) accounts, management of cash sweeps
between DDAs and mutual fund accounts and coordination of the printing and
distribution of prospectuses, annual reports and semi-annual reports are subject
to additional fees which will be quoted upon request. Programming costs or
database management fees for special reports or specialized processing will be
quoted upon request.
Out-of-pocket Expenses:
BISYS shall be entitled to be reimbursed for all reasonable
out-of-pocket expenses including, but not limited to, the expenses set forth in
Section 3 of the Transfer Agency Agreement to which this Schedule B is attached.
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<PAGE>
SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
AND
BISYS FUND SERVICES, INC.
REPORTS
1. Daily Shareholder Activity Journal
2. Daily Fund Activity Summary Report
a. Beginning Balance
b. Dealer Transactions
c. Shareholder Transactions
d. Reinvested Dividends
e. Exchanges
f. Adjustments
g. Ending Balance
3. Daily Wire and Check Registers
4. Monthly Dealer Processing Reports
5. Monthly Dividend Reports
6. Sales Data Reports for Blue Sky Registration
7. Annual report by independent public accountants concerning BISYS' shareholder
system and internal accounting control systems to be filed with the Securities
and Exchange Commission pursuant to Rule 17Ad-13 of the Securities Exchange Act
of 1934, as amended.
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FUND ACCOUNTING AGREEMENT
AGREEMENT made this 1st day of October, 1996, between THE OFFITBANK
VARIABLE INSURANCE FUND, INC. (the "Company"), a Maryland corporation, and BISYS
FUND SERVICES, INC. ("Fund Accountant"), a corporation organized under the laws
of the State of Delaware.
WHEREAS, the Company desires that Fund Accountant perform certain fund
accounting services for each investment portfolio of the Company, all as now or
hereafter may be established from time to time (individually referred to herein
as the "Fund" and collectively as the "Funds"); and
WHEREAS, Fund Accountant is willing to perform such services on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Fund Accountant; Conversion to Services.
The Company hereby engages Fund Accountant to perform fund
accounting services as set forth in this Section 1 (collectively, the
"Services"), and, in connection therewith, the Company agrees to convert to Fund
Accountant's data processing systems and software (the "BISYS System") as
necessary in order to receive the Services. The Company shall cooperate with
Fund Accountant to provide Fund Accountant with all necessary information and
assistance required to successfully convert to the BISYS System. Fund Accountant
shall provide the Company with a schedule relating to such conversion and the
parties agree that the conversion may progress in stages. The date upon which
all Services shall have been converted to the BISYS System shall be referred to
herein as the "Conversion Date." Fund Accountant hereby accepts such engagement
and agrees to perform the Services commencing, with respect to each individual
Service, on the date that the conversion of such Service to the BISYS System has
been completed. Fund Accountant shall determine in accordance with its normal
acceptance procedures when the applicable Service has been successfully
converted.
(a) Maintenance of Books and Records. Fund Accountant will keep
and maintain the following books and records of each Fund pursuant to
Rule 31a-1 under the Investment Company Act of 1940 (the "Rule"):
(i) Journals containing an itemized daily record in detail
of all purchases and sales of securities, all receipts and
disbursements of cash and all other debits and credits, as
required by subsection (b)(1) of the Rule;
<PAGE>
(ii) General and auxiliary ledgers reflecting all asset,
liability, reserve, capital, income and expense accounts,
including interest accrued and interest received, as required by
subsection (b)(2)(I) of the Rule;
(iii) Separate ledger accounts required by subsection
(b)(2)(ii) and (iii) of the Rule; and
(iv) A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of the
Rule.
