Registration Nos. 33-81748
811-8640
As filed via EDGAR with the Securities and Exchange Commission on January 31,
1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 6
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7
(Check appropriate box or boxes)
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
(Exact name of Registrant as specified in charter)
237 Park Avenue
New York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 618-9510
Stephen Brent Wells, Esq.
OFFITBANK
520 Madison Avenue
New York, New York 10022
(Name and Address of Agent for Service)
with a copy to:
Carl Frischling, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
It is proposed that this filing will become effective:
___X___ immediately upon filing pursuant to paragraph (b)
_______ on _______ pursuant to paragraph (b) a)(i)
_______ on _______ pursuant to paragraph
_______ (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. JANUARY 31, 1997
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DJG VALUE EQUITY FUND
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DJG Value Equity Fund (the "Fund") is a diversified investment portfolio of the
OFFITBANK Variable Insurance Fund, Inc. (the "Company"), an open-end, management
investment company. The Fund's investment objectives are long-term appreciation
and preservation of capital. The Fund will seek to achieve its objectives by
researching and investing in equity securities priced at a discount to their
intrinsic values. Capital appreciation is achieved over time as the price-value
gap narrows, often as a result of a corporate change or the occurrence of a
major non-operating event or combination thereof.
David J. Greene and Company, a registered investment adviser, serves as the
Fund's investment adviser and manages the Fund's portfolio (the "Adviser"). The
Adviser specializes in equity management with a value style orientation and
currently manages in excess of $1.6 billion in assets for pension, profit
sharing, endowment and individual accounts. 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
January 31, 1997, as amended or supplemented from time to time, has been filed
with the Securities and Exchange Commission (the "Commission") and is available
to investors without charge by calling 1-800-618-9510. The Statement of
Additional Information is incorporated in its entirety by reference into this
Prospectus.
INVESTORS ARE ADVISED THAT (A) THE COMPANY IS NOT AUTHORIZED TO ENGAGE IN THE
BUSINESS OF BANKING AND (B) SHARES OF THE 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.
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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 Objectives and Policies............................................2
Investment Policies and Techniques............................................3
Limiting Investment Risks.....................................................5
Management....................................................................6
About Your Investment.........................................................6
How the Company Values Its Shares.............................................7
How Distributions are Made: Tax Information..............................7
Shareholder Communications ...................................................8
Performance Information.......................................................8
Counsel; Independent Accountants..............................................9
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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 investment portfolio of the Company, an open-end management
investment company. The Company is not authorized to engage in the business of
banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the 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 OBJECTIVES AND POLICIES
The Fund has investment objectives which it pursues through investment policies
as described below. The objectives and policies of the Fund can be expected to
affect the return of the Fund and the degree of market and financial risk to
which the Fund is subject. For more information about the investment strategies
employed by the Fund, see "Investment Policies and Techniques." The investment
objective and policies of the Fund may, unless otherwise specifically stated, be
changed by the Directors of the Company without a vote of the shareholders. As a
matter of fundamental policy, the Directors would not materially change the
investment objectives of the Fund without thirty days prior written notice to
shareholders. There is no assurance that the Fund will achieve its objectives.
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 investment objectives of the Fund are long-term appreciation and
preservation of capital, which the Fund seeks to achieve by investing in
undervalued securities and in special situations. Capital appreciation is
achieved over time as the price-value gap narrows, often as a result of a
corporate change or the occurrence of a major non-operating event - such as a
major management change, substantial share repurchase, spin-off, split-up,
restructuring, liquidation, acquisition or other catalyst. The Adviser attempts
to manage the Fund so as to provide consistent absolute returns as well as
outperform the S&P 500 over a market cycle by using a bottom up value-oriented
approach to equity investment that stresses the purchase of securities with cash
flow, reported earnings and asset value at a measured price.
The Adviser's investment philosophy is centered upon fundamental research with
particular emphasis on event-driven special situations. Valuations are based on
cash flow (defined as earnings plus non-cash charges, less required capital
spending and working capital) rather than reported earnings in order to focus on
underlying economics rather than accounting. Furthermore, the Adviser believes
that management's capabilities and motivations with respect to the enhancement
of shareholder value are particularly important in making investment decisions.
Generally, the sale of a security will be based upon factors such as (i) an
increase in the share price which adequately reflects the original investment
premise, (ii) any other significant increase in the market valuation of a stock
relative to its true economic value (a narrowing of the price value gap); (iii)
availability of alternative investments with greater ratios
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of reward to risk; and (iv) perceived deterioration of the issuer's operations
which may adversely affect the underlying value of the security. Turnover will
be influenced by sound investment practices related to the Fund's objectives,
and the need for funds in the event of redemptions of the Funds shares.
Investments for the Fund will be made by the Adviser on a stock by stock basis
without regard to market timing. Cash reserves for the Fund will fluctuate based
upon individual investment decisions as well as purchases and new redemptions of
the Fund's shares.
The Fund will normally invest its assets in a diversified portfolio of equity
securities, including common stocks, rights, and warrants to subscribe for or
purchase common stocks. The Fund may purchase listed and unlisted common and
preferred stocks, securities of companies in bankruptcy, fixed income securities
which are convertible into equity securities, as well as write covered call
options on such equity securities. In addition, the Fund may invest in "risk
arbitrage positions", which include securities that may become exchangeable for
cash or other securities as a result of the issuer being an announced candidate
for a merger, acquisition, restructuring or similar transaction, or securities
the issuer of which has been the subject of a filing on Schedule 13D under the
Securities Exchange Act of 1934. Dividends and interest are not prime
considerations in the purchase of securities but are considered in relation to
the total expected return of the investment. Because the Fund will invest
primarily in equity securities, it will be subject to general conditions
prevailing in securities markets and the net asset value of the Fund's shares
will fluctuate with changes in the market prices of its portfolio securities.
Cash reserves may be invested in short-term fixed income instruments including
money market funds, certificates of deposit and commercial paper.
INVESTMENT POLICIES AND TECHNIQUES
WARRANTS
The Fund may invest in warrants which entitle the holder to buy equity
securities at a specific price for a specific period of time. The Fund will not,
however, purchase any warrant if, as a result of such purchase, 5% or more of
the Fund's total assets would be invested in warrants. Included within that
amount, but not to exceed 2% of the value of the Fund's total assets, may be
warrants which are not listed on the New York or American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value.
COVERED CALL OPTIONS
To assist in the management of its portfolio and to enhance the Fund's
performance, the Fund may engage in the writing (selling) of call option
contracts on securities at such times as the Adviser shall determine to be
appropriate. However, options shall be written solely as "covered" call options,
that is, options on securities that the Fund owns. The fund will write covered
call options on securities held in the portfolio at the exercise price which
would approximate the price at which the Adviser would desire to sell the
security. The Fund will not write covered call options on portfolio securities
having an aggregate value in excess of 20 percent of the Fund's net assets. A
call option gives the purchaser of the option the right to buy a security from a
writer at the exercise price at any time prior to the expiration of the
contract, regardless of the market price of the security during the option
period. The premium paid to the writer is the consideration for undertaking the
obligations under the option contract. The writer forgoes the opportunity to
profit from an increase in the market price of the underlying security above the
exercise price except insofar as the premium represents a profit.
The Fund will purchase options only to close out a call option position. In
order to close out a position, the Fund will make a "closing purchase
transaction" - the purchase of a call option on the same security with the same
exercise price and expiration date as a call option which it has previously
written When a security is sold from the Fund's portfolio, the Fund will effect
a closing purchase transaction so as to close out any existing call option on
that security. The Fund will realize a profit or loss from a closing purchase
transaction if the amount paid to
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purchase a call option is less or more than the amount received from the sale
thereof. There can be no assurance that the Fund will be able to effect closing
purchase transactions at a time when it desires to do so. To facilitate closing
purchase transactions, however, the Fund will write options only if a secondary
market for the options exists on a national securities exchange.
Securities for the Fund's portfolio will at all times be bought and sold solely
on the basis of investment considerations and appropriateness to the fulfillment
of the Fund's objective.
CORPORATE REORGANIZATIONS
The Fund may invest in securities for which a tender or exchange offer has been
made or announced and in securities of companies for which a merger,
consolidation, liquidation or similar reorganization proposal has been announced
if, in the judgement of the Adviser, there is a reasonable prospect of capital
appreciation significantly greater than the added portfolio turnover expenses
inherent in the short term nature of such transactions. The principal risk is
that such offers or proposals may not be consummated within the time and under
the terms contemplated at the time of the investment, in which case, unless such
offers or proposals are replaced by equivalent or increased offers or proposals
which are consummated, the Fund may sustain a loss.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities and any other investments on behalf of
the Fund will be placed with broker-dealers selected by the Adviser. The Adviser
may serve as the Fund's broker in effecting portfolio transactions on national
securities exchanges and in the national over-the-counter market as agent and
retain commissions in accordance with certain regulations of the SEC and
procedures adopted by the Fund's Board of Directors. In addition, the Adviser
may select broker-dealers that provide it with research services and may cause
the Fund to pay these broker-dealers commissions that exceed those other
broker-dealers may have charged, if it views the commissions as reasonable in
relation to the value of the brokerage and/or research services received. In
placing orders, it is the policy of the Fund to obtain the net best results
taking into account the broker's general execution and operational facilities as
well as the type of transaction involved. While the Adviser generally seeks a
competitive price in placing its orders, the Fund may not necessarily be paying
the lowest price available. In accordance with procedures adopted by the Board
of Directors, in order for the Adviser, as an affiliated person, to be permitted
to effect portfolio transactions for the Fund, 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 Fund are made independently from those for other
accounts advised or managed by the Adviser, including accounts designated as
proprietary. However, since the research resources and Investment Committee
process of the Adviser are common to all accounts, including the Fund, all such
other accounts are prepared to invest in, or desire to dispose of, the same
securities at the same time as the Fund, and transactions in such securities
will be made, insofar as feasible, for the respective 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 Fund or the price paid
or received by the Fund. In addition, because of different investment objectives
including tax considerations for individual accounts, a particular security may
be purchased for the Fund or such other accounts when the Fund or such other
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 Fund with
those to be sold or purchased for such other accounts, including proprietary
accounts, in order to obtain best execution in accordance with the Fund's Code
of Ethics and applicable SEC no-action positions on this subject.
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
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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, such an investment otherwise meets its criteria, such as a
closed-end investment company selling at a discount to its net asset value. The
Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by investment companies in which it invests in addition to
the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the Fund's investment
objectives and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
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 Adviser's investment style usually requires a holding period of one year or
more, however, 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 50% in any one year.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund will not purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities, or repurchase agreements secured
thereby) if, as a result, more than 25% of the value of the Fund's
total assets would be invested in the securities of companies whose
principal business activities are in the same industry.
2. 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.
3. The Fund may not borrow money 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 the Fund's total assets.
4. 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 described immediately above 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
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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. The Management of the Fund's
portfolio, including the placement of purchase and sale orders, is the
responsibility of the investment adviser.
INVESTMENT ADVISER
The Adviser provides investment advisory services to the Fund pursuant to an
Investment Advisory Agreement with the Company (the "Advisory Agreement"). 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 .80% of the Fund's average daily net assets.
David J. Greene & Company ("the Adviser") is an investment adviser and
broker-dealer registered with the SEC and the NASD. The Firm, established as a
partnership in 1952, is located at 599 Lexington Avenue, New York, N.Y. 10022.
As of April 30, 1996, the Adviser had investment management authority with
respect to approximately $1.6 billion of assets for pension, profit sharing,
endowment and individual accounts. The partnership consists of fourteen partners
and a staff of twenty-one professional and support persons, all of whom devote
their full time to the business. The Adviser specializes in equity management
with a value style orientation.
PORTFOLIO MANAGER
Erwin A. Zeuschner, a Senior Partner of David J. Greene and Company for the past
16 years, is primarily responsible for the daily management of the Fund. Mr.
Zeuschner will undertake his responsibilities under guidelines established by
the Adviser's Investment Committee, consisting of Alan I. Greene, Robert J.
Ravitz and Michael C. Greene in addition to himself.
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
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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 offered through
the Account 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.
FUND DISTRIBUTIONS. Distributions by the Fund are taxable, if at all, to the
Accounts, and not to Contract or Policy Owners. An Account will include
distributions in its taxable income in the year in which they are received
(whether paid in cash or reinvested).
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of 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.
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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 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 mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard and Poor's Corporation .
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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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.
10
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PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. JANUARY 31, 1997
- --------------------------------------------------------------------------------
OFFITBANK VIF-U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFITBANK VIF-U.S. Government Securities Fund (the "Fund") is an investment
portfolio of the OFFITBANK Variable Insurance Fund, Inc. (the "Company"), an
open-end, management investment company. The Fund's investment objective is to
seek current income consistent with preservation of capital. The Fund seeks to
achieve its objective by investing, under normal circumstances, at least 80% of
its total assets in U.S. Government Obligations. 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. 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
January 31, 1997, as amended or supplemented from time to time, has been filed
with the Securities and Exchange Commission (the "Commission") and is available
to investors without charge by calling 1-800-618-9510. The Statement of
Additional Information is incorporated in its entirety by reference into this
Prospectus.
INVESTORS ARE ADVISED THAT (A) THE COMPANY IS NOT AUTHORIZED TO ENGAGE IN THE
BUSINESS OF BANKING AND (B) SHARES OF THE 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.
------------------------
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....................................................6
Limiting Investment Risks......................................................9
Management.....................................................................9
About Your Investment.........................................................10
How the Company Values Its Shares.............................................10
How Distributions Are Made: Tax Information...................................11
Shareholder Communications ...................................................11
Performance Information.......................................................12
Counsel; Independent Accountants..............................................12
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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 investment portfolio of the Company, an open-end management
investment company. The Company is not authorized to engage in the business of
banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the 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 objectives and policies of the Fund can be
expected to affect the return of the Fund and the degree of market and financial
risk to which the Fund is subject. For more information about the investment
strategies employed by the Fund, see "Investment Policies and Techniques." The
investment objectives 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 fundamental policy, the Directors would not
materially change the investment objectives of the Fund without thirty days
prior written notification to shareholders. There is no assurance that the Fund
will achieve its objectives.
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's investment objective is to seek current income consistent with
preservation of capital. The Fund seeks to achieve its objective by investing,
under normal circumstances, at least 80% of its total assets in U.S. Government
obligations. In addition, the Fund may invest up to 20% of its total assets in
other high quality fixed income securities including, but not limited to,
mortgage-backed and asset-backed securities, sovereign obligations of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and The United
Kingdom. Any fund investments denominated in any foreign currency will be hedged
against fluctuations in value versus the U.S. dollar. See "Limiting Investment
Risks".
Obligations of the U.S. Government in which the Fund may invest are in two broad
categories and include the following: (a) direct obligations of the U.S.
Treasury, which differ only in their interest rates, maturities and times of
issuance, including U.S. Treasury Bills (maturities of one year or less), U.S.
Treasury Notes (maturities of one to ten years), and U.S. Treasury Bonds
(generally, maturities greater than ten years); and (b) obligations issued or
guaranteed by the agencies or instrumentalities of the U.S. Government which are
supported by: (i) the full faith and credit of the U.S. Government (e.g.,
Government National Mortgage Association ("GNMA") Certificates, See below); (ii)
the right of the issuer to borrow an amount limited to a specific amount of
credit from the U.S. Government; (iii) the credit of the instrumentality (e.g.,
bonds issued by the Federal National Mortgage Association ("FNMA")); or (iv) the
discretionary authority of the U.S. Government to purchase certain obligations
of U.S. Government agencies or instrumentalities (collectively, "Government
Securities").
The agencies and instrumentalities that issue Government Securities include,
among others, Federal Land Banks, Farmers Home Administration, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Student Loan Marketing Association and U.S. Maritime Administration.
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Securities issued by the U.S. Government differ with respect to maturity and
mode of payment. The modes of payment are coupon paying and capital
appreciation. Coupon paying bonds and notes pay a periodic interest payment,
usually semi-annually, and a final principal payment at maturity. Capital
appreciation bonds and Treasury bills accrue a daily amount of interest income,
and pay a stated face amount at maturity. Most U.S. Government capital
appreciation bonds were created as a result of the separation of coupon paying
bonds into distinct securities representing the periodic coupon payments and the
final principal payments. This is referred to as "stripping". The separate
securities representing a specific payment to be made by the U.S. Government on
a specific date are also called "zero coupon bonds." Current federal tax law
requires the Fund to accrue as income daily a portion of the original issue
discount at which each zero coupon bond was purchased. Amortization of this
discount has the effect of increasing the Fund's income, although it receives no
actual cash payments. The Fund distributes this income to its shareholders as
income dividends and such income is reflected in the Fund's quoted yield. (See
"Other Investment Policies - Zero Coupon Securities, Pay-In Kind Bonds and
Discount Obligations").
At any given time, there is a relationship between the yield of the U.S.
Government obligation and its maturity. This is called the "yield curve". Since
Government Securities are assumed to have negligible credit risks, the main
determinant of yield differential between individual securities is maturity.
When the yield curve is such that longer maturities correspond to higher yields,
the yield curve has a positive slope and is referred to as a "normal" yield
curve. At certain times shorter maturities have high yields and the yield curve
is said to be "inverted". Even when the yield curve is "normal" (i.e. has a
positive slope), the relationship between yield and maturity for some Government
Stripped Securities is such that yields increase with maturity up to some point,
and then after peaking, decline so that the longest maturities are not the
highest yielding. This is called a "humped" curve. The highest yielding point on
the yield curve for such securities is referred to as the "stripper's hump".
U.S. Government securities of the type in which the Fund may invest have
historically involved little risk of principal if held to maturity. The
Government's guarantee of the securities in the Fund, however, does not
guarantee the net asset value of the shares of the fund. There are market risks
inherent in all investments in securities and the value of an investment in the
fund will fluctuate over time. Normally, the value of the Fund's investments
varies inversely with changes in interest rates. For example, as interest rates
rise, the value of the Fund's investments will tend to decline and as interest
rates fall, the value of the Fund's investments will tend to increase. Because
of these factors, the Fund's share value and yield are not guaranteed and will
fluctuate. The magnitude of these fluctuations generally will be greater when
the average maturity of the Fund's portfolio securities is longer.
The Fund is not limited to the maturities of the securities in which it may
invest. Debt securities with longer maturities generally tend to produce higher
yields and are subject to greater market fluctuation as a result of changes in
interest rates than debt securities with shorter maturities.
The Advisor seeks an enhanced fixed income return through the active management
of portfolio duration and sector allocation. Investment decisions are based on a
continual evaluation of the supply and demand for capital, the current and
future shape of the yield curve, underlying trends in the direction of interest
rates and relative value among market sectors. The selection of individual
investment reflects the Advisor's view of relative value within and among market
sectors. The Advisor manages duration and maturity to take advantage of interest
rates and yield curve trends. A minimum of 80% of the Fund will be invested in
Government Securities.
Up to 20% of the Fund's assets may be allocated to other high-quality fixed
income securities including, but not limited to, asset-backed and
mortgage-backed securities, sovereign obligations and other securities, (such as
debt obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities of Australia, Canada, Denmark, France, Germany, Japan, New
Zealand and The United Kingdom), debt obligations of supranational entities; and
debt obligations of the U.S. Government issued in non-dollar securities. The
sovereign obligations and other securities issued or guaranteed by foreign
governments purchased by the Fund will generally be denominated in non-U.S.
currencies or composite currencies. Any fund investments denominated in any
foreign currency will be hedged against fluctuations in value versus the U.S.
dollar. See "Limiting Investment Risks". "High quality" instruments for this
purpose consist of securities rated AAA by at least one nationally recognized
statistical rating organization (such as Standard & Poors or Moodys) or
considered to be of equivalent quality by the Adviser.
The obligations of foreign governmental entities, including supranational
issuers, have various kinds of government support. Obligations of foreign
governmental entities include obligations, issued or guaranteed by national,
provincial, state or other governments with taxing power or by their agencies.
These obligations may or may not be supported by the full faith and credit of a
foreign government. Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development
3
<PAGE>
and international banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the World
Bank), the European Steel and Coal Community, the Asian Development Bank and the
Inter-American Development Bank. The governmental agencies, or "stockholders,"
usually make initial capital contributions to the supranational entity and in
many cases are committed to make additional capital contributions, if the
supranational entity is unable to repay its borrowings. Each supranational
entity's lending activities are limited to a percentage of its total capital
(including "callable capital" contributed by members at the entity's call),
reserves and net income.
INVESTMENT POLICIES AND TECHNIQUES
ZERO COUPON SECURITIES AND DISCOUNT OBLIGATIONS
The Fund may invest in zero coupon securities and a substantial portion of the
Fund's sovereign debt securities may be acquired at a discount. These
investments involve special risk considerations. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date.
Zero coupon securities 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 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.
MORTGAGE-RELATED SECURITIES
The Fund may invest in all or a portion of the 20% of its assets not required to
be invested in U.S. Government Obligations in mortgage-related securities.
Mortgage-related securities 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. 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.
4
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ASSET-BACKED SECURITIES
The Fund may invest all or a portion of the 20% of its assets which are not
required to be invested in U.S. Government Obligations in asset-backed
securities. 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.
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, liquid 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.
FOREIGN SECURITIES The Fund may invest all or a portion of the 20% of its
assets not required in U.S. Government Obligations 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 may be affected by changes
in exchange rates. See "Special Risk Considerations."
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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."
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 to hedge all
non-dollar investments with the U.S. dollar. 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"). 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.
ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities which are not readily marketable, time
deposits and repurchase agreements not terminable within seven days. Illiquid
assets are assets which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment. Securities that have readily available market quotations
are not deemed illiquid for purposes of this limitation (irrespective of any
legal or contractual restrictions on resale). The Fund may purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Rule 144A securities generally must be sold
to other qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% limitation on investment in illiquid securities. The ability to
sell Rule 144A securities to qualified institutional buyers is a recent
development and it is not possible to predict how this market will mature. The
Adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES
The Fund reserves the right to invest up to 10% of its total assets in the
securities of other investment companies. The Fund may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company. The Fund
does not intend to invest in such investment companies unless, in the judgment
of the Adviser, the potential benefits of such investment justify the payment of
any premium to net asset value of the investment company or of any sales charge.
The Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by investment companies in which it invests in addition to
the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the Fund's investment
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
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 and/or invest up to 100% of its assets in U.S.
money market instruments and most or all of the Fund's investments may be made
in the United States and denominated in U.S. dollars.
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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 and may
invest any portion of its assets in high quality 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. The value of the Fund's fixed income
securities generally fluctuates inversely with interest rate movements and fixed
income securities with longer maturities tend to be subject to increased
volatility. There is no assurance that the Fund will achieve its investment
objectives.
INTEREST RATE FLUCTUATIONS AND CREDIT RISK
The performance of the Fund depends in part on interest rate changes. As
interest rates increase, the value of the fixed income securities held by the
Fund tends to decrease. This effect will be more pronounced with respect to
investments by the Fund in mortgage-related securities, the value of which are
more sensitive to interest rate changes. There is no restriction on the maturity
of the Fund's portfolio or any individual portfolio security, and to the extent
the Fund invests in securities with longer maturities, the volatility of the
Fund in response to changes in interest rates can be expected to be greater than
if the Fund had invested in comparable securities with shorter maturities. The
performance of the Fund will also depend on the quality of its investments.
While U.S. Government securities generally are of high quality, government
securities that are not backed by the full faith and credit of the U.S. Treasury
may be affected by changes in the creditworthiness of the agency that issued
them. Guarantees of principal and interest on obligations that may be purchased
by the Fund are not guarantees of the market value of such obligations, nor do
they extend to the value of shares of the Fund. Other fixed-income securities in
which the Fund may invest, while of investment-grade quality, may be of lesser
credit quality than U.S.
Government securities.
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 countries
that issue the securities. The ability and willingness of sovereign obligors 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. Additional factors which
may influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than U.S. dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign sovereign
obligor cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks and multilateral organizations, and inflows of
foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
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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.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund is 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,
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 markets for certain of these securities are
relatively new and the ability to establish and close out positions is subject
to the maintenance of a liquid market that may not always be available.
Therefore, the Fund does not make 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. Although the Fund intends to fully
hedge its exposure to foreign currencies versus the U.S. dollar, the
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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. A detailed discussion of various
Hedging and Other Strategic Transactions, including applicable regulations of
the CFTC 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. 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.
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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.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may (I) borrow in an amount up to 25% of its total assets
(including the amount borrowed), less all liabilities and
indebtedness other than the borrowing and (ii) enter into reverse
repurchase agreements.
2. 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 described immediately above 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 from the Fund a monthly fee at the annual rate of .40% of
the average daily net assets of the Fund. The investment advisory fee for the
Fund is higher than that paid by most investment companies, but is comparable to
that paid by other investment companies that have strategies focusing on high
yield and international investments.
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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 global assets management and offers its clients a complete range of
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 registered investment companies (or portfolios thereof). The principal
business address of the Adviser is 520 Madison Avenue, New York, New York 10022.
PORTFOLIO MANAGER. Jack D. Burks will be the portfolio manager for the Fund. Mr.
Burks is a Managing Director of the Adviser and has been associated with the
Adviser in since 1984.
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, 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.
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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 dividends from net investment income daily and paid
monthly 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).
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of 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
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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 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. 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.
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. JANUARY 31, 1997
- -------------------------------------------------------------------------------
OFFITBANK VIF-U.S. SMALL CAP FUND
================================================================================
OFFITBANK VIF-U.S. Small Cap Fund (the "Fund") is a diversified investment
portfolio 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. The Fund will seek to achieve its objective by
investing primarily in a diversified portfolio of securities of smaller
companies located in the United States. Up to 10% of the Fund's portfolio may be
in companies located outside the United States. At least 65% of the Fund's
portfolio will consist of securities of smaller portfolio companies with a
capitalization of $1 billion or less at the time of purchase, although the Fund
may also invest in any company, entity or vehicle that conforms to its
investment objective, including investments such as warrants and convertible
debt securities. The Fund intends to invest primarily in publicly-held
companies.
THE FUND WILL INVEST IN SMALL CAPITALIZATION ISSUERS WHICH ARE MORE VOLATILE
THAN INVESTMENTS IN ISSUERS WITH MARKET CAPITALIZATION GREATER THAN $1 BILLION
DUE TO THE LACK OF DIVERSIFICATION IN THE BUSINESS ACTIVITIES, AND CORRESPONDING
GREATER SUSCEPTIBILITY TO CHANGES IN THE BUSINESS CYCLE OF SMALL CAPITALIZATION
ISSUERS. 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 address of the
Company is 125 West 55th Street, New York, New York 10019. Rockefeller & Co.,
Inc. (the "Sub-Adviser") has been engaged to provide investment advisory
services, including portfolio management, to the Fund, subject to the
supervision of the Adviser. 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
January 31, 1997, as amended or supplemented from time to time, has been filed
with the Securities and Exchange Commission (the "Commission") and is available
to investors without charge by calling 1-800-618-9510. The Statement of
Additional Information is incorporated in its entirety by reference into this
Prospectus.
INVESTORS ARE ADVISED THAT 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
Special Risk Considerations..................................................6
Limiting Investment Risks....................................................7
Management...................................................................8
About Your Investment........................................................9
How the Company Values Its Shares...........................................10
How Distributions are Made: Tax Information.................................10
Shareholder Communications .................................................11
Performance Information.....................................................11
Counsel; Independent Accountants............................................11
<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 investment portfolio of the Company, an open-end management
investment company. The Company is not authorized to engage in the business of
banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the 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 fundamental policy, the Directors would not
materially change the investment objective of the Fund without thirty days prior
written notice to shareholders. There is no assurance that the Fund will achieve
its objective.
Additional portfolios may be created from time to time with different investment
objectives and policies for use as funding vehicles for the Accounts or for
other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Fund, with the classes being subject to different charges and expenses and
having such other different rights as the Directors may prescribe.
The investment objective of the Fund is to achieve capital appreciation. The
Fund will seek to achieve its objective by investing primarily in a diversified
portfolio of securities of smaller publicly-held companies located in the United
States. Up to 10% of the Fund's portfolio, however, may consist of securities of
companies located outside the United States. At least 65% of the Fund's
portfolio will consists of securities of smaller companies with a capitalization
of $1 billion or less at the time of purchase, although the Fund may also invest
in any company, entity or vehicle that conforms to its investment objective,
including investments such as convertible debt securities and warrants. The Fund
intends to invest primarily in publicly-held companies.
The Fund will invest primarily in companies which are expected to meet most of
the following criteria: the company should have a market position in a fast
growing segment of the economy, good management, preferably a leading position
in its business, superior financial returns (i.e., primarily return on assets
and invested capital) with ability to self-finance, and a reasonable market
valuation. While the Fund will not generally invest in start-ups, it may invest
in stock of companies' initial public securities offerings and companies having
only a few years' operating history.
In addition to investments expected to meet the preceding criteria, the Fund may
also invest in companies which have undervalued assets and in special
situations. Special situations might include private placements, fixed-income
securities, cyclically depressed companies or take-over candidates. In analyzing
convertible debt securities, the Sub- Adviser will consider both the yield on
the convertible security and the potential capital appreciation that is offered
by the underlying common stock.
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The Fund will have a diversified portfolio. It will not ordinarily acquire more
than 5% of its assets in the equity securities of any single issuer, although
the holding of higher equity percentages will be considered under some
circumstances. In furthering its objective, the Fund may also engage in indirect
investments as discussed below, including investments in mutual funds, funds
directed by other investment advisers or other pooled vehicles, (although the
Sub-Adviser does not currently intend to invest in registered investment
companies). Such investments will not exceed 10% of the portfolio. In the case
of mutual funds, funds directed by other investment advisers or other pooled
vehicles, such investments may be subject to management fees including
performance fees which will be reflected in the net asset value of such
securities. The Fund's management may alter the proportion of the portfolio
invested for defensive purposes in order to respond to market conditions.
Trading policy (as opposed to investment policy) is determined by market
conditions and is not constrained by tax considerations.
There can be no assurance that the investment methodology employed will satisfy
the Fund's objective of capital appreciation. The Fund believes that investments
that meet its objective potentially offer above average return, but they are
higher risk investments and are expected to fluctuate more widely in price than
the general market. An investor should be aware that investment in small
capitalization issuers may be more volatile than investments in issuers with
market capitalizations greater than $1 billion due to the lack of
diversification in the business activities, limited product lines, markets or
financial resources, and correspondingly greater susceptibility to changes in
the business cycle of small capitalization issuers. Smaller capitalization
stocks as a group may not respond to general market rallies or downturns as much
as other types of equity securities. This investment policy involves the risks
that the changes or trends identified by the Sub-Adviser will not occur or will
not be as significant as projected and that, even if the changes or trends
develop, the particular issues held by the Fund will not benefit as anticipated
from such changes or trends.
The convertible securities that may be held by the 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.
The Fund believes that the characteristics of convertible securities make them
appropriate investments for an investment company seeking capital appreciation.
These characteristics include the potential for capital appreciation as the
value of the underlying common stock increases and decreased risks of decline in
value relative to the underlying common stock due to their fixed income nature.
Under normal circumstances, the Fund may invest up to 10% of its assets in other
types of securities including equity securities and nonconvertible debt
securities of U.S. and non-U.S. issuers.
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INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES. The Fund may invest up to 10% of its assets 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 could be
affected by changes in exchange rates. See "Special Risk Considerations."
HEDGING AND OTHER STRATEGIC TRANSACTIONS. The Fund may be authorized to use a
variety of investment strategies to hedge various market risks such as broad or
specific market movements (such investment strategies and transactions are
referred to herein as "Hedging and Other Strategic Transactions"). Currently,
the Fund may use cross currency hedges as a portfolio management strategy. The
Fund also may enter into forward foreign currency contracts and options
transactions to hedge in connection with currency positions. See "Special Risk
Considerations - Risks of Hedging and Other Strategic Transactions". The Fund
will not be obligated, however, to pursue any of such strategies and the Fund
makes no representation as to the availability of these techniques at this time
or at any time in the future.
Subject to the constraints described above, the Fund may (if and to the extent
so authorized) enter into currency transactions. 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 currency exchange rate fluctuations. 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 Sub-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.
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 liquid securities or cash not available for
investment 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.
4
<PAGE>
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, liquid
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.
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 Sub-Adviser will monitor the liquidity of such restricted
securities under the supervision of the Board of Directors.
CONVERTIBLE SECURITIES. The Fund may invest up to 10% of its assets in
convertible securities, which are bonds, debentures, notes, preferred stocks or
other securities that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest generally paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Convertible securities have several unique investment
characteristics such as (1) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (2) a lesser degree of fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (3) the potential for capital appreciation if the market price of the
underlying common stock increases.
A convertible security might be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for redemption,
the Fund may be required to permit the issuer to redeem the security, convert it
into the underlying common stock or sell it to a third party.
OTHER INVESTMENT COMPANIES AND POOLED VEHICLES. The Fund reserves the right to
invest up to 10% of its total assets in the securities of other investment
companies, including mutual funds, investment partnerships and other pooled
investment vehicles. 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
5
<PAGE>
does not intend to invest in such investment companies unless, in the judgment
of the Sub-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 or pooled
investment products in which it invests in addition to the advisory fee paid by
the Fund.
FUTURE DEVELOPMENTS. The Fund may, following notice to its shareholders, take
advantage of other investment practices which are not at present contemplated
for use by the Fund or which currently are not available but which may be
developed, to the extent such investment practices are both consistent with the
Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described above.
TEMPORARY STRATEGIES. The Fund retains the flexibility to respond promptly to
changes in market and economic conditions. Accordingly, consistent with the
Fund's investment objective, the Sub-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 and/or invest its assets
in high quality debt securities or money market instruments of U.S. issuers.
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 and may
invest any portion of its assets in high quality money market instruments of
U.S. Issuers.
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) changes in the actual and perceived creditworthiness of
the issuers of such securities, (2) factors affecting the industry in which the
issuer operates, such as competition or technological advances and (3) factors
affecting the issuer directly, such as management changes or labor relations.
There is no assurance that the Fund will achieve its investment objective.
FOREIGN SECURITIES
The Fund may invest up to 10% of its total assets in the securities of foreign
issuers. There are certain risks involved in investing in securities of
companies and governments of foreign nations which are in addition to the usual
risks inherent in domestic investments. These risks include those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
adverse political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or restrictions,
reduced availability of public information concerning issuers, the lack of
uniform accounting, auditing and financial reporting standards and other
regulatory practices and requirements that are often generally less rigorous
than those applied in the United States. Moreover, securities of many foreign
companies may be less liquid and their prices more volatile than those
securities of comparable U.S. companies. Certain foreign countries are known to
experience long delays between the trade and settlement dates of securities
purchased or sold. In addition, with respect to certain foreign countries, there
is the possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net return on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital investment, resources self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign
6
<PAGE>
currency into U.S. dollars, the payment of fixed brokerage commissions on
foreign exchanges, which generally are higher than commissions on U.S.
exchanges, higher valuation and communications costs and the expense of
maintaining securities with foreign custodians.
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 Sub-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 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.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund will not purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities, or repurchase agreements secured
thereby) if, as a result, more than 25% of the value of the Fund's
total assets would be invested in the securities of companies whose
principal business activities are in the same industry.
2. 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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<PAGE>
3. 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 30% 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.
4. 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 described immediately above 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"). 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 1.00% 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 business address of the Advisor is 520 Madison Avenue,
New York, New York 10022.
THE SUB-ADVISER AND PORTFOLIO MANAGER.
The Sub-Adviser, Rockefeller & Co., Inc., subject to the overall supervision of
the Adviser, provides the Fund with investment advisory services, including
portfolio management, pursuant to an Investment Management Agreement (the
"Management Agreement"). The Sub-Adviser, which is registered as an investment
adviser under the Investment Advisers Act of 1940, is a private investment
advisory and management firm established by the Rockefeller Family to serve its
own needs and those of a small number of other persons and institutions. As of
January 1, 1996, the Sub-Adviser managed over $3 billion in assets. The
Sub-Adviser, with offices at 30 Rockefeller Plaza, New York, New York 10112, is
an indirect, wholly-owned subsidiary of the Rockefeller Family Trust.
The Sub-Adviser places the orders for the purchase and sale of portfolio
securities and options and futures transactions for the Fund. In doing so, the
Sub-Adviser seeks to obtain the best combination of price and execution, which
involves a number of judgmental factors.
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The Management Agreement provides that, as compensation for services, the
Sub-Adviser is entitled to receive a fee from OFFITBANK, computed daily and paid
monthly, at the annual rate of 1.00% of the Fund's average daily net assets.
PORTFOLIO MANAGER.
Jane A. Freeman, an investment manager with the Sub-Adviser since 1988, is
primarily responsible for the day-to- day management of the Fund's portfolio.
Ms. Freeman has been the portfolio manager of other small capitalization equity
investment vehicles managed by the Sub-Adviser. She received a B.A. from Cornell
University in 1975, a License from the University of Louvain (Belgium) in 1977,
and an M.B.A. (with distinction) from Cornell University in 1978.