(b) Performance of Daily Accounting Services. In addition to the
maintenance of the books and records specified above, Fund Accountant
shall perform the following accounting services daily for each Fund:
(i) Calculate the net asset value per share utilizing prices
obtained from the sources described in subsection 1(b)(ii) below;
(ii) Obtain security prices from independent pricing
services, or if such quotes are unavailable, then obtain such
prices from each Fund's investment adviser or its designee, as
approved by the Company's Board of Directors;
(iii) Verify and reconcile with the Fund's custodian all
daily trade activity;
(iv) Compute, as appropriate, each Fund's net income and
capital gains, dividend payables, dividend factors, 7-day yields,
7-day effective yields, 30-day yields, and weighted average
portfolio maturity;
(v) Review daily the net asset value calculation and
dividend factor (if any) for each Fund prior to release to
shareholders, check and confirm the net asset values and dividend
factors for reasonableness and deviations, and distribute net
asset values and yields to NASDAQ;
(vi) Report to the Company the daily market pricing of
securities in any money market Funds, with the comparison to the
amortized cost basis;
(vii) Determine unrealized appreciation and depreciation on
securities held in variable net asset value Funds;
(viii) Amortize premiums and accrete discounts on securities
purchased at a price other than face value, if requested by the
Company;
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<PAGE>
(ix) Update fund accounting system to reflect rate changes,
as received from a Fund's investment adviser, on variable
interest rate instruments;
(x) Post Fund transactions to appropriate categories;
(xi) Accrue expenses of each Fund according to instructions
received from the Company's Administrator;
(xii) Determine the outstanding receivables and payables for
all (1) security trades, (2) Fund share transactions and (3)
income and expense accounts;
(xiii) Provide accounting reports in connection with the
Company's regular annual audit and other audits and examinations
by regulatory agencies; and
(xiv) Provide such periodic reports as the parties shall
agree upon, as set forth in a separate schedule.
(c) Special Reports and Services.
(i) Fund Accountant may provide additional special reports
upon the request of the Company or a Fund's investment adviser,
which may result in an additional charge, the amount of which
shall be agreed upon between the parties.
(ii) Fund Accountant may provide such other similar services
with respect to a Fund as may be reasonably requested by the
Company, which may result in an additional charge, the amount of
which shall be agreed upon between the parties.
(d) Additional Accounting Services. Fund Accountant shall also
perform the following additional accounting services for each Fund:
(i) Provide monthly a download (and hard copy thereof) of
the financial statements described below, upon request of the
Company. The download will include the following items:
Statement of Assets and Liabilities,
Statement of Operations,
Statement of Changes in Net Assets, and
Condensed Financial Information;
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<PAGE>
(ii) Provide accounting information for the following:
(A) federal and state income tax returns and federal
excise tax returns;
(B) the Company's semi-annual reports with the
Securities and Exchange Commission ("SEC") on Form N-SAR;
(C) the Company's annual, semi-annual and quarterly (if
any) shareholder reports;
(D) registration statements on Form N-1A and other
filings relating to the registration of Shares;
(E) the Administrator's monitoring of the Company's
status as a regulated investment company under Subchapter M
of the Internal Revenue Code, as amended;
(F) annual audit by the Company's auditors; and
(G) examinations performed by the SEC.
2. Subcontracting.
Fund Accountant may, at its expense, subcontract with any entity or
person concerning the provision of the services contemplated hereunder;
provided, however, that Fund Accountant shall not be relieved of any of its
obligations under this Agreement by the appointment of such subcontractor and
provided further, that Fund Accountant shall be responsible, to the extent
provided in Section 6 hereof, for all acts of such subcontractor as if such acts
were its own.
3. Compensation.
The Company shall pay Fund Accountant for the services to be
provided by Fund Accountant under this Agreement in accordance with, and in the
manner set forth in, Schedule A hereto, as such Schedule may be amended from
time to time.