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 "Distributor"), the Fund's principal underwriter, to the
Accounts without any sales or other charge, at the Fund's net asset value on
each day on which the New York Stock Exchange ("NYSE") is open for business. The
Company will effect orders to purchase or redeem shares of the Fund, that are
based on premium payments, surrender and transfer requests and any other
transaction requests from Contract and Policy Owners, annuitants and
beneficiaries, at the Fund's net asset value per share next computed after the
Account receives such transaction request. Any orders to purchase or redeem Fund
shares that are not based on actions by Contract or Policy Owners, annuitants,
and beneficiaries will be effected at the Fund's net asset value per share next
computed after the order is received by the Distributor. The Fund reserves the
right to suspend the sale of the Fund's shares in response to conditions in the
securities markets or for other reasons.
Individuals may not place orders directly with the Fund. Please refer to the
appropriate Account Prospectus of the Participating Company for more information
on the purchase of Portfolio shares.
REDEMPTION OF SHARES
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above. Shares redeemed are entitled to earn dividends, if
any, up to and including the day redemption is effected. There is no redemption
charge. Payment of the redemption price will normally be made within seven days
after receipt of such tender for redemption.
The right of redemption may be suspended or the date of payment may be postponed
for any period during which the NYSE is closed (other than customary weekend and
holiday closings) or during which the SEC determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
SEC) exists as a result of which disposal by the Fund of securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Company fairly to determine the value of the Fund's net assets, or for
such other periods as the SEC may by order permit for the protection of security
holders of the Company.
EXCHANGE PRIVILEGE
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset values.
HOW THE COMPANY VALUES ITS SHARES
The net asset value per share of the Fund is calculated once daily at 4:15 p.m.,
New York time, Monday through Friday, each day the NYSE is open. The net asset
value per share of the Fund is computed by dividing the value
9
<PAGE>
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.
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
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<PAGE>
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.
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, Russell 2000 (total return), and S&P SmallCap Index (total return).
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.
11
<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. JANUARY 31, 1997
- --------------------------------------------------------------------------------
OFFITBANK VIF-HIGH YIELD FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFITBANK VIF - High Yield Fund (the "Fund") is an investment portfolio of the
OFFITBANK Variable Insurance Fund, Inc. (the "Company") , an open-end,
management investment company consisting of seven separate investment
portfolios. The Fund's investment objective is to seek high current income with
capital appreciation as a secondary objective. The Fund invests, under normal
circumstances, at least 65% of its total assets in U.S. corporate fixed income
securities rated below investment grade offering potential returns that are
sufficiently high to justify the greater investment risks.
THE FUND MAY INVEST PRIMARILY IN HIGH YIELD, HIGH RISK CORPORATE DEBT SECURITIES
AND SOVEREIGN DEBT OBLIGATIONS WHICH ARE CONSIDERED SPECULATIVE AND SUBJECT TO
CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE AND POLICIES" AND "SPECIAL RISK
CONSIDERATIONS." There can be no assurance that the Fund's investment objective
will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Fund's investment adviser (the "Adviser"). The Adviser currently
manages in excess of $8 billion in assets. The address of the Company is 125
West 55th Street, New York, New York 10019. Yield and other information
regarding the Funds may be obtained by calling 1-800-618-9510.
SHARES OF THE FUND ARE SOLD ONLY TO CERTAIN LIFE INSURANCE COMPANIES
(COLLECTIVELY, "PARTICIPATING COMPANIES") AND THEIR SEPARATE ACCOUNTS
(COLLECTIVELY, THE "ACCOUNTS") TO FUND BENEFITS UNDER VARIABLE ANNUITY CONTRACTS
("CONTRACTS") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF ONE OR MORE OF THE
FUNDS IN ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND
POLICY OWNERS ("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH
ALLOCATION RIGHTS ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS.
SHARES ARE REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE
CONTRACTS AND POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated January 31, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus. INVESTORS ARE ADVISED THAT (A) THE
COMPANY IS NOT AUTHORIZED TO ENGAGE IN THE BUSINESS OF BANKING AND (B) SHARES OF
THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY,
OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR ARE THEY FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WHAT YOU NEED TO KNOW
Financial Highlights...................................................... 2
The Company............................................................... 3
Investment Objective and Policies........................................ 3
Investment Policies and Techniques........................................ 5
Special Risk Considerations............................................... 11
Limiting Investment Risks................................................. 20
Management................................................................ 21
About Your Investment..................................................... 21
How the Company Values Its Shares......................................... 22
How Distributions are Made: Tax Information............................... 22
Shareholder Communications ............................................... 23
Performance Information................................................... 23
Counsel; Independent Accountants.......................................... 24
Appendix A................................................................ A-1
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights of the High Yield Fund for the period ending September 30,
1996. The information below has been derived from financial statements included
in the Semi-Annual Report to Shareholders for the period ending September 30,
1996. Such information has not been audited by Price Waterhouse LLP, independent
auditors for the Company. The Semi-Annual Report is incorporated by reference
into the Statement of Additional Information. The information set forth below is
for a share of the Fund outstanding for the period indicated.
VIF-HIGH YIELD FUND
For the period August
28, 1996* through
September 30, 1996
For a share of capital stock outstanding through the period:
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.......................... 10.00
Net investment income.................................... 0.39
Net realized and unrealized gains on investments......... 0.29
-----
Total from investment operations......................... 0.68
-----
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.................................... (0.39)
Total dividends and distribution......................... (0.39)
------
NET ASSET VALUE, END OF PERIOD................................ $10.29
TOTAL INVESTMENT RETURN....................................... 6.963%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $9,211
RATIOS TO AVERAGE NET ASSETS:
Expenses(1)(2)........................................... 1.15%
Net investment income (1)................................ 7.77%
PORTFOLIO TURNOVER RATE....................................... 0%
* Commencement of Operations.
(1) Annualized
(2) If the Fund had borne all expenses that were paid or assumed by the Adviser
and Administrator the above expense ratio would have been 2.70% for the
Fund.
<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, an
open-end management investment company. The Company is not authorized to engage
in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Funds, which could possibly force the Company to sell portfolio securities
at disadvantageous prices. The Company's Directors intend to monitor events in
order to identify any material irreconcilable conflicts that may possibly arise
and to determine what action, if any, should be taken in response thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an objective which it pursues through investment policies as
described below. The objectives and policies of the Fund can be expected to
affect the return of the Fund and the degree of market and financial risk to
which the Fund is subject. For more information about the investment strategies
employed by the Fund, see "Investment Policies and Techniques." The investment
objective and policies of the Fund may, unless otherwise specifically stated, be
changed by the Directors of the Company without a vote of the shareholders. As a
matter of policy, the Directors would not materially change the investment
objective of the Fund without shareholder approval. There is no assurance that
the Fund will achieve its objective.
Additional portfolios may be created from time to time with different investment
objectives and policies for use as funding vehicles for the Accounts or for
other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Fund, with the classes being subject to different charges and expenses and
having such other different rights as the Directors may prescribe.
The Fund may utilize many of the same investment techniques and invest in
similar securities. Investors should note, however, that the Fund will invest
their assets in accordance with their respective investment objectives and
policies described below. Accordingly, the Adviser expects that the Fund's
investment portfolios will be distinct, notwithstanding their ability to invest
in comparable instruments.
The VIF-High Yield Fund's primary investment objective is high current income.
Capital appreciation is a secondary objective. The Fund will seek to achieve its
objectives by investing, under normal circumstances, at least 65% of its total
assets in U.S. corporate fixed income securities (including debt securities,
convertible securities and preferred stocks) which are lower rated or unrated at
the time of investment and are generally perceived by the marketplace to be high
yield/high risk securities, commonly referred to as "junk bonds." In addition,
the Fund will seek to invest in debt securities which are (i) "seasoned" senior
securities (as defined below) and offer sufficiently high potential yields to
justify the greater investment risk, (ii) judged by the Adviser to be more
creditworthy than generally perceived in the marketplace, or (iii) issued by
once creditworthy companies that are now considered a high risk investment
generally due to changing industry conditions, a change in company
capitalization or a reduction of earning power. The Fund will seek capital
appreciation opportunities in those special situations in which an issuer's
senior securities sell at a substantial discount in relation to their
liquidation value, or in which the creditworthiness of an issuer is believed, in
the judgment of the Adviser, to be improving. For
2
<PAGE>
purposes of this Prospectus, a "senior" security of an issuer is any security
entitled to preference over the issuer's common stock in the distribution of
income or assets upon liquidation.
Securities offering the high yield and appreciation potential characteristics
that the VIF-High Yield Fund seeks are generally found in mature cyclical or
depressed industries and highly leveraged companies. The Adviser attempts to
identify securities the underlying fundamentals of which are improving or are
sufficiently strong to sustain the issuer. The Adviser also attempts to identify
securities in which the asset values ultimately supporting the credit are
sufficient so that attractive returns are achievable in the event of bankruptcy,
reorganization or liquidation of the issuer. Some of the Fund's securities may
be obtained as a result of the issuer's reorganization or may be in default or
arrears.
In selecting a security for investment by the VIF-High Yield Fund, the Adviser
considers the following factors, among others: (i) the current yield, the yield
to maturity where appropriate, and the price of the security relative to other
securities of comparable quality and maturity; (ii) the balance sheet and
capital structure of the issuer; (iii) the market price of the security relative
to its face value; (iv) the rating, or absence of a rating, by Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's") or Duff &
Phelps Credit Rating Co. ("D&P"); (v) the variety of issuers and industries
represented in the Fund's portfolio; and (vi) management of the issuer. Industry
trends and fundamental developments that may affect an issuer are also analyzed,
including factors such as liquidity, profitability and asset quality. The
Adviser will be free to invest in high yield, high risk debt securities of any
maturity and duration and the interest rates on such securities may be fixed or
floating.
The VIF-High Yield Fund invests primarily in "seasoned" senior securities. The
Fund defines a "seasoned" security as any security whose issuer has been
operating in its current form for a considerable period of time. The Fund
generally does not invest in original issue high yield securities of newly
formed, highly leveraged corporations but reserves the right to do so. An
additional risk associated with such investments is the unproven credit quality
of newly formed corporations because of the lack of any operating history.
The higher yields sought by the VIF-High Yield Fund are generally obtainable
from non-investment grade securities (i.e., rated BB or lower by S&P or D&P, or
Ba or lower by Moody's, or if unrated, of equivalent quality as determined by
the Adviser). See Appendix A to this Prospectus for a description of ratings of
S&P, Moody's and D&P. Investments in high yield, high risk debt securities
involve comparatively greater risks, including price volatility and the risk of
default in the timely payment of interest and principal, than higher rated
securities. Some of such investments may be non-performing when purchased. See
"Special Risk Considerations."
Although the VIF-High Yield Fund's investments are primarily in U.S. corporate
securities, it may also invest in foreign corporate debt securities, sovereign
debt, municipal securities and mortgage-backed debt having many of the
characteristics of its corporate portfolio. The Adviser does not currently
anticipate seeking investments in the common stock of any issuers. However, the
Fund may acquire securities convertible into common stock or receive common
stock in lieu of dividends, interest, or principal.
OFFITBANK VIF-High Yield Fund will generally be managed in a style similar to
OFFITBANK High Yield Fund.
GENERAL. As indicated above, the Fund is generally managed in the style similar
to other open-end investment companies which are managed by OFFITBANK and whose
shares are generally offered to the public. These other OFFITBANK Funds may,
however, employ different investment practices and may invest in securities
different from those in which their counterpart Fund invests, and, as such, may
not have identical portfolios or experience identical investment results.
3
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. When the Fund invests in
foreign securities, they may be denominated in foreign currencies. Thus, the
Fund's net asset value will be affected by changes in exchange rates. See
"Special Risk Considerations."
BRADY BONDS
The Fund may invest in "Brady Bonds" which are debt securities issued or
guaranteed by foreign governments in exchange for existing external commercial
bank indebtedness under a plan announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989. To date, over $73 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, Mexico and Venezuela. Brazil, the Dominican
Republic and Poland have announced plans to issue approximately $52 billion
(face amount), based on current estimates, of Brady Bonds. 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.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may use, as portfolio management strategies, cross currency hedges,
interest rate transactions, commodity futures contracts in the form of futures
contracts on securities, securities indices and foreign currencies, and related
options transactions. The Fund also may enter into forward foreign currency
contracts and options transactions to hedge in connection with currency and
interest rate positions and in order to enhance the Fund's income or gain. See
"Special Risk Considerations--Hedging and Other Strategic Transactions."
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign entity and one or more financial
institutions ("Lenders"). The majority of the Fund's investments in Loans in
emerging markets is expected to be in the form of participations
("Participations") in Loans and assignments ("Assignments") of portions of Loans
from third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower government.
The Fund will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan ("Loan Agreement"), nor any rights of set-off against the borrower, and the
Fund may not directly benefit from any collateral supporting the Loan in which
it has purchased the Participation. As a result, the Fund will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, the Fund may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. The 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
4
<PAGE>
by the Adviser when purchasing marketable securities. When the Fund purchases
Assignments from Lenders, the Fund will acquire direct rights against the
borrower on the Loan. However, since Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by the Fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Fund anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Funds' ability to dispose of particular
Assignments or Participations when necessary to meet the Funds' liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets, respectively. See "Illiquid Securities" below.
STRUCTURED PRODUCTS
The Fund may invest in interests in entities organized and operated solely for
the purpose of restructuring the investment characteristics of certain debt
obligations. This type of restructuring involves the deposit with or purchase by
an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("structured products") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured products to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to structured products is dependent on the extent
of the cash flow on the underlying instruments. The Fund may invest in
structured products which represent derived investment positions based on
relationships among different markets or asset classes.
The Fund may also invest in other types of structured products, including among
others, inverse floaters, spread trades and notes linked by a formula to the
price of an underlying instrument or currency. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent) (the "reference
rate"). As an example, inverse floaters may constitute a class of collateralized
mortgage obligations with a coupon rate that moves inversely to a designated
index, such as LIBOR (London Interbank Offered Rate) or the Cost of Funds Index.
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
A spread trade is an investment position relating to a difference in the prices
or interest rates of two securities or currencies where the value of the
investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities or
currencies. When
the Fund invests in notes linked to the price of an underlying instrument or
currency, the price of the underlying security or the exchange rate of the
currency is determined by a multiple (based on a formula) of the price of such
underlying security or exchange rate of such currency. Because they are linked
to their underlying markets or securities, investments in structured products
generally are subject to greater volatility than an investment directly in the
underlying market or security. Total return on the structured product is derived
by linking return to one or more characteristics of the underlying instrument.
Although the Fund's purchase of structured products would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing and
other leveraging activities.
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, which are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
have several unique investment characteristics such as (1) higher yields than
common stocks, but lower yields than comparable nonconvertible securities, (2) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) the potential for capital appreciation if
the market price of the underlying common stock increases.
The Fund has no current intention of converting any convertible securities they
may own into equity securities or holding them as an equity investment upon
conversion, although they may do so for temporary purposes. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by the Fund is called for redemption, the Fund may be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-related securities, consistent with their
respective investment objectives and policies, that provide funds for mortgage
loans made to residential homeowners. These include securities which represent
interests in pools of mortgage loans made by lenders such as savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled for sale to investors (such as the Fund) by various
governmental, government-related and private organizations. Interests in pools
of mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Prepayments are caused by repayments of principal resulting from the sale of the
underlying residential property, refinancing or foreclosure, net of fees or
costs which may be incurred.
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Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payments in such pools. However, timely payment of
interest and/or principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool or hazard
insurance. There can be no assurance that the private insurers can meet their
obligations under the policies. The Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experience
and practices of the poolers the Adviser determines that the securities meet the
Fund's investment criteria. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
The Adviser expects that governmental, governmental-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-term fixed rate mortgages. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with the Fund's investment objective and policies, consider
making investments in such new types of securities. For additional information
regarding mortgage-related securities and the risks associated with investment
in such instruments, see "Additional Information on Portfolio Instruments -
Mortgage-Related Securities" in the Statement of Additional Information.
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities in accordance with its investment
objective and policies. Asset-backed securities represent an undivided ownership
interest in a pool of installment sales contracts and installment loans
collateralized by, among other things, credit card receivables and automobiles.
In general, asset-backed securities and the collateral supporting them are of
shorter maturity than mortgage loans. As a result, investment in these
securities should result in greater price stability for the Fund.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional Information.
The Fund will not limit their investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally traded on a
national securities exchange, such securities are widely traded by brokers and
dealers, and to such extent will not be considered illiquid for the purposes of
the Fund's limitation on investment in illiquid securities.
U.S. MUNICIPAL SECURITIES
In circumstances where the Adviser determines that investment in U.S.
dollar-denominated municipal obligations would facilitate the Fund's ability to
accomplish its investment objectives, the Fund may invest in such obligations,
including municipal bonds issued at a discount.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge"). Additionally, for example,
when the Fund believes that a foreign currency may 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
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foreign currency, it may enter into a forward purchase contract to buy that
foreign currency for a fixed dollar amount ("position hedge"). In this
situation, the Fund may, in the alternative, enter into a forward contract to
sell a different foreign currency for a fixed U.S. dollar amount where such Fund
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which portfolio securities of the Fund are denominated
("cross-hedge"). The Fund's custodian will place cash not available for
investment or U.S. government securities or other high quality debt securities
in a segregated account having a value equal to the aggregate amount of the
Fund's commitments under forward contracts entered into with respect to position
hedges, cross-hedges and transaction hedges, to the extent they do not already
own the security subject to the transaction hedge. If the value of the
securities placed in a segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to such
contracts. As an alternative to maintaining all or part of the segregated
account, the Fund may purchase a call option permitting such Fund to purchase
the amount of foreign currency being hedged by a forward sale contract at a
price no higher than the forward contract price or the Fund may purchase a put
option permitting the Fund to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the forward contract
price. Unanticipated changes in currency prices may result in poorer overall
performance for the Fund than if it had not entered into such contracts. If the
party with which the Fund enters into a forward contract becomes insolvent or
breaches its obligation under the contract, then the Fund may lose the ability
to purchase or sell a currency as desired.
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund would sell portfolio securities to financial
institutions, such as banks and broker-dealers, and agree to repurchase them at
an agreed upon date, price and interest payment. When effecting reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. A reverse repurchase agreement involves the risk that
the market value of the portfolio securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, which price is
fixed at the time the Fund enters into such agreement.
SECURITIES LOANS, REPURCHASE AGREEMENTS, WHEN-ISSUED AND FORWARD COMMITMENTS
TRANSACTIONS
The Fund may lend portfolio securities in an amount up to 30% of its assets to
broker-dealers, major banks or other recognized domestic institutional borrowers
of securities. The Fund may also enter into repurchase agreements with dealers,
domestic banks or recognized financial institutions which, in the opinion of the
Adviser, present minimal credit risks. These transactions must be fully
collateralized at all times, but involve some risk to
the Fund if the other party should default on its obligations and the Fund is
delayed or prevented from recovering the collateral. The Fund may also purchase
securities on a when-issued basis or for future delivery, which may increase its
overall investment exposure and involves a risk of loss if the value of the
securities declines prior to the settlement date.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS
The Fund may invest in zero coupon securities and pay-in-kind bonds . These
investments involve special risk considerations. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. When a zero coupon security is held to maturity, its
entire return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. The Fund also may purchase pay-in-kind
bonds. Pay-in-kind bonds pay all or a portion of their interest in the form of
debt or equity securities. The FUnd will only purchase pay-in-kind bnds
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that pay all or a portion of their interest in the form of debt securities. Zero
coupon securities and pay-in-kind bonds may be issued by a wide variety of
corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Fund is required to accrue as income each year the value of
securities received in respect of pay-in-kind bonds and a portion of the
original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Fund will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Fund may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements.
ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities which are not readily marketable, time
deposits and repurchase agreements not terminable within seven days. Illiquid
assets are assets which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment. Securities that have readily available market quotations
are not deemed illiquid for purposes of this limitation (irrespective of any
legal or contractual restrictions on resale). The Fund may purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Rule 144A securities generally must be sold
to other qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% limitation on investment in illiquid securities. The ability to
sell Rule 144A securities to qualified institutional buyers is a recent
development and it is not possible to predict how this market will mature. The
Adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES
The Fund reserves the right to invest up to 10% of its total assets in the
securities of other investment companies. The Fund may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company. The Fund
does not intend to invest in such investment companies unless, in the judgment
of the Adviser, the potential benefits of such investment justify the payment of
any premium to net asset value of the investment company or of any sales charge.
The Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by investment companies in which it invests in addition to
the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the Fund's investment
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most or all of the Fund's investments may be made in the United States and
denominated in U.S. dollars.
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In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.
PORTFOLIO TURNOVER
The Fund will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because emerging markets can be
especially volatile, securities of emerging markets countries may at times be
held only briefly. It is not anticipated that, under normal conditions, the
portfolio turnover rates for the Fund will exceed 75% in any one year. A high
rate of portfolio turnover (100% or more) involves correspondingly greater
brokerage commission expenses and/or markups and markdowns, which will be borne
directly by the Fund and indirectly by the Fund's shareholders. High portfolio
turnover may also result in the realization of substantial net capital gains.
SPECIAL RISK CONSIDERATIONS
GENERAL
The Fund's net asset value will fluctuate, reflecting fluctuations in the market
value of its portfolio positions and its net currency exposure. The value of the
Fund's fixed income securities generally fluctuates inversely with interest rate
movements and fixed income securities with longer maturities tend to be subject
to increased volatility. There is no assurance that the Fund will achieve its
investment objective.
The Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of their
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk of
loss with respect to its portfolio securities as compared to a diversified fund.
The Fund, however, intends to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code") applicable
to segregated asset accounts underlying variable products under section 817(h)
of the Code and to regulated investment companies under Subchapter M of the
Code.
HIGH YIELD SECURITIES
GENERAL. The Fund may invest all or substantially all of its assets in high
yield, high risk debt securities, commonly referred to as "junk bonds."
Securities rated below investment grade and comparable unrated securities offer
yields that fluctuate over time, but generally are superior to the yields
offered by higher rated securities. However, securities rated below investment
grade also involve greater risks than higher rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which the Fund may invest may have, or be
considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's, S&P or D&P (i.e., rated C
by Moody's or CCC or lower by S&P or D&P). Under rating agency guidelines, these
securities are considered to have extremely poor prospects of ever attaining any
real investment standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay principal
when due in the event of adverse business, financial or economic conditions,
and/or to be in default or not current in the payment of interest or principal.
Such securities are considered speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. Unrated securities deemed comparable to these lower- and
lowest-rated securities will have similar characteristics. Accordingly, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by the Fund with a commensurate effect on the value of
their respective shares. Therefore, an investment in the Fund should not be
considered as a complete investment program for all investors.
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
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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 Funds may invest have historically experienced, and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's cash
flow situation, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of its debt service
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burden to the economy as a whole, and its government's policy towards the
International Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than U.S. dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign sovereign
obligor cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks and multilateral organizations, and inflows of
foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. These obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Fund may invest will not be
subject to similar defaults or restructuring arrangements which may adversely
affect the value of such investments. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
In addition to high yield foreign sovereign debt securities, the Fund may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Foreign Securities" below.
FOREIGN SECURITIES
A portion of the Fund's assets may be invested in the securities of non-U.S.
issuers. Investors should recognize that investing in securities of non-U.S.
issuers involves certain risks and special considerations, including those set
forth below, which are not typically associated with investing in securities of
U.S. issuers. Further, certain
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investments that the Fund may purchase, and investment techniques in which it
may engage, involve risks, including those set forth below.
Social, Political and Economic Factors. Many countries in which the Fund will
invest, and the emerging market countries in particular, may be subject to a
substantially greater degree of social, political and economic instability than
is the case in the United States, Japan and Western European countries. Such
instability may result from, among other things, some or all of the following:
(i) authoritarian governments or military involvement in political and economic
decision-making, and changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies and terrorist activities; (iv)
hostile relations with neighboring countries; and (v) drug trafficking. Social,
political and economic instability could significantly disrupt the principal
financial markets in which the Funds invest and adversely affect the value of
the Fund's assets.
Individual foreign economies in general, and those of emerging market countries
in particular, may differ favorably or unfavorably and significantly from the
U.S. economy in such respects as the rate of growth of gross domestic product or
gross national product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, structural unemployment and balance of
payments position. Governments of many of these countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In some cases, the government owns or controls many companies, including
some of the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in many countries,
including emerging market countries, which could affect private sector companies
and the Fund, and on market conditions, prices and yields of securities in the
Fund's portfolio. There may be the possibility of nationalization or
expropriation of assets, or future confiscatory levels of taxation affecting the
Fund. In the event of nationalization, expropriation or other confiscation, the
Fund may not be fairly compensated for its loss and could lose its entire
investment in the country involved.
Investment and Repatriation Restrictions. Investment by the Fund in non-U.S.
issuers may be restricted or controlled to varying degrees. These restrictions
may limit or preclude investment in certain of such issuers or countries and may
increase the costs and expenses of the Fund. For example, certain countries
require governmental approval prior to investments by foreign persons in the
country or in a particular company or industry sector or limit investment by
foreign persons to only a specific class of securities of a company which may
have less advantageous terms (including price) than securities of the company
available for purchases by nationals. Certain countries may also restrict or
prohibit investment opportunities in issuers or industries deemed important to
national interests. As a result of investment restrictions, the Fund may, in
certain countries (such as Mexico) invest through intermediary vehicles or
trusts. In addition, the repatriation of both investment income and capital from
some of these countries requires governmental approval and if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose temporary restrictions on foreign capital remittances abroad. Even
where there is no outright restriction on repatriation of capital, the mechanics
of repatriation may affect certain aspects of the operation of the Fund.
The Fund could be adversely affected by delays in, or a refusal to grant any
required governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, the Fund was unable to distribute
substantially all of its net investment income and long-term capital gains
within applicable time periods, the Fund could be subject to U.S. federal income
and excise taxes which would not otherwise be incurred and may cease to qualify
for the favorable tax treatment afforded to regulated investment companies under
the Code, in which case it would become subject to U.S. federal income tax on
all of its income and gains.
Currency Fluctuations. Because the Fund may invest a portion of its assets in
the securities of foreign issuers which are denominated in foreign currencies,
the strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the Fund's investment performance. A decline in the value of
any particular
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currency against the U.S. dollar will cause a decline in the U.S. dollar value
of the Fund's holdings of securities denominated in such currency and,
therefore, will cause an overall decline in the Fund's net asset value and any
net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.
Inflation. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and emerging
market countries in particular. In an attempt to control inflation, wage and
price controls have been imposed at times in certain countries.
Market Characteristics; Differences in Securities Markets. The securities
markets in many countries, and in emerging markets in particular generally have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies listed on such markets may be less liquid and more
volatile than equity securities of U.S. companies of comparable size. Some of
the stock exchanges outside of the United States and in emerging market
countries, to the extent that established securities markets even exist, are in
the earlier stages of their development. A high proportion of the shares of many
foreign companies may be held by a limited number of persons, which may limit
the number of shares available for investment by the Fund . A limited number of
issuers in most, if not all, of these securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
In addition, the application of certain 1940 Act provisions may limit the Fund's
ability to invest in certain non-U.S. issuers and to participate in public
offerings in these countries. The limited liquidity of certain non-U.S.
securities markets may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country 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
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higher than in the United States. In addition, securities settlements and
clearance procedures in certain countries, and, in particular, in emerging
market countries, are less developed and less reliable than those in the United
States and the Fund may be subject to delays or other material difficulties and
could experience a loss if a counterparty defaults. Delays in settlement could
result in temporary periods when assets of the Funds are uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. The inability to dispose of a portfolio security due
to settlement problems could result either in losses to the Fund due to
subsequent declines in the value of such portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
Non-U.S. Subcustodians. Rules adopted under the 1940 Act permit the Fund to
maintain its non-U.S. securities and cash in the custody of certain eligible
non-U.S. banks and securities depositories. Certain banks in non-U.S. countries
may not be eligible subcustodians for the Fund, in which event the Fund may be
precluded from purchasing securities in which they would otherwise invest, and
other banks that are eligible subcustodians may be recently organized or
otherwise lack extensive operating experience. At present, custody arrangements
complying with the requirements of the Securities and Exchange Commission (the
"Commission") are available in each of the countries in which the Adviser
intends to invest. In certain countries in which the Fund may make investments,
there may be legal restrictions or limitations on the ability of the Fund to
recover assets held in custody by subcustodians in the event of the bankruptcy
of the subcustodian.
Government Supervision; Legal Systems. Disclosure and regulatory standards in
certain foreign countries, including emerging market countries, are in many
respects less stringent than U.S. standards. There may be less government
supervision and regulation of securities exchanges, listed companies and brokers
in these countries than exists in the United States. Brokers in some countries
may not be as well capitalized as those in the United States, so that they may
be more susceptible to financial failure in times of market, political, or
economic stress, exposing the Fund to a risk of loss. Less information may be
available to the Fund than with respect to investments in the United States and,
in certain of these countries, less information may be available to the Fund
than to local market participants. In addition, existing laws and regulations
are often inconsistently applied. Foreign investors may be adversely affected by
new laws and regulations, changes to existing laws and regulations and
preemption of local laws and regulations by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Financial Information and Standards. Non-U.S. issuers may be subject to
accounting, auditing and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular,
the assets and profits appearing on the financial statements of certain non-U.S.
issuers may not reflect their financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting
rules may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Moreover,
substantially less information may be publicly available about non-U.S. issuers
than is available about U.S. issuers.
In addition to the foreign securities listed above, the Fund may also invest in
foreign sovereign debt securities, which involve certain additional risks. See
"Sovereign Debt Securities" above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may be authorized to use a variety of investment strategies to hedge
various market risks (such as interest rates, currency exchange rates and broad
or specific market movements), to manage the effective maturity or duration of
debt instruments held by the Fund, or, with respect to certain strategies, to
seek to increase the
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Fund's income or gain (such investment strategies and transactions are referred
to herein as "Hedging and Other Strategic Transactions"). Currently, the Fund
may use, as portfolio management strategies, cross currency hedges, interest
rate transactions, commodity futures contracts in the form of futures contracts
on securities, securities indices and foreign currencies, and related options
transactions. The Fund also may enter into forward foreign currency contracts
and options transactions to hedge in connection with currency and interest rate
positions and in order to enhance the Fund's income or gain.
A discussion of the risks associated with Hedging and Other Strategic
Transactions follows below. The Fund will not be obligated, however, to pursue
any of such strategies and Fund makes no representation as to the availability
of these techniques at this time or at any time in the future. In addition, the
Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable rules and regulations of the
Commodity Futures Trading Commission ("CFTC") thereunder and the federal income
tax requirements applicable to regulated investment companies which are not
operated as commodity pools. To the extent not otherwise restricted by the
Commission, the CFTC, the Code or its investment objectives and policies,
the Fund may utilize, without limitation, Hedging and Other Strategic
Transactions. For further information see "Additional Information on Investment
Policies and Techniques - Hedging and Other Strategic Transactions" and
"Additional Information Concerning Taxes" in the Statement of Additional
Information.
IN GENERAL
Subject to the constraints described above, the Fund may (if and to the extent
so authorized) purchase and sell (or write) exchange-listed and over-the-counter
put and call options on securities, index futures contracts, financial futures
contracts and fixed income indices and other financial instruments, and enter
into financial futures contracts, interest rate transactions and currency
transactions (collectively, these transactions are referred to in this
Prospectus as "Hedging and Other Strategic Transactions"). The Fund's interest
rate transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Hedging and Other Strategic Transactions may generally be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The Fund may use any or all types
of Hedging and Other Strategic Transactions which it is authorized to use at any
time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any authorized Hedging and Other Strategic
Transaction will be a function of numerous variables, including market
conditions. The ability of the Fund to utilize Hedging and Other Strategic
Transactions successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select the Fund's
securities. The Fund is not a "commodity pool' (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Other Strategic Transactions involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging, and non-hedging purposes to the extent
permitted by CFTC regulations; provided that the Fund may enter into futures
contracts or options thereon for purposes other 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
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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
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instruments. The value of positions taken as part of non-U.S. Hedging and Other
Strategic Transactions also could be adversely affected by: (1) other complex
foreign political, legal and economic factors, (2) lesser availability of data
on which to make trading decisions than in the United States, (3) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Other Strategic Transactions by the Fund will require,
among other things, that the Fund segregate cash, liquid high grade debt
obligations or other assets with its custodian, or a designated sub-custodian,
to the extent the Fund's obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency. In
general, either the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by the Fund,
for example, will require the Fund to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid high grade debt obligations
equal to the excess of the index value over the exercise price on a current
basis. A put option on securities written by the Fund will require the Fund to
segregate liquid high grade debt obligations equal to the exercise price. Except
when the Fund enters into a forward contract in connection with the purchase or
sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency, liquid securities denominated in
that currency equal to the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when the Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option on a futures contract, the Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt securities or other acceptable assets. The
Fund will accrue the net amount of the excess, if any, of its obligations
relating to swaps over its entitlements with respect to each swap on a daily
basis and will segregate with its custodian, or designated sub-custodian, an
amount of cash or liquid high grade debt obligations having an aggregate value
equal to at least the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
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
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of that option is the same or higher than the strike price of a put option sold
by the Fund. Moreover, instead of segregating assets if it holds a futures
contracts or forward contract, the Fund could purchase a put option on the same
futures contract or forward contract with a strike price as high or higher than
the price of the contract held. Other Hedging and Other Strategic Transactions
may also be offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction, no segregation is required, but if
it terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
CONCENTRATION
Under normal market conditions, the Fund may invest greater than 25% of its
assets in securities of issuers whose primary business activity is in the
banking industry (see "Limiting Investment Risks" below). As such, an investment
in the Fund should be made with an understanding of the characteristics of the
banking industry and the risks that such an investment may entail. Banks are
subject to extensive government regulations that may limit both the amounts and
types of loans and other financial commitments that may be made and the interest
rates and fees that may be charged. The profitability of this industry is
largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from financial
difficulties of borrowers might affect a bank's ability to meet its obligations.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic obligations. For a discussion of additional risks, see
"Foreign Securities" above.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there
is no limitation with respect to investment in obligations issued
or guaranteed by the U.S. government, its agencies or
instrumentalities.
2. The Fund may not borrow money (except that they may enter into
reverse repurchase agreements) except from banks for temporary or
emergency purposes; provided, that (a) the amount of such
borrowing may not exceed 20% of the value of the Fund's total
assets and (b) the Fund will 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
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of the Fund. Shareholders are entitled to one vote for each full share held and
to fractional votes for fractional shares held.
MANAGEMENT
The business and affairs of the Fund are managed under the general direction and
supervision of the Company's Board of Directors. The Fund's day-to-day
operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK provides investment advisory services to the Fund pursuant to an
Investment Advisory Agreement with the Company (the "Advisory Agreement").
Subject to such policies as the Company's Board of Directors may determine, the
Adviser makes investment decisions for the Fund.
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive from the Fund a monthly fee at the annual rate of.90% for
the first $200,000,000 of assets and .80% for amounts in excess thereof based
upon the average daily net assets of the Fund. The investment advisory fee for
the Fund is higher than that paid by most investment companies, but is
comparable to that paid by other investment companies that have strategies
focusing on high yield and international investments.
The Adviser is a New York State chartered trust company. Under its charter, the
Adviser may neither accept deposits nor make loans except for deposits or loans
arising directly from its exercise of the fiduciary powers granted it under the
New York Banking Law. The Adviser's principal business is the rendering of
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. The Adviser specializes
in fixed income management and offers its clients a complete range of fixed
income investments in capital markets throughout the world. The Adviser
currently manages in excess of $8 billion in assets and serves as investment
adviser to fifteen other registered investment companies (or portfolios
thereof). The principal business address of the Adviser is 520 Madison Avenue,
New York, New York 10022.
PORTFOLIO MANAGERS. Stephen T. Shapiro will serve as the portfolio manager for
the Fund. Mr. Shapiro is a Managing Director of the Adviser and has been
associated with the Adviser since 1983.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
BISYS Fund Services Limited Partnership, d/b/a BISYS Fund Services ("BISYS")
serves as the Company's administrator and generally assists the Company in all
aspects of its administration and operation. The Bank of New York
serves as custodian of the assets of the Fund. 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.
20
<PAGE>
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.
21
<PAGE>
TAX MATTERS
THE FUND. The Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code, as
amended (the "Code"), concerning the diversification of assets, distribution of
income, and sources of income. When the Fund qualifies as a regulated investment
company and all of its taxable income is distributed in accordance with the
timing requirements imposed by the Code, the Fund will not be subject to Federal
income tax. If, however, for any taxable year the Fund does not qualify as a
regulated investment company, then all of its taxable income will be subject to
tax at regular corporate rates (without any deduction for distributions to the
Accounts), and the receipt of such distributions will be taxable to the extent
that the distributing Fund has current and accumulated earnings and profits.
FUND DISTRIBUTIONS. Distributions by the Fund are taxable, if at all, to the
Accounts, and not to Contract or Policy Owners. An Account will include
distributions in its taxable income in the year in which they are received
(whether paid in cash or reinvested).
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of one or more Funds are the investment
vehicle reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by 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
22
<PAGE>
From time to time the Fund may advertise certain information about its
performance. The Fund may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Fund may make available information as to their
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Funds published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A.
Today or The New York Times or other industry or financial publications.
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.
23
<PAGE>
APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of the Company's Funds may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the
A-1
<PAGE>
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
A-2
<PAGE>
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-3
<PAGE>
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
------------------------
A-4
<PAGE>
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether a Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-5
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. JANUARY 31, 1997
- --------------------------------------------------------------------------------
OFFITBANK VIF-EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFITBANK VIF - Emerging Markets Fund (the "Fund") is an investment portfolio of
the OFFITBANK Variable Insurance Fund, Inc. (the "Company") , an open-end,
management investment company consisting of seven separate investment
portfolios. The Fund's investment objective is to seek to provide investors with
a competitive total investment return by focusing on current yield and
opportunities for capital appreciation primarily by investing in corporate and
sovereign debt securities of emerging market countries. Under normal
circumstances, the Fund will invest at least 80% of its total assets in debt
instruments, but may invest up to 20% of its total assets in equity securities.
THE FUND MAY INVEST PRIMARILY IN HIGH YIELD, HIGH RISK CORPORATE DEBT SECURITIES
AND SOVEREIGN DEBT OBLIGATIONS WHICH ARE CONSIDERED SPECULATIVE AND SUBJECT TO
CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE AND POLICIES" AND "SPECIAL RISK
CONSIDERATIONS." There can be no assurance that the Fund's investment objective
will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Fund's investment adviser (the "Adviser"). The Adviser currently
manages in excess of $8 billion in assets. The address of the Company is 125
West 55th Street, New York, New York 10019. Yield and other information
regarding the Funds may be obtained by calling 1-800-618-9510.
SHARES OF THE FUND ARE SOLD ONLY TO CERTAIN LIFE INSURANCE COMPANIES
(COLLECTIVELY, "PARTICIPATING COMPANIES") AND THEIR SEPARATE ACCOUNTS
(COLLECTIVELY, THE "ACCOUNTS") TO FUND BENEFITS UNDER VARIABLE ANNUITY CONTRACTS
("CONTRACTS") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF ONE OR MORE OF THE
FUNDS IN ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND
POLICY OWNERS ("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH
ALLOCATION RIGHTS ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS.
SHARES ARE REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE
CONTRACTS AND POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated January 31, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus. INVESTORS ARE ADVISED THAT (A) THE
COMPANY IS NOT AUTHORIZED TO ENGAGE IN THE BUSINESS OF BANKING AND (B) SHARES OF
THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY,
OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR ARE THEY FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. ------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WHAT YOU NEED TO KNOW
Financial Highlights..................................................... 2
The Company.............................................................. 3
Investment Objective and Policies....................................... 3
Investment Policies and Techniques....................................... 5
Special Risk Considerations.............................................. 11
Limiting Investment Risks................................................ 20
Management............................................................... 21
About Your Investment.................................................... 21
How the Company Values Its Shares........................................ 22
How Distributions are Made: Tax Information.............................. 22
Shareholder Communications .............................................. 23
Performance Information.................................................. 23
Counsel; Independent Accountants......................................... 24
Appendix A............................................................... A-1
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights of the Emerging Markets Fund for the period ending
September 30, 1996. The information below has been derived from financial
statements included in the Semi-Annual Report to Shareholders for the period
ending September 30, 1996. Such information has not been audited by Price
Waterhouse LLP, independent auditors for the Company. The Semi-Annual Report is
incorporated by reference into the Statement of Additional Information. The
information set forth below is for a share of the Fund outstanding for the
period indicated.
VIF-EMERGING
MARKETS FUND
For the period August
28, 1996* through
September 30, 1996
For a share of capital stock outstanding through the period:
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD............................... 10.00
Net investment income......................................... 0.07
Net realized and unrealized gains on investments.............. 0.18
-----
Total from investment operations.............................. 0.25
-----
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income......................................... (0.07)
Total dividends and distribution.............................. (0.07)
------
NET ASSET VALUE, END OF PERIOD..................................... $10.18
TOTAL INVESTMENT RETURN............................................ 2.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....................... $1,061
RATIOS TO AVERAGE NET ASSETS:
Expenses (1)(2)............................................. 1.50%
Net investment income (1).................................. 8.00%
PORTFOLIO TURNOVER RATE.......................................... 131%
* Commencement of Operations.
(1) Annualized
(2) If the Fund had borne all expenses that were paid or assumed by the Adviser
and Administrator the above expense ratio would have been 6.22% for the
Fund.
<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, an
open-end management investment company. The Company is not authorized to engage
in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Funds, which could possibly force the Company to sell portfolio securities
at disadvantageous prices. The Company's Directors intend to monitor events in
order to identify any material irreconcilable conflicts that may possibly arise
and to determine what action, if any, should be taken in response thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an objective which it pursues through investment policies as
described below. The objectives and policies of the Fund can be expected to
affect the return of the Fund and the degree of market and financial risk to
which the Fund is subject. For more information about the investment strategies
employed by the Fund, see "Investment Policies and Techniques." The investment
objective and policies of the Fund may, unless otherwise specifically stated, be
changed by the Directors of the Company without a vote of the shareholders. As a
matter of policy, the Directors would not materially change the investment
objective of the Fund without shareholder approval. There is no assurance that
the Fund will achieve its objective.
Additional portfolios may be created from time to time with different investment
objectives and policies for use as funding vehicles for the Accounts or for
other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Fund, with the classes being subject to different charges and expenses and
having such other different rights as the Directors may prescribe.
The Fund may utilize many of the same investment techniques and invest in
similar securities. Investors should note, however, that the Fund will invest
their assets in accordance with their respective investment objectives and
policies described below. Accordingly, the Adviser expects that the Fund's
investment portfolios will be distinct, notwithstanding their ability to invest
in comparable instruments.
The investment objective of the Fund is to provide a competitive total
investment return by focusing on current yield and opportunities for capital
appreciation. The Fund will seek to achieve its objective by investing primarily
in corporate and sovereign debt instruments of emerging market countries. Under
normal circumstances, the Fund will invest at least 80% of its total assets in
debt instruments, but may invest up to 20% of its total assets in equity
securities. As used in this Prospectus, an "emerging market country" is any
country that is considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (the "World Bank") or the
International Finance Corporation, or is determined by the Adviser to have per
capita gross domestic product below $7,500 (in 1994 dollars). Under normal
circumstances, the Fund will invest at least 25% of its total assets in
securities of issuers whose primary business activity is in the banking
industry. The Fund will not invest 25% or more of its total assets in
obligations issued by any one country, its agencies, instrumentalities or
political subdivisions. See "Special Risk Considerations - Concentration" and
"Limiting Investment Risks."
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The Fund seeks to benefit from investment opportunities deriving from long-term
improving economic and political conditions, and other positive trends and
developments in emerging market countries. Accordingly, the Fund is intended
primarily for long-term investors and should not be considered as a vehicle for
trading purposes. The continuation of a long-term international trend
encouraging greater market orientation and economic growth may result in local
or international political, economic or financial developments that could
benefit the capital markets in emerging market countries.
An "emerging market country" debt instrument or equity security, as used in this
Prospectus, means an instrument or security (a) of an issuer organized or with
more than 50% of its business activities in such emerging market country; (b)
denominated in such country's currency or with a primary trading market in such
emerging market country; (c) of a company which derives at least 50% of its
gross revenues from goods produced, sales made, services performed or
investments in such emerging market country; or (d) issued or guaranteed by the
government of such emerging market country, its agencies, political subdivisions
or instrumentalities, or the central bank of such country. Determinations as to
eligibility will be made by the Adviser based on publicly available information
and inquiries made to companies. See "Special Risk Considerations--Foreign
Securities" in this Prospectus and "Additional Risk Considerations--Non-Uniform
Corporate Disclosure Standards and Governmental Regulation" in the Statement of
Additional Information for a discussion of the nature of publicly available
information for non-U.S.
companies.
DEBT INSTRUMENTS. The Fund intends to invest in debt instruments including
bonds, notes, bills, debentures, convertible securities, debt with attached
warrants, bank obligations, short-term paper, loan participations and
assignments, trust and partnership interests, money market instruments and other
similar instruments. Such instruments may be issued or guaranteed by the
governments of emerging market countries, their agencies, instrumentalities or
political subdivisions, international organizations or business entities located
in such countries, including financial institutions, or companies located in
emerging market countries that are subsidiaries of multinational business
entities. Such obligations may be payable in U.S. dollars, Eurocurrencies or
other currencies (including currencies of emerging market countries which may be
indexed to the U.S. dollar). The Adviser will be free to invest in debt
securities of any maturity and duration and the interest rates on such
securities may be fixed or floating. The Fund's debt instruments may or may not
be listed or traded on a securities exchange.
In selecting particular debt instruments for the Fund, the Adviser intends to
consider factors such as liquidity, price volatility, tax implications, interest
rate sensitivity, foreign currency exchange risks, counterparty risks and
technical market considerations. Debt instruments in which the Fund may invest
will not be required to meet a minimum rating standard and a substantial amount
of such instruments are expected to be non-investment grade securities (i.e.,
rated BB or lower by S&P or D&P, or Ba or lower by Moody's, or if unrated, of
comparable quality as determined by the Adviser). See Appendix A to this
Prospectus for a description of ratings of S&P, Moody's and D&P. Investments in
high yield, high risk debt securities involve comparatively greater risks,
including price volatility and the risk of default in the timely payment of
interest and principal, than higher rated securities. Some of such investments
may be non-performing when purchased. See "Special Risk Considerations--High
Yield Securities."
EQUITY SECURITIES. The Fund may invest up to 20% of its total assets in common
stocks, preferred stocks, detachable warrants and other equity securities that
may or may not be listed or traded on a recognized securities exchange. The Fund
intends that such investments in equity securities often will be related to the
Fund's investments in debt instruments, such as those equity securities received
upon the exercise of convertible debt instruments or attached warrants, or those
equity securities acquired pursuant to investment opportunities deriving from
the Fund's activities in emerging market debt markets. The equity securities
purchased by the Fund may include American Depositary Receipts, European
Depositary Receipts and interests in investment companies.
[OFFITBANK VIF-Emerging Markets Fund will generally be managed in a style
similar to OFFITBANK Emerging Markets Fund.]
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GENERAL. As indicated above, the Fund is generally managed in the style similar
to other open-end investment companies which are managed by OFFITBANK and whose
shares are generally offered to the public. These other OFFITBANK Funds may,
however, employ different investment practices and may invest in securities
different from those in which their counterpart Fund invests, and, as such, may
not have identical portfolios or experience identical investment results.
INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. When the Fund invests in
foreign securities, they may be denominated in foreign currencies. Thus, the
Fund's net asset value will be affected by changes in exchange rates. See
"Special Risk Considerations."
BRADY BONDS
The Fund may invest in "Brady Bonds" which are debt securities issued or
guaranteed by foreign governments in exchange for existing external commercial
bank indebtedness under a plan announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989. To date, over $73 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, Mexico and Venezuela. Brazil, the Dominican
Republic and Poland have announced plans to issue approximately $52 billion
(face amount), based on current estimates, of Brady Bonds. 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.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may use, as portfolio management strategies, cross currency hedges,
interest rate transactions, commodity futures contracts in the form of futures
contracts on securities, securities indices and foreign currencies, and related
options transactions. The Fund also may enter into forward foreign currency
contracts and options transactions to hedge in connection with currency and
interest rate positions and in order to enhance the Fund's income or gain. See
"Special Risk Considerations--Hedging and Other Strategic Transactions."
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign entity and one or more financial
institutions ("Lenders"). The majority of the Fund's investments in Loans in
emerging markets is expected to be in the form of participations
("Participations") in Loans and assignments ("Assignments") of portions of Loans
from third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower government.
The Fund will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan ("Loan Agreement"), nor any rights of set-off against the borrower,
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and the Fund may not directly benefit from any collateral supporting the Loan in
which it has purchased the Participation. As a result, the Fund will assume the
credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Fund
will acquire Participations only if the Lender interpositioned between the Fund
and the borrower is determined by the Adviser to be creditworthy.
Creditworthiness will be judged based on the same credit analysis performed by
the Adviser when purchasing marketable securities. When the Fund purchases
Assignments from Lenders, the Fund will acquire direct rights against the
borrower on the Loan. However, since Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by the Fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Fund anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Funds' ability to dispose of particular
Assignments or Participations when necessary to meet the Funds' liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets, respectively. See "Illiquid Securities" below.
STRUCTURED PRODUCTS
The Fund may invest in interests in entities organized and operated solely for
the purpose of restructuring the investment characteristics of certain debt
obligations. This type of restructuring involves the deposit with or purchase by
an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("structured products") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured products to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to structured products is dependent on the extent
of the cash flow on the underlying instruments. The Fund may invest in
structured products which represent derived investment positions based on
relationships among different markets or asset classes.
The Fund may also invest in other types of structured products, including among
others, inverse floaters, spread trades and notes linked by a formula to the
price of an underlying instrument or currency. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent) (the "reference
rate"). As an example, inverse floaters may constitute a class of collateralized
mortgage obligations with a coupon rate that moves inversely to a designated
index, such as LIBOR (London Interbank Offered Rate) or the Cost of Funds Index.
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
A spread trade is an investment position relating to a difference in the prices
or interest rates of two securities or currencies where the value of the
investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities or
currencies. When the Fund invests in notes linked to the price of an underlying
instrument or currency, the price of the underlying security or the exchange
rate of the currency is determined by a multiple (based on a formula) of the
price of such underlying security or exchange rate of such currency. Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security. Total return on the
structured product is derived by linking return to one or more characteristics
of the underlying instrument. Although the Fund's purchase of structured
products would
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have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leverage for purposes of the
limitations placed on the extent of the Fund's assets that may be used for
borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). As a result, the Fund's investment in these structured products may
be limited by the restrictions contained in the 1940 Act. See "Other Investment
Companies" below. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which the Fund invests may
be deemed illiquid and subject to the 15% limitation described below under
"Illiquid Securities."
DEPOSITORY RECEIPTS AND DEPOSITORY SHARES
The Fund may invest in American Depository Receipts ("ADRs") or other similar
securities, such as American Depository Shares and Global Depository Shares,
convertible into securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. Generally, ADRs
in registered form are designed for use in U.S. securities markets. As a result
of the absence of established securities markets and publicly-owned corporations
in certain foreign countries as well as restrictions on direct investment by
foreign entities, the Fund may be able to invest in such countries solely or
primarily through ADRs or similar securities and government approved investment
vehicles. The Adviser expects that the Fund, to the extent of its investment in
ADRs, will invest predominantly in ADRs sponsored by the underlying issuers. The
Fund, however, may invest in unsponsored ADRs. Issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, which are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
have several unique investment characteristics such as (1) higher yields than
common stocks, but lower yields than comparable nonconvertible securities, (2) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) the potential for capital appreciation if
the market price of the underlying common stock increases.
The Fund has no current intention of converting any convertible securities they
may own into equity securities or holding them as an equity investment upon
conversion, although they may do so for temporary purposes. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by the Fund is called for redemption, the Fund may be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-related securities, consistent with their
respective investment objectives and policies, that provide funds for mortgage
loans made to residential homeowners. These include securities which represent
interests in pools of mortgage loans made by lenders such as savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled for sale to investors (such as the Fund) by various
governmental, government-related and private organizations. Interests in pools
of mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a
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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. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with the Fund's investment objective and policies, consider
making investments in such new types of securities. For additional information
regarding mortgage-related securities and the risks associated with investment
in such instruments, see "Additional Information on Portfolio Instruments -
Mortgage-Related Securities" in the Statement of Additional Information.
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities in accordance with its investment
objective and policies. Asset-backed securities represent an undivided ownership
interest in a pool of installment sales contracts and installment loans
collateralized by, among other things, credit card receivables and automobiles.
In general, asset-backed securities and the collateral supporting them are of
shorter maturity than mortgage loans. As a result, investment in these
securities should result in greater price stability for the Fund.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional Information.
The Fund will not limit their investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally traded on a
national securities exchange, such securities are widely traded by brokers and
dealers, and to such extent will not be considered illiquid for the purposes of
the Fund's limitation on investment in illiquid securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge"). Additionally, for example,
when the Fund believes that a foreign currency may
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suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's portfolio securities denominated in such
foreign currency. Conversely, when the Fund believes that the U.S. dollar may
suffer a substantial decline against foreign currency, it may enter into a
forward purchase contract to buy that foreign currency for a fixed dollar amount
("position hedge"). In this situation, the Fund may, in the alternative, enter
into a forward contract to sell a different foreign currency for a fixed U.S.
dollar amount where such Fund believes that the U.S. dollar value of the
currency to be sold pursuant to the forward contract will fall whenever there is
a decline in the U.S. dollar value of the currency in which portfolio securities
of the Fund are denominated ("cross-hedge"). The Fund's custodian will place
cash not available for investment or U.S. government securities or other high
quality debt securities in a segregated account having a value equal to the
aggregate amount of the Fund's commitments under forward contracts entered into
with respect to position hedges, cross-hedges and transaction hedges, to the
extent they do not already own the security subject to the transaction hedge. If
the value of the securities placed in a segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Fund's commitments with
respect to such contracts. As an alternative to maintaining all or part of the
segregated account, the Fund may purchase a call option permitting such Fund to
purchase the amount of foreign currency being hedged by a forward sale contract
at a price no higher than the forward contract price or the Fund may purchase a
put option permitting the Fund to sell the amount of foreign currency subject to
a forward purchase contract at a price as high or higher than the forward
contract price. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not entered into such contracts.
If the party with which the Fund enters into a forward contract becomes
insolvent or breaches its obligation under the contract, then the Fund may lose
the ability to purchase or sell a currency as desired.
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund would sell portfolio securities to financial
institutions, such as banks and broker-dealers, and agree to repurchase them at
an agreed upon date, price and interest payment. When effecting reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. A reverse repurchase agreement involves the risk that
the market value of the portfolio securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, which price is
fixed at the time the Fund enters into such agreement.
SECURITIES LOANS, REPURCHASE AGREEMENTS, WHEN-ISSUED AND FORWARD COMMITMENTS
TRANSACTIONS
The Fund may lend portfolio securities in an amount up to 30% of its assets to
broker-dealers, major banks or other recognized domestic institutional borrowers
of securities. The Fund may also enter into repurchase agreements with dealers,
domestic banks or recognized financial institutions which, in the opinion of the
Adviser, present minimal credit risks. These transactions must be fully
collateralized at all times, but involve some risk to
the Fund if the other party should default on its obligations and the Fund is
delayed or prevented from recovering the collateral. The Fund may also purchase
securities on a when-issued basis or for future delivery, which may increase its
overall investment exposure and involves a risk of loss if the value of the
securities declines prior to the settlement date.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS
The Fund may invest in zero coupon securities and pay-in-kind bonds and a
substantial portion of the Fund's sovereign debt securities may be acquired at a
discount. These investments involve special risk considerations. Zero coupon
securities are debt securities that pay no cash income but are sold at
substantial discounts from their value at maturity. When a zero coupon security
is held to maturity, its entire return, which consists of the amortization of
discount, comes from the difference between its purchase price and its maturity
value. This difference is known at the time of purchase, so that investors
holding zero coupon securities until maturity know
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at the time of their investment what the return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. The Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds
pay all or a portion of their interest in the form of debt or equity securities.
The Fund may receive payments from pay-in-kind bonds in the form of both debt
and equity securities provided such equity securities do not cause the Fund to
exceed its 20% investment limitation in such securities. Zero coupon securities
and pay-in-kind bonds may be issued by a wide variety of corporate and
governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Fund is required to accrue as income each year the value of
securities received in respect of pay-in-kind bonds and a portion of the
original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Fund will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Fund may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements.
ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities which are not readily marketable, time
deposits and repurchase agreements not terminable within seven days. Illiquid
assets are assets which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment. Securities that have readily available market quotations
are not deemed illiquid for purposes of this limitation (irrespective of any
legal or contractual restrictions on resale). The Fund may purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Rule 144A securities generally must be sold
to other qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% limitation on investment in illiquid securities. The ability to
sell Rule 144A securities to qualified institutional buyers is a recent
development and it is not possible to predict how this market will mature. The
Adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES
The Fund reserves the right to invest up to 10% of its total assets in the
securities of other investment companies. The Fund may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company. The Fund
does not intend to invest in such investment companies unless, in the judgment
of the Adviser, the potential benefits of such investment justify the payment of
any premium to net asset value of the investment company or of any sales charge.
The Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by investment companies in which it invests in addition to
the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the Fund's investment
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
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TEMPORARY STRATEGIES
The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most or all of the Fund's investments may be made in the United States and
denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.
PORTFOLIO TURNOVER
The Fund will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because emerging markets can be
especially volatile, securities of emerging markets countries may at times be
held only briefly. It is not anticipated that, under normal conditions, the
portfolio turnover rates for the Fund will exceed 200% in any one year. A high
rate of portfolio turnover (100% or more) involves correspondingly greater
brokerage commission expenses and/or markups and markdowns, which will be borne
directly by the Fund and indirectly by the Fund's shareholders. High portfolio
turnover may also result in the realization of substantial net capital gains.
SPECIAL RISK CONSIDERATIONS
GENERAL
The Fund's net asset value will fluctuate, reflecting fluctuations in the market
value of its portfolio positions and its net currency exposure. The value of the
Fund's fixed income securities generally fluctuates inversely with interest rate
movements and fixed income securities with longer maturities tend to be subject
to increased volatility. There is no assurance that the Fund will achieve its
investment objective.
The Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of their
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk of
loss with respect to its portfolio securities as compared to a diversified fund.
The Fund, however, intends to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code") applicable
to segregated asset accounts underlying variable products under section 817(h)
of the Code and to regulated investment companies under Subchapter M of the
Code.
HIGH YIELD SECURITIES
GENERAL. The Fund may invest all or substantially all of its assets in high
yield, high risk debt securities, commonly referred to as "junk bonds."
Securities rated below investment grade and comparable unrated securities offer
yields that fluctuate over time, but generally are superior to the yields
offered by higher rated securities. However, securities rated below investment
grade also involve greater risks than higher rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which the Fund may invest may have, or be
considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's, S&P or D&P (i.e., rated C
by Moody's or CCC or lower by S&P or D&P). Under rating agency guidelines, these
securities are considered to have extremely poor prospects of ever attaining any
real investment standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay principal
when due in the event of adverse business, financial or economic conditions,
and/or to be in default or not current in the payment of interest or principal.
Such securities are considered speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. Unrated securities
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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.
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
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governmental authorities that control repayment of their external debt to pay
principal and interest on such debt when due may depend on general economic and
political conditions within the relevant country. Countries such as those in
which the Funds may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, trade difficulties and extreme poverty and unemployment. Many of
these countries are also characterized by political uncertainty or instability.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, and its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies.
The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than U.S. dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign sovereign
obligor cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks and multilateral organizations, and inflows of
foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.
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.
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In addition to high yield foreign sovereign debt securities, the Fund may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Foreign Securities" below.
FOREIGN SECURITIES
Most of the Fund's assets will be invested in the securities of non-U.S.
issuers. Investors should recognize that investing in securities of non-U.S.
issuers involves certain risks and special considerations, including those set
forth below, which are not typically associated with investing in securities of
U.S. issuers. Further, certain investments that the Fund may purchase, and
investment techniques in which it may engage, involve risks, including those set
forth below.
Social, Political and Economic Factors. Many countries in which the Fund will
invest, and the emerging market countries in particular, may be subject to a
substantially greater degree of social, political and economic instability than
is the case in the United States, Japan and Western European countries. Such
instability may result from, among other things, some or all of the following:
(i) authoritarian governments or military involvement in political and economic
decision-making, and changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies and terrorist activities; (iv)
hostile relations with neighboring countries; and (v) drug trafficking. Social,
political and economic instability could significantly disrupt the principal
financial markets in which the Funds invest and adversely affect the value of
the Fund's assets.
Individual foreign economies in general, and those of emerging market countries
in particular, may differ favorably or unfavorably and significantly from the
U.S. economy in such respects as the rate of growth of gross domestic product or
gross national product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, structural unemployment and balance of
payments position. Governments of many of these countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In some cases, the government owns or controls many companies, including
some of the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in many countries,
including emerging market countries, which could affect private sector companies
and the Fund, and on market conditions, prices and yields of securities in the
Fund's portfolio. There may be the possibility of nationalization or
expropriation of assets, or future confiscatory levels of taxation affecting the
Fund. In the event of nationalization, expropriation or other confiscation, the
Fund may not be fairly compensated for its loss and could lose its entire
investment in the country involved.
Investment and Repatriation Restrictions. Investment by the Fund in non-U.S.
issuers may be restricted or controlled to varying degrees. These restrictions
may limit or preclude investment in certain of such issuers or countries and may
increase the costs and expenses of the Fund. For example, certain countries
require governmental approval prior to investments by foreign persons in the
country or in a particular company or industry sector or limit investment by
foreign persons to only a specific class of securities of a company which may
have less advantageous terms (including price) than securities of the company
available for purchases by nationals. Certain countries may also restrict or
prohibit investment opportunities in issuers or industries deemed important to
national interests. As a result of investment restrictions, the Fund may, in
certain countries (such as Mexico) invest through intermediary vehicles or
trusts. In addition, the repatriation of both investment income and capital from
some of these countries requires governmental approval and if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose temporary restrictions on foreign capital remittances abroad. Even
where there is no outright restriction on repatriation of capital, the mechanics
of repatriation may affect certain aspects of the operation of the Fund.
The Fund could be adversely affected by delays in, or a refusal to grant any
required governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, the Fund was unable to distribute
substantially all of its net
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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 a substantial portion of its
assets in the securities of foreign issuers which are denominated in foreign
currencies, the strength or weakness of the U.S. dollar against such foreign
currencies will account for part of the Fund's investment performance. A decline
in the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of the Fund's holdings of securities
denominated in such currency and, therefore, will cause an overall decline in
the Fund's net asset value and any net investment income and capital gains to be
distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.
Inflation. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and emerging
market countries in particular. In an attempt to control inflation, wage and
price controls have been imposed at times in certain countries.
Market Characteristics; Differences in Securities Markets. The securities
markets in many countries, and in emerging markets in particular generally have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies listed on such markets may be less liquid and more
volatile than equity securities of U.S. companies of comparable size. Some of
the stock exchanges outside of the United States and in emerging market
countries, to the extent that established securities markets even exist, are in
the earlier stages of their development. A high proportion of the shares of many
foreign companies may be held by a limited number of persons, which may limit
the number of shares available for investment by the Fund . A limited number of
issuers in most, if not all, of these securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
In addition, the application of certain 1940 Act provisions may limit the Fund's
ability to invest in certain non-U.S. issuers and to participate in public
offerings in these countries. The limited liquidity of certain non-U.S.
securities markets may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money
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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 Funds are uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. The inability to dispose of a portfolio security due
to settlement problems could result either in losses to the Fund due to
subsequent declines in the value of such portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
Non-U.S. Subcustodians. Rules adopted under the 1940 Act permit the Fund to
maintain its non-U.S. securities and cash in the custody of certain eligible
non-U.S. banks and securities depositories. Certain banks in non-U.S. countries
may not be eligible subcustodians for the Fund, in which event the Fund may be
precluded from purchasing securities in which they would otherwise invest, and
other banks that are eligible subcustodians may be recently organized or
otherwise lack extensive operating experience. At present, custody arrangements
complying with the requirements of the Securities and Exchange Commission (the
"Commission") are available in each of the countries in which the Adviser
intends to invest. In certain countries in which the Fund may make investments,
there may be legal restrictions or limitations on the ability of the Fund to
recover assets held in custody by subcustodians in the event of the bankruptcy
of the subcustodian.
Government Supervision; Legal Systems. Disclosure and regulatory standards in
certain foreign countries, including emerging market countries, are in many
respects less stringent than U.S. standards. There may be less government
supervision and regulation of securities exchanges, listed companies and brokers
in these countries than exists in the United States. Brokers in some countries
may not be as well capitalized as those in the United States, so that they may
be more susceptible to financial failure in times of market, political, or
economic stress, exposing the Fund to a risk of loss. Less information may be
available to the Fund than with respect to investments in the United States and,
in certain of these countries, less information may be available to the Fund
than to local market participants. In addition, existing laws and regulations
are often inconsistently applied. Foreign investors may be adversely affected by
new laws and regulations, changes to existing laws and regulations and
preemption of local laws and regulations by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Financial Information and Standards. Non-U.S. issuers may be subject to
accounting, auditing and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular,
the assets and profits appearing on the financial statements of certain non-U.S.
issuers may not reflect their financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting
rules may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Moreover,
substantially less information may be publicly available about non-U.S. issuers
than is available about U.S. issuers.
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In addition to the foreign securities listed above, the Fund may also invest in
foreign sovereign debt securities, which involve certain additional risks. See
"Sovereign Debt Securities" above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may be authorized to use a variety of investment strategies to hedge
various market risks (such as interest rates, currency exchange rates and broad
or specific market movements), to manage the effective maturity or duration of
debt instruments held by the Fund, or, with respect to certain strategies, to
seek to increase the Fund's income or gain (such investment strategies and
transactions are referred to herein as "Hedging and Other Strategic
Transactions"). Currently, the Fund may use, as portfolio management strategies,
cross currency hedges, interest rate transactions, commodity futures contracts
in the form of futures contracts on securities, securities indices and foreign
currencies, and related options transactions. The Fund also may enter into
forward foreign currency contracts and options transactions to hedge in
connection with currency and interest rate positions and in order to enhance the
Fund's income or gain.
A discussion of the risks associated with Hedging and Other Strategic
Transactions follows below. The Fund will not be obligated, however, to pursue
any of such strategies and Fund makes no representation as to the availability
of these techniques at this time or at any time in the future. In addition, the
Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable rules and regulations of the
Commodity Futures Trading Commission ("CFTC") thereunder and the federal income
tax requirements applicable to regulated investment companies which are not
operated as commodity pools. To the extent not otherwise restricted by the
Commission, the CFTC, the Code or its investment objectives and policies,
the Fund may utilize, without limitation, Hedging and Other Strategic
Transactions. For further information see "Additional Information on Investment
Policies and Techniques - Hedging and Other Strategic Transactions" and
"Additional Information Concerning Taxes" in the Statement of Additional
Information.
IN GENERAL
Subject to the constraints described above, the Fund may (if and to the extent
so authorized) purchase and sell (or write) exchange-listed and over-the-counter
put and call options on securities, index futures contracts, financial futures
contracts and fixed income indices and other financial instruments, and enter
into financial futures contracts, interest rate transactions and currency
transactions (collectively, these transactions are referred to in this
Prospectus as "Hedging and Other Strategic Transactions"). The Fund's interest
rate transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Hedging and Other Strategic Transactions may generally be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The Fund may use any or all types
of Hedging and Other Strategic Transactions which it is authorized to use at any
time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any authorized Hedging and Other Strategic
Transaction will be a function of numerous variables, including market
conditions. The ability of the Fund to utilize Hedging and Other Strategic
Transactions successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select the Fund's
securities. The Fund is not a "commodity pool' (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Other Strategic Transactions involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging, and non-hedging purposes to the extent
permitted by CFTC regulations; provided that the Fund may enter into futures
contracts or options thereon for purposes
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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 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.
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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 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.
- 18 -
<PAGE>
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.
CONCENTRATION
Under normal market conditions, the Fund may invest greater than 25% of its
assets in securities of issuers whose primary business activity is in the
banking industry (see "Limiting Investment Risks" below). As such, an investment
in the Fund should be made with an understanding of the characteristics of the
banking industry and the risks that such an investment may entail. Banks are
subject to extensive government regulations that may limit both the amounts and
types of loans and other financial commitments that may be made and the interest
rates and fees that may be charged. The profitability of this industry is
largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from financial
difficulties of borrowers might affect a bank's ability to meet its obligations.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic obligations. For a discussion of additional risks, see
"Foreign Securities" above.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there
is no limitation with respect to investment in obligations issued
or guaranteed by the U.S. government, its agencies or
instrumentalities; and provided further that , under normal market
conditions, this limitation shall not apply with respect to the
purchase of securities of issuers whose primary business activity
is in the banking industry.
2. The Fund may not borrow money (except that they may enter into
reverse repurchase agreements) except from banks for temporary or
emergency purposes; provided, that (a) the amount of such
borrowing may not exceed 20% of the value of the Fund's total
assets and (b) the Fund will 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
- 19 -
<PAGE>
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 from the Fund a monthly fee at the annual rate of.90% for
the first $200,000,000 of assets and .80% for amounts in excess thereof based
upon the average daily net assets of the Fund. The investment advisory fee for
the Fund is higher than that paid by most investment companies, but is
comparable to that paid by other investment companies that have strategies
focusing on high yield and international investments.
The Adviser is a New York State chartered trust company. Under its charter, the
Adviser may neither accept deposits nor make loans except for deposits or loans
arising directly from its exercise of the fiduciary powers granted it under the
New York Banking Law. The Adviser's principal business is the rendering of
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. The Adviser specializes
in fixed income management and offers its clients a complete range of fixed
income investments in capital markets throughout the world. The Adviser
currently manages in excess of $8 billion in assets and serves as investment
adviser to fifteen other registered investment companies (or portfolios
thereof). The principal business address of the Adviser is 520 Madison Avenue,
New York, New York 10022.
PORTFOLIO MANAGERS. Dr. Wallace Mathai-Davis and Richard M. Johnston serve as
portfolio managers of the Fund. Dr. Mathai-Davis is a Managing Director of the
Adviser and has been associated with the Adviser since 1986. Mr. Johnston is a
Managing Director of the Adviser and has been the director of Latin American
investments since 1992. From 1988 to 1992 Mr. Johnston was Vice President,
International Corporate Finance at Salomon Brothers Inc.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
serves as the Company's administrator and generally assists the Company in all
aspects of its administration and operation. The Chase Manhattan Bank, N.A.
serves as custodian of the assets of the Fund. BISYS Fund Services, Inc.
provides transfer agency services and dividend disbursing services for the Fund.
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 Chase Manhattan Bank, N.A. is 4 Metrotech Center, Brooklyn, New York 11245.
- 20 -
<PAGE>
ABOUT YOUR INVESTMENT
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc., the Fund's Principal Underwriter, to the Accounts without any
sales or other charge, at the Fund's net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for business. The Company will effect
orders to purchase or redeem shares of the Fund, that are based on premium
payments, surrender and transfer requests and any other transaction requests
from Contract and Policy Owners, annuitants and beneficiaries, at the Fund's net
asset value per share next computed after the Account receives such transaction
request. Any orders to purchase or redeem Fund shares that are not based on
actions by Contract or Policy Owners, annuitants, and beneficiaries will be
effected at the Fund's net asset value per share next computed after the order
is received by the Distributor. The Fund reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Individuals may not place orders directly with the Fund. Please refer to the
appropriate Account Prospectus of the Participating Company for more information
on the purchase of Portfolio shares.
REDEMPTION OF SHARES
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above. Shares redeemed are entitled to earn dividends, if
any, up to and including the day redemption is effected. There is no redemption
charge. Payment of the redemption price will normally be made within seven days
after receipt of such tender for redemption.
The right of redemption may be suspended or the date of payment may be postponed
for any period during which the NYSE is closed (other than customary weekend and
holiday closings) or during which the SEC determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
SEC) exists as a result of which disposal by the Fund of securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Company fairly to determine the value of the Fund's net assets, or for
such other periods as the SEC may by order permit for the protection of security
holders of the Company.
EXCHANGE PRIVILEGE
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset values.
HOW THE COMPANY VALUES ITS SHARES
The net asset value per share of the Fund is calculated once daily at 4:15 p.m.,
New York time, Monday through Friday, each day the NYSE is open. The net asset
value per share of the Fund is computed by dividing the value of the net assets
of the Fund by the total number of Fund shares outstanding. Equity securities
held by the Fund are valued at the last sale price on the exchange or in the
principal over-the-counter market in which such securities are traded, as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price. Debt securities held by the Fund
generally are valued based on quoted bid prices. Short-term debt investments
having maturities of 60 days or less are amortized to maturity based on their
cost, and if applicable, adjusted for foreign exchange translation. Foreign
securities are valued on the basis of quotations from the primary market in
which they are traded and are translated from the local currency into U.S.
dollars using prevailing exchange rates.
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.
- 21 -
<PAGE>
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 distributing Fund has current and accumulated earnings and profits.
FUND DISTRIBUTIONS. Distributions by the Fund are taxable, if at all, to the
Accounts, and not to Contract or Policy Owners. An Account will include
distributions in its taxable income in the year in which they are received
(whether paid in cash or reinvested).