4. Reimbursement of Expenses.
In addition to paying Fund Accountant the fees described in Section
3 hereof, the Company agrees to reimburse Fund Accountant for its out-of-pocket
expenses in providing services hereunder, including without limitation the
following:
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<PAGE>
(a) All direct telephone, telephone transmission and
telecopy or other electronic transmission expenses incurred by
Fund Accountant in communication with the Company, the Company's
investment advisor or custodian, dealers or others as required
for Fund Accountant to perform the services to be provided
hereunder;
(b) The cost of obtaining security market quotes pursuant to
Section l(b)(ii) above;
(c) Any expenses Fund Accountant shall incur at the written
direction of an officer of the Company thereunto duly authorized;
and
(d) Any additional expenses reasonably incurred by Fund
Accountant, upon receipt of prior approval from the Company, in
the performance of its duties and obligations under this
Agreement.
5. Effective Date.
This Agreement shall become effective with respect to a Fund as of
the date first written above.
6. Term.
The initial term of this Agreement (the "Initial Term") shall be for
a period commencing on the date this Agreement is executed by both parties and
ending on the date that is one year after the Conversion Date. Thereafter,
unless otherwise terminated as provided herein, this Agreement shall be renewed
automatically for successive one-year periods ("Rollover Periods"). This
Agreement may be terminated without penalty (i) by provision of 60 days advance
written notice of nonrenewal to the other party prior to the end of the Initial
Term or the then-current Rollover Period, (ii) by mutual agreement of the
parties, (iii) for "cause," as defined below, upon the provision of 60 days
advance written notice by the party alleging cause, or (iv) by provision of 90
days advance written notice of termination during a Rollover Period.
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence or reckless disregard on the part of
the party to be terminated with respect to its obligations and duties set forth
herein; (b) multiple negligent acts on the part of the party to be terminated
which in the aggregate constitute a serious failure to perform satisfactorily
that party's obligations hereunder; (c) a material breach of this Agreement that
has not been remedied for 45 days following receipt of written notice of such
breach from the nonbreaching party; or (d) a "service standard deficiency," as
defined below.
-5-
<PAGE>
For purposes of this Agreement, a service standard deficiency shall
be defined as (i) any pattern of substandard performance over a 60-day period
with respect to such service standards as the parties shall agree upon relating
to the duties and obligations of Fund Accountant herein or to the duties and
obligations of Fund Accountant or an affiliate of Fund Accountant pursuant to
any other service agreement with the Company ("Service Standards") or (ii) any
"asset withdrawal," as defined below, by a Shareholder which, in the aggregate,
exceeds $1 million, that can be reasonably attributed to a failure on the part
of Fund Accountant or an affiliate of Fund Accountant to meet one or more
Service Standards. For purposes of this Agreement, "asset withdrawal" shall
include any combination of (i) a redemption of Company Shares and/or (ii) a
withdrawal of assets from any non-mutual fund account or other mutual fund
account held by a Company Shareholder that is advised by the Company's
investment adviser or an affiliate of such investment adviser.
Notwithstanding the foregoing, after such termination, for so long
as Fund Accountant, with the written consent of the Company, in fact continues
to perform any one or more of the services contemplated by this Agreement or any
schedule or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Compensation due Fund Accountant and unpaid by the Company
upon such termination shall be immediately due and payable upon and
notwithstanding such termination.
If, during the first six months of the Initial Term, for any reason
other than cause, as defined herein, Fund Accountant is replaced as fund
accountant, or if a third party is added to perform all or a part of the
services provided by Fund Accountant under this Agreement (excluding any
sub-accountant appointed by Fund Accountant as provided in Section 2 hereof),
then the Company shall make a one-time cash payment, as liquidated damages, to
Fund Accountant equal to the balance due Fund Accountant for the remainder of
such Initial Term, assuming for purposes of calculation of the payment that the
asset level of the Company on the date Fund Accountant is replaced, or a third
party is added, will remain constant for the balance of such term.
If, during the second six months of the Initial Term, for any reason
other than cause, as defined herein, Fund Accountant is replaced as fund
accountant, or if a third party is added to perform all or a part of the
services provided by Fund Accountant under this Agreement (excluding any
sub-accountant appointed by Fund Accountant as provided in Section 2 hereof),
then the Company shall make a one-time cash payment, as liquidated damages to
Fund Accountant equal to one-half of the balance due Fund Accountant for the
remainder of such Initial Term, assuming for purposes of calculation of the
payment that the asset level of the Company on the date Fund Accountant is
replaced, or a third party is added, will remain constant for the balance of
such term.
-6-
<PAGE>
7. Standard of Care; Reliance on Records and Instructions;
Indemnification.
Fund Accountant shall use its best efforts to insure the accuracy of
all services performed under this Agreement, but shall not be liable to the
Company for any action taken or omitted by Fund Accountant in the absence of bad
faith, willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties. A Fund agrees to indemnify and hold harmless Fund
Accountant, its employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Fund Accountant's actions
taken or nonactions with respect to the performance of services under this
Agreement with respect to such Fund or based, if applicable, upon reasonable
reliance on information, records, instructions or requests with respect to such
Fund given or made to Fund Accountant by a duly authorized representative of the
Company; provided that this indemnification shall not apply to actions or
omissions of Fund Accountant in cases of its own bad faith, willful misfeasance,
negligence or from reckless disregard by it of its obligations and duties, and
further provided that prior to confessing any claim against it which may be the
subject of this indemnification, Fund Accountant shall give the Company written
notice of and reasonable opportunity to defend against said claim in its own
name or in the name of Fund Accountant.
Fund Accountant agrees to indemnify and hold harmless the Company,
its employees, agents, Directors, officers and nominees from and against any and
all actions, suits and claims, whether groundless or otherwise, and from and
against any and all judgements, liabilities, losses, damages, costs, charges,
reasonable counsel fees and other expenses of every nature and character arising
out or in any way relating to Fund Accountant's bad faith, willful misfeasance,
negligence or reckless disregard by it of its obligations and duties, with
respect to the performance of services under this Agreement; provided, that,
prior to confessing any claim against it which may be the subject of this
indemnification, the Company shall give Fund Accountant written notice of and a
reasonable opportunity to defend against said claim in its own name or in the
name of the Company.
8. Record Retention and Confidentiality.
Fund Accountant shall keep and maintain on behalf of the Company all
books and records which the Company and Fund Accountant is, or may be, required
to keep and maintain pursuant to any applicable statutes, rules and regulations,
including without limitation Rules 31a-1 and 31a-2 under the Investment Company
Act of 1940, as amended (the "1940 Act"), relating to the maintenance of books
and records in connection with the services to be provided hereunder. Fund
Accountant further agrees that all such books and records shall be the property
of the Company and to make such books and records available for inspection by
the Company or by the Securities and Exchange Commission at reasonable times and
otherwise to keep confidential all books and records and other information
relative
-7-
<PAGE>
to the Company and its shareholders; except when requested to divulge such
information by duly-constituted authorities or court process.
9. Uncontrollable Events.
Fund Accountant assumes no responsibility hereunder, and shall not
be liable, for any damage, loss of data, delay or any other loss whatsoever
caused by events beyond its reasonable control.
10. Reports.
Fund Accountant will furnish to the Company and to its properly
authorized auditors, investment advisers, examiners, distributors, dealers,
underwriters, salesmen, insurance companies and others designated by the Company
in writing, such reports and at such times as are prescribed pursuant to the
terms and the conditions of this Agreement to be provided or completed by Fund
Accountant, or as subsequently agreed upon by the parties pursuant to an
amendment hereto.
11. Rights of Ownership.
All computer programs and procedures developed to perform services
required to be provided by Fund Accountant under this Agreement are the property
of Fund Accountant. All records and other data except such computer programs and
procedures are the exclusive property of the Company and all such other records
and data will be furnished to the Company in appropriate form as soon as
practicable after termination of this Agreement for any reason.