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of one or more Funds are the investment
vehicle reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by 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
- 22 -
<PAGE>
the shares for which voting instructions are received by the Account. If the
Participating Insurance Company determines, however, that it is permitted to
vote any such shares of the Fund in its own right, it may elect to do so,
subject to the then current interpretation of the 1940 Act and the rules
thereunder.
PERFORMANCE INFORMATION
From time to time the Fund may advertise certain information about its
performance. The Fund may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Fund may make available information as to their
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Funds published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A. Today or The New York Times or other industry or
financial publications.
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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<PAGE>
APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of the Company's Funds may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the
A-1
<PAGE>
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
A-2
<PAGE>
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-3
<PAGE>
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
------------------------
A-4
<PAGE>
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether a Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-5
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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THE OFFITBANK VARIABLE INSURANCE FUND, INC. JANUARY 31, 1997
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OFFITBANK VIF-GLOBAL CONVERTIBLE FUND
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OFFITBANK VIF-Global Convertible Fund (the "Fund") is one of seven 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 capital
appreciation and investment income. The Fund will seek to achieve its objective
by investing primarily in an internationally diversified portfolio of
convertible debt securities, convertible preferred stocks and "synthetic"
convertible securities consisting of a combination of debt securities or
preferred stock and warrants or options. Under normal circumstances, the Fund
will invest at least 65% of its total assets in traditional convertible
securities and may invest up to 35% of its total assets in synthetic convertible
securities. 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 MAY INVEST ALL OR A PORTION OF ITS ASSETS IN HIGH YIELD, HIGH RISK
CORPORATE DEBT SECURITIES AND SOVEREIGN DEBT OBLIGATIONS WHICH ARE CONSIDERED
SPECULATIVE AND SUBJECT TO CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE AND
POLICIES" AND "SPECIAL RISK CONSIDERATIONS". There can be no assurance that the
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 January 31, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-800-618-9510. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
INVESTORS ARE ADVISED THAT 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
Special Risk Considerations..................................................9
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 investment objective of the Fund is to maximize total return from a
combination of capital appreciation and investment income. The Fund will seek to
achieve its objective by investing primarily in an internationally diversified
portfolio of convertible debt securities, convertible preferred stocks and
"synthetic" convertible securities consisting of a combination of debt
securities or preferred stock and warrants or options. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
traditional convertible securities and may invest up to 35% in synthetic
convertible securities. 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.
In evaluating proposed investments the Adviser will seek to maximize the total
return on the Fund's portfolio in terms of U.S. dollars. In this regard, the
Adviser will consider factors that relate both to various securities markets and
to specific securities traded in those markets. In evaluating markets, the
Adviser will consider such factors as the condition and growth potential of
various economies and securities markets, currency and taxation factors
(including the applicability and rate of withholding taxes) and other pertinent
financial, social, national and political factors. In analyzing convertible
securities, the Adviser will consider both the yield on the convertible security
and the potential capital appreciation that is offered by the underlying common
stock. There can be no assurance that the Fund will achieve its investment
objective.
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The convertible securities to be held by the 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. See "Special Risk
Considerations -- Convertible Securities" below for additional information
concerning traditional convertible securities and synthetic convertible
securities eligible for purchase by the Fund.
The Fund believes that the characteristics of convertible securities make them
appropriate investments for an investment company seeking a high total return
from capital appreciation and investment income. These characteristics include
the potential for capital appreciation as the value of the underlying common
stock increases, the relatively high yield received from dividend or interest
payments as compared to common stock dividends and decreased risks of decline in
value relative to the underlying common stock due to their fixed income nature.
As a result of the conversion feature, however, the interest rate or dividend
preference on a convertible security is generally less than would be the case if
the securities were issued in nonconvertible form.
Although the Fund may invest in securities denominated in any currency that are
convertible into common stocks of companies located throughout the world, it is
expected that a majority of its assets will be invested in securities
denominated in U.S. dollars, currencies of Pacific Basin countries and
currencies of Western European countries and convertible into equity securities
of United States, Pacific Basin or Western European corporations. To the extent
the Fund acquires synthetic convertible securities, it is expected that the debt
securities or preferred stock will principally be denominated in U.S. dollars,
Pacific Basin currencies or Western European currencies and the warrants or
options will principally be exercisable to purchase equity securities of U.S.,
Pacific Basin or Western European issuers.
Under normal circumstances, the Fund may invest up to 20% of its assets in other
types of securities including equity securities and nonconvertible debt
securities of U.S. and non-U.S. issuers.
The Fund has established no rating criteria for the debt securities in which it
may invest and such securities may not be rated at all for creditworthiness.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price and risk of default than
securities in higher rating categories. See "Special Risk Considerations -- High
Yield Securities." In purchasing such securities, the Fund will rely on the
Adviser's judgment, analysis and experience in evaluating the creditworthiness
of an issuer of such securities. The Adviser will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The Fund does not intend to purchase debt
securities that are in default or which the Adviser believes will be in default.
See Appendix A to this Prospectus for a description of ratings of Standard &
Poor's Corporation ("S&P"), Moody's Investors Services, Inc. ("Moody's") and
Duff & Phelps Credit Rating Co. ("D&P").
The Fund will generally be managed in a style similar to OFFITBANK Global
Convertible Fund. This other OFFITBANK fund may, however, employ different
investment practices and may invest in securities different from those in which
the Fund, as its counterpart, invests, and, as such, may not have an identical
portfolio or experience identical investment results.
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INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES. The Fund may invest in securities of foreign issuers. When
the Fund invests in foreign securities, they may be denominated in foreign
currencies. Thus, the Fund's net asset value will be affected by changes in
exchange rates. See "Special Risk Considerations."
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.
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 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
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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. 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
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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.
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.
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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 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
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to 100% of its assets in high quality debt securities or 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.
CONVERTIBLE SECURITIES
GENERAL. Under normal market circumstances, the Fund will invest at least 65% of
its total assets 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.
For the past several years, the principal markets have been the United States,
the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since the Fund will invest a substantial portion of its
assets in the U.S. market and the Euromarket where convertible bonds have been
primarily denominated in U.S. dollars, it is expected that ordinarily a
substantial portion of the convertible securities held by 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-
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convertible securities, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
underlying common stock, the conversion value is below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.
Holders of convertible securities have a claim on the assets of the issuer prior
to the common stockholders but may be subordinated to similar non-convertible
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by 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.
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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.
FOREIGN SECURITIES
The Fund may be invested in the securities of non-U.S. issuers. Investors should
recognize that investing in securities of non-U.S. issuers involves certain
risks and special considerations, including those set forth below, which are not
typically associated with investing in securities of U.S. issuers. Further,
certain investments that the Fund may 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.
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CURRENCY FLUCTUATIONS. Because the Fund may invest a portion of its assets in
the securities of foreign issuers which are denominated in foreign currencies,
the strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the Fund's investment performance. A decline in the value of
any particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of the Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's net asset value and
any net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.
INFLATION. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and emerging
market countries in particular. In an attempt to control inflation, wage and
price controls have been imposed at times in certain countries.
MARKET CHARACTERISTICS; DIFFERENCES IN SECURITIES MARKETS. The securities
markets in many countries, and in emerging markets in particular, generally have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies listed on such markets may be less liquid and more
volatile than equity securities of U.S. companies of comparable size. Some of
the stock exchanges outside of the United States and in emerging market
countries, to the extent that established securities markets even exist, are in
the earlier stages of their development. A high proportion of the shares of many
foreign companies may be held by a limited number of persons, which may limit
the number of shares available for investment by the Fund. A limited number of
issuers in most, if not all, of these securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
In addition, the application of certain 1940 Act provisions may limit the Fund's
ability to invest in certain non-U.S. issuers and to participate in public
offerings in these countries. The limited liquidity of certain non-U.S.
securities markets may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country 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
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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.
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 all or a portion of its total assets in high yield,
high risk debt securities, commonly referred to as "junk bonds." Securities
rated below investment grade and comparable unrated securities offer yields that
fluctuate over time, but generally are superior to the yields offered by higher
rated securities. However, securities rated below investment grade also involve
greater risks than higher rated securities. Under rating agency guidelines,
medium- and lower-rated securities and comparable unrated securities will likely
have some quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions. Certain of the debt
securities in which the Fund may invest may have, or be considered comparable to
securities having, the lowest ratings for non-subordinated debt instruments
assigned by Moody's, S&P or D&P (i.e., rated C by Moody's or CCC or lower by S&P
or D&P). Under rating agency guidelines, these securities are considered to have
extremely poor prospects of ever attaining any real investment standing, to have
a current identifiable
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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.
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
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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.
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
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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
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
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<PAGE>
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.
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
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<PAGE>
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.
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
value of its net assets in investments that are illiquid.
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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. Dr. Wallace Mathai-Davis will serve as the portfolio manager
for the Fund. Dr. Mathai- Davis is a Managing Director of the Adviser and has
been associated with the Adviser since 1986.
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
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<PAGE>
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.
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
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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.
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
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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
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S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
A-2
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DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
A-3
<PAGE>
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative 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.
125 West 55th Street
New York, New York 10019
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1997
The OFFITBANK Variable Insurance Fund, Inc. (the "Company") is a no load mutual
fund consisting of seven portfolios whose shares are available to participating
life insurance companies ("Participating Companies") and their separate accounts
("Accounts") to fund benefits under variable annuity contracts ("Contracts") and
variable life insurance policies ("Policies") issued by the Participating
Companies. The portfolios are DJG Value Equity Fund (the "Value Equity Fund"),
OFFITBANK VIF-U.S. Government Securities Fund ("U.S. Government Fund") ,
OFFITBANK VIF-U.S. Small Cap Fund ("U.S. Small Cap Fund"), OFFITBANK VIF-High
Yield Fund ("High Yield Fund"), OFFITBANK VIF- Emerging Markets Fund ("Emerging
Markets Fund"), OFFITBANK VIF-Global Convertible Fund ("Global Convertible
Fund") and OFFITBANK VIF-Total Return Fund ("Total Return Fund").
This Statement of Additional Information should be read in conjunction with the
individual Prospectuses offering shares of each of the Funds (other than the
Total Return Fund). The U.S. Small Cap Fund, U.S. Government Fund , High Yield
Fund, Emerging Markets Fund, Global Convertible Fund and Total Return Fund are
advised by OFFITBANK. OFFITBANK has retained Rockefeller & Co., Inc.
("Rockefeller & Co.") as Sub-Adviser to the U.S. Small Cap Fund. The Value
Equity Fund is advised by David J. Greene & Company ("DJ Greene"). As used
herein, the term "Adviser" shall mean, with respect to each Fund, the entity
responsible for portfolio management.
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Prospectus
offering each Fund. Any reference to the "Prospectus" in this Statement of
Additional Information is a reference to the Prospectus or Prospectuses offering
a Fund or Funds to which this Statement pertains. In each instance, the specific
Prospectus or Prospectuses referred to are referenced by the surrounding text,
which identifies a specific Fund or Funds.
This Statement of Additional Information is NOT a prospectus and is only
authorized for distribution when preceded or accompanied by an effective
Prospectus. Copies of each Prospectus may be obtained by an investor without
charge by writing or calling the Company at the address and telephone number set
forth above.
1
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TABLE OF CONTENTS
PAGE
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND TECHNIQUES............................................................. 2
ADDITIONAL RISK CONSIDERATIONS............................................. 16
INVESTMENT LIMITATIONS..................................................... 18
MANAGEMENT OF THE FUNDS.................................................... 20
PORTFOLIO TRANSACTIONS..................................................... 28
PURCHASE OF SHARES......................................................... 29
REDEMPTION OF SHARES....................................................... 30
PERFORMANCE CALCULATIONS................................................... 30
ADDITIONAL INFORMATION CONCERNING TAXES.................................... 32
DETERMINATION OF NET ASSET VALUE........................................... 32
GENERAL INFORMATION........................................................ 34
FINANCIAL STATEMENTS....................................................... 35
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND
TECHNIQUES
Information concerning each Fund's investment objective is set forth in each
fund's Prospectus under the heading "Investment Objectives and Policies." There
can be no assurance that any Fund will achieve its objective. The principal
features of each Fund's investment program and the primary risks associated with
that program are discussed in the Prospectus. The following discussion of
investment policies supplements the discussion of investment objectives and
policies set forth in each Fund's Prospectus.
REPURCHASE AGREEMENTS
If and to the extent authorized to do so, each Fund may enter into repurchase
agreements. A repurchase agreement is a transaction in which the seller of a
security commits itself at the time of the sale to repurchase that security from
the buyer at a mutually agreed upon time and price. The Funds will enter into
repurchase agreements only with dealers, domestic banks or recognized financial
institutions which, in the opinion of OFFITBANK, DJ Greene, or Rockefeller &
Co., as the case may be, based on guidelines established by the Company's Board
of Directors, present minimal credit risks. The relevant Adviser will monitor
the value of the securities underlying the repurchase agreement at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the securities always exceeds the
repurchase price plus accrued interest. In the event of default by the seller
2
<PAGE>
under the repurchase agreement, each Fund may incur costs and experience time
delays in connection with the disposition of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
If and to the extent authorized to do so, each Fund may enter into reverse
repurchase agreements. A reverse repurchase agreement is a borrowing transaction
in which a Fund transfers possession of a security to another party, such as a
bank or broker/dealer, in return for cash, and agrees to repurchase the security
in the future at an agreed upon price, which includes an interest component.
Whenever a Fund enters into a reverse repurchase agreement as described in the
Prospectus, it will place in a segregated custodian account liquid assets having
a value equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such equivalent value is maintained.
Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
DOLLAR ROLL TRANSACTIONS
In order to enhance portfolio returns and manage prepayment risks, if and to the
extent authorized to do so, each Fund may engage in dollar roll transactions
with respect to mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar
roll transaction, a Fund sells a mortgage security held in the portfolio to a
financial institution such as a bank or broker-dealer, and simultaneously agrees
to repurchase a substantially similar security (same type, coupon and maturity)
from the institution at a later date at an agreed upon price. The mortgage
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with
different prepayment histories. During the period between the sale and
repurchase, a Fund will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be invested in
short-term instruments, and the income from these investments, together with any
additional fee income received on the sale, could generate income for a Fund
exceeding the yield on the sold security. When a Fund enters into a dollar roll
transaction, cash or liquid securities of the Fund, in a dollar amount
sufficient to make payment for the obligations to be repurchased, are segregated
with its custodian at the trade date. These securities are marked to market
daily and are maintained until the transaction is settled.
ASSET-BACKED SECURITIES
If and to the extent authorized to do so, each Fund other than the U.S.
Government 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
3
<PAGE>
used to back asset-backed securities include motor vehicle installment sales
contracts or installment loans secured by motor vehicles, and receivables from
revolving credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the services to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. If the letter of
credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized. Because asset-backed securities are relatively new,
the market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
Credit Support. Asset-backed securities often contain elements of credit support
to lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying asset. Liquidity protection ensures that
the pass through of payments due on the installment sales contracts and
installment loans which comprise the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The Funds will not pay any additional fee for
such credit support. The existence of credit support may increase the market
price of the security.
MORTGAGE-BACKED SECURITIES
Collateralized Mortgage Obligations ("CMOs"). If and to the extent authorized to
do so, each Fund may invest in CMOs. CMOs are debt obligations collateralized by
certificates issued by the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
but also may be collateralized by whole loans or private pass-through securities
(such collateral collectively referred to as "Mortgage Assets"). Multiclass
pass-through securities are equity interests in a trust composed of Mortgage
Assets. Payments of principal and of interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
4
<PAGE>
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"). If and to the extent authorized to
do so, each Fund may invest in SMBS. SMBS are derivative multiclass mortgage
securities. SMBS may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the principal from the Mortgage Assets, while the other
classes will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only class) while the other class will receive all of the
principal ("PO" or principal-only class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and a rapid rate of principal
payments may have a material adverse effect on such securities' yield to
maturity and result in a loss to the investor.
Under the Internal Revenue Code of 1986, as amended, POs may generate taxable
income from the current accrual of original issue discount, without a
corresponding distribution of cash to a Fund. In addition, the Staff of the
United States Securities and Exchange Commission (the "SEC") considers privately
issued SMBS to be illiquid securities.
Mortgage-backed and asset-backed securities are generically considered to be
derivative securities.
5
<PAGE>
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
each Fund's investment policies, each Fund's investments in ADRs, ADSs, EDRs,
and CDRs will be deemed to be investments in the equity securities representing
securities of foreign issuers into which they may be converted.
WARRANTS OR RIGHTS
Warrants or rights may be acquired by a Fund in connection with other securities
or separately, and provide the Fund with the right to purchase at a later date
other securities of the issuer. Warrants or rights acquired by a Fund in units
or attached to securities will be deemed to be without value for purpose of this
restriction. These limits are not fundamental policies of the Funds and may be
changed by the Company's Board of Directors without shareholder approval.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, if and to the extent authorized
to do so, each Fund may make secured loans of portfolio securities amounting to
not more than 30% of its total assets. Securities loans are made to
broker/dealers or institutional investors pursuant to agreements requiring that
the loans continuously be secured by collateral at least equal at all times to
the value of the securities lent plus any accrued interest, "marked to market"
on a daily basis. The collateral received will consist of cash, U.S. short-term
government securities, bank letters of credit or such other collateral as may be
permitted under each Fund's investment program and by regulatory agencies and
approved by the Company's Board of Directors. While the securities loan is
outstanding, each Fund will continue to receive the equivalent of the interest
or dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. Each Fund has the right
to call each loan and obtain the securities on five business days' notice. To
the extent applicable, each Fund will not have the right to vote equity
securities while they are being lent, but it will call in a loan in anticipation
of any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans only will be made to
firms deemed by the Adviser to be of good standing and
6
<PAGE>
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, each Fund may
invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(e.g., obligations of the Federal Home Loan Mortgage Corporation). In the case
of obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and that
have been established or sponsored by the U.S. government include, in addition
to those identified above, the Bank for Cooperatives, the Export-Import Bank,
the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
As stated in the Prospectus, bank obligations that may be purchased by and to
the extent authorized to do so, each Fund include certificates of deposit,
bankers' acceptances and fixed time deposits. A certificate of deposit is a
short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or
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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 each
Fund, the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by each Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.
With the exception of the U.S. Small Cap Fund, the Funds will not purchase
securities which the relevant Adviser believes, at the time of purchase, will be
subject to exchange controls or foreign withholding taxes; however, there can be
no assurance that such laws may not become applicable to certain of each Fund's
investments. In the event unforeseen exchange controls or foreign withholding
taxes are imposed with respect to each Fund's investments, the effect may be to
reduce the income received by each Fund on such investments.
CONVERTIBLE SECURITIES
GENERAL. Under normal market circumstances, each Fund may invest in convertible
securities (the U.S. Small Cap Fund will limit its investment to up to 10% of
its total assets in such securities and the U.S. Government Fund may invest only
in convertible securities rated AAA). Set forth below is additional information
concerning convertible securities.
Convertible securities are issued and traded in a number of securities markets.
For the past several years, the principal markets have been the United States,
the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since each Fund's investments are expected to be
primarily in the U.S. market or the Euromarket where convertible bonds have
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been primarily denominated in U.S. dollars, it is expected that ordinarily a
substantial portion of the convertible securities held by each Fund will be
denominated in U.S. dollars. However, the underlying equity securities typically
will be quoted in the currency of the country where the issuer is domiciled.
With respect to convertible securities denominated in a currency different from
that of the underlying equity securities, the conversion price may be based on a
fixed exchange rate established at the time the security is issued. As a result,
fluctuations in the exchange rate between the currency in which the debt
security is denominated and the currency in which the share price is quoted will
affect the value of the convertible security. Each Fund may enter into foreign
currency hedging transactions in which they may seek to reduce the impact of
such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent there are changes in interest rates or yields of similar non-convertible
securities, the investment value of the convertible security typically will
fluctuate. However, at the same time, the value of the convertible security will
be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock. If, because of a low price of the underlying common stock, the
conversion value is below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.
Holders of convertible securities have a claim on the assets of the issuer prior
to the common stockholders but may be subordinated to similar non-convertible
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security.
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HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Special Risk Considerations - Hedging and
Other Strategic Transactions," each Fund may enter into transactions in options,
futures, and forward contracts on a variety of instruments and indexes, in order
to hedge various market risks and/or in the case of Funds other than the U.S.
Small Cap Fund, to manage the effective maturity or duration of debt instruments
held by a Fund. In addition, the Value Equity Fund may enter into transactions
to seek to increase a Fund's income or gain. The U.S. Government Fund currently
intends to pursue such transactions only to hedge its exposure to foreign
currencies versus the U.S. dollar. The discussion below supplements the
discussion in each Fund's Prospectus.
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Hedging and Other Strategic Transactions involving options require
segregation of Fund assets in special accounts, as described below under "Use of
Segregated and Other Special Accounts".
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect a Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase the instrument. An "American" style put or call option may
be exercised at any time during the option period, whereas a "European" style
put or call option may be exercised only upon expiration or during a fixed
period prior to expiration. Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to the options. The discussion
below uses the OCC as an example, but is also applicable to other similar
financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by
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entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
A Fund's inability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are determined by
negotiation of the parties. It is anticipated that any Fund authorized to use
OTC options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with a Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the Adviser must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC option will be met. A Fund will enter into
OTC option transactions only with U.S. government securities dealers recognized
by the Federal Reserve Bank of New York as "primary dealers", or broker-dealers,
domestic or foreign banks, or other financial institutions that are deemed
creditworthy by the Adviser. In the absence of a change in the current position
of the staff of the SEC, OTC options purchased by a Fund and the amount of the
Fund's obligation pursuant to an OTC option sold by the Fund (the cost of the
sell-back plus the in-the-money amount, if any) or the value of the assets held
to cover such options will be deemed illiquid.
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If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
If and to the extent authorized to do so, a Fund may purchase and sell call
options on securities and on Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the OTC markets, and on securities indices,
currencies and futures contracts. All calls sold by a Fund must be "covered",
that is, the Fund must own the securities subject to the call, must own an
offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though a Fund will receive the option premium to help protect it against
loss, a call sold by a Fund will expose a Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, each Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. In selling put
options, a Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate, currency or market changes, for duration
management and for permissible non-hedging purposes. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract and obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC and generally will be entered into only
for bona fide hedging, risk management (including duration management) or other
permissible non-hedging purposes. Maintaining a futures contract or selling an
option on a futures contract will typically require a Fund to deposit with a
financial intermediary, as security for its obligations, an amount of cash or
other specified
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assets ("initial margin") that initially is from 1% to 10% of the face amount of
the contract (but may be higher in some circumstances). Additional cash or
assets ("variation margin") may be required to be deposited thereafter daily as
the mark-to-market value of the futures contract fluctuates. The purchase of an
option on a financial futures contract involves payment of a premium for the
option without any further obligation on the part of a Fund. If a Fund exercises
an option on a futures contract it will be obligated to post initial margin (and
potentially variation margin) for the resulting futures position just as it
would for any futures position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction, but no assurance
can be given that a position can be offset prior to settlement or that delivery
will occur.
No Fund will enter into a futures contract or option thereon for purposes other
than bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums required to maintain permissible non-hedging
positions in futures contracts and options thereon would exceed 5% of the
liquidation value of the Fund's net assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below under "Use
of Segregated and Other Special Accounts".
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, each Fund may purchase and sell call
and put options on securities indices and other financial indices. In so doing,
each Fund can achieve many of the same objectives it would achieve through the
sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
CURRENCY TRANSACTIONS
If and to the extent authorized to do so, each Fund may engage in currency
transactions with Counterparties to hedge the value of portfolio securities
denominated in particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange-listed and OTC options
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on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars". Each Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.
Except as provided in its Prospectus, each Fund's dealings in forward currency
contracts and other currency transactions such as futures contracts, options,
options on futures contracts and swaps will be limited to hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
If and to the extent authorized to do so, a Fund may cross-hedge currencies by
entering into transactions to purchase or sell one or more currencies that are
expected to increase or decline in value relative to other currencies to which
the Fund has or in which the Fund expects to have exposure. To reduce the effect
of currency fluctuations on the value of existing or anticipated holdings of its
securities, a Fund may also engage in proxy hedging. Proxy hedging is often used
when the currency to which a Fund's holdings is exposed is difficult to hedge
generally or difficult to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency, the changes in the value of
which are generally considered to be linked to a currency or currencies in which
some or all of a Fund's securities are or are expected to be denominated, and to
buy dollars. The amount of the contract would not exceed the market value of the
Fund's securities denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions. If a Fund enters into a currency hedging transaction, the Fund
will comply with the asset segregation requirements described in the Prospectus
under "Use of Segregated and Other Special Accounts".
COMBINED TRANSACTIONS
If and to the extent authorized to do so, each Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any
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combination of futures, options, currency and interest rate transactions,
instead of a single Hedging and Other Strategic Transaction, as part of a single
or combined strategy when, in the judgment of the Adviser, it is in the best
interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a Fund based on
the Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase the risks or hinder
achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
If and to the extent authorized to do so, each Fund may be authorized to enter
into interest rate, currency and index swaps, the purchase or sale of related
caps, floors and collars. Each Fund will enter into these transactions primarily
to seek to preserve a return or spread on a particular investment or portion of
its portfolio, to protect against currency fluctuations, as a duration
management technique or to protect against any increase in the price of
securities a Fund anticipates purchasing at a later date. Each Fund will use
these transactions for non-speculative purposes and will not sell interest rate
caps or floors if it does not own securities or other instruments providing the
income a Fund may be obligated to pay. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). A currency swap is an
agreement to exchange cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate. The
purchase of an interest rate floor entitles the purchaser to receive payments of
interest on a notional principal amount from the party selling the interest rate
floor to the extent that a specified index falls below a predetermined interest
rate or amount. The purchase of a floor entitles the purchaser to receive
payments on a notional principal amount from the party selling the floor to the
extent that a specific index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that preserves a certain
return with a predetermined range of interest rates or values.
Provided the contract so permits, a Fund will usually enter into interest rate
swaps on a net basis, that is, the two payments streams are netted out in a cash
settlement on the payment date or dates specified in the instrument, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. A
Fund will not enter into any swap, cap, floor, collar or other derivative
transaction unless the Counterparty is deemed creditworthy by the Adviser. If a
Counterparty defaults, a Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become
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relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the Adviser based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 15% restriction on investments in securities that are not
readily marketable.
A Fund will maintain cash and appropriate liquid assets (i.e., high grade debt
securities) in a segregated custodial account to cover its current obligations
under swap agreements. If a Fund enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess, if any,
of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If a Fund enters
into a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement. See "Use of Segregated and Other Special Accounts".
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, each Fund may make investments in
Eurodollar instruments, which are typically dollar-denominated futures contracts
or options on those contracts that are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
ADDITIONAL RISK CONSIDERATIONS
POLITICAL AND ECONOMIC RISKS
Investing in securities of non-U.S. companies may entail additional risks due to
the potential political and economic instability of certain countries and the
risks of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country.
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FOREIGN INVESTMENT RESTRICTIONS
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as each of the Funds. For example, certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
by foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Moreover, the national policies of certain countries may
restrict investment opportunities in issuers or industries deemed sensitive to
national interests. In addition. some countries require governmental approval
for the repatriation of investment income, capital or the proceeds of securities
sales by foreign investors. A Fund could be adversely affected by delays in, or
a refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions on investments.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ in some cases significantly from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the securities held by a Fund will not be
registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by a
Fund than is available concerning U.S. issuers. In instances where the financial
statements of an issuer are not deemed to reflect accurately the financial
situation of the issuer, the Adviser will take appropriate steps to evaluate the
proposed investment, which may include interviews with its management and
consultations with accountants, bankers and other specialists. There is
substantially less publicly available information about foreign companies than
there are reports and ratings published about U.S. companies and the U.S.
government. In addition, where public information is available, it may be less
reliable than such information regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS
Securities of many foreign issuers may be less liquid and their prices more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities exchanges and brokers generally are subject to less governmental
supervision and regulation than in the United States, and foreign securities
exchange transactions usually are subject to fixed commissions, which generally
are higher than negotiated commissions on U.S. transactions. In addition,
foreign securities exchange transactions may be subject to difficulties
associated with the settlement of such transactions. Delays in settlement could
result in temporary periods when assets of a Fund are uninvested and no return
is earned thereon. The inability of a Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive
opportunities.
17
<PAGE>
Inability to dispose of a portfolio security due to settlement problems either
could result in losses to a Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. The Adviser will
consider such difficulties when determining the allocation of such Fund's
assets, though the Adviser does not believe that such difficulties will have a
material adverse effect on the Fund's portfolio trading activities.
NON-U.S. WITHHOLDING TAXES
If and to the extent authorized to do so, each Fund's net investment income from
foreign issuers may be subject to non-U.S. withholding taxes thereby reducing
each Fund's net investment income. See "Additional Information Concerning
Taxes".
ILLIQUID SECURITIES
If and to the extent authorized to do so, each Fund may invest up to 15% of its
net assets in illiquid securities. See "Limiting Investment Risks" in the
Prospectus. The sale of restricted or illiquid securities require more time and
result in higher brokerage charges or dealer discounts and other selling
expenses than the sale of securities eligible for trading on securities
exchanges or in the over-the-counter markets. Restricted securities often sell
at a price lower than similar securities that are not subject to restrictions on
resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, are liquid or illiquid. The Board has delegated the
function of making day to day determinations of liquidity to the Adviser,
pursuant to guidelines reviewed by the Board. The relevant Adviser takes into
account a number of factors in reaching liquidity decisions, including, but not
limited to: (i) the frequency of trading in the security; (ii) the number of
dealers who make quotes for the security; (iii) the number of dealers who have
undertaken to make a market in the security; (iv) the number of other potential
purchasers; and (v) the nature of the security and how trading is effected
(e.g., the time needed to sell the security, how offers are solicited and the
mechanics of transfer). The relevant Adviser will monitor the liquidity of
securities in each Fund's portfolio and report periodically on such decisions to
the Board of Directors.
INVESTMENT LIMITATIONS
In addition to the restrictions described under "Limiting Investment Risks" in
the Prospectus, each Fund may not:
(1) purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase
18
<PAGE>
and sell currency forward contracts, options on foreign currencies and
may otherwise engage in transactions in foreign currencies;
(2) make loans, except that a Fund may (a) (i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in
loans and participations in accordance with its investment objectives
and policies, (b) make loans of portfolio securities and (c) enter
into repurchase agreements with respect to portfolio securities;
(3) underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with a Fund's investment
program may be deemed to be an underwriting;
(4) purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein);
(5) purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5% of
a Fund's net assets in the case of any one other investment company
and 10% of such net assets in the case of all other investment
companies in the aggregate. This restriction shall not apply to
investment company securities received or acquired by a Fund pursuant
to a merger or plan of reorganization;
(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary
for the clearance of transactions, and except for initial and
variation margin payments in connection with the use of options,
futures contracts, options thereon or forward currency contracts; a
Fund may also make deposits of margin in connection with futures and
forward contracts and options thereon);
(7) sell securities short (except for short positions in a futures
contract or forward contract);
(8) invest for the purpose of exercising control over management of any
company;
(9) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;
(10) pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings;
(11) invest in stock or bond futures and/or options on futures unless (i)
not more than 5% of a Fund's total assets are required as deposit to
secure obligations under such futures and/or options on futures
contracts, provided, however, that in the case of an option
19
<PAGE>
that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing such 5%; and
(12) invest in puts, calls straddles or spreads, except as described in
(11) above.
With respect to the U.S. Government Fund, the U.S. Government Fund has adopted
the following fundamental investment restriction: the Fund will not purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, or repurchase agreements
secured thereby) if, as a result, more than 25% of the value of the Fund's total
assets would be invested in the securities of companies whose principal business
activities are in the same industry. Note that each of the Funds is also subject
to this fundamental restriction as described under "Limiting Investment Risks"
in each such Funds' Prospectus.
If a percentage restriction on investment or use of assets set forth above is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
Investment restrictions (1) through (5) described above and those set forth in
the Prospectus under "Limiting Investment Risks" are fundamental policies of
each Fund which may be changed only when permitted by law and approved by the
holders of a majority of each Fund's outstanding voting securities, as described
under "General Information--Capital Stock". Restrictions (7) through (12) are
nonfundamental policies of each Fund, and may be changed by a vote of the
Company's Board of Directors.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the Company
for the past five years are listed below.
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.
20
<PAGE>
Edward J. Landau, 66 Director Member, Lowenthal, Landau
Lowenthal, Landau, Fischer & Bring, P.C. (1960 -
Fischer & Bring, P.C. present); Director, Revlon Group
250 Park Avenue Inc. (cosmetics), Revlon Consumer
New York, NY 10177 Products Inc. (cosmetics),
Pittsburgh Annealing Box (metal
fabricating) and Clad Metals Inc.
(cookware).
The Very Reverend Director Dean of Cathedral of St. John the
James Parks Morton, 66 Divine (1972 - present)
Cathedral of St. John
the Divine
1047 Madison Avenue
New York, NY 10025
Wallace Mathai-Davis, 52 Secretary and Managing Director, OFFITBANK
OFFITBANK Treasurer (1986 - present). Secretary
520 Madison Avenue and Treasurer of OFFITBANK
New York, NY 10022 Investment Fund, Inc.
Stephen Brent Wells, 52 Assistant Treasurer Managing Director,
OFFITBANK OFFITBANK (1994 - present);
520 Madison Avenue General Counsel, Gabelli Funds,
New York, NY 10022 Inc. (1993 - 1994); General
Counsel and President, Funds
Group, Goldman Sachs Asset
Management (1989 - 1993)
Vincent M. Rella, 44 Assistant Treasurer Controller, OFFITBANK
OFFITBANK (1986 - present)
520 Madison Avenue
New York, NY 10022
Bruce Treff, 30 Assistant Secretary Counsel, BISYS Fund Services,
BISYS Fund Services Inc. since September 1995.
3435 Stelzer Road Previously, Manager Alliance
Columbus, Ohio 43219 Capital Management, L.P.
Alaina Metz, 29 Assistant Secretary Chief Administrative Officer of
BISYS Fund Services 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.
21
<PAGE>
Carrie Zuckerman, 29 Assistant Secretary Manager, BISYS Fund Services
BISYS Fund Services 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.
ESTIMATED DIRECTOR COMPENSATION
(FOR CALENDAR YEAR 1996)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM REGISTRANT
AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION ACCRUED BENEFITS COMPLEX* PAID
NAME OF PERSON, POSITION FROM REGISTRANT AS PART OF FUND UPON TO DIRECTORS
- ------------------------ --------------- EXPENSES RETIREMENT ------------
-------- ----------
<S> <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
</TABLE>
* For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.
INVESTMENT ADVISER
U.S. SMALL CAP FUND , U.S. GOVERNMENT FUND, HIGH YIELD FUND, EMERGING MARKETS
FUND AND GLOBAL CONVERTIBLE FUND
The Company has retained OFFITBANK, a New York State chartered trust company, to
act as its investment adviser (the "Adviser") for the U.S. Small Cap Fund , U.S.
Government Fund, High Yield Fund, Emerging Markets Fund and Global Convertible
Fund. The advisory agreement (the "Advisory Agreement") between the Adviser and
the Company provides that the Adviser shall manage the operations of the
Company, subject to policies established by the Board of Directors of the
Company. Pursuant to the Advisory Agreement, except in the case of the U.S.
Small Cap Fund, the Adviser manages the Company's investment portfolios, directs
22
<PAGE>
purchases and sales of the portfolio securities and reports thereon to the
Company's officers and directors regularly. In addition, the Adviser pays the
compensation of the Company's officers, employees and directors affiliated with
the Adviser. The Company bears all other costs of its operations, including the
compensation of its directors not affiliated with the Adviser.
For its services under the Advisory Agreement, the Adviser receives from each
Fund an advisory fee. The fee is payable monthly at an annual rate of 1.00% of
U.S. Small Cap Fund's average daily net assets , 0.40% of U.S. Government Fund's
average daily net assets 0.85% of the first $200,000,000 and 0.75% on amounts in
excess thereof of VIF-High Yield Fund's average daily net assets, 0.90% of the
first $200,000,000 and 0.80% on amounts in excess thereof of VIF-Emerging
Markets Fund's average daily net assets, 0.80% of the first $200,000,000 and
0.70% on amounts in excess thereof of VIF-Investment Grade Global Debt Fund's
average daily net assets and 0.90% of VIF-Global Convertible Fund's average
daily net assets. The Adviser may waive all or part of its fee from time to time
in order to increase a Fund's net investment income available for distribution
to shareholders. The Funds will not be required to reimburse the Adviser for any
advisory fees waived.
Unless sooner terminated, the Advisory Agreement provides that it will continue
in effect as to a particular Fund until February 28, 1997 and for consecutive
one year terms thereafter, provided such continuance is approved at least
annually by the Company's Board of Directors or by a vote of a majority (as
defined under "General Information--Capital Stock") of the outstanding shares of
each Fund, and, in either case, by a majority of the directors who are not
parties to the contract or "interested persons" (as defined in the 1940 Act) of
any party by votes cast in person at a meeting called for such purpose. The
Advisory Agreement may be terminated by the Company or the Adviser on 60 days'
written notice, and will terminate immediately in the event of its assignment.
VALUE EQUITY FUND
David J. Greene & Company ("DJ Greene") is responsible for managing the
investment portfolio of the Value Equity Fund. DJ Greene is a registered
investment adviser under the 1940 Act and a member of the New York Stock
Exchange. The advisory agreement (the "DJ Greene Agreement") between DJ Greene
and the Company provides that DJ Greene shall manage the investment operations
of the Company, subject to policies established by the Board of Directors of the
Company. Pursuant to the DJ Greene Agreement, DJ Greene manages the Company's
Value Equity Fund, directs purchases and sales of the portfolio securities for
the Value Equity Fund and reports regularly thereon to the Company's officers
and directors. The Company bears all other costs of its operations.
For its services under the Advisory Agreement, DJ Greene receives an advisory
fee. The fee is payable monthly at an annual rate of .80% of the Value Equity
Fund's average daily net worth. DJ Greene may waive all or part of its fee from
time to time in order to increase the Value Equity Fund's net investment income
available for distribution to shareholders. The Value Equity Fund will not be
required to reimburse DJ Greene for any advisory fees waived.
The DJ Greene Agreement, dated September 3, 1996, was approved by the Company's
Board of Directors on July 17, 1996, for an initial two year period. Unless
sooner terminated, the Advisory Agreement will continue in effect with respect
to the Company and from year to year
23
<PAGE>
thereafter if such continuance is approved at least annually by the Company's
Board of Directors or by a vote of a majority (as defined under "General
Information" - Capital Stock") of the outstanding shares of the Value Equity
Fund, and, in either case, by a majority of the directors who are not parties to
the contract or "interested persons" (as defined in the 1940 Act) of any party
by votes case in person at a meeting called for such purpose. The Advisory
Agreement may be terminated by the Company or DJ Greene on 60 days' written
notice and will terminate immediately in the event of its assignment.
SUB-ADVISER - U.S. SMALL CAP FUND
Rockefeller & Co., Inc. subject to the review and overall supervision of the
Adviser, is responsible for managing the investment portfolio of the U.S. Small
Cap Fund. Rockefeller & Co. is a registered investment adviser under the
Investment Advisers Act of 1940. Its earliest predecessor was established in the
19th century for the benefit of John D. Rockefeller and his family. Today,
Rockefeller & Co. is a private investment advisory and management firm that
serves the needs of the Rockefeller family and those of a small number of other
persons and institutions. As of January 1, 1996, Rockefeller & Co. managed over
$3 billion in assets. Rockefeller & Co., with offices at 30 Rockefeller Plaza,
New York, New York 10112, is a wholly-owned subsidiary of Rockefeller Financial
Services, Inc., all of the voting shares of which are owned by the Rockefeller
Family Trust. The Rockefeller Family Trust was established in 1979, primarily
for the benefit of the grandchildren of John D. Rockefeller, Jr. and their
descendants. The grantors of the trust property are the senior members of the
Rockefeller Family. In 1980, Rockefeller & Co. was registered as an investment
adviser and commenced providing management services to non-Rockefeller Family
clients. Rockefeller & Co. provides comprehensive investment management services
in the global equity and fixed- income markets. It allocates capital to asset
classes with superior investment return potential, commensurate with the overall
financial objectives and risk tolerances of its clients. Each asset class
employed is managed by a specialized investment unit with dedicated investment
and research professionals suited to its particular asset class or geographic
region. Rockefeller & Co. maintains offices in New York, London and Hong Kong.
Rockefeller & Co. has been retained to provide sub-advisory services to the U.S.
Small Cap Fund pursuant to an agreement between Rockefeller & Co. and OFFITBANK
(the "Sub- Advisory Agreement"). Pursuant to the Sub-Advisory Agreement,
OFFITBANK has delegated to Rockefeller & Co. the authority and responsibility to
make and execute portfolio investment decisions for the U.S. Small Cap Fund
within the framework of the U.S. Small Cap Fund's investment objectives,
policies and restrictions, and subject to review by OFFITBANK and the Board of
Directors of the Company. The Sub-Advisory Agreement provides that OFFITBANK,
and not the U.S. Small Cap Fund will pay to Rockefeller & Co. monthly
compensation based on the average daily net assets of the U.S. Small Cap Fund at
the annual rate of 1.00%.
The Sub-Advisory Agreement, dated September 3, 1996, was approved by the Fund's
Directors on July 17, 1996. The Sub-Advisory Agreement provides that it may be
terminated without penalty by either the Fund or Rockefeller & Co. at any time
by the giving of 60 days' written
24
<PAGE>
notice to the other and terminates automatically in the event of "assignment",
as defined in the 1940 Act or upon termination of the Advisory Agreement. The
Sub-Advisory Agreement provides that, unless sooner terminated, it shall
continue in effect for an initial two year period, and from year to year
thereafter only so long as such continuance is specifically approved at least
annually by either the Board of Directors of the Company or by a vote of the
majority of the outstanding voting securities of the Fund, provided, that in
either event, such continuance is also approved by the vote of the majority of
the Directors who are not parties to the Sub-Advisory Agreement or "interested
persons" of such parties cast in person at a meeting called for the purpose of
voting on such approval.
REGULATORY MATTERS
OFFITBANK is a trust company chartered under the New York Banking Law and is
supervised and examined thereunder by the New York Banking Department. OFFITBANK
is prohibited by its charter from accepting deposits other than deposits arising
directly from its exercise of the fiduciary powers granted under the New York
Banking Law and, accordingly, is not an insured depository institution for
purposes of the Federal Deposit Insurance Act or any other banking law or
regulation.
Banking laws and regulations, as currently interpreted by the New York Banking
Department, prohibit New York State chartered trust companies from controlling,
or distributing the shares of, a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit such trust
companies generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such trust companies from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. OFFITBANK believes that it may perform the services
described in this Prospectus with respect to the Company without violation of
such laws or regulations. OFFITBANK is not a member of the Federal Reserve
System and is not subject to the Glass-Steagall Act, the Bank Holding Company
Act of 1956 or any other federal banking law or regulation that might affect its
ability to perform such services.
If the Adviser or DJ Greene were prohibited from performing the services
described in this Prospectus with respect to the Funds, it is expected that the
Company's Board of Directors would recommend to each Fund's shareholders that
they approve new agreements with another entity or entities qualified to perform
such services and selected by the Board of Directors. The Company does not
anticipate that investors would suffer any adverse financial consequences as a
result of these occurrences.
25
<PAGE>
DISTRIBUTOR
OFFIT Funds Distributor, Inc., (the "Distributor"), a wholly-owned subsidiary of
BISYS Fund Services Limited Partnership, with its principal office at 125 West
55th Street, New York 10019, distributes the shares of the Company. Under a
distribution agreement with the Company (the "Distribution Agreement"), the
Distributor is not obligated to sell any specific amount of shares of the
Company. The Distributor, as agent of the Company, agrees to use its best
efforts as sole distributor of the Company's shares.
The Distribution Agreement will continue in effect with respect to a particular
Fund from year to year if such continuance is approved at least annually by the
Company's Board of Directors and by a majority of the Directors who have no
direct or indirect financial interest in the Agreement ("Qualified Directors")
and who are not "interested persons" (as defined in the 1940 Act) of any party
by votes cast in person at a meeting called for such purpose. In approving the
continuance of the Distribution Agreement, the Directors must determine that the
Agreement is in the best interest of the shareholders of the Fund.
ADMINISTRATION, FUND ACCOUNTING, CUSTODY AND TRANSFER AGENCY SERVICES
BISYS Fund Services Limited Partnership, d/b/a BISYS Fund Services ("BISYS")
provides the Company with administrative services pursuant to an Administration
Agreement dated October 1, 1996 (the "Administration Agreement"). BISYS Fund
Services, Inc. provides the Company with fund accounting services pursuant to a
Fund Accounting Agreement dated October 1, 1996 (the "Fund Accounting
Agreement"). Both the Administration Agreement and the Fund Accounting Agreement
continue to be in effect until January 1, 1998 and from year to year thereafter
if such continuances are approved at least annually by the Company's Board of
Directors and by a majority of the Directors who are not parties to such
Agreement or "interested persons" (as defined in the 1940 Act).
Pursuant to the Administration Agreement, BISYS performs certain administrative
and clerical services, including calculating the net asset value of each Fund,
certain accounting services, facilitation of redemption requests, exchange
privileges, and account adjustments and maintenance of certain books and
records; and certain services to the Company's shareholders, including assuring
that investments and redemptions are completed efficiently, responding to
shareholder inquiries and maintaining a flow of information to shareholders.
BISYS also furnishes office space and certain facilities reasonably necessary
for the performance of its services under the Administration Agreement, and
provides the office space, facilities, equipment and personnel necessary to
perform the following services for the Company: SEC compliance, including record
keeping, reporting requirements and registration statements and proxies;
supervision of Company operations, including custodian, accountants and counsel
and other parties performing services or operational functions for the Company.
As compensation for its administrative services, BISYS receives a monthly fee,
based on an annual rate of .15% of aggregate average daily net assets of the
Funds plus an annual fee of $30,000 for each Fund.
26
<PAGE>
BISYS Fund Services, Inc. serves as the Company's Transfer Agent and Dividend
Disbursing Agent pursuant to a transfer agency agreement (the "Transfer Agency
Agreement") with the Company. Under the Transfer Agency Agreement, BISYS Fund
Services, Inc. has agreed, among other things, to: (i) issue and redeem shares
of each Fund; (ii) transmit all communications by each Fund to its shareholders
of record, including reports to shareholders, dividend and distribution notices
and proxy materials for meetings of shareholders; (iii) respond to
correspondence by shareholders and others relating to its duties; (iv) maintain
shareholder accounts; and (v) make periodic reports to the Board of Directors
concerning each Funds' operations. Each Fund pays BISYS Fund Services, Inc. such
compensation as may be agreed upon from time to time. The Transfer Agency
Agreement continues in effect until January 1, 1998 and from year to year
thereafter if such continuance is approved at least annually by the Company's
Board of Directors and by a majority of the Directors who are not "interested
persons" (as defined in the 1940 Act) of any party, and such Agreement may be
terminated by either party on 60 days' written notice.
The Bank of New York ("BONY") serves as the Company's custodian, with respect to
all Funds, other than the Emerging Markets Fund, pursuant to a custodian
agreement (the "BONY Custodian Agreement") with the Company. BONY is located at
90 Washington Street, New York, New York 10286. Under the BONY Custodian
Agreement, BONY has agreed to (i) maintain a segregated account or accounts in
the name of each Fund; (ii) hold and disburse portfolio securities on account of
each Fund; (iii) collect and receive all income and other payments and
distributions on account of each Fund's portfolio securities; (iv) respond to
correspondence relating to its duties; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. BONY is
authorized under the BONY Custodian Agreement to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Funds, provided that
BONY remains responsible for the performance of all of its duties under the BONY
Custodian Agreement. BONY is entitled to receive such compensation from the
Funds as may be agreed upon from time to time.
The Chase Manhattan Bank, N.A. ("Chase") serves as the Company's custodian, with
respect to the Emerging Markets Fund only, pursuant to a custodian agreement
(the "Chase Custodian Agreement") with the Company. Chase is located at 4
MetroTech Center, 18th Floor, Brooklyn, New York 11245. Under the Chase
Custodian Agreement, Chase has agreed to (i) maintain a segregated account or
accounts in the name of each Fund; (ii) hold and disburse portfolio securities
on account of each Fund; (iii) collect and receive all income and other payments
and distributions on account of each Fund's portfolio securities; (iv) respond
to correspondence relating to its duties; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. Chase is
authorized under the Chase Custodian Agreement to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Funds, provided that
Chase remains responsible for the performance of all of its duties under the
Chase Custodian Agreement. Chase is entitled to receive monthly fees under the
Chase Custodian Agreement based upon the types of assets held by each Fund, at
the annual rate of .0865% on the first $10 million and .05% on amounts in excess
thereof for assets held in the United States and .20% on the first $10 million
and .15% on amounts in excess thereof for
27
<PAGE>
assets held outside the United States, except that with respect to assets held
in certain emerging market countries, the annual fee shall be .30% of such
Fund's assets held in the particular type of security. The Chase Custodian
Agreement continues in effect until December 31, 1996 and from year to year
thereafter if such continuance is approved at least annually by the Company's
Board of Directors and by a majority of the Directors who are not parties to
such Agreement or "interested persons" (as defined in the 1940 Act) of any
party, and such Agreement may be terminated by either party on 60 days' written
notice.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by any or all of each of the Funds to the
organizations retained to provide services for each of the Funds may be waived
from time to time in order to increase such Funds' net investment income
available for distribution to shareholders or total return.
Except as otherwise noted, OFFITBANK , BISYS and BISYS Fund Services, Inc. bear
all expenses in connection with the performance of their advisory and
administrative services respectively. The Company bears the expenses incurred in
its operations, including: taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Company); fees payable to the SEC;
costs of preparing prospectuses for regulatory purposes and for distribution to
shareholders; advisory and administration fees; charges of its custodian and
transfer agent; certain insurance costs; auditing and legal expenses; fees of
independent pricing services; costs of shareholders' reports and shareholder
meetings, including proxy statements and related materials; and any
extraordinary expenses. The Company also pays for brokerage fees and
commissions, if any, in connection with the purchase of portfolio securities.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, except as stated below, the
Adviser is primarily responsible for the Company's portfolio decisions and the
placing of the Company's portfolio transactions. DJ Greene is primarily
responsible for the portfolio decisions and the placing of the portfolio
transaction for the Value Equity Fund. Rockefeller & Co., however, under the
supervision of the Adviser, is primarily responsible for the portfolio decisions
and the placing of the portfolio transactions for the U.S. Small Cap Fund.
With respect to the U.S. Government Fund High Yield Fund, Emerging Markets Fund,
Global Convertible Fund and Total Return Fund, portfolio securities normally
will be purchased or sold from or to dealers at a net price, which may include
dealer spreads and underwriting commissions. With respect to the U.S. Small Cap
Fund , Value Equity Fund, purchases and sales of securities on a stock exchange
are effected through brokers who charge a commission. In the over-the-counter
market, securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the
28
<PAGE>
security usually includes a profit to the dealer. In placing orders, it is the
policy of the Company to obtain the best results taking into account the
dealer's general execution and operational facilities, the type of transaction
involved and other factors such as the dealer's risk in positioning the
securities involved. While the Adviser, DJ Greene and Rockefeller & Co. each
generally seeks a competitive price in placing its orders, the Company may not
necessarily be paying the lowest price available.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless the transaction is conducted in accordance with procedures established by
the Company's Board of Directors and complies in all other respects with certain
criteria or an exemptive order allowing such transactions is obtained from the
SEC. Affiliated persons of the Company, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for the
Company as agent. Subject to the considerations discussed above and in
accordance with procedures adopted by the Board of Directors, in order for such
an affiliated person to be permitted to effect any portfolio transactions for
the Company, the commissions, fees or other remuneration received by such
affiliated person must be reasonable and fair compared to the commissions, fees
and other remuneration received by other brokers in connection with comparable
transactions. This standard would allow such an affiliated person to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker in a commensurate arm's-length agency transaction.
Investment decisions for the Company are made independently from those for other
funds and accounts advised or managed by the Adviser, DJ Greene or Rockefeller &
Co., as the case may be. Such other funds and accounts may also invest in the
same securities as the Company. If those funds or accounts are prepared to
invest in, or desire to dispose of, the same security at the same time as the
Company, however, transactions in such securities will be made, insofar as
feasible, for the respective funds and accounts in a manner deemed equitable to
all. In some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by the Company or the price paid or received by the
Company. In addition, because of different investment objectives, a particular
security may be purchased for one or more funds or accounts when one or more
funds or accounts are selling the same security. To the extent permitted by law,
the Adviser, DJ Greene and Rockefeller & Co. may aggregate the securities to be
sold or purchased for the Company with those to be sold or purchased for other
funds or accounts in order to obtain best execution.
PURCHASE OF SHARES
The Company reserves the right, in its sole discretion, to (i) suspend the
offering of shares of each of its Funds, and (ii) reject purchase orders when,
in the judgment of management, such suspension or rejection is in the best
interest of the Company.
29
<PAGE>
REDEMPTION OF SHARES
The Company may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange (the "NYSE") or the bond
market is closed, or trading on the NYSE is restricted as determined by the SEC,
(ii) during any period when an emergency exists as defined by the rules of the
SEC as a result of which it is not reasonably practicable for a Fund to dispose
of securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the SEC may permit.
Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of a Fund, such Fund may pay the
redemption price, in whole or in part, by a distribution in kind.
PERFORMANCE CALCULATIONS
The Company may from time to time quote various performance figures to
illustrate the past performance of each of its Funds. Performance quotations by
investment companies are subject to rules adopted by the SEC, which require the
use of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the SEC methods for computing performance follows.
TOTAL RETURN
A Fund's average annual total return is determined by funding the average annual
compounded rates of return over 1, 5 and 10 year periods (or, if sooner, the
period since inception of the Fund) that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The calculation assures that
all dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each 1, 5 and 10 year period
(or, if shorter, the period since inception of the Fund) and the deduction of
all applicable Fund expenses on an annual basis. Average annual total return is
calculated according to the following formula:
^n
P (1+T) = 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
30
<PAGE>
A Fund may also calculate total return on an aggregate basis which reflects the
cumulative percentage change in value over the measuring period. The formula for
calculating aggregate total return can be expressed as follows:
Aggregate Total Return = [( ERV ) - 1]
---
P
In addition to total return, each Fund may quote performance in terms of a
30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the SEC and can be expressed as follows:
a-b ^6
Yield = 2 [ ( --- +1) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the minimum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Fund at a discount or premium, the
formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations.
The performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or other independent services which monitor the performance data
of investment companies, and may be quoted in advertising in terms of their
rankings in each applicable universe. In addition, the Company may use
performance reported in financial and industry publications, including Barron's,
Business Week, Forbes, Fortune, Institutional Investor, Money, Morningstar,
Mutual Fund Values, The Wall Street Journal, The New York Times and U.S.A.
Today.
Performance information presented for each of the Funds should not be compared
directly with performance information of other insurance products without taking
into account insurance-related charges and expenses payable under the variable
annuity contract and variable life insurance policy. These charges and expenses
are not reflected in the Funds' performance and would reduce an investor's
return under the annuity contract or life policy.
31
<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax considerations that
are not described in the Prospectus and generally affect each Fund and its
shareholders. No attempt is made to present a detailed explanation of the tax
treatment of each Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
Each Fund intends to qualify to be treated as a "regulated investment company"
("RIC") under the Internal Revenue Code of 1986 (the "Code"). If so qualified,
each Fund will not be subject to federal income tax on its investment company
taxable income and net capital gains to the extent that such investment company
taxable income and net capital gains are distributed in each taxable year to the
separate accounts of insurance companies that hold its shares. In addition, if
each Fund distributes annually to the separate accounts its ordinary income and
capital gain net income, in the manner prescribed in the Code, it will also not
be subject to the 4% federal excise tax otherwise applicable to the RIC's on any
of its income or gains. Distributions of net investment income and net
short-term capital gains will be treated as ordinary income and distributions of
net long-term capital gains will be treated as long-term capital gain in the
hands of the insurance companies. Under current tax law, capital gains or
dividends from any Funds are not currently taxable when left to accumulate
within a variable annuity or variable life insurance contract.
Section 817(h) of the Code requires that investments of a segregated asset
account of an insurance company be "adequately diversified", in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of the
variable annuity contracts or variable life insurance policies investing in the
account to receive the tax-deferred or tax-free treatment generally afforded
holders of annuities or life insurance policies under the Code. The Department
of the Treasury has issued Regulations under section 817(h) which, among other
things, provide the manner in which a segregated asset account will treat
investments in a RIC for purposes of the applicable diversification
requirements. Under the Regulations, if a RIC satisfies certain conditions, that
RIC will not be treated as a single investment for these purposes, but rather
the segregated asset account will be treated as owning its proportionate share
of each of the assets of the RIC. Each Fund plans to satisfy these conditions at
all times so that each segregated asset account of a life insurance company
investing in the Funds will be treated as adequately diversified under the Code
and Regulations.
For information concerning the federal income tax consequences to the holders of
variable annuity contracts and variable rate insurance policies, such holders
should consult the prospectuses used in connection with the issuance of their
particular contracts or policies.
DETERMINATION OF NET ASSET VALUE
The Company values the shares of each Fund daily on each day the New York Stock
Exchange (the "NYSE") is open. Currently, the NYSE is closed Saturdays, Sundays
and the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, the Fourth of July,
32
<PAGE>
Labor Day, Thanksgiving and Christmas. The Company determines net asset value as
of the close of the NYSE. However, equity options held by a Fund are priced as
of the close of trading at 4:10 p.m, and futures on U.S. government securities
and index options held by a Fund are priced as of their close of trading at 4:15
p.m.
Each Fund determines net asset value as follows: Securities for which market
quotations are readily available are valued at prices which, in the opinion of
the Directors, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sales price on or,
if no sales are reported (as in the case of some securities traded
over-the-counter) the last reported bid price, except that certain U.S.
government securities are stated at the mean between the reported bid and asked
prices. Short-term investments having remaining maturities of 60 days or less
are stated at amortized cost, which approximates market. All other securities
and assets are valued at their fair value following procedures approved by the
Directors. Liabilities are deducted from the total, and the resulting amount is
divided by the number of shares outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. Securities for which reliable
quotations are not readily available and all other assets will be valued at
their respective fair market value as determined in good faith by, or under
procedures established by, the Company's Board of Directors.
If any securities held by a Fund are restricted as to resale, their fair value
will be determined in good faith by, or under procedures established by, the
Company's Board of Directors. The Directors periodically review such valuations
and procedures. The fair value of such securities is generally determined as the
amount which Fund could reasonably expect to realize from an orderly disposition
of such securities over a reasonable period of time. The valuation procedures
applied in any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any registration
expenses that might be borne by the Fund in connection with such disposition).
In addition, specific factors are also generally considered, such as the cost of
the investment, the market value of any unrestricted securities of the same
class (both at the time of purchase and at the time of valuation), the size of
the holding, the prices of any recent transactions or offers with respect to
such securities and any available analysts' reports regarding the issuer.
To the extent a Fund invests in foreign securities, the calculation of the
Fund's net asset value may not take place contemporaneously with the
determination of the prices of certain of the portfolio securities used in the
calculation. Also, because of the amount of time required to collect and process
trading information as to large numbers of securities issues, the values of
certain securities (such as convertible bonds, U.S. government securities, and
tax-exempt securities) are determined based on market quotations collected
earlier in the day at the latest practicable time prior to the close of the
NYSE. Occasionally, events which affect the values
33
<PAGE>
of such securities (and, with respect to foreign securities, the value of the
currency in which the security is denominated) may occur between the times at
which they are determined and the close of the NYSE and will therefore not be
reflected in the computation of a Fund's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value as determined in good faith by, or
under procedures established by, the Company's Board of Directors.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law. As
used in this Statement of Additional Information, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Company and all Funds, means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of more than 50% of the outstanding shares are present in person or by
proxy or (ii) more than 50% of the Company's outstanding shares. The term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting any single Fund (e.g., approval of Advisory
Agreements), means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy or (ii) more than 50% of
the outstanding shares of the Fund. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Each share of a Fund of the Company is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Fund as
are declared in the discretion of the Company's Board of Directors. In the event
of the liquidation or dissolution of the Company, shares of a Fund are entitled
to receive the assets allocable to that Fund which are available for
distribution, and a proportionate distribution, based upon the relative net
assets of the Funds, of any general assets not belonging to a Fund which are
available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-accessible, fully transferable and redeemable at the
option of the holder.
As of the date of this Statement of Additional Information, OFFIT Funds
Distributor, Inc. was the record and beneficial owner of all of the outstanding
shares of the Company's common stock and thus may be deemed to "control" the
Company as that term is defined in the 1940 Act. The shares held by OFFIT Funds
Distributor, Inc. are intended to enable the Company to meet an initial
capitalization requirement imposed under the 1940 Act. OFFIT Funds Distributor,
Inc. has undertaken that the shares were purchased for investment purposes only
and that they will be sold only pursuant to a registration statement under the
Securities Act of 1933, as amended, or an applicable exemption from the
registration requirements thereof.
34
<PAGE>
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Company.
Price Waterhouse LLP is located at 1177 Avenue of the Americas, New York, New
York 10036.
COUNSEL
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022,
serves as counsel to each of the Funds.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain all
the information included in the Registration Statement filed with the SEC under
the Securities Act of 1933 with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Statement of Additional Information pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
The unaudited financial statements for OFFITBANK VIF-High Yield Fund and
OFFITBANK VIF-Emerging Markets Fund for the period ended September 30, 1996 and
the unaudited statement of assets and liabilities and report thereon for the
Company for the period ended September 30, 1996 are included herein by reference
to the Company's Semi-Annual Report to Shareholders dated November 30, 1996.
35
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in the Prospectus:
(1) Financial Highlights for the period ended September
30, 1996 for the OFFITBANK VIF - Emerging Markets
Fund and OFFITBANK VIF - High Yield Fund
(unaudited).
With respect to the Emerging Markets Fund and High Yield Fund
series of the Registrant only, included in the Semi- Annual
Report to Shareholders, and incorporated by reference in the
Statement of Additional Information from the Rule 30-D filing
made by the Registrant on December 3, 1996 (Accession Number
0000912057-96-028069):
(1) Portfolios of Investments dated September 30, 1996
(unaudited).
(2) Statements of Assets and Liabilities dated
September 30, 1996 (unaudited).
(3) Statements of Operations for the period ended
September 30, 1996 (unaudited).
(4) Statement of Changes in Net Assets for the period
ended September 30, 1996 (unaudited).
(5) Financial Highlights for the period ended September
30, 1996 (unaudited).
(6) Notes to Financial Statements dated September 30,
1996 (unaudited).
(7) Statement of Assets and Liabilities dated September
30, 1996.
(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.B6 -- Form of Distribution Agreement between Registrant and
OFFIT Funds Distributor, Inc. (1)
Ex-99.B7 -- None.
Ex-99.B8 -- Form of Custodian Agreement between Registrant and The
Chase Manhattan Bank, N.A. (1)
Ex-99.B9(a) -- Form of Administration Agreement between Registrant
and Furman Selz Incorporated (1)
Ex-99.B9(b) -- Form of Transfer Agency Agreement between
Registrant and Furman Selz Incorporated (1)
Ex-99.B9(c) -- Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITBANK, C.M. Life Insurance Company, Connecticut
<PAGE>
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 Distibutor, Inc.,
OFFITBANK and Security Equity Life Insurance Company
(4)
Ex-99.B10 -- Opinion of Kramer, Levin, Naftalis, & Frankel (4)
Ex-99.B11(a) -- Consent of Kramer, Levin, Naftalis & Frankel (4)
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 herewith.
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 herewith) and Article VIII of Registrant'S Amended and
Restated By-Laws (filed herewith).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any
<PAGE>
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)
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not Applicable
(b) Not Applicable
(c) The Registrant undertakes to furnish each person to whom a
prospectus is delivered, a copy of the Registrant's latest
annual report to shareholders which will include the
information required by item 5A, upon request and without
charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it has met all the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and 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 31st day of January, 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 on the 31st day of January, 1997.
SIGNATURE TITLE
/s/ Morris W. Offit Director, Chairman of
- ---------------------------- the Board and President
Morris W. Offit (Principal Executive Director)
* Director
Edward J. Landau
- ---------------------------
*
The Very Reverend James Parks Morton Director
- ---------------------------
/s/ Morris W. Offit
- ---------------------------
Morris W. Offit
Attorney-in-fact
* Attorney-in-Fact pursuant to powers of attorney filed herewith.
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
Ex-99.B1(a) Articles of Incorporation
Ex-99.B1(b) Articles of Amendment
Ex-99.B2 Amended and Restated By-Laws
Ex-99.B4 Form of Specimen Share Certificates
Ex-99.B6 Distribution Agreement between Registrant and OFFIT Fund
Distributor, Inc.
Ex-99.B9(c) Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITIBANK, C.M. Life Insurance Company, Connecticut
Mutual Life Insurance Company and Connecticut Mutual
Financial Services, L.L.C.
Ex-99.B9(d) Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITBANK and Security Equity Life Insurance Company.
Ex-99.B10 Opinion of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
Ex-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
Ex-99.B13 Purchase Agreement between Registrant and OFFIT Funds
Distributor, Inc.
Ex-99.B.PofA Power of Attorney.
Ex-27 Financial Data Schedules.
ARTICLES OF INCORPORATION
OF
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
FIRST: The undersigned, Peter O'Rourke, whose address is 40 West 57th
Street, New York, New York, being at least eighteen years of age, hereby forms a
corporation under the Maryland General Corporation Law.
SECOND: The name of the corporation is The OFFITBANK Variable
Insurance Fund, Inc. (hereinafter called the "corporation").
THIRD: The corporation is formed for the following purpose or
purposes:
(a) to conduct, operate and carry on the business of an
investment company;
(b) to subscribe for, invest in, reinvest in, purchase or
otherwise acquire, hold, pledge, sell, assign, transfer, lend, write
options on, exchange, distribute or otherwise dispose of and deal in
and with securities of every nature, kind, character, type and form,
including without limitation of the generality of the foregoing, all
types of stocks, shares, futures contracts, bonds, debentures, notes,
bills and other negotiable or non-negotiable instruments, obligations,
evidences of interest, certificates of interest, certificates of
participation, certificates, interests, evidences of ownership,
guarantees, warrants, options or evidences of indebtedness issued or
created by or guaranteed as to principal and interest by any state or
local government or any agency or instrumentality thereof, by the
United States Government or any agency, instrumentality, territory,
district or possession thereof, by any foreign government or any
agency, instrumentality, territory, district or possession thereof, by
any corporation organized under the laws of any state, the United
States or any territory or possession thereof or under the laws of any
foreign country, bank certificates of deposit, bank time deposits,
bankers' acceptances and commercial paper; to pay for the same in cash
or by the issue of stock, bonds or notes of the corporation or
otherwise; and to exercise any and all rights, powers and privileges
of ownership or interest in respect of any and all such
<PAGE>
investments of every kind and description, including without
limitation, the right to consent and otherwise act with respect
thereto, with power to designate one or more persons, firms,
associations or corporations to exercise any of said rights, powers
and privileges in respect of any said instruments;
(c) to borrow money or otherwise obtain credit and to secure the
same by mortgaging, pledging or otherwise subjecting as security the
assets of the corporation;
(d) to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer, and otherwise deal in,
shares of stock of the corporation, including shares of stock of the
corporation in fractional denominations, and to apply to any such
repurchase, redemption, retirement, cancellation or acquisition of
shares of stock of the corporation any funds or property of the
corporation whether capital or surplus or otherwise, to the full
extent now or hereafter permitted by the laws of the State of
Maryland;
(e) to conduct its business, promote its purposes and carry on
its operations in any and all of its branches and maintain offices
both within and without the State of Maryland, in any State of the
United States of America, in the District of Columbia and in any other
parts of the world; and
(f) to do all and everything necessary, suitable, convenient, or
proper for the conduct, promotion and attainment of any of the
businesses and purposes herein specified or which at any time may be
incidental thereto or may appear conducive to or expedient for the
accomplishment of any of such businesses and purposes and which might
be engaged in or carried on by a corporation incorporated or organized
under the Maryland General Corporation Law, and to have and exercise
all of the powers conferred by the laws of the State of Maryland upon
corporations incorporated or organized under the Maryland General
Corporation Law.
The foregoing provisions of this Article THIRD shall be construed both
as purposes and powers and each as an independent purpose and power. The
foregoing enumeration of specific purposes and powers shall not be held to limit
or restrict in any manner the purposes and powers of the corporation, and the
purposes and powers herein specified shall, except when otherwise provided in
this Article THIRD, be in no wise limited or restricted by reference to, or
inference from, the terms of any provision of this or any other Article of these
Articles of Incorporation; provided, that the corporation shall not conduct
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<PAGE>
any business, promote any purpose, or exercise any power or privilege within or
without the State of Maryland which, under the laws thereof, the corporation may
not lawfully conduct, promote, or exercise.
FOURTH: The post office address of the principal office and Resident
Agent of the corporation within the State of Maryland is 11 East Chase Street,
Suite 9E, c/o CSC-Lawyers Incorporating Service Company, Baltimore, Maryland
21202. The name and address of the Resident Agent of the corporation is
CSCLawyers Incorporating Service Company, 11 East Chase Street, suite 9E,
Baltimore, Maryland 21202.
FIFTH: (1) The total number of shares of stock which the corporation
initially has authority to issue is two billion (2,000,000,000) shares of Common
Stock which are initially designated by series as follows: five hundred million
(500,000,000) shares are designated "Offitbank VIF-High Yield Fund" series, five
hundred million (500,000,000) shares are designated "Offitbank VIF-Investment
Grade Global Debt Fund" series, five hundred million (500,000,000) shares are
designated "Offitbank VIF-Emerging Markets Fund" series, and of which five
hundred million (500,000,000) shares are unclassified. All of the shares of
Common Stock of each series are initially designated as one class of shares. The
par value of the shares of each class is one tenth of one cent ($.001) per
share.
(2) The aggregate par value of all the authorized shares of stock is
two million dollars ($2,000,000.00).
(3) The Board of Directors of the corporation is authorized, from time
to time, to fix the price or the minimum price or the consideration or minimum
consideration for, and to authorize the issuance of, the shares of stock of the
corporation.
(4) The Board of Directors of the corporation is authorized, from time
to time, to further classify or to reclassify, as the case may be, any unissued
shares of stock of the corporation by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms or conditions of redemption of the stock.
(5) Subject to the power of the Board of Directors to reclassify
unissued shares, the shares of each class of stock of the corporation shall have
the following preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption:
(a) (i) All consideration received by the corporation for the
issuance or sale of shares of the class together with all income,
earnings, profits and
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<PAGE>
proceeds thereof, shall irrevocably belong to such class for all
purposes, subject only to the rights of creditors, and are herein
referred to as "assets belonging to" such class.
(ii) The assets belonging to such class shall be charged
with the liabilities of the corporation in respect of such class and
with such class's share of the general liabilities of the corporation,
in the latter case in proportion that the net asset value of such
class bears to the net asset value of all classes. The determination
of the Board of Directors shall be conclusive as to the allocation of
liabilities, including accrued expenses and reserves, to a class.
(iii) Dividends or distributions on shares of each class,
whether payable in stock or cash, shall be paid only out of earnings,
surplus or other assets belonging to such class.
(iv) In the event of the liquidation or dissolution of the
corporation, stockholders of each class shall be entitled to receive,
as a class, out of the assets of the corporation available for
distribution to stockholders, the assets belonging to such class and
the assets so distributable to the stockholders of such class shall be
distributed among such stockholders in proportion to the number of
shares of such class held by them.
(b) A series of Common Stock may be further classified by the
Board of Directors into two or more classes of stock that may be
invested together in the common investment portfolio in which the
series is invested. Notwithstanding the provisions of paragraph (5)(a)
of this Article Fifth, if two or more classes are invested in a common
investment portfolio as a series, the shares of each such class of
stock of the corporation shall be subject to the following
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions
of redemption, and, if there are other classes of stock of another
series invested in a different investment portfolio, shall also be
subject to the provisions of paragraph (5)(a) of this Article Fifth at
the series level as if the classes within the series were one class:
(i) The income and expenses of the series shall be allocated
among the classes in the series in accordance with the number of
shares outstanding of each such class or as otherwise determined by
the Board of Directors in a manner consistent with subparagraph (iii)
below.
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<PAGE>
(ii) As more fully set forth in this paragraph (5)(b) of
Article Fifth, the liabilities and expenses of the classes in the
series shall be determined separately from those of each other and,
accordingly, the net asset value, the dividends and distributions
payable to holders, and the amounts distributable in the event of
liquidation of the corporation to holders of shares of the
corporation's stock may vary from class to class within the series.
Except for these differences and certain other differences set forth
in this paragraph (5) of Article Fifth, the classes in the same series
shall have the same preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption.
(iii) The dividends and distributions of investment income
and capital gains with respect to the classes in the series shall be
in such amounts as may be declared from time to time by the Board of
Directors, and such dividends and distributions may vary among the
classes in the series to reflect differing allocations of the expenses
of the corporation among the classes and any resultant differences
among the net asset values per share of the classes, to such extent
and for such purposes as the Board of Directors may deem appropriate.
The allocation of investment income, capital gains, expenses and
liabilities of the corporation among the classes in the series shall
be determined by the Board of Directors in a manner that is consistent
with an order, if any, obtained from the Securities and Exchange
Commission or any future amendment to such order or any rule or
interpretation under the Investment Company Act of 1940, as amended.