12. Return of Records.
Fund Accountant may at its option at any time, and shall promptly
upon the Company's demand, turn over to the Company and cease to retain Fund
Accountant's files, records and documents created and maintained by Fund
Accountant pursuant to this Agreement which are no longer needed by Fund
Accountant in the performance of its services or for its legal protection. If
not so turned over to the Company, such documents and records will be retained
by Fund Accountant for six years from the year of creation. At the end of such
six-year period, such records and documents will be turned over to the Company
unless the Company authorizes in writing the destruction of such records and
documents.
13. Representations of the Company.
The Company certifies to Fund Accountant that: (1) as of the close
of business on each Conversion Date, each Fund that is in existence as of the
Conversion Date
-8-
<PAGE>
has authorized unlimited shares, and (2) this Agreement has been duly authorized
by the Company and, when executed and delivered by the Company, will constitute
a legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting the
rights and remedies of creditors and secured parties.
14. Representations of Fund Accountant.
Fund Accountant represents and warrants that: (1) the various
procedures and systems which Fund Accountant has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
the records, and other data of the Company and Fund Accountant's records, data,
equipment facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder, and (2) this Agreement has been duly authorized by Fund Accountant
and, when executed and delivered by Fund Accountant, will constitute a legal,
valid and binding obligation of Fund Accountant, enforceable against Fund
Accountant in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting the
rights and remedies of creditors and secured parties.
15. Insurance.
Fund Accountant shall notify the Company should any of its
insurance coverage be canceled or reduced. Such notification shall include the
date of change and the reasons therefor. Fund Accountant shall notify the
Company of any material claims against it with respect to services performed
under this Agreement, whether or not they may be covered by insurance, and shall
notify the Company from time to time as may be appropriate of the total
outstanding claims made by Fund Accountant under its insurance coverage.
16. Information to be Furnished by the Company and Funds.
The Company has furnished to Fund Accountant the following:
(a) Copies of the Articles of Incorporation of the Company and of
any amendments thereto, certified by the proper official of the state
in which such document has been filed.
(b) Copies of the following documents:
(i) The Company's Bylaws and any amendments thereto; and
(ii) Certified copies of resolutions of the Board of
Directors covering the approval of this Agreement, authorization
of a specified officer of
-9-
<PAGE>
the Company to execute and deliver this Agreement and
authorization for specified officers of the Company to instruct
Fund Accountant thereunder.
(c) A list of all the officers of the Company, together with
specimen signatures of those officers who are authorized to instruct
Fund Accountant in all matters.
(d) Two copies of the Prospectuses and Statements of Additional
Information for each Fund.
17. Information Furnished by Fund Accountant.
(a) Fund Accountant has furnished to the Company the following:
(i) Fund Accountant's Articles of Incorporation; and
(ii) Fund Accountant's Bylaws and any amendments thereto.
(b) Fund Accountant shall, upon request, furnish certified copies
of corporate actions covering the following matters:
(i) Approval of this Agreement, and authorization of a
specified officer of Fund Accountant to execute and deliver
this Agreement; and
(ii) Authorization of Fund Accountant to act as fund
accountant for the Company and to provide accounting
services for the Company.
18. Amendments to Documents.
The Company shall furnish Fund Accountant written copies of any
amendments to, or changes in, any of the items referred to in Section 16 hereof
forthwith upon such amendments or changes becoming effective. In addition, the
Company agrees that no amendments will be made to the Prospectuses or Statements
of Additional Information of the Company which might have the effect of changing
the procedures employed by Fund Accountant in providing the services agreed to
hereunder or which amendment might affect the duties of Fund Accountant
hereunder unless the Company first obtains Fund Accountant's approval of such
amendments or changes.
19. Compliance with Law.
Except for the obligations of Fund Accountant set forth in Section
8 hereof, the Company assumes full responsibility for the preparation, contents
and distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securi-
-10-
<PAGE>
ties Act of 1933, as amended (the "Securities Act"), the 1940 Act and any other
laws, rules and regulations of governmental authorities having jurisdiction.