(c) Except as provided below, on each matter submitted to a vote
of the stockholders, each holder of a share of stock shall be entitled
to one vote for each share standing in his name on the books of the
corporation irrespective of the class or series thereof. All holders
of shares of stock shall vote as a single class except as may
otherwise be required by law pursuant to any applicable order, rule or
interpretation issued by the Securities and Exchange Commission, or
otherwise, or except with respect to any matter which affects only one
or more classes or series of stock, in which case only the holders of
shares of the class, classes or series affected shall be entitled to
vote.
Except as provided above, all provisions of the Articles of Incorporation
relating to stock of the corporation shall apply to shares of, and to the
holders of, all classes of stock.
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<PAGE>
(6) Notwithstanding any provisions of the Maryland General Corporation
Law requiring a greater proportion than a majority of the votes of stockholders
of all classes or of any class of stock entitled to be cast in order to take or
authorize any action, any such action may be taken or authorized upon the
concurrence of a majority of the aggregate number of votes entitled to be cast
thereon.
(7) The presence in person or by proxy of the holders of one-third of
the shares of stock of the corporation entitled to vote (without regard to
class) shall constitute a quorum at any meeting of the stockholders, except with
respect to any matter which, under applicable statutes or regulatory
requirements, requires approval by a separate vote of one or more classes of
stock, in which case the presence in person or by proxy of the holders of
one-third of the shares of stock of each class required to vote as a class on
the matter shall constitute a quorum.
(8) The corporation may issue shares of stock in fractional
denominations to the same extent as its whole shares, and shares in fractional
denominations shall be shares of stock having proportionately to the respective
fractions represented thereby all the rights of whole shares, including, without
limitation, the right to vote, the right to receive dividends and distributions
and the right to participate upon liquidation of the corporation, but excluding
the right to receive a stock certificate evidencing a fractional share.
(9) No holder of any shares of any class of the corporation shall be
entitled as of right to subscribe for, purchase, or otherwise acquire any shares
of any class which the corporation proposes to issue, or any rights or options
which the corporation proposes to issue or to grant for the purchase of shares
of any class or for the purchase of any shares, bonds, securities, or
obligations of the corporation which are convertible into or exchangeable for,
or which carry any rights to subscribe for, purchase, or otherwise acquire
shares of any class of the corporation; and any and all of such shares, bonds,
securities or obligations of the corporation, whether now or hereafter
authorized or created, may be issued, or may be reissued if the same have been
reacquired, and any and all of such rights and options may be granted by the
Board of Directors to such persons, firms, corporations and associations, and
for such lawful consideration, and on such terms, as the Board of Directors in
its discretion may determine, without first offering the same, or any thereof,
to any said holder.
-6-
<PAGE>
SIXTH: (1) The initial number of directors of the corporation is three
(3) and the names of those who will serve as such until the first annual meeting
or until their successors are duly elected and qualify are as follows:
Stephen Brent Wells
Susan J. Penry-Williams
Peter J. O'Rourke
The By-Laws of the Corporation may fix the number of directors at a
number greater or less than that named in these Articles of Incorporation and
may authorize a majority of the entire Board of Directors to increase or
decrease the number of directors. The number of directors shall never be less
than the minimum number prescribed by the Maryland General Corporation Law.
(2) The initial by-laws of the corporation shall be adopted by the
directors at their organizational meeting or by their informal written action,
as the case may be. Thereafter, the power to make, alter, and repeal the by-laws
of the corporation shall be vested in the Board of Directors of the corporation.
(3) Any determination made in good faith by or pursuant to the
direction of the Board of Directors, as to: the amount of the assets, debts,
obligations, or liabilities of the corporation; the amount of any reserves or
charges set up and the propriety thereof; the time of or purpose for creating
such reserves or charges; the use, alteration or cancellation of any reserves or
charges (whether or not any debt, obligation or liability for which such
reserves or charges shall have been created shall have been paid or discharged
or shall be then or thereafter required to be paid or discharged); the value of
any investment or fair value of any other asset of the corporation; the amount
of net investment income; the number of shares of stock outstanding; the
estimated expense in connection with purchases or redemptions of the
corporation's stock; the ability to liquidate investments in an orderly fashion;
the extent to which it is practicable to deliver a cross-section of the
portfolio of the corporation in payment for any such shares, or as to any other
matters relating to the issue, sale, purchase, redemption and/or other
acquisition or disposition of investments or shares of the corporation, or the
determination of the net asset value of shares of the corporation shall be final
and conclusive, and shall be binding upon the corporation and all holders of its
shares, past, present and future, and shares of the corporation are issued and
sold on the condition and understanding that any and all such determinations
shall be binding as aforesaid.
SEVENTH: (1) To the fullest extent that limitations on the liability
of directors and officers are permitted by the
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<PAGE>
Maryland General Corporation Law, no director or officer of the corporation
shall have any liability to the corporation or its stockholders for damages.
This limitation on liability applies to events occurring at the time a person
serves as a director or officer of the corporation whether or not such person is
a director or officer at the time of any proceeding in which liability is
asserted.
(2) The corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The corporation shall indemnify and advance expenses to its officers to the
same extent as its directors and to such further extent as is consistent with
law. The Board of Directors may, through a by-law, resolution or agreement, make
further provisions for indemnification of directors, officers, employees and
agents to the fullest extent permitted by the Maryland General Corporation Law.
(3) No provision of this Article SEVENTH shall be effective (i) to
require a waiver of compliance with any provision of the Securities Act of 1933,
or of the Investment Company Act of 1940, or of any valid rule, regulation or
order of the Securities and Exchange Commission thereunder or (ii) to protect or
purport to protect any director or officer of the corporation against any
liability to the corporation or its stockholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
(4) References to the Maryland General Corporation Law in this Article
SEVENTH are to the law as from time to time amended. No amendment to the
Articles of Incorporation of the corporation shall affect any right of any
person under this Article SEVENTH based on any event, omission or proceeding
prior to such amendment.
EIGHTH: Any holder of shares of stock of the corporation may require
the corporation to redeem and the corporation shall be obligated to redeem at
the option of such holder all or any part of the shares of the corporation owned
by said holder, at the redemption price, pursuant to the method, upon the terms
and subject to the conditions hereinafter set forth:
(a) The redemption price per share shall be the net asset value
per share determined at such time or times as the Board of Directors
of the corporation shall designate in accordance with any provision of
the Investment Company Act of 1940, any rule or regulation thereunder
or exemption or exception therefrom, or any rule or regulation made or
adopted by any securities
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<PAGE>
association registered under the Securities Exchange Act of 1934.
(b) Net asset value per share of a class shall be determined by
dividing:
(i) The total value of the assets of such class, or in the
case of a series with more than one class, such class's
proportionate share of the total value of the assets of the
series, such value determined as provided in Subsection (c) below
less, to the extent determined by or pursuant to the direction of
the Board of Directors, all debts, obligations and liabilities of
such class (which debts, obligations and liabilities shall
include, without limitation of the generality of the foregoing,
any and all debts, obligations, liabilities, or claims, of any
and every kind and nature, fixed, accrued and otherwise,
including the estimated accrued expenses of management and
supervision, administration and distribution and any reserves or
charges for any or all of the foregoing, whether for taxes,
expenses or otherwise) but excluding such class's liability upon
its shares and its surplus, by
(ii) The total number of shares of such class outstanding.
The Board of Directors is empowered, in its absolute discretion,
to establish other methods for determining such net asset value
whenever such other methods are deemed by it to be necessary in order
to enable the corporation to comply with, or are deemed by it to be
desirable provided they are not inconsistent with, any provision of
the Investment Company Act of 1940 or any rule or regulation
thereunder.
(c) In determining for the purposes of these Articles of
Incorporation the total value of the assets of the corporation at any
time, investments and any other assets of the corporation shall be
valued in such manner as may be determined from time to time by the
Board of Directors.
(d) Payment of the redemption price by the corporation may be
made either in cash or in securities or other assets at the time owned
by the corporation or partly in cash and partly in securities or other
assets at the time owned by the corporation. The value of any part of
such payment to be made in securities or other assets of the
corporation shall be the value employed
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<PAGE>
in determining the redemption price. Payment of the redemption price
shall be made on or before the seventh day following the day on which
the shares are properly presented for redemption hereunder, except
that delivery of any securities included in any such payment shall be
made as promptly as any necessary transfers on the books of the
issuers whose securities are to be delivered may be made.
(e) Redemption of shares of stock by the corporation is
conditional upon the corporation having funds or property legally
available therefor.
(f) The corporation, either directly or through an agent, may
repurchase its shares, out of funds legally available therefor, upon
such terms and conditions and for such consideration as the Board of
Directors shall deem advisable, by agreement with the owner at a price
not exceeding the net asset value per share as determined by the
corporation at such time or times as the Board of Directors of the
corporation shall designate, less a charge not to exceed five percent
(5%) of such net asset value, if and as fixed by resolution of the
Board of Directors of the corporation from time to time, and take all
other steps deemed necessary or advisable in connection therewith.
(g) The corporation may cause the redemption, upon the terms set
forth in subsections (a) through (e) and subsection (h) of this
Article EIGHTH, of shares of a class of stock held by a stockholder if
the net asset value of the shares of stock is less than $500 or such
other amount not exceeding $5000 as may be fixed from time to time by
the Board of Directors (the "Minimum Amount") with respect to that
class. The Board of Directors may establish differing Minimum Amounts
for each class of the Corporation's stock and for categories of
holders of stock based on such criteria as the Board of Directors may
deem appropriate. The Corporation shall give the stockholder notice
which shall be in writing personally delivered or deposited in the
mail, at least 30 days (or such other number of days as may be
specified from time to time by the Board of Directors) prior to such
redemption.
Notwithstanding any other provision of this Article EIGHTH, if
certificates representing such shares have been issued, the redemption
price need not be paid by the corporation until such certificates are
presented in proper form for transfer to the corporation or the agent
of the corporation appointed for such purpose; however, the redemption
shall be effective, in accordance with the resolution of the
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<PAGE>
Board of Directors, regardless of whether or not such presentation has
been made.
(h) The obligations set forth in this Article EIGHTH may be
suspended or postponed as may be permissible under the Investment
Company Act of 1940 and the rules and regulations thereunder.
(i) The Board of Directors may establish other terms and
conditions and procedures for redemption, including requirements as to
delivery of certificates evidencing shares, if issued.
NINTH: All persons who shall acquire stock or other securities of the
corporation shall acquire the same subject to the provisions of the
corporation's Charter, as from time to time amended.
TENTH: From time to time any of the provisions of the Charter of the
corporation may be amended, altered or repealed, including amendments which
alter the contract rights of any class of stock outstanding, and other
provisions authorized by the Maryland General Corporation Law at the time in
force may be added or inserted in the manner and at the time prescribed by said
Law, and all rights at any time conferred upon the stockholders of the
corporation by its Charter are granted subject to the provisions of this
Article.
IN WITNESS WHEREOF, I have adopted and signed these Articles of
Incorporation and do hereby acknowledge that the adoption and signing are my
act.
Dated: June 30, 1994
/s/Peter J. O'Rourke
--------------------
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ARTICLES OF AMENDMENT
OF
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
The OFFITBANK Variable Insurance Fund, Inc., a Maryland Corporation,
with its principal corporate office in the state of Maryland in Baltimore City,
Maryland (hereinafter the "Corporation") certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended as follows:
1. Article FIFTH, paragraph (1) of the Articles of Incorporation shall
be deleted and in lieu thereof the following shall be inserted:
"FIFTH: (1) The total number of shares of stock which the
corporation initially has authority to issue is six billion
(6,000,000,000) shares of common stock which are hereby
initially designated by series as follows: one billion
(1,000,000,000) shares are designated "OFFITBANK VIF-High
Yield Fund" series, one billion (1,000,000,000) shares are
designated "OFFITBANK VIF-Investment Grade Global Debt Fund"
series, one billion (1,000,000,000) shares are designated
"OFFITBANK VIF-Emerging Markets Fund series, one billion
(1,000,000,000) shares are designated "OFFITBANK VIF-Latin
America Equity Fund" series, one billion (1,000,000,000)
shares are designated "OFFITBANK VIF-CVO Greater China Fund"
series and of which one billion (1,000,000,000) shares are
unclassified. All of the shares of Common Stock of each series
are initially designated as one class of shares. The par value
of the shares of each class is one tenth of one cent ($.001)
per share."
2. The aggregate par value of all the authorized shares of common stock
is six million dollars ($6,000,000.00).
SECOND: 1. The total number of shares of all classes of stock of the
Corporation heretofore authorized was two billion (2,000,000,000) shares of
Common Stock. The par value of the shares of each class was one tenth of one
cent ($.001) per share. The number of shares of each class was as follows: five
hundred million (500,000,000) shares of Offitbank VIF-High Yield Fund series;
five hundred million (500,000,000) shares of Offitbank VIF-Investment Grade
Global Debt Fund series; five hundred million (500,000,000) shares of Offitbank
VIF-Emerging Markets
<PAGE>
Fund series; and five hundred million (500,000,000) shares were unclassified.
2. The total number of shares of all classes of stock of the
Corporation as increased is six billion (6,000,000,000) shares of Common Stock.
The par value of the shares of each class is one tenth of one cent ($.001) per
share. The number of shares of each class as increased is as follows: one
billion (1,000,000,000) shares of Offitbank VIF-High Yield Fund series; one
billion (1,000,000,000) shares of Offitbank VIF-Investment Grade Global Debt
Fund series; one billion (1,000,000,000) shares of Offitbank VIF-Emerging
Markets Fund series; one billion (1,000,000,000) shares of Offitbank VIF-Latin
America Equity Fund series; one billion (1,000,000,000) shares of Offitbank
VIF-CVO Greater China Fund series; and one billion (1,000,000,000) shares are
unclassified.
3. The aggregate par value of all shares of all classes of stock of the
Corporation heretofore authorized was two million dollars ($2,000,000.00). The
aggregate par value of all shares of all classes of stock as increased by this
amendment is six million dollars ($6,000,000.00). This amendment has the effect
of increasing the aggregate par value of all shares of all classes of stock of
the Corporation by four million dollars ($4,000,000.00).
4. The information required by Section 2-607(b) of the Maryland General
Corporation Law is as follows: There has been no change in the preferences,
conversion and other rights, voting powers, restrictions, limitations to
dividends, qualifications, and terms and conditions of redemption of the
Offitbank VIF-High Yield Fund Series shares, the Offitbank VIF-Investment Grade
Global Debt Fund series shares, or the Offitbank VIF-Emerging Markets Fund
series shares. The Offitbank VIF-Latin America Equity Fund series shares and the
Offitbank VIF-CVO Greater China Fund series shares shall have, respectively, the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption that are provided with respect to separate series of shares of the
Corporation in Article FIFTH (5) of the Articles of Incorporation of the
Corporation and shall be subject to all of the other provisions of the Articles
of Incorporation that are generally applicable to shares of the Corporation.
THIRD: The Board of Directors of the Corporation approved the foregoing
amendments to the charter as set forth in Article FIRST hereto, and declared
that said amendments were advisable. The Amendment was approved by the sole
shareholder.
The undersigned President acknowledges these Articles of Amendment to
be the corporate act of the Corporation and states that to the best of his
knowledge, information and belief,
<PAGE>
the matters and facts set forth in these Articles of Amendment with respect to
the authorization and approval of the amendments of the Corporation's charter
are true in all material respects and that this statement is made under the
penalties of perjury.
IN WITNESS WHEREOF, The OFFITBANK Variable Insurance Fund, Inc. has
caused this instrument to be signed in its name and on its behalf by its
President and witnessed by its Secretary on the 1st day of March, 1995.
Dated: March 1, 1995.
The OFFITBANK Variable Insurance
Fund, Inc.
By:/s/Morris W. Offit
---------------------
Morris W. Offit, President
ATTEST:
/s/Wallace Mathai-Davis
- -----------------------
Wallace Mathai-Davis, Secretary
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AMENDED AND RESTATED
BY-LAWS
OF
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
(A MARYLAND CORPORATION)
------------------------------
ARTICLE I
STOCKHOLDERS
1. Certificates Representing Stock. Certificates representing shares of
stock shall set forth thereon the statements prescribed by Section 2-211 of the
Maryland General Corporation Law ("General Corporation Law") and by any other
applicable provision of law and shall be signed by the Chairman of the Board or
the President or a Vice President and countersigned by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer and may be sealed
with the corporate seal. The signatures of any such officers may be either
manual or facsimile signatures and the corporate seal may be either facsimile or
any other form of seal. In case any such officer who has signed manually or by
facsimile any such certificate ceases to be such officer before the certificate
is issued, it nevertheless may be issued by the corporation with the same effect
as if the officer had not ceased to be such officer as of the date of its issue.
No certificate representing shares of stock shall be issued for any
share of stock until such share is fully paid, except as otherwise authorized in
Section 2-206 of the General Corporation Law.
The corporation may issue a new certificate of stock in place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Board of Directors may require, in its discretion, the owner
of any such certificate or his legal representative to give bond, with
sufficient surety, to the corporation to indemnify it against any loss or claim
that may arise by reason of the issuance of a new certificate.
2. Share Transfers. Upon compliance with provisions restricting the
transferability of shares of stock, if any, transfers of shares of stock of the
corporation shall be made only on the stock transfer books of the corporation by
the record holder thereof or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the corporation or with a
transfer agent or a registrar, if any, and on
<PAGE>
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
3. Record Date for Stockholders. The Board of Directors may fix, in
advance, a date as the record date for the purpose of determining stockholders
entitled to notice of, or to vote at, any meeting of stockholders, or
stockholders entitled to receive payment of any dividend or the allotment of any
rights or in order to make a determination of stockholders for any other proper
purpose. Such date, in any case, shall be not more than 90 days, and in case of
a meeting of stockholders not less than 10 days, prior to the date on which the
meeting or particular action requiring such determination of stockholders is to
be held or taken. In lieu of fixing a record date, the Board of Directors may
provide that the stock transfer books shall be closed for a stated period but
not to exceed 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of, or to vote at, a meeting of
stockholders, such books shall be closed for at least 10 days immediately
preceding such meeting. If no record date is fixed and the stock transfer books
are not closed for the determination of stockholders: (1) The record date for
the determination of stockholders entitled to notice of, or to vote at, a
meeting of stockholders shall be at the close of business on the day on which
the notice of meeting is mailed or the day 30 days before the meeting, whichever
is the closer date to the meeting; and (2) The record date for the determination
of stockholders entitled to receive payment of a dividend or an allotment of any
rights shall be at the close of business on the day on which the resolution of
the Board of Directors declaring the dividend or allotment of rights is adopted,
provided that the payment or allotment date shall not be more than 60 days after
the date on which the resolution is adopted.
4. Meaning of Certain Terms. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share of stock" or "shares of stock" or "stockholder" or
"stockholders" refers to an outstanding share or shares of stock and to a holder
or holders of record of outstanding shares of stock when the corporation is
authorized to issue only one class of shares of stock and said reference also is
intended to include any outstanding share or shares of stock and any holder or
holders of record of outstanding shares of stock of any class or series upon
which or upon whom the Articles of Incorporation confers such rights where there
are two or more classes or series of shares or upon which or upon whom the
General Corporation Law confers such rights notwithstanding that the Articles of
Incorporation may provide for more than one class or series of shares of stock,
one or more of which are limited or denied such rights thereunder.
-2-
<PAGE>
5. Stockholder Meetings.
Annual Meetings. If a meeting of the stockholders of the corporation is
required by the Investment Company Act of 1940, as amended, to elect the
directors, then there shall be submitted to the stockholders at such meeting the
question of the election of directors, and a meeting called for that purpose
shall be designated the annual meeting of stockholders for that year. In other
years in which no action by stockholders is required for the aforesaid election
of directors, no annual meeting need be held.
Special Meetings. Special stockholder meetings for any purpose may be
called by the Chairman of the Board of Directors, if any, Board of Directors or
the President and shall be called by the Secretary for the purpose of removing a
Director and for all other purposes whenever the holders of shares entitled to
at least twenty five percent (25%) of all the votes entitled to be cast at such
meeting shall make a duly authorized request that such meeting be called. Such
request shall state the purpose of such meeting and the matters proposed to be
acted on thereat, and no other business shall be transacted at any such special
meeting. In addition, the Directors will promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any Director when
requested to do so in writing by the recordholders of not less than ten percent
(10%) of the Company's outstanding shares. Notwithstanding the foregoing, unless
requested by stockholders entitled to cast a majority of the votes entitled to
be cast at the meeting, a special meeting of the stockholders need not be called
at the request of stockholders to consider any matter that is substantially the
same as a matter voted on at any special meeting of the stockholders held during
the preceding twelve (12) months.
Place and Time. Stockholder meetings shall be held at such place,
either within the State of Maryland or at such other place within the United
States, and at such date or dates as the directors from time to time may fix.
Notice or Actual or Constructive Waiver of Notice. Written or printed
notice of all meetings shall be given by the Secretary and shall state the time
and place of the meeting. The notice of a special meeting shall state in all
instances the purpose or purposes for which the meeting is called. Written or
printed notice of any meeting shall be given to each stockholder either by mail
or by presenting it to him personally or by leaving it at his residence or usual
place of business not less than ten days and not more than ninety days before
the date of the meeting, unless any provisions of the General Corporation Law
shall prescribe a different elapsed period of time, to each stockholder at his
address appearing on the books of the corporation or the address supplied by him
for the purpose of notice. If mailed,
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<PAGE>
notice shall be deemed to be given when deposited in the United States mail
addressed to the stockholder at his post office address as it appears on the
records of the corporation with postage thereon prepaid. Whenever any notice of
the time, place or purpose of any meeting of stockholders is required to be
given under the provisions of these by-laws or of the General Corporation Law, a
waiver thereof in writing, signed by the stockholder and filed with the records
of the meeting, whether before or after the holding thereof, or actual
attendance or representation at the meeting shall be deemed equivalent to the
giving of such notice to such stockholder. The foregoing requirements of notice
also shall apply, whenever the corporation shall have any class of stock which
is not entitled to vote, to holders of stock who are not entitled to vote at the
meeting, but who are entitled to notice thereof and to dissent from any action
taken thereat.
Statement of Affairs. The President of the corporation or, if the Board
of Directors shall determine otherwise, some other executive officer thereof,
shall prepare or cause to be prepared annually a full and correct statement of
the affairs of the corporation, including a balance sheet and a financial
statement of operations for the preceding fiscal year, which shall be filed at
the principal office of the corporation in the State of Maryland.
Conduct of Meeting. Meetings of the stockholders shall be presided over
by one of the following officers in the order of seniority and if present and
acting: the Chairman of the Board, the President, a Vice President or, if none
of the foregoing is in office and present and acting, by a chairman to be chosen
by the stockholders. The Secretary of the corporation or, in his absence, an
Assistant Secretary, shall act as secretary of every meeting, but if neither the
Secretary nor an Assistant Secretary is present the chairman of the meeting
shall appoint a secretary of the meeting.
Proxy Representation. Every stockholder may authorize another person or
persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether for the purposes of determining his presence at
a meeting, or whether by waiving notice of any meeting, voting or participating
at a meeting, expressing consent or dissent without a meeting or otherwise.
Every proxy shall be executed in writing by the stockholder or by his duly
authorized attorney-in-fact and filed with the Secretary of the corporation. No
unrevoked proxy shall be valid after eleven months from the date of its
execution, unless a longer time is expressly provided therein.
Inspectors of Election. The directors, in advance of any meeting, may,
but need not, appoint one or more inspectors to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not appointed, the person
presiding at the meeting
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<PAGE>
may, but need not, appoint one or more inspectors. In case any person who may be
appointed as an inspector fails to appear or act, the vacancy may be filled by
appointment made by the directors in advance of the meeting or at the meeting by
the person presiding thereat. Each inspector, if any, before entering upon the
discharge of his duties, shall take and sign an oath to execute faithfully the
duties of inspector at such meeting with strict impartiality and according to
the best of his ability. The inspectors, if any, shall determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum and the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting or any stockholder, the inspector or
inspectors, if any, shall make a report in writing of any challenge, question or
matter determined by him or them and execute a certificate of any fact found by
him or them.
Voting. Each share of stock shall entitle the holder thereof to one
vote with respect to each matter on which he is entitled to vote under the
Articles of Incorporation, except in the election of directors, at which each
said vote may be cast for as many persons as there are directors to be elected.
Except for election of directors, a majority of the votes cast at a meeting of
stockholders, duly called and at which a quorum is present, shall be sufficient
to take or authorize action upon any matter which may come before a meeting,
unless more than a majority of votes cast is required by the corporation's
Articles of Incorporation or by law. A plurality of all the votes cast at a
meeting at which a quorum is present shall be sufficient to elect a director.
Quorum. At any meeting of stockholders the presence in person or by
proxy of one-third of the shares of stock of the corporation entitled to vote
thereat shall constitute a quorum. In the absence of a quorum, the stockholders
present in person or by proxy, by majority vote and without notice other than by
announcement at the meeting, may adjourn the meeting from time to time, but not
for a period exceeding 120 days after the original record date until a quorum
shall attend.
Adjourned Meetings. A meeting of stockholders convened on the date for
which it is called (including one adjourned to achieve a quorum as above
provided) may be adjourned from time to time without further notice to a date
not more than 120 days after the original record date, and any business may be
transacted at any adjourned meeting which could have been transacted at the
meeting as originally called.
-5-
<PAGE>
6. Informal Action. Any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting if a consent in writing,
setting forth such action, is signed by all the stockholders entitled to vote on
the subject matter thereof and any other stockholders entitled to notice of a
meeting of stockholders (but not to vote thereat) have waived in writing any
rights which they may have to dissent from such action and such consent and
waiver are filed with the records of the corporation.
ARTICLE II
BOARD OF DIRECTORS
1. Functions and Definition. The business and affairs of the
corporation shall be managed under the direction of a Board of Directors. The
use of the phrase "entire board" herein refers to the total number of directors
which the corporation would have if there were no vacancies.
2. Qualifications and Number. Each director shall be a natural person
being at least eighteen years of age. A director need not be a stockholder, a
citizen of the United States or a resident of the State of Maryland. The initial
Board of Directors shall consist of three persons. Thereafter, the number of
directors constituting the entire board shall never be less than three or the
number of shareholders, whichever is less. At any regular meeting or at any
special meeting called for that purpose, a majority of the entire Board of
Directors may increase or decrease the number of directors, provided that the
number thereof shall never be less than three, nor more than twenty and further
provided that the tenure of office of a director shall not be affected by any
decrease in the number of directors.
3. Election and Term. The first Board of Directors shall consist of the
directors named in the Articles of Incorporation and shall hold office until the
first meeting of stockholders or until their successors have been elected and
qualified. Thereafter, directors who are elected at a meeting of stockholders,
and directors who are elected in the interim to fill vacancies and newly created
directorships, shall hold office until their successors have been elected and
qualified. Newly created directorships and any vacancies in the Board of
Directors, other than vacancies resulting from the removal of directors by the
stockholders, may be filled by the Board of Directors, subject to the provisions
of the Investment Company Act of 1940. Newly created directorships filled by the
Board of Directors shall be by action of a majority of the entire Board of
Directors then in office. All vacancies to be filled by the Board of Directors
may be filled by a majority of the remaining members of the Board of Directors,
although such majority is less than a quorum thereof.
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<PAGE>
4. Meetings.
Time. Meetings shall be held at such time as the Board shall fix,
except that the first meeting of a newly elected Board shall be held as soon
after its election as the directors conveniently may assemble.
Place. Meetings shall be held at such place within or without the State
of Maryland as shall be fixed by the Board.
Call. No call shall be required for regular meetings for which the time
and place have been fixed. Special meetings may be called by or at the direction
of the President or of a majority of the directors in office.
Notice or Actual or Constructive Waiver. Whenever any notice of the
time, place or purpose of any meeting of directors or any committee thereof is
required to be given under the provisions of the General Corporation Law or of
these by-laws, a waiver thereof in writing, signed by the director or committee
member entitled to such notice and filed with the records of the meeting,
whether before or after the holding thereof, or actual attendance at the meeting
shall be deemed equivalent to the giving of such notice to such director or such
committee member.
Quorum and Action. One third of the Directors then in office (but in no
event less than two Directors) shall constitute a quorum. A majority of the
directors present, whether or not a quorum is present, may adjourn a meeting to
another time and place. Except as otherwise specifically provided by the
Articles of Incorporation, the General Corporation Law, the Investment Company
Act of 1940, as amended, or these by-laws, the action of a majority of the
directors present at a meeting at which a quorum is present shall be the action
of the Board of Directors.
Chairman of the Meeting. The Chairman of the Board, if any and if
present and acting, or the President or any other director chosen by the Board,
shall preside at all meetings.
5. Removal of Directors. Any or all of the directors may be removed for
cause or without cause by the stockholders, who may elect a successor or
successors to fill any resulting vacancy or vacancies for the unexpired term of
the removed director or directors.
6. Committees. The Board of Directors may appoint from among its
members an Executive Committee and other committees composed of two or more
directors and may delegate to such committee or committees, in the intervals
between meetings of the Board of Directors, any or all of the powers of the
Board of Directors in the management of the business and affairs of the
-7-
<PAGE>
corporation to the extent permitted by law. In the absence of any member of any
such committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member.
7. Informal Action. Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if a written consent to such action is signed by all members
of the Board of Directors or any such committee, as the case may be, and such
written consent is filed with the minutes of the proceedings of the Board or any
such committee.
8. Telephone Meeting. Members of the Board of Directors or any
committee designated thereby may participate in a meeting of such Board or
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting.
ARTICLE III
OFFICERS
The corporation may have a Chairman of the Board and shall have a
President, a Secretary and a Treasurer, who shall be elected by the Board of
Directors, and may have such other officers, assistant officers and agents as
the Board of Directors shall authorize from time to time. Any two or more
offices, except those of President and Vice President, may be held by the same
person, but no person shall execute, acknowledge or verify any instrument in
more than one capacity, if such instrument is required by law to be executed,
acknowledged or verified by two or more officers.
Any officer or agent may be removed by the Board of Directors whenever,
in its judgment, the best interests of the corporation will be served thereby.
ARTICLE IV
PRINCIPAL OFFICE - RESIDENT AGENT - STOCK LEDGER
The address of the principal office of the corporation in the State of
Maryland is 11 East Chase Street, Suite 9E, c/o CSC-Lawyers Incorporating
Service Company, Baltimore, Maryland 21202. The name and address of the resident
agent in the State of Maryland
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<PAGE>
are: CSC-Lawyers Incorporating Service Company, 11 East Chase Street, Suite 9E,
Baltimore, Maryland 21202.
The corporation shall maintain, at its principal office in the State of
Maryland prescribed by the General Corporation Law or at the business office or
an agency of the corporation, an original or duplicate stock ledger containing
the names and addresses of all stockholders and the number of shares of each
class held by each stockholder. Such stock ledger may be in written form or any
other form capable of being converted into written form within a reasonable time
for visual inspection.
The corporation shall keep at said principal office in the State of
Maryland the original or a certified copy of the by-laws, including all
amendments thereto, and shall duly file thereat the annual statement of affairs
of the corporation prescribed by Section 2-313 of the General Corporation Law.
ARTICLE V
CORPORATE SEAL
The Board of Directors may provide a suitable corporate seal. The
corporate seal shall have inscribed thereon the name of the corporation and
shall be in such form and contain such other words and/or figures as the Board
of Directors shall determine or the law require.
ARTICLE VI
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject
to change, by the Board of Directors.
ARTICLE VII
CONTROL OVER BY-LAWS
The power to make, alter, amend and repeal the by-laws is vested in the
Board of Directors of the corporation.
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<PAGE>
ARTICLE VIII
INDEMNIFICATION
1. Indemnification of Directors and Officers. The corporation shall
indemnify its directors to the fullest extent that indemnification of directors
is permitted by the law. The corporation shall indemnify its officers to the
same extent as its directors and to such further extent as is consistent with
law. The corporation shall indemnify its directors and officers who while
serving as directors or officers also serve at the request of the corporation as
a director, officer, partner, trustee, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan to the same extent as its directors and, in the case of officers,
to such further extent as is consistent with law. The indemnification and other
rights provided by this Article shall continue as to a person who has ceased to
be a director or officer and shall inure to the benefit of the heirs, executors
and administrators of such a person. This Article shall not protect any such
person against any liability to the corporation or any stockholder thereof to
which such person would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office ("disabling conduct").
2. Advances. Any current or former director or officer of the
corporation seeking indemnification within the scope of this Article shall be
entitled to advances from the corporation for payment of the reasonable expenses
incurred by him in connection with the matter as to which he is seeking
indemnification in the manner and to the fullest extent permissible under the
General Corporation Law. The person seeking indemnification shall provide to the
corporation a written affirmation of his good faith belief that the standard of
conduct necessary for indemnification by the corporation has been met and a
written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at least
one of the following additional conditions shall be met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
corporation for his undertaking; (b) the corporation is insured against losses
arising by reason of the advance; or (c) a majority of a quorum of directors of
the corporation who are neither "interested persons" as defined in Section
2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the
proceeding ("disinterested non-party directors"), or independent legal counsel,
in a written opinion, shall have determined, based on a review of facts readily
available to the corporation at the time the advance is proposed to be made,
that there is reason to believe that the person seeking
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<PAGE>
indemnification will ultimately be found to be entitled to indemnification.
3. Procedure. At the request of any person claiming indemnification
under this Article, the Board of Directors shall determine, or cause to be
determined, in a manner consistent with the General Corporation Law, whether the
standards required by this Article have been met. Indemnification shall be made
only following: (a) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified was not
liable by reason of disabling conduct or (b) in the absence of such a decision,
a reasonable determination, based upon a review of the facts, that the person to
be indemnified was not liable by reason of disabling conduct by (i) the vote of
a majority of a quorum of disinterested non-party directors or (ii) an
independent legal counsel in a written opinion.
4. Indemnification of Employees and Agents. Employees and agents who
are not officers or directors of the corporation may be indemnified, and
reasonable expenses may be advanced to such employees or agents, as may be
provided by action of the Board of Directors or by contract, subject to any
limitations imposed by the Investment Company Act of 1940, as amended.
5. Other Rights. The Board of Directors may make further provision
consistent with law for indemnification and advance of expenses to directors,
officers, employees and agents by resolution, agreement or otherwise. The
indemnification provided by this Article shall not be deemed exclusive of any
other right, with respect to indemnification or otherwise, to which those
seeking indemnification may be entitled under any insurance or other agreement
or resolution of stockholders or disinterested non-party directors or otherwise.
6. Amendments. References in this Article are to the General
Corporation Law and to the Investment Company Act of 1940 as from time to time
amended. No amendment of the by-laws shall affect any right of any person under
this Article based on any event, omission or proceeding prior to the amendment.
Dated: October 17, 1994
-11-
INCORPORATED UNDER THE LAWS OF THE
State of Maryland
Number Shares
-000- -000-
Offitbank Variable Insurance Fund, Inc.
par value $.001 per share
This Certifies that _______VOID__________________is the registered holder of
________VOID________________Shares of Common Stock of the Offitbank VIF -
Emerging Markets Fund series transferable only on the books of the Corporation
by the holder hereof in person or by Attorney upon surrender of this Certificate
properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate so
be signed by its duly authorized officers and is Corporate Seal to be
hereunto affixed this ________ day of ________ A.D. 19_____
----------------- ------------------
Secretary President
SHARES $.001 par value EACH
[REVERSE SIDE OF CERTIFICATE]
The Corporation is authorized to issue two or more classes of
stock. The Corporation will furnish to any stockholder on request and without
charge a full statement of the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the stock of each class
which the Corporation is authorized to issue and, if the Corporation is
authorized to issue any prefereed or special class in series of the differences
in the relative rights and preferences between the shares of each series to the
extent they have been set and the authority of the Board of Directors to set the
relative rights and preferences of subsequent series.
For Value Received, _____ hereby sell, assign and transfer unto
-----------------------------------------------------------------------
________________________________________________Shares represented by
the within Certificate and do hereby irrevocably constitute and appoint
__________________________________________________________Attorney so
transfer the said Shares on the books of the within named Corporation
with full power of substitution in the premises.
Dated________________ 19___
In presence of
-------------------------------------
------------------------------
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACT OF
THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
INCORPORATED UNDER THE LAWS OF THE
State of Maryland
Number Shares
-000- -000-
Offitbank Variable Insurance Fund, Inc.
par value $.001 per share
This Certifies that _______VOID__________________is the registered holder of
________VOID________________Shares of Common Stock of the Offitbank VIF - High
Yield Fund series transferable only on the books of the Corporation by the
holder hereof in person or by Attorney upon surrender of this Certificate
properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate so
be signed by its duly authorized officers and is Corporate Seal to be
hereunto affixed this ________ day of ________ A.D. 19_____
----------------- ------------------
Secretary President
SHARES $.001 par value EACH
[REVERSE SIDE OF CERTIFICATE]
The Corporation is authorized to issue two or more classes of
stock. The Corporation will furnish to any stockholder on request and without
charge a full statement of the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the stock of each class
which the Corporation is authorized to issue and, if the Corporation is
authorized to issue any prefereed or special class in series of the differences
in the relative rights and preferences between the shares of each series to the
extent they have been set and the authority of the Board of Directors to set the
relative rights and preferences of subsequent series.
For Value Received, _____ hereby sell, assign and transfer unto
-----------------------------------------------------------------------
________________________________________________ Shares represented by
the within Certificate and do hereby irrevocably constitute and appoint
__________________________________________________________Attorney so
transfer the said Shares on the books of the within named Corporation
with full power of substitution in the premises.
Dated________________ 19___
In presence of
-------------------------------------
------------------------------
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACT OF
THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
INCORPORATED UNDER THE LAWS OF THE
State of Maryland
Number Shares
-000- -000-
Offitbank Variable Insurance Fund, Inc.
par value $.001 per share
This Certifies that _______VOID__________________is the registered holder of
________VOID________________Shares of Common Stock of the Offitbank VIF -
Investment Grade Global Debt Fund series transferable only on the books of the
Corporation by the holder hereof in person or by Attorney upon surrender of this
Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate so
be signed by its duly authorized officers and is Corporate Seal to be
hereunto affixed this ________ day of ________ A.D. 19_____
----------------- ------------------
Secretary President
SHARES $.001 par value EACH
[REVERSE SIDE OF CERTIFICATE]
The Corporation is authorized to issue two or more classes of
stock. The Corporation will furnish to any stockholder on request and without
charge a full statement of the designation and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the stock of each class
which the Corporation is authorized to issue and, if the Corporation is
authorized to issue any prefereed or special class in series of the differences
in the relative rights and preferences between the shares of each series to the
extent they have been set and the authority of the Board of Directors to set the
relative rights and preferences of subsequent series.
For Value Received, _____ hereby sell, assign and transfer unto
-----------------------------------------------------------------------
________________________________________________ Shares represented by
the within Certificate and do hereby irrevocably constitute and appoint
__________________________________________________________Attorney so
transfer the said Shares on the books of the within named Corporation
with full power of substitution in the premises.
Dated________________ 19___
In presence of
-------------------------------------
------------------------------
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACT OF
THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
AND
OFFITBANK
AGREEMENT made this 1st day of March, 1995, by and between The
OFFITBANK Variable Insurance Fund, Inc., a Maryland corporation which may issue
one or more series of shares (hereinafter the "Company"), and OFFITBANK, a New
York chartered trust company (hereinafter the "Adviser").
1. STRUCTURE OF AGREEMENT. The Company is entering into this Agreement
on behalf of the Company's series listed on Schedule A attached hereto
(individually, a "Fund" and collectively, the "Funds") severally and not
jointly. The responsibilities and benefits set forth in this Agreement shall
refer to each Fund severally and not jointly. No individual Fund shall have any
responsibility for any obligation with respect to any other Fund arising out of
this Agreement. Without otherwise limiting the generality of the foregoing,
(a) any breach of any term of this Agreement regarding the
Company with respect to any one Fund shall not create a
right or obligation with respect to any other Fund;
(b) under no circumstances shall the Adviser have the right to
set off claims relating to a Fund by applying property of
any other Fund; and
(c) the business and contractual relationships created by this
Agreement, consideration for entering into this Agreement,
and the consequences of such relationship and consideration
relate solely to the Company and the particular Fund to
which such relationship and consideration applies.
2. DELIVERY OF DOCUMENTS. The Company has delivered to the Adviser
copies of each of the following documents and will deliver to it all future
amendments and supplements thereto, if any:
(a) The Company's Articles of Incorporation (the "Articles");
(b) The By-Laws of the Company;
(c) Resolutions of the Board of Directors of the Company
authorizing the execution and delivery of this Agreement;
(d) The Company's Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), and the Investment
Company Act of 1940, as amended (the "1940 Act"), on Form
N-1A as filed with the Securities and Exchange
<PAGE>
Commission (the "Commission") on July 20, 1994 and all
subsequent amendments thereto relating to the Funds
(the "Registration Statement");
(e) Notification of Registration of the Company under the 1940
Act on Form N-8A as filed with the Commission; and
(f) Prospectuses and Statements of Additional Information of the
Funds (collectively, the "Prospectuses").
3. INVESTMENT ADVISORY SERVICES. The Company hereby appoints the
Adviser, and the Adviser hereby undertakes, to act as investment adviser of the
Funds and, subject to the supervision of the Company's Board of Directors, to
(a) make investment strategy decisions for the Funds, (b) manage the investing
and reinvesting of the Fund's assets, (c) place purchase and sale orders on
behalf of the Funds and (d) provide continuous supervision of each Fund's
investment portfolio. The Adviser shall, subject to review by the Board of
Directors, furnish such other services as the Adviser shall from time to time
determine to be necessary or useful to perform its obligations under this
Agreement.
As manager of the Funds' assets, the Adviser shall make investments for
the Funds' account in accordance with the investment objectives and limitations
set forth in the Articles, the Prospectuses, the 1940 Act, the provisions of the
Internal Revenue Code of 1986, as amended, including Subchapters L and M,
relating to variable contracts and regulated investment companies, respectively,
applicable banking laws and regulations, and policy decisions adopted by the
Company's Board of Directors from time to time. The Adviser shall advise the
Company's officers and Board of Directors, at such times as the Company's Board
of Directors may specify, of investments made for the Funds' accounts and shall,
when requested by the Company's officers or Board of Directors, supply the
reasons for making such investments.
The Adviser is authorized on behalf of the Company, from time to time
when deemed to be in the best interests of the Company and to the extent
permitted by applicable law, to purchase and/or sell securities in which the
Adviser or any of its affiliates underwrites, deals in and/or makes a market
and/or may perform or seek to perform investment banking services for issuers of
such securities. The Adviser is further authorized, to the extent permitted by
applicable law, to select brokers for the execution of trades for the Company,
which broker may be an affiliate of the Adviser, provided that the best
competitive execution price is obtained at the time of the trade execution.
It is understood and agreed that the Adviser may from time to time
employ or associate with such other entities or persons as the Adviser believes
appropriate to assist in the performance of this Agreement with respect to a
particular Fund or Funds (each a "Sub-Adviser") and that any such Sub-Adviser
shall have all the rights and powers of the Adviser set forth in this Agreement;
provided that a Fund shall not pay any additional compensation for any
Sub-Adviser and the Adviser shall be as fully responsible to the Company for the
acts and omissions of the Sub-Adviser as it is for its own acts and omissions;
and provided further that the retention of any Sub-Adviser shall be approved in
advance by (i) the Board of Directors of the Company and (ii) the shareholders
of the relevant Fund if required under any applicable provisions of the 1940
Act. The Adviser will review, monitor and report to the Company's Board of
Directors regarding the performance and investment procedures of any
Sub-Adviser. In the event that the services of any Sub-Adviser are terminated,
the Adviser may provide investment advisory services pursuant to this Agreement
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<PAGE>
to the Fund without a Sub-Adviser and without further shareholder approval, to
the extent consistent with the 1940 Act. A Sub-Adviser may be an affiliate of
the Adviser.
4. EXPENSES.
(a) The Adviser shall, at its expense, provide the Funds
with office space, furnishings and equipment and
personnel required by it to perform the services to be
provided by the Adviser pursuant to this Agreement.
(b) Except as provided in subparagraph (a), the Company
shall be responsible for all of the Funds' expenses and
liabilities, including, but not limited to, taxes;
interest; fees (including fees paid to its directors
who are not affiliated with the Adviser or any of its
affiliates); fees payable to the Securities and
Exchange Commission; state securities qualification
fees; costs of preparing and printing Prospectuses for
regulatory purposes and for distribution to existing
shareholders; advisory and administration fees; charges
of the custodian and transfer agent; insurance
premiums; auditing and legal expenses; costs of
shareholders' reports and shareholders' meetings; any
extraordinary expenses; and brokerage fees and
commissions, if any, in connection with the purchase or
sale of portfolio securities.
5. COMPENSATION. In consideration of the services to be rendered by the
Adviser under this Agreement, the Company shall pay the Adviser monthly fees on
the first Business Day (as defined in the Prospectuses) of each month based upon
the average daily net assets of each Fund during the preceding month (as
determined on the days and at the time set forth in the Prospectuses for
determining net asset value per share) at the annual rate set forth opposite the
Fund's name on Schedule A attached hereto. If the fees payable to the Adviser
pursuant to this paragraph begin to accrue before the end of any month or if
this Agreement terminates before the end of any month, the fees for the period
from such date to the end of such month or from the beginning of such month to
the date of termination, as the case may be, shall be prorated according to the
proportion which such period bears to the full month in which such effectiveness
or termination occurs. For purposes of calculating each such monthly fee, the
value of the Funds' net assets shall be computed in the manner specified in the
Prospectuses and the Articles for the computation of the value of the Funds' net
assets in connection with the determination of the net asset value of shares of
the Funds' capital stock.
If the aggregate expenses incurred by, or allocated to, each Fund in
any fiscal year shall exceed the lowest expense limitation, if applicable to
such Fund, imposed by state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Adviser shall
reimburse such Fund for such excess. The Adviser's reimbursement obligation will
be limited to the amount of fees it received under this agreement during the
period in which such expense limitations were exceeded, unless otherwise
required by applicable laws or regulations. With respect to portions of a fiscal
year in which this Agreement shall be in effect, the foregoing limitations shall
be prorated according to the proportion which that portion of the fiscal year
bears to the full fiscal year. Any payments required to be made by this
paragraph shall be made once a year promptly after the end of the Company's
fiscal year.
In consideration of the Adviser's undertaking to render the services
described in this Agreement, the Company agrees that the Adviser shall not be
liable under this Agreement for any error of judgment or mistake of law or for
any loss suffered by the Company in connection with the performance of this
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<PAGE>
Agreement, provided that nothing in this Agreement shall be deemed to protect or
purport to protect the Investment Adviser against any liability to the Company
or its stockholders to which the Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of the
Adviser's duties under this Agreement or by reason of the Adviser's reckless
disregard of its obligations and duties hereunder.
6. NON-EXCLUSIVE SERVICES. Except to the extent necessary to perform
the Investment Adviser's obligations under this Agreement, nothing herein shall
be deemed to limit or restrict the right of the Adviser, or any affiliate of the
Adviser, including any employee of the Adviser, to engage in any other business
or to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other corporation, firm, individual or association.
7. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall
become effective on the date hereof, provided that it shall have been approved
by a majority of the outstanding voting securities of each Fund, in accordance
with the requirements of the 1940 Act, or such later date as may be agreed by
the parties following such shareholder approval.
(a) Subject to prior termination as provided in
sub-paragraph (d) of this paragraph, this Agreement
shall continue in force until February 28, 1997 and
indefinitely thereafter, but only so long as the
continuance after such date shall be specifically
approved at least annually by vote of the Directors
of the Company or by vote of a majority of the
outstanding voting securities of each Fund.
(b) This Agreement may be modified by mutual consent,
such consent on the part of the Company to be
authorized by vote of a majority of the outstanding
voting securities of each Fund.
(c) In addition to the requirements of sub-paragraphs (a)
and (b) of this paragraph, the terms of any
continuance or modification of this Agreement must
have been approved by the vote of a majority of those
Directors of the Company who are not parties to this
Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of
voting on such approval.
(d) Either party hereto may, at any time on sixty (60)
days prior written notice to the other, terminate
this Agreement, without payment of any penalty, by
action of its Trustees or Board of Directors, as the
case may be, or by action of its authorized officers
or, with respect to a Fund, by vote of a majority of
the outstanding voting securities of that Fund. This
Agreement may remain in effect with respect to a Fund
even if it has been terminated in accordance with
this paragraph with respect to the other Funds. This
Agreement shall terminate automatically in the event
of its assignment.
8. USE OF NAME. Upon expiration or earlier termination of this
Agreement, the Company shall, if reference to "OFFITBANK" is made in the
corporate name of the Company or in the names of the Funds and if the Adviser
requests in writing, as promptly as practicable change its corporate name and
the names of the Funds so as to eliminate all reference to "OFFITBANK", and
thereafter the Company and the Funds
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<PAGE>
shall cease transacting business in any corporate name using the words
"OFFITBANK" or any other reference to the Adviser or "OFFITBANK". The foregoing
rights of the Adviser and obligations of the Company shall not deprive the
Adviser, or any affiliate thereof which has "OFFITBANK" in its name, of, but
shall be in addition to, any other rights or remedies to which the Adviser and
any such affiliate may be entitled in law or equity by reason of any breach of
this Agreement by the Company, and the failure or omission of the Adviser to
request a change of the Company's or a Fund's name or a cessation of the use of
the name of "OFFITBANK" as described in this paragraph shall not under any
circumstances be deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any subsequent breach.
9. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Maryland.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, and their
respective seals to be hereunto affixed, all as of the date written above.
OFFITBANK VARIABLE INSURANCE FUND, INC. OFFITBANK
By: /s/Wallace Mathai-Davis By: /s/ Morris W. Offit
----------------------- -------------------
Wallace Mathai-Davis Morris W. Offit
Secretary Chairman
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<PAGE>
SCHEDULE A
OFFITBANK VIF FUND: FEE:
HIGH YIELD FUND .85% (first $200 million of net assets)
.75% (thereafter)
INVESTMENT GRADE GLOBAL DEBT FUND .80% (first $200 million of net assets)
.70% (thereafter)
EMERGING MARKETS FUND .90% (first $200 million of net assets)
.80% (thereafter)
LATIN AMERICA TOTAL RETURN FUND 1.00%
TOTAL RETURN FUND .80%
GLOBAL CONVERTIBLE FUND .90%
U.S. GOVERNMENT SECURITIES FUND .40%
U.S. SMALL CAP FUND 1.00%
Revised: July 17, 1996
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PARTICIPATION AGREEMENT
Among
OFFITBANK VARIABLE INSURANCE FUNDS, INC.,
OFFIT FUNDS DISTRIBUTOR, INC.
OFFITBANK
C.M. LIFE INSURANCE COMPANY
CONNECTICUT MUTUAL LIFE INSURANCE COMPANY
CONNECTICUT MUTUAL FINANCIAL SERVICES, L.L.C.
THIS AGREEMENT, made and entered into as of the 30th day of November,
1995 by and among CONNECTICUT MUTUAL LIFE INSURANCE COMPANY ("CML"), C.M. LIFE
INSURANCE COMPANY, ("C.M. Life"), each a Connecticut corporation, on its own
behalf and on behalf of certain validly existing segregated asset separate
accounts, together with any other segregated asset separate account established
by either Company and which the parties may agree to add to this Agreement from
time to time, (referred to herein as the "Separate Accounts"). CONNECTICUT
MUTUAL FINANCIAL SERVICES, L.L.C., (hereinafter referred to as "CMFS") a limited
liability company organized under the laws of the state of Connecticut,
OFFITBANK VARIABLE INSURANCE FUNDS, INC., a corporation organized under the laws
of the State of Maryland (hereinafter the "Fund") OFFIT FUNDS DISTRIBUTOR, INC.,
(hereinafter the "Underwriter"), a corporation organized under the laws of the
State of Delaware, and OFFITBANK, a trust company organized under the laws of
the State of New York.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by the C.M. Life and/or CML, as well as other affiliated and
unaffiliated life insurance companies, (collectively the "Participating
Insurance Companies"); and
WHEREAS, the common stock in the Fund is divided into several series of
shares, each designated and referred throughout as a "Portfolio" and
representing an interest in a particular managed portfolio of securities and
other assets; and
<PAGE>
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (hereinafter the
"1940 Act") and its shares are registered under the Securities Act of 1933, as
amended (hereinafter the "1933 Act"); and
WHEREAS, OFFITBANK, is a Trust company organized under the banking laws
of the State of New York, (hereinafter the "Adviser"); and
WHEREAS, CML and C.M. Life (collectively the "Companies") will be the
issuers of certain variable annuity insurance contracts and variable life
insurance policies (collectively, the "Contracts") as set forth in Schedule B
hereto, as the Parties hereto may amend from time to time, which Contracts, if
required by applicable law, will be registered under the 1933 Act; and
WHEREAS, each separate account of the Companies listed on Schedule A
attached hereto (collectively the "Separate Accounts") is duly organized under
applicable state insurance law and authorized by resolutions of the respective
Boards of Directors of the Companies to set aside and invest assets attributable
to the aforesaid Contracts; and
WHEREAS, the parties to this agreement acknowledge that Contracts using
segregated asset separate accounts may be developed in the future, and such
segregated asset accounts may by agreement of the parties hereto, also purchase
shares of the Fund; and
WHEREAS, the Companies have registered or will register the Separate
Accounts as unit investment trusts under the 1940 Act to the extent required by
law; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission (hereinafter "SEC") under the Securities
Exchange Act of 1934, as amended (hereinafter the "1934 Act"), and is a member
in good standing of the National Association of Securities Dealers, Inc.
(hereinafter "NASD"); and
WHEREAS, CMFS is also registered as a broker-dealer under applicable
state and federal laws, is a member in good standing of the NASD, and it will
enter into principal underwriting agreements with the Companies to distribute
the Contracts; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Companies intend to purchase shares of the Portfolios on behalf
of the Separate Accounts to fund the Contracts, and the Underwriter is
authorized to sell such shares to unit investment trusts such as each Separate
Account at net asset value; and
WHEREAS, the Contracts may also make available as funding vehicles
thereunder shares of certain other management investment companies shares under
the Contracts (the "CML Funds"), in addition to the Portfolios.
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<PAGE>
NOW, THEREFORE, in consideration of their mutual promises, the Parties
hereto agree as follows:
ARTICLE I. Sale of Fund Shares
1.1 The Underwriter agrees to sell to the Companies on behalf of the
Separate Accounts those shares of the Portfolios which a Separate Account
orders, executing such orders on a daily basis at the net asset value next
computed after receipt by the Fund or its designee of the order for the shares
of the particular Portfolios. For purposes of this Section 1.1, the Company so
acting shall be the designee of the Fund for receipt of such orders from the
Separate Account and receipt by such designee shall constitute receipt by the
Fund; provided that the Fund receives notice of such order on the next following
Business Day. . "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the SEC. The Company shall use its best efforts
to communicate such orders to the Fund by 11:00 a.m. Eastern Standard Time.
1.2 The Fund agrees to make shares of the Portfolios available
indefinitely for purchase at the applicable net asset value per share by the
Companies and their Separate Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the SEC and the Fund shall calculate
such net asset value on each day on which the New York Stock Exchange is open
for trading. Notwithstanding the foregoing, the Board of Directors of the Fund
(hereinafter the "Board") may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Board, acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3 The Parties hereto may agree, from time to time, to add other
Portfolios to provide additional funding media for the Contracts, or to delete,
combine, or modify existing Portfolios, by amending Schedule C hereto. Upon such
amendment to Schedule C, any applicable reference herein to a Portfolio, the
Fund, or its shares shall include a reference to any such additional Portfolio.
The Companies agree that if a decision is made to add a Portfolio, it will take
all actions required under state and federal insurance and securities laws in
connection with making the Portfolios available. These actions may include, but
are not limited to:
(i) amending an existing registration statement filed with the
SEC for a Contract;
(ii) obtaining the approval of applicable state insurance
regulatory authorities; and
(iii) notifying and/or obtaining Contract Owner approval.
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<PAGE>
1.4 For a period of three years from the date hereof, the Company, the
Fund, and the Underwriter agree that shares of the Fund will not be sold to any
other similarly situated, segregated asset separate account for the purpose of
providing an investment vehicle for variable annuity Contracts with features
that are substantially similar to those of the Contracts. The parties to this
agreement understand, however, that the Fund may sell shares to variable life
insurance separate accounts, including the Separate Account(s) listed on
Schedule A.
1.5 The Fund agrees to redeem for cash, at the Companies' request, any
full or fractional shares of the Fund held by a Company, executing such requests
on a daily basis at the net asset value next computed after receipt by the Fund
or its designee of the request for redemption. The Fund will use its best
efforts to pay and transmit the redemption proceeds the next business day after
redemption. For purposes of this Section 1.5 the Companies shall be the designee
of the Fund for receipt of requests for redemption from a Separate Account and
receipt by such designee shall constitute receipt by the Fund; provided that the
Fund receives notice of such request from a Company on the next following
Business Day.
1.6 The Companies agree to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund available to a
Separate Account and in accordance with the provisions of such prospectus.
Amounts received under the Contracts may also be invested in other investment
companies available to a Separate Account.
1.7 Payments with respect to purchase and redemption orders for each
Portfolio shall be netted and each Company or the Fund, as applicable, shall
transmit one net payment per Portfolio. In the event of net purchases, each
Company shall pay for Fund shares in federal funds transmitted by wire on the
next business day after an order to purchase Fund shares is made in accordance
with the provisions of Section 1.1 hereof. In the event of net redemptions, the
Fund shall pay the redemption proceeds in federal funds transmitted by wire on
the next business day after an order to redeem Fund shares is made in accordance
with the provisions of Section 1.5 hereof. Each Company may elect to receive a
credit for shares of any Portfolio in lieu of receiving net redemption proceeds.
Upon receipt by a Company or the Fund of federal funds, such funds shall cease
to be the responsibility of the Party transmitting such funds and shall become
the responsibility of the Party receiving such funds.
1.8 Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to a Company or to any Separate
Account. Shares ordered from the Fund will be recorded in an appropriate title
for the Separate Account or an appropriate sub-account of a Separate Account.
1.9 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Companies of any income dividends or
capital gain distributions payable on the Fund's shares. The Companies, both
individually and on behalf of its respective Separate Account(s), hereby elect
to receive all such income dividends and capital gain distributions as are
payable on the Portfolio shares in additional shares of the particular
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<PAGE>
Portfolio receiving such income dividend or distribution. The Companies each
reserve the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash. The Fund shall notify the
Companies of the number of shares so issued as payment of such dividends and
distributions.
1.10 The Fund shall make the net asset value per share for each
Portfolio available to the Companies on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and the Fund shall
use its best efforts to both calculate and make such net asset value per share
available by 4:15 p.m. Eastern Time. If the Fund provides incorrect share net
asset value information, a Company, either on behalf of itself or on behalf of a
Separate Account(s), shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct net asset value per share (and, if
and to the extent necessary, a Company shall make adjustments to the number of
units credited and/or unit values for the Contracts for the periods affected).
Any error in the calculation or reporting of net asset value per share, dividend
or capital gains information greater than or equal to $.0l per share shall be
reported immediately upon discovery to a Company. Such errors shall be corrected
as soon as is reasonably practical. Any error of a lesser amount shall be
corrected in the next business day's net asset value per share.
ARTICLE II. Representations and Warranties
2.1 The Companies each represent and warrant that the Contracts are, or
will be, registered under the 1933 Act to the extent required thereby and that
the Contracts will be issued in compliance in all material respects with all
applicable federal and state laws and regulations. The Companies further
represent and warrant that each is an insurance company duly organized and in
good standing under applicable law and that it has (or will have) legally and
validly established each Separate Account thereof as a segregated asset account
under applicable state insurance law and has registered or, prior to any
issuance or sale of the Contracts, will register each Separate Account as a unit
investment trust to the extent required by and in accordance with the provisions
of the 1940 Act to serve as a segregated investment account for the Contracts.
In addition, each Company represents and warrants that its Contracts are
currently or will be treated as endowment, annuity or life insurance contracts,
under applicable provisions of the Internal Revenue Code of 1986, as amended,
(the "Code") and that it will make every effort to maintain such treatment and
that it will notify the Fund and the Underwriter immediately upon having a
reasonable basis for believing that the Contracts have ceased to be so treated
or that they might not be so treated in the future. Moreover, each Company
represents and warrants that each Separate Account is a "segregated asset
account" and that interests in each Separate Account are offered exclusively
through the purchase of or transfer into a "variable contract," within the
meaning of such terms under Section 817 of the Code and the regulations
thereunder. The Company will use its every effort to continue to meet such
definitional requirements, and it will notify the Fund and the Underwriter
immediately upon having a reasonable basis for believing that such requirements
have ceased to be met or that they might not be met in the future.
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<PAGE>
2.2 The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act to the extent required by
law on the form prescribed by such Act (hereinafter referred to as the
"Registration Statement"). The Fund further represents and warrants that its
shares are duly authorized for issuance and are sold in compliance with all
applicable federal and state laws, and that the Fund is and shall remain
registered under the 1940 Act. The Fund shall amend the Registration Statement
for its shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares. The Fund shall
register and qualify the shares for sale in accordance with the laws of the
various states if and to the extent required by law.
2.3 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter warrants that it is lawfully organized and validly existing under
the laws of the State of Delaware. The Underwriter further represents that it
will sell and distribute Fund shares in accordance with all applicable state and
federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
2.4 CMFS represents and warrants that it is a member in good standing
of the NASD and is registered as a broker-dealer with the SEC. CMFS warrants
that it is lawfully organized and validly existing under the laws State of
Connecticut. CMFS further represents that it will sell and distribute the
Contracts in accordance with all other applicable state and federal securities
laws, including without limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.5 The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that its organization and
operations will comply in all material respects with the 1940 Act.
2.6 The Adviser represents and warrants that it is and shall remain
duly registered in all material respects under all applicable federal and state
securities and banking laws and regulations and that it shall perform its
obligations for the Fund in compliance in all material respects with any
applicable state and federal securities and banking laws and regulations.
2.7 The Fund and Underwriter each represents and warrants that all of
their respective Directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid Bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company acceptable to the Fund.
2.8 The Fund and the Underwriter each represent and warrant that each
will notify the Companies of any federal, state or other regulatory inquiries,
disciplinary actions, stop
-6-
<PAGE>
orders, or customer complaints that could impact sales of either the Fund shares
or the Contracts. The Companies and CMFS each agree that they shall likewise
notify the Underwriter of any such actions, inquiries, stop orders or complaints
that could impact sales of either the Fund shares or the Contracts.
2.9 The Fund represents that it has obtained all necessary or customary
orders of exemption or approval from the SEC to permit sales of Fund shares to
the Separate Accounts, and that it agrees to obtain any exemption or approval as
may be required in the future.
2.10 The Companies each represent that they have (or will) obtained all
necessary and customary orders of exemptions or approval from the SEC to permit
sales of the Contracts and each agrees to obtain any exemption or approval as
may be required in the future.
2.11 The Fund represents and warrants that all financial statements
contained in the Registration Statement for the Fund or to be furnished in
connection with amendments thereto, or annual or semiannual reports to
shareholders present or will present fairly the financial position of the Fund
on the dates indicated, and that such financial statements have been or will be
prepared in conformity with generally accepted accounting principles.
2.12 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. To the extent that it decides
to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to
have a Board or Directors, a majority of whom are not interested persons of the
Fund, formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
ARTICLE III. Prospectuses and Proxy Statements: Voting
3.1 Each Company shall prepare and provide the Fund or its designee
with a copy of the current prospectus (and any supplement thereto) for each
Contract, either in "camera ready" form or on a computer diskette in a form
ready for immediate use, and such other assistance as may be reasonably
necessary in order for the Fund once each year (or more frequently if the
prospectus for the Contracts is supplemented or amended) to have the prospectus
for the Contracts and the prospectus for the Fund's shares printed together in
one document and delivered in a timely manner to existing or prospective
Contract owners. The expense of such printing and distributing shall be borne by
the Fund or its Adviser, as appropriate, in accordance with applicable law.
3.2 The Fund's prospectus shall state that the Statement of Additional
Information ("SAI") for the Fund is available from the Underwriter (or in the
Fund's discretion, the Prospectus shall state that the SAI is available from the
Fund).
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<PAGE>
3.3 Each Company shall provide the Fund or its designee with copies of
the SAI (including any supplement thereto), voting instruction forms, and other
communications to the Contract owners with respect to the Contracts either in
"camera ready" form or on a computer diskette in a form ready for immediate use,
and such other assistance as may be reasonably necessary in order for the Fund
to print and distribute such materials in a timely manner to existing or
prospective Contract owners, as the case may be. Such materials may be, but are
not required to be printed together with the SAI, proxy materials, and other
communications or materials of the Fund. The expense of such printing and
distributing shall be borne by the Fund or its Adviser, as appropriate, in
accordance with applicable law.
3.4 If and to the extent required by law the Companies each agree that
they will:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with timely instructions
received from Contract owners; and
(iii) vote Fund shares for which: (a) no instructions have been
received, and (b) Fund shares not attributable to a
particular Contract owner, in the same proportion as shares
of such Portfolio for which instructions have been received,
so long as and to the extent that the SEC continues to
interpret the 1940 Act to require pass-through voting
privileges for variable contract owners. Each Company
reserves the right to vote Fund shares held in any Separate
Account in its own right, to the extent permitted by law.
The Companies shall be responsible for insuring that each of their Separate
Accounts participating in the Fund calculates voting privileges in a manner
consistent with other Participating Insurance Companies.
3.5 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the SEC's interpretation of the requirements of Section 16(a)
with respect to periodic elections of Directors and with whatever rules the SEC
may promulgate with respect thereto.
3.6 As set forth in Section 7.1 it is understood and agreed that,
except for information regarding the Companies, the Separate Accounts, CMFS, or
the Contracts provided by them to either the Fund or Underwriter, the Companies
are not responsible for the content of either the Fund's prospectus or its
statement of additional information. As set forth in Section 8.2 and 8.3, it is
also understood and agreed that, except with respect to information regarding
the Fund, Adviser or the Portfolios, neither the Fund, nor the Adviser,
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nor the Underwriter are responsible for the content of the prospectus or SAI for
the Contracts.
ARTICLE IV. Sales Material and Communications
with Contract Owners
4.1 The Companies shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser or the Underwriter is named, at least
fifteen Business Days prior to its use (or such different period as the parties
hereto may, from time to time, agree to in writing). No such material shall be
used if the Fund or its designee reasonably objects to such use within fifteen
Business Days after receipt of such material, or such different period as the
parties hereto may, from time to time, agree to in writing. All such materials
will, if necessary, be filed with the NASD or any applicable state regulatory
authority. Such materials will be presented in a form consistent with NASD rules
and applicable state insurance or security advertising laws and regulations.
4.2 The Companies and CMFS shall not give any information or make any
representations or statements on behalf of the Fund, or concerning the Fund, the
Adviser, or the Underwriter in connection with the sale of the Contracts other
than the information or representations contained in the Registration Statement
or prospectus for the Fund shares, as such Registration Statement and prospectus
may be amended or supplemented from time to time, or in reports or proxy
statements for the Fund, or in sales literature or other promotional material
approved by the Fund, the Adviser or the Underwriter or designee thereof, except
with the permission of the Fund or the Underwriter or the designee of either.
4.3 The Fund, Underwriter, or their respective designee(s) shall
furnish, or shall cause to be furnished, to each Company or its designee, each
piece of sales literature or other promotional material in which the Company
and/or its Separate Account(s) and/or the Contract(s), is named at least fifteen
Business Days prior to its use, or such different period as the parties hereto
may agree upon from time to time in writing. No such material shall be used if
either Company or its designee reasonably objects to such use within fifteen
Business Days after receipt of such material, or such different period as the
parties hereto may agree upon from time to time in writing. All such materials
will, if necessary, be filed with the NASD or any applicable state regulatory
authority. Such materials will be presented in a form consistent with NASD rules
and applicable state insurance or security advertising laws and regulations.
4.4 The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Companies or concerning the Companies, the
Separate Accounts, the CML Funds or the Contracts other than the information or
representations contained in the then current registration statement(s) or
prospectus(es) for the Contracts or the CML Funds, as such registration
statement(s) and prospectus(es) may be amended or
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supplemented from time to time, or in published reports for the Separate
Accounts which are in the public domain or approved by the Companies for
distribution to Contract Owners (or offerees), or in sales literature or other
promotional material approved by the Companies or their designee, except with
the permission of the Companies.
4.5 The Fund will provide to the Companies at least one complete copy
of all registration statements, annual and semiannual reports, prospectuses,
SAIs, reports, proxy statements, sales literature or other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities. If any such filings directly discuss the Companies, the
Separate Accounts, the Contract, or the CML Funds, the Fund shall obtain the
approval, which approval shall not be unreasonably withheld, of such party
concerning the statements relating to such party prior to filing or distributing
such document(s).
4.6 The Fund shall provide the Companies with copies of its annual and
semiannual reports to shareholders as required by Section 30 of the 1940 Act, in
a timely manner, and: (i) for annual reports, within a reasonable time after the
end of each calendar year but prior to the time such reports are required to be
mailed to shareholders by applicable law or regulation; and (ii) for semiannual
reports, within a reasonable time after the end of the second fiscal quarter of
each year. The Fund and the Company understand that the annual and semiannual
reports may be consolidated with any Separate Account annual or semi-annual
report to Contract Owners and printed in one booklet and that such booklet will
be forwarded to Contract Owners and the SEC as required by Section 30 of the
1940 Act.
4.7 The Companies will provide to the Fund at least one complete copy
of all registration statements, prospectuses, SAIS, reports, solicitations for
voting instructions, sales literature or other promotional materials,
applications for exemptions, requests for no action letters, and all amendments
to any of the above, that relate to the Contracts or a Separate Account,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities. If any filing directly discusses the Fund, the Adviser
or the Underwriter, the Company or its designee shall obtain the approval of
such party concerning the statements relating to such party prior to filing or
distributing such documents.
4.8 CMFS will, at all times, conduct its distribution activities in
compliance with applicable state and federal rules and regulations concerning
the distribution of variable life and annuity contracts. CMFS will require the
same of other distributors with whom it enters into agreements to sell the
Contracts.
4.9 For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion
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pictures, or other public media), sales literature (i.e., any written
communication distributed or made generally available to customers or the
public, including brochures, circulars, research reports, market letters, form
letters, seminar texts, reprints or excerpts of any other advertisement, sales
literature, or published article), so called "broker-dealer only" material and
registration statements, prospectuses, proxy materials, SAIs, annual and
semiannual reports and any other shareholder reports or any other communications
with the public that are designed to solicit sales of the Contracts.
4.10 Each Party will provide the other Parties hereto with as much
advance notice as is reasonably practicable and, if possible, with at least
ninety (90) days advance notice, of any material change affecting that Party
(including, but not limited to, any material change in its registration
statement or prospectus and in the case of the Fund, any proxy solicitation) and
shall consult with the other Parties in order to implement any such change in an
orderly manner, recognizing the expenses of changes and attempting to minimize
such expenses by implementing them whenever possible in conjunction with regular
annual updates of the prospectuses for the Contracts and the Fund.
ARTICLE V. Fees and Expenses
5.1 The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement, except that if the Fund or any Portfolio, if
permitted to do so, adopts and implements a plan pursuant to Rule 12b-1 to
finance distribution expenses, then the Underwriter may make payments to the
Companies or to CMFS if and in amounts agreed to by the Underwriter in writing
and such payments will be made out of existing fees otherwise payable to the
Underwriter or other resources available to the Underwriter. Although no such
payments are currently contemplated, if such payments are made in the future,
such payments shall not be made directly by the Fund.
5.2 Except as otherwise specifically provided herein, each Party will
bear all expenses incident to its performance under this agreement. The Fund
shall see to it that all its shares are registered and authorized for issuance
in accordance with applicable federal law and in accordance with applicable
state laws (if required) prior to their sale.
5.3 The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, printing and distributing the prospectus to the Contract
owners, setting in type and distributing the proxy materials and annual and
semiannual reports to shareholders, the preparation of all statements and
notices required by any federal or state law, and all taxes on the issuance or
transfer of the Fund's shares.
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ARTICLE VI. Diversification and Qualification
6.1 The Fund and the Adviser represent and warrant that the Fund will
at all times sell its shares and invest its assets in such a manner as to enable
the Contracts to be treated as variable contracts under the Code, and the
regulations issued thereunder. Without limiting the scope of the foregoing, the
Fund and Underwriter represent and warrant that the Fund and each Portfolio
thereof will at all times use their best efforts to comply with Section 817(h)
of the Code and Treasury Regulation 1.817-5, as amended from time to time, and
any Treasury interpretations thereof, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications or successor provisions to such section or
regulation. In the event that any Portfolio is not so diversified, the Fund will
notify the Companies and will use reasonable efforts to adequately diversify the
Portfolio so as to achieve compliance within the grace period afforded by
Treasury Regulation 1.817-5.
6.2 No shares of any series or portfolio of the Fund will be sold to
the general public.
6.3 The Fund and the Adviser represent and warrant that the Fund and
each Portfolio are or will be qualified as a Regulated Investment Company under
Subchapter M of the Code, and that best efforts will be used to maintain such
qualification (under Subchapter M or any successor or similar provisions) as
long as shares of any Portfolio are held by the Separate Account.
6.4 The Fund or the Adviser will notify the Companies immediately upon
having a reasonable basis for believing that the Fund or any Portfolio has
ceased to comply with the aforesaid Section 817(h) diversification or Subchapter
M qualification requirements or might not so comply in the future.