Fund Accountant shall have no obligation to take cognizance of any laws relating
to the sale of the Company's Shares. The Company represents and warrants that no
Shares of the Company will be offered to the public until the Company's
registration statement under the Securities Act and the 1940 Act has been
declared or becomes effective.
20. Notices.
Any notice provided hereunder shall be sufficiently given when sent
by registered or certified mail to the party required to be served with such
notice at the following address: if to the Company, to it at 125 West 55th
Street, New York, New York 10019; if to BISYS, to it at 3435 Stelzer Road,
Columbus, Ohio 43219, or at such other address as such party may from time to
time specify in writing to the other party pursuant to this Section.
21. Headings.
Paragraph headings in this Agreement are included for convenience
only and are not to be used to construe or interpret this Agreement.
22. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable with respect to a Fund by either of the parties hereto except by the
specific written consent of the other party. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
23. Governing Law.
This Agreement shall be governed by and provisions shall be
construed in accordance with the laws of the State of New York.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
THE OFFITBANK VARIABLE
INSURANCE FUND, INC.
By: /s/ John J. Pileggi
-----------------------------------
Title: Assistant Treasurer
--------------------------------
BISYS FUND SERVICES, INC.
By: /s/ Stephen Mintos
-----------------------------------
Title: Executive Vice President
--------------------------------
-12-
<PAGE>
Dated: October 1, 1996
SCHEDULE A
TO THE FUND ACCOUNTING AGREEMENT
BETWEENTHE OFFITBANK VARIABLE INSURANCE FUND, INC.
AND
BISYS FUND SERVICES, INC..
FEES
Fund Accountant shall be entitled to receive an annual fee of $30,000 from each
Fund.
THE OFFITBANK VARIABLE
INSURANCE FUND, INC. BISYS FUND SERVICES, INC.
By: /s/John J. Pileggi By: /s/Stephen Mintos
------------------ -----------------
-1-
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
Arthur H. Aufses III Monica C. Lord Sherwin Kamin
Thomas D. Balliett Richard Marlin Arthur B. Kramer
Jay G. Baris Thomas E. Molner Maurice N. Nessen
Philip Bentley Thomas H. Moreland Founding Partners
Saul E. Burian Ellen R. Nadler Counsel
Barry Michael Cass Gary P. Naftalis _____
Thomas E. Constance Michael J. Nassau
Michael J. Dell Michael S. Nelson Martin Balsam
Kenneth H. Eckstein Jay A. Neveloff Joshua M. Berman
Charlotte M. Fischman Michael S. Oberman Jules Buchwald
David S. Frankel Paul S. Pearlman Rudolph de Winter
Marvin E. Frankel Susan J. Penry-Williams Meyer Eisenberg
Alan R. Friedman Bruce Rabb Arthur D. Emil
Carl Frischling Allan E. Reznick Maxwell M. Rabb
Mark J. Headley Scott S. Rosenblum James Schreiber
Robert M. Heller Michele D. Ross Counsel
Philip S. Kaufman Max J. Schwartz _____
Peter S. Kolevzon Mark B. Segall
Kenneth P. Kopelman Judith Singer M. Frances Buchinsky
Michael Paul Korotkin Howard A. Sobel Abbe L. Dienstag
Shari K. Krouner Jeffrey S. Trachtman Ronald S. Greenberg
Kevin B. Leblang Jonathan M. Wagner Debora K. Grobman
David P. Levin Harold P. Weinberger Christian S. Herzeca
Ezra G. Levin E. Lisk Wyckoff, Jr. Jane lee
Larry M. Loeb Pinchas Mendelson
Lynn R. Saidenberg
Special Counsel
-----
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
February 13, 1997
The OFFITBANK Variable Insurance Fund, Inc.
125 West 55th Street
New York, New York 10019
Re: Post-Effective Amendment No. 7 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