6.5 Without in any way limiting or restricting any other remedies
available to the Companies, the Adviser will pay all costs associated with or
arising out of any failure, or any anticipated or reasonably foreseeable
failure, of the Fund or any Portfolio to comply with Sections 6.1 or 6.3 hereof,
including all reasonable costs associated with correcting or responding to any
such failure; such costs may include, but are not limited to, the costs involved
in creating, organizing, and registering a new investment company as a funding
medium for the Contracts and/or the costs of obtaining whatever regulatory
authorizations are required to substitute shares of another investment company
for those of the failed Portfolio (including but not limited to an order
pursuant to Section 26(b) of the 1940 Act), such costs are to include, but are
not limited to, fees and expenses of legal counsel and other advisors to the
Companies and any federal income taxes or tax penalties or amounts paid in
settlement incurred by the Company in connection with any such failure or
anticipated or reasonably foreseeable failure.
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<PAGE>
6.6 The Companies agree that if the Internal Revenue Service ("IRS")
asserts in writing in connection with any governmental audit or review of the
Companies or, to either of the Companies' knowledge, of any Contract owner, that
any Portfolio has failed to comply with the diversification requirements of
Section 817(h) of the Code or the Companies otherwise become aware of any facts
that could give rise to any claim against the Fund or its affiliates as a result
of such a failure or alleged failure: (i) the Companies shall promptly notify
the Fund of such assertion or potential claim; (ii) the Companies shall consult
with the Fund as to how to minimize any liability that may arise as a result of
such failure or alleged failure, (iii) the Companies shall use its best efforts
to minimize any liability of the Fund or its affiliates resulting from such
failure, including, without limitation, demonstrating, pursuant to Treasury
Regulations Section 1.8175(a), to the Commissioner of the IRS that such failure
was inadvertent; (iv) the Companies, to the fullest extent practical, shall
permit the Fund, its affiliates and their legal and accounting advisors to
participate in any conferences, settlements, discussions or other administrative
judicial proceedings or contests (including judicial appeals thereof) with the
IRS, any Contract Owner or any other claimant regarding any claims that could
give rise to liability to the Fund or its affiliates as a result of such a
failure or alleged failure; and (v) any written materials to be submitted by the
Companies to the IRS, any Contract Owner or any other claimant in connection
with any of the foregoing proceedings or contests (including, without
limitation, any such materials to be submitted to the IRS pursuant to Treasury
Regulations Section 1.817-5(a)(2), (a) shall be provided by the Company to the
Fund (together with any supporting information or analysis) at least five (5)
business days prior to the day on which such proposed materials are to be
submitted, and (b) shall not be submitted by the Companies to any such person
without the express written consent of a Fund officer and an Advisor officer
which shall not be unreasonably withheld, (vi) the Companies shall provide the
Fund or its affiliates and their accounting and legal advisors with such
cooperation as the Fund shall reasonably request (including without limitation,
by permitting the Fund and its accounting and legal advisors to review the
relevant books and records of the Companies) in order to facilitate review by
the Fund or its advisors of any written submissions provided to it pursuant to
the preceding clause or its assessment of the validity or amount of any claim
against its arising from such a failure of alleged failure; (vii) the Companies
shall not with respect to any claim of the IRS or any Contract owner that would
give rise to a claim against the Fund or its affiliates (a) compromise or settle
any claim, (b) accept any adjustment on audit, or (c) forego any allowable
administrative or judicial appeals, without the express written consent of the
Fund or its affiliates, which shall not be unreasonably withheld, provided that
no Company shall be required to appeal any adverse judicial decision unless the
Fund or its affiliates shall have provided an opinion of independent counsel to
the effect that a reasonable basis exists for taking such appeal; and (viii) the
Fund and its affiliates shall have no liability as a result of such failure or
alleged failure if either Company fails to comply with any of the foregoing
clauses (i) through (vii), and such failure is determined by a panel of
arbitrator(s) acting under the Commercial Arbitration Rules of the American
Arbitration Association to have materially contributed to the liability. Should
the Fund or any of its affiliates refuse to give its written consent to any
compromise or settlement of any claim or liability hereunder, each Company may,
in it discretion authorize the Fund or its affiliates to act in the name of the
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Company in, and to control the conduct of, such conferences, discussions,
proceedings, contests or appeals and all administrative or judicial appeals
thereof, and in that event the Fund or its affiliates shall bear the fees and
expenses associated with the conduct of the proceedings that it is so authorized
to control; provided further that in no event shall any liability to the Company
exceed the amount which would have otherwise attached had the proposed
settlement or compromise been accepted by the Fund.
ARTICLE VII. Potential Material Conflicts
7.1 The Board of Directors of the Fund (the "Board") will monitor for
the existence of any material irreconcilable conflict between the interests of
the Contract Owners of all Separate Accounts investing in the Fund. An
irreconcilable material conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority; (b) a change in
applicable federal or state insurance, tax, or securities laws or regulations,
or a public ruling, private letter ruling, no-action or interpretative letter,
or any similar action by insurance, tax, or securities regulatory authorities;
(c) and administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Portfolio are being managed; (e) a
difference in voting instructions given by variable annuity contract and
variable life insurance contract owners; or (f) a decision by a Participating
Insurance Company to disregard the voting instructions of Contract Owners. The
Board shall promptly inform each Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2 Each Company will immediately report any potential or existing
conflicts of which it is aware to the Board and, in addition, provide the Board
with a quarterly written statement that they know of no conflicts. Each Company
will assist the Board in carrying out its responsibilities under the Shared
Funding Exemptive Order, by providing the Board with all information reasonably
necessary for the Board to consider any issues so raised. This includes, but is
not limited to, an obligation by each Company to inform the Board whenever
Contract Owner voting instructions are disregarded. Each Company agrees to carry
out these responsibilities with a view only to the interest of Contract Owners.
7.3 If it is determined by a majority of the Board, or a majority of
its disinterested Directors, that a material irreconcilable conflict exists,
each Company and any other Participating Insurance Companies whose Contract
Owners are also affected shall, at their expense and to the extent reasonably
practicable (as determined by a majority of the disinterested Directors), take
whatever steps are necessary to remedy or eliminate the material irreconcilable
conflict, up to and including (a) withdrawing the assets allocable to some or
all of the Separate Accounts from the Fund or any Portfolio and reinvesting such
assets in a different investment medium, including (but not limited to) another
Portfolio of the Fund, or submitting the question whether such segregation
should be implemented to a vote of all affected Contract Owners and, as
appropriate, segregating the assets of any appropriate group (e.g., life
insurance Contract Owners or variable Contract Owners of any
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<PAGE>
Participating Insurance Companies) that votes in favor of such segregation, or
offering to any of the affected contract owners the option of making such a
change; and (b) establishing a new registered management investment company or
managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision
by a Company to disregard Contract Owner voting instructions, and that decision
represents a minority position or would preclude a majority vote, each Company
may be required, at the Fund's election, to withdraw the affected Separate
Account's investments in the Fund and terminate this agreement with respect to
such Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. No
penalty or charge will be imposed as a result of such withdrawal. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six (6) month period the Underwriter and the Fund shall continue to
accept and implement orders by each Company for the purchase (and redemption) of
shares of the Fund.
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to a Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Separate Account's investment in the Fund and terminate this Agreement with
respect to such Separate Account within six (6) months after the Board informs
the Company in writing that it has determined that such decision has created a
material irreconcilable conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the foregoing six (6) month period, the
Underwriter and the Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.6 For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested Directors of the Board shall determine whether any
proposed action by a Company adequately remedies any material irreconcilable
conflict, but in no event will the Fund or its affiliates be required to
establish a new funding medium for the Contracts. No Company shall be required
by Section 7.3 to establish a new funding medium for the Contracts if an offer
to do so has been declined by a vote of a majority of Contract owners materially
affected by the material irreconcilable conflict. In the event that the Board
determines that any proposed action does not adequately remedy any material
irreconcilable conflict, then each Company with withdraw the Separate Account's
investment in the Fund and terminate this Agreement within six (6) months after
the Board informs the Company in writing of the foregoing determination;
provided, however, that such withdrawal and termination shall be limited to the
extent required by any such material irreconcilable conflict as determined by a
majority of the disinterested members of the Board.
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Each Company agrees that any remedial action taken by it in resolving
any material irreconcilable conflict will be carried out at its expense and with
a view only to the interest of Contract owners.
7.7 Each Company shall at least annually submit to the Board such
reports, materials or data as the Board may reasonably request that so it may
carry out the obligations imposed on it by the Shared Funding Exemptive Order,
and said reports, materials and data shall be submitted at any reasonable time
deemed appropriate by the Board.
7.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then: (a) the Fund or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable; and (b) Sections 3.4, 3.5, 7.1 through 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. Indemnification
8.1 Indemnification By The Companies
8.1(a) The Companies agree to Indemnify and hold harmless the Fund, the
Adviser, the Underwriter, and each Officer and Director of the Board and
Directors and officers of the Adviser and the Underwriter and each person, if
any, who controls the Adviser or the Underwriter within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of either of the Companies)
or litigation (including reasonable legal and other related expenses), to which
the Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in any
Registration Statement or prospectus for the Contracts or contained in
the Contracts or sales literature for the Contracts prepared by or on
behalf of either of the Company (or any amendment or supplement to any
of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
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shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the Companies by
or on behalf of the Underwriter or the Fund for use in any
Registration Statement or prospectus for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature of the Fund not
supplied by the Companies, CMFS, or persons under its control) or
wrongful conduct of the Companies, CMFS, or persons under the control
of either Company or CMFS, with respect to the sale or distribution of
the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement,
prospectus, or sales literature of the Fund or any amendment thereof
or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading if such a statement or
omission was made in reliance upon information famished to the Fund by
or on behalf of the Companies; or
(iv) arise as a result of any material failure by the Companies
or CMFS to provide the services and furnish the materials under the
terms of this agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Companies or CMFS in this
agreement or arise out of or result from any other material breach of
this agreement by the Companies or CMFS,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b) The Companies shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this agreement or to
the Fund or to the Underwriter or to the Adviser, whichever may be applicable.
8.1(c) The Companies shall not be liable under this indemnification
provision with respect to claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Companies in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service
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on any designated agent), but failure to notify the Companies of any such claim
shall not relieve the Companies from any liability which each may have to the
Indemnified Party against whom such action is brought otherwise than on account
of this indemnification provision. In case any such action is brought against
the Indemnified Parties, the Companies shall be entitled to participate, at
their own expense, in the defense of such action. The Companies also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Companies to such party of the
Companies' election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d) The Indemnified Parties will promptly notify the Companies of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund shares or the Contracts or the operation
of the Fund.
8.2 Indemnification by the Underwriter
8.2(a) The Underwriter agrees to indemnify and hold harmless each
Company and CMFS and each of its Directors and officers (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including reasonable
legal and other related expenses) to which the Indemnified Parties may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts, and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statements of any material fact contained in the
Registration Statement or prospectus or in sales literature prepared
by or on behalf of the Fund (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not
misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Underwriter or Fund by or
on behalf of the Companies for use in the Registration Statement or
prospectus, or sales literature for the Fund (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in any
Registration Statement, prospectus or
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sales literature for the Contracts not supplied by the Underwriter,
Fund, or Adviser or persons under its control) or wrongful conduct of
the Underwriter or persons under its control, with respect to the sale
or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement,
prospectus, or sales literature covering the Contracts and/or the
Separate Account, or any amendment thereof or supplement thereto, or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or omission was
made in reliance upon information furnished to the Company by or on
behalf of the Fund or Underwriter; or
(iv) arise as a result of any material failure by the Underwriter
to provide the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
agreement or arise out of or result from any other material breach of
this agreement by the Underwriter; as limited by and in accordance
with the provisions of Sections 8.2(b), 8.2(c), and 8.2(d) hereof.
8.2(b) The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this agreement or to
the Company or a Separate Account, whichever is applicable.
8.2(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
in connection with this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
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<PAGE>
8.2(d) In no event shall the Underwriter be liable under the
indemnification provisions contained in this agreement to any individual or
entity, including without limitation, the Companies, CMFS, or any Contract
Owner, with respect to any losses, claims, damages, liabilities or expenses that
arise out of or result from: (i) the failure by the Fund or any Portfolio to
quality or maintain its qualification as a regulated investment company under
Subchapter M of the Code; or (ii) the failure by the Fund or any Portfolio to
comply with the diversification requirements of Section 817(h) of the Code.
8.2(e) The Companies agree to promptly notify the Underwriter (or cause
CMFS to notify the Underwriter), and to cause the Fund to be notified, of the
commencement of any litigation or proceedings against it or any of its
indemnified parties in connection with the issuance or sale of the Contracts or
the operation of the Separate Accounts.
8.3 Indemnification By the Fund
8.3(a) The Fund agrees to indemnify and hold harmless each Company
(including CMFS), and each of its directors and officers, and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Fund) or litigation (including
reasonable legal and other related expenses) to which the Indemnified Parties
may become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements result from the gross negligence, bad faith or
willful misconduct of the Board or any member thereof, are related to the
operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this agreement;
or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this agreement or
arise out of or result from any other material breach of this
agreement by the Fund, as limited by and in accordance with the
provisions of Sections 8.3(b), 8.3(e) and 8.3(d) hereof, as limited by
and in accordance with the provisions of sections 8.3(b), 8.3(c) and
8.3(d) hereof.
8.3(b) The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this agreement.
8.3(c) The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal
-20-
<PAGE>
process giving information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party shall have received
notice of such service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve the Fund from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
in connection with this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Fund will be entitled to
participate, at its own expense, in the defense thereof. The Fund also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Fund to such party of the Fund's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Fund will
not be liable to such party under this agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d) In no event shall the Fund be liable under the indemnification
provisions contained in this agreement to any individual or entity, including
without limitation, the Companies or any Contract Owner, with respect to any
losses, claims, damages, liabilities or expenses that arise out of or result
from: (i) the failure by the Fund or any Portfolio to qualify or maintain its
qualification as a regulated investment company under Subchapter M of the Code;
or (ii) the failure by the Fund or any Portfolio to comply with the
diversification requirements of Section 817(h) of the Code.
8.3(e) The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this agreement, the issuance
or sale of the Contracts, with respect to the operation of the Separate
Accounts, or the sale or acquisition of shares of the Fund.
8.4 Indemnification by the Adviser
8.4(a) The Adviser agrees to indemnify and hold harmless each Company,
and each director and officer of each Company and each person, if any, who
controls each Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.4)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Adviser) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof), or settlements
are related to the sale or acquisition of the Fund's shares and:
(i) arise as a result of any failure by the Fund or any Portfolio of
the Fund to qualify or maintain its qualification as a regulated
investment company under Subchapter M of the Code or to comply
with the diversification requirements of Section 817(h) of the
Code; or
-21-
<PAGE>
(ii) arise out of or result from any material breach of any
representation or warranty made by the Adviser in this agreement
or arise out of or result from any other material breach of this
agreement by the Adviser, as limited by and in accordance with
the provisions of Sections 8.4(b), 8.4(c), and 8.4(d) hereof.
8.4(b) The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance by that Indemnified Party of its duties or by reason of such
Indemnified Party's reckless disregard of its obligations and duties under this
Agreement or to the Adviser, the Fund, the Underwriter, or each Account,
whichever may be applicable.
8.4(c) The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the action shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser shall be entitled to participate,
at its own expense, in the defense thereof. The Adviser also shall be entitled
to assume the defense thereof (which shall include, without limitation, the
conduct of any ruling request and closing agreement or other settlement
proceeding with the IRS), with counsel approved by the Indemnified Party named
in this action, which approval shall not be unreasonably withheld. After notice
from the Adviser to such Indemnified Party of the Adviser's election to assume
the defense thereof, the Indemnified Party shall cooperate fully with the
Adviser and shall bear the fees and expenses of any additional counsel retained
by it, and the Adviser shall not be liable to such Indemnified Party under this
agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof, other
than reasonable costs of investigation.
8.4(d) In no event shall the Adviser be liable under the
indemnification provisions contained in this agreement to any individual or
entity, including without limitation, the Companies or any Contract owner, with
respect to any losses, claims, damages, liabilities or expenses that arise out
of or result from: (i) a breach of any representation, warranty, and/or covenant
made by a Company hereunder or by any Participating Insurance Company under an
agreement containing substantially similar representations, warranties and
covenants; (ii) the failure by a Company or any Participating Insurance Company
to maintain its segregated asset account (which invests in any Portfolio) as a
legally and validly established segregated asset account under applicable state
law and as a duly registered unit investment trust under the provision of the
1940 Act (unless exempt therefrom); or (iii) the failure by a Company or any
Participating Insurance Company to maintain its variable
-22-
<PAGE>
annuity and/or variable life insurance contracts (with respect to which any
Portfolio serves as an underlying funding vehicle), as life insurance, endowment
or annuity contracts under applicable provisions of the Code.
8.4(e) Each Company agrees to notify promptly the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with this agreement, the issuance or sale of Fund
shares or the Contracts, or the operation of any Account.
ARTICLE IX. Applicable Law
9.1 This agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of Maryland.
9.2 This agreement shall be subject, to the extent applicable, to the
provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and
rulings thereunder, including such exemptions from those statutes, rules and
regulations as the SEC grant and the terms hereof shall be interpreted and
construed in accordance therewith.
9.3 The Fund and the Companies acknowledge that the Separate Accounts
and the Fund may be subject to laws and regulations that restrict the investment
activities of Separate Accounts. Should either of the Companies become aware of
any such law or regulation, in particular those laws and regulations concerning
insurance laws or rules, the Companies shall notify the Fund of any such
investment restriction, and the Fund agrees that it will cooperate with the
Companies to assist them in taking reasonable measures to comply with any such
rule or regulation.
ARTICLE X. Termination
10.1 This agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by six (6) months advance
written notice delivered to the other parties; or
(b) termination by either of the Companies by written notice to the
Fund, the Adviser, and the Underwriter with respect to any Portfolio
based upon the particular Company's determination that shares of such
Portfolio are not reasonably available to meet the requirements of the
Contracts; or
(c) termination by either of the Companies by written notice to the
Fund, the Adviser, and the Underwriter with respect to any Portfolio
in the event that any of the Portfolio's shares are not registered,
issued or sold in accordance with applicable state
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<PAGE>
and/or federal law or such law precludes the use of such shares as the
underlying investment media of the Contracts issued or to be issued by
the Companies; or
(d) termination by the Companies by written notice to the Fund, the
Adviser, and the Underwriter with respect to any Portfolio in the
event that such Portfolio ceases to qualify as a Regulated Investment
Company under Subchapter M of the Code or under any successor or
similar provision, or if the Companies reasonably believe that the
Fund may fail to so qualify; or
(e) termination by the Companies by written notice to the Fund, the
Adviser, and the Underwriter with respect to any Portfolio in the
event that such Portfolio fails to meet the diversification
requirements specified in Article VI hereof; or
(f) termination by either the Fund, the Adviser, or the Underwriter by
written notice to the Companies, if any of the Fund, the Adviser, or
the Underwriter respectively, shall determine, in its sole judgment
reasonably exercised in good faith, that either Company and/or its
affiliated companies has suffered a material adverse change in its
business, operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse publicity and
that such change or publicity will have a material adverse effect on
the ability of either Company to perform its obligations related to
the Contracts; or
(g) termination by the Companies by written notice to the Fund, the
Adviser, and the Underwriter, if any of the Companies shall determine,
in its sole judgment reasonably exercised in good faith, that either
the Fund, the Advisor, or the Underwriter has suffered a material
adverse change in its business, operations, financial condition or
prospects since the date of this agreement or is the subject of
material adverse publicity and that such change or publicity will have
a material adverse effect on the ability of the Fund, the Adviser, or
Underwriter to perform its obligations related to the Fund's shares.
10.2 Notwithstanding any termination of this agreement, the Fund and
the Underwriter shall at the option of the Companies, continue to make available
additional shares of the Fund pursuant to the terms and conditions of this
agreement, for all Contracts in effect on the effective date of termination of
this agreement (hereinafter referred to as "Existing Contracts"). Specifically,
wtihout limitation, the owners the Existing Contracts shall be permitted to
reallocate investments in the the Fund, redeem investments in the Fund and/or
invest in the Fund upon the making of additional purchase payments under the
Existing Contracts. The Parties hereto agree that this Section 10.2 shall not
apply to any termination under Article VII and the effect of such Article VII
terminations shall be governed by Article VII hereof.
10.3 Except (a) as necessary to implement Contract owner-initiated
transactions, (b) as required by state insurance laws or regulations, (c) as
required pursuant to the
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<PAGE>
conditions of any SEC order governing mixed and shared funding, or (d) with
respect to any Portfolio as to which this Agreement has terminated pursuant to
Section 9.1 hereof, neither of the Companies shall: (i) redeem Shares
attributable to Contracts (as opposed to Shares attributable to the Company's
assets held in each Separate Account), or (ii) prevent Contract owners from
allocating payments to or transferring amounts from a Portfolio that was
otherwise available under the Contracts, until six (6) months after the Company
shall have notified the Fund of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
cerified mail to the other party at the address of such party set forth below or
at such other address as such party may from time to time specify in writing to
the other party.
If to the Fund or the Adviser:
OFFITBANK
520 Madison Avenue
New York, NY 10022-4203
Attention: Stephen B. Wells
If to the Companies, the Separte Accounts and/or CMFS:
C.M. Life Insurance Company
140 Garden Street
Hartford, Connecticut 06154
Attention: General Counsel
If to the Underwriter
OFFIT Funds Distributors, Inc.
c/o The OFFITBANK Variable Insurance Fund
237 Park Avenue, Suite 910
New York, New York 10017
Attention: President
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<PAGE>
ARTICLE XII. Miscellaneous
12.1 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.2 The captions in this agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.3 This agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.4 If any provision of this agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the agreement
shall not be affected thereby.
12.5 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, state insurance regulators, and designee of the California Insurance
Commission) and shall permit such authorities reasonable access to its books and
records in connection with any investigation or inquiry relating to this
agreement or the transactions contemplated hereby.
12.6 The rights, remedies and obligations contained in this agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.7 Neither the Underwriter nor the Fund nor the Companies nor CMFS or
any of their respective agents will knowingly induce or cause, or attempt to
induce or cause either directly or indirectly, any Contract owner to lapse,
terminate, surrender, or exchange a Contract or to discontinue making payments
thereunder.
12.8 This agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Underwriter upon prior written notice to the
Companies, may assign this agreement or any rights or obligations hereunder to
any affiliate of or company under common control with the Underwriter, if such
assignee is duly licensed and registered to perform the obligations of the
Underwriter under this agreement, (b) CMFS may, upon prior written notice to the
Fund, assign this agreement or any rights or obligations hereunder to any
affiliate or company under common control with CMFS, if such assignee is duly
licensed and registered to perform the obligations of CMFS under this Agreement,
(c) the parties
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<PAGE>
hereto agree that this Agreement shall survive and the current rights and
obligations of the parties shall continue, notwithstanding a merger between
Massachusetts Mutual Life Insurance Company and Connecticut Mutual Life
Insurance Company.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as the date specified
below.
CONNECTICUT MUTUAL LIFE INSURANCE CO.,
ON BEHALF OF ITSELF AND ITS SEPARATE
ACCOUNT
By: /s/ David E. Sams, Jr.
----------------------
David E. Sams, Jr.
Title: President and Chief Executive Officer
Date: 1/31/96
C.M. LIFE INSURANCE COMPANY,
ON BEHALF OF ITSELF AND ITS SEPARATE
ACCOUNTS
By: /s/ David E. Sams, Jr.
----------------------
David E. Sams, Jr.
Title: President
Date: 1/31/96
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<PAGE>
OFFITBANK VARIABLE INSURANCE FUND, INC.
By: /s/ Gordon Forrester
------------------------
Gordon Forrester
Title: Assistant Treasurer
Date: 1/30/96
OFFIT FUNDS DISTRIBUTOR, INC.
By: /s/ Gordon Forrester
------------------------
Gordon Forrester
Title: Vice President
Date: 1/31/96
OFFITBANK
By: /s/ Stephen Brent Wells
---------------------------
Stephen Brent Wells
Title: Managing Director
Date: 1/30/96
CONNECTICUT MUTUAL FINANCIAL
SERVICES, L.L.C.
By: /s/ Maureen Ford
--------------------
Maureen Ford
Title: Vice President
Date: 1/31/96
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<PAGE>
SCHEDULE A - Separate Accounts
C.M./OFFITBANK Variable Annuity Separate Account
CML/OFFITBANK Variable Annuity Separate Account
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<PAGE>
SCHEDULE B
Variable Annuity Contracts
CM/OFFITBANK Variable Annuity Contract
CM/OFFITBANK Variable Annuity Contract (NY)
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<PAGE>
SCHEDULE C
Portfolios offered by the Fund
(1.) OFFITBANK VIF -- HIGH YIELD
(2.) OFFITBANK VIF -- Investment Grade Global Debt Fund
(3.) OFFITBANK VIF -- Emerging Markets Fund
(4.) OFFITBANK VIF -- Total Return Fund
(5.) OFFITBANK VIF -- Global Convertible Fund
-31-
PARTICIPATION AGREEMENT
Among
OFFITBANK VARIABLE INSURANCE FUND, INC.
OFFIT FUNDS DISTRIBUTOR, INC.
OFFITBANK
and
SECURITY EQUITY LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this 2nd day of February,
1996 by and among SECURITY EQUITY LIFE INSURANCE COMPANY (hereinafter the
"Company"), a New York corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedules A-1 and A-2
hereto as such schedules may be amended from time to time (each such account
hereinafter referred to as an "Account" and collectively as the "Accounts"), and
the OFFITBANK VARIABLE INSURANCE FUND, INC., a corporation organized under the
laws of the State of Maryland (hereinafter the "Fund"), OFFIT FUNDS DISTRIBUTOR,
INC., a Massachusetts corporation (hereinafter the "Underwriter"), and
OFFITBANK, a trust company organized under the banking laws of the State of New
York (hereinafter the Adviser).
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the common stock of the Fund is divided into several series of
shares, each designated a Portfolio and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission (hereinafter the SEC), dated February 15, 1995 (File No.
812-9306), granting Participating Insurance Companies and variable annuity and
variable life insurance separate accounts exemptions from the provisions of
sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as
amended (hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
<PAGE>
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is a trust company duly organized under the
banking laws of the State of New York; and
WHEREAS, the Company has developed or intends to develop certain
variable life insurance policies (hereinafter the "Contracts"), set forth in
Schedule B-1 hereto, for sale to "accredited investors," as that term is defined
in Regulation D, promulgated under the 1933 Act (hereinafter "Regulation D"), or
other investors permitted by Regulation D; and
WHEREAS, the Company has developed or intends to develop certain other
Contracts shown on Schedule B-2 interests under which have been or will be
registered under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedules A-1 and A-2 hereto, to
set aside and invest assets attributable to one or more variable life insurance
contracts; and
WHEREAS, each Account listed in Schedule A-2 will be registered under
the 1940 Act as a unit investment trust; and
WHEREAS, each Account listed in Schedule A-1 will be excepted from the
definition of an investment company under the 1940 Act; and
WHEREAS, the Company does not intend to make a "public offering" of the
Contracts listed in Schedule B-1, as that term is defined in Section 4(2) of the
1933 Act and Regulation D; and
WHEREAS, the Underwriter is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc.(hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Contracts and the Underwriter
is authorized to sell such shares to separate accounts of insurance companies,
such as each Account, at net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund, the Adviser, and the Underwriter agree as follows:
- 2 -
<PAGE>
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each Account
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such order by 4:15 p.m. Eastern time on any Business
Day. "Business Day" shall mean any day on which the New York Stock Exchange is
open for trading and on which the Fund calculates its net asset value pursuant
to the rules of the SEC.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on each Business Day and the Fund shall use reasonable efforts to
calculate such net asset value on each Business Day. Notwithstanding the
foregoing, the Board of Directors of the Fund (hereinafter the "Board") may
refuse to sell shares of any Portfolio to any person, or suspend, or terminate
the offering of shares of any Portfolio if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of the
Board acting in good faith and in light of their fiduciary duties under federal
and any applicable state laws, necessary in the best interests of the
shareholders of such Portfolio.
1.3. Notwithstanding Sections 1.1 and 1.2, neither the Underwriter nor
the Fund shall be required to sell shares of any Portfolio to any Account that
is registered or required to be registered unless and until the principal
underwriter for the Contracts issued through such Account enters into a mutually
satisfactory agreement with the Underwriter and the Fund setting forth, among
other things, the duties and responsibilities of such principal underwriter with
respect to the distribution of the Contracts. Such agreement may be in the form
of an amendment to this Agreement.
1.4. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public.
1.5. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Sections 1.4, 2.5, 3.4, 3.5, 5.1, and Article VII of
this Agreement is in effect to govern such sales.
1.6. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.6, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption by 4:15 p.m. Eastern time on any Business Day.
- 3 -
<PAGE>
1.7. The Company agrees to purchase and redeem the shares of selected
Portfolios offered by the then-current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the Contracts with the form number(s) which are listed on
Schedules B-1 and B-2 attached hereto and incorporated herein by this reference,
as such Schedules B-1 and B-2 may be amended from time to time hereafter by
mutual written agreement of all the parties hereto, shall be invested in the
Portfolios currently available as listed in Schedule B-3, in such other
Portfolios advised by the Adviser as may be mutually agreed to in writing by the
parties hereto, or in the Company's general account, provided that such amounts
may also be invested in an investment company other than the Fund if (a) such
other investment company, or series thereof, has investment objectives or
policies that are substantially different from the investment objectives and
policies of all the Portfolios of the Fund; or (b) the Company gives the Fund
and the Underwriter forty-five (45) days written notice of its intention to make
such other investment company available as a funding vehicle for the Contracts;
or (c) such other investment company was available as a funding vehicle for the
Contracts prior to the date of this Agreement and the Company so informs the
Fund and Underwriter prior to their signing this Agreement; or (d) the Fund or
Underwriter consents to the use of such other investment company. With respect
to those Accounts listed on Schedule A-2, the Company agrees that it shall not
substitute shares of the Portfolios of the Fund in the Accounts unless the SEC
shall have approved the substitution, if required pursuant to Section 26 of the
1940 Act.
1.8. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Sections 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.9. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.10. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income dividends or
capital gain distributions payable on the Fund's shares. The Company on behalf
of itself and each Account hereby elects to receive all such income dividends
and capital gain distributions as are payable on the Portfolio shares in
additional shares of that Portfolio. The Company reserves the right to revoke
this election and to receive all such income dividends and capital gain
distributions in cash. The Fund shall notify the Company of the number of shares
so issued as payment of such dividends and distributions.
1.11. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Eastern time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Eastern time.
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1.12. The Fund will provide as much advance notice as is reasonably
practicable of any material change affecting the Fund (including, but not
limited to, any material change in its registration statement or prospectus and
any proxy solicitations) and will take reasonable steps to assist the Company in
implementing the change in an orderly manner, taking into account the expense to
the Company.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts listed in
Schedule B-2 are or will be registered under the 1933 Act, and Contracts listed
on Schedule B-1 are exempt from registration under the 1933 Act; that the
Accounts listed in Schedule A- 1 are and will remain excluded from the
definition of an investment company under the 1940 Act, and that it will
immediately notify the Underwriter and the Fund upon having a reasonable basis
for believing that the Accounts listed in Schedule A-1 have ceased to be so
exempt or that they might cease to be exempt in the future; that each Account,
or subdivision thereof, listed in Schedule A-1 will invest exclusively in shares
of one Portfolio; that the Accounts listed in Schedule A-2 will be registered as
unit investment trusts in accordance with the provisions of the 1940 Act; that
the Contracts will be issued and sold in compliance in all material respects
with all applicable federal and state laws and that the sale of the Contracts
shall comply in all material respects with state insurance suitability
requirements. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law and
that it has legally and validly established each Account, prior to any issuance
or sale of any Contract funded by that Account, as a segregated asset account
under Section 4240 of the Insurance Laws of the State of New York and has
registered or, prior to any issuance or sale of the Contracts, will register to
the extent required by law, each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts. The Company further represents and
warrants that each Account is a segregated asset account and that interests in
each Account are offered exclusively through the purchase of or transfer into a
variable contract, within the meaning of such terms under Section 817 of the
Internal Revenue Code of 1986, as amended (the Code) and the regulations
thereunder. The Company will use every effort to continue to meet such
definitional requirements, and it will notify the Fund and the Underwriter
immediately upon having a reasonable basis for believing that such requirements
have ceased to be met or that they might not be met in the future.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act to the extent required by
that Act, duly authorized for issuance in compliance with the laws of the State
of Maryland and sold in compliance with all applicable federal and state
securities laws and that the Fund is and shall remain registered under the 1940
Act to the extent required by that Act. The Fund shall amend the registration
statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
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2.3. The Fund represents that it is currently qualified as a regulated
investment company under Subchapter M of the Code and that it will make every
effort to maintain such qualification (under Subchapter M or any successor or
similar provision) and that it will notify the Company immediately upon having a
reasonable basis for believing that it has ceased to so qualify or that it might
not so qualify in the future.
2.4. The Company represents that the Contracts are currently, or will
be, treated as life insurance contracts under applicable provisions of the Code
and that it will make every effort to maintain such treatment and that it will
notify the Fund and the Underwriter immediately upon having a reasonable basis
for believing that the Contracts have ceased to be so treated or that they might
not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. To the extent that it decides
to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to
have a board of directors, a majority of whom are not interested persons of the
Fund, formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees, and
expenses are and shall at all times remain in compliance with the laws of the
State of New York and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of New York to the extent required to perform this
Agreement.
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of New York and all applicable state
and federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.9. The Adviser represents and warrants that it is and shall remain
duly registered in all material respects under all applicable federal and state
securities laws and that the Adviser shall perform its obligations for the Fund
in compliance in all material respects with the laws of the State of New York
and any applicable state and federal securities laws.
2.10. The Fund, the Adviser, and Underwriter represent and warrant that
all of their respective directors, officers, employees, and other
individuals/entities dealing with
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the money or securities of the Fund are and shall continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Fund in an amount not less than the minimal coverage as required currently by
Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from
time to time. The aforesaid bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other entities dealing with the
money or securities of the Fund are and shall continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Fund, in an amount not less than 5 million dollars ($5,000,000). The aforesaid
bond shall include coverage for larceny and embezzlement and shall be issued by
a reputable bonding company.
ARTICLE III. Prospectuses and Proxy Statements: Voting
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus and any amendments
thereof or supplements thereto as the Company may reasonably request. If
requested by the Company in lieu thereof, the Fund shall provide such
documentation (including a final copy of any prospectus as set in type at the
Fund's expense) and other assistance as is reasonably necessary in order for the
Company once each year (or more frequently if the prospectus for the Fund is
amended) to have the disclosure document for the Contracts and the Fund's
prospectus printed together in one document and delivered to existing and
prospective Contract owners (such printing and delivery to be at the Company's
expense).
It is understood and agreed that the Company is not responsible for the
content of the prospectus or statement of additional information (the SAI) for
the Fund, except to the extent that statements in the Fund's prospectus or SAI
reflect information given to the Fund by the Company. It is also understood and
agreed that, except with respect to information provided to the Company by the
Fund, the Underwriter, or the Adviser, the Fund, the Adviser, and the
Underwriter shall not be responsible for the content of the prospectus, SAI, or
disclosure statement for the Contracts.
3.2. The Fund's prospectus shall state that the SAI for the Fund is
available from the Underwriter (or in the Fund's discretion, the prospectus
shall state that such SAI is available from the Fund), and the Underwriter (or
the Fund as permitted by law), at its expense, shall print and provide such SAI
free of charge to the Company and to any owner of a Contract or prospective
owner who requests such SAI. The Fund will not be responsible for any
distribution expenses.
3.3. The Fund, at its expense, shall provide the Company with
copies of its proxy material, reports to shareholders, and other communications
to shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
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3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with timely
instructions received from Contract owners; and
(iii) vote Fund shares for which (a) no timely instructions
have been received, and (b) Fund shares not
attributable to Contract owners, in the same proportion
as Fund shares of such portfolio for which timely
instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Fund shares held in any Account in its own right, to
the extent permitted by law. The Company shall be responsible for assuring that
each of its Separate Accounts participating in the Fund calculates voting
privileges in a manner consistent with other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the SEC's interpretation of the requirements of Section 16(a)
with respect to periodic elections of directors and with whatever rules the
Commission may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser or the Underwriter is named, at least
fifteen (15) Business Days prior to its use or such shorter period to which the
parties hereto may agree from time to time. No such material shall be used if
the Fund or its designee object to such use within fifteen (15) Business Days
after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund, by
the Adviser, by the Underwriter or their respective designees, except with the
prior written permission of the Fund, the Adviser, the Underwriter or their
respective designees.
4.3. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in any disclosure document for the Contracts, as such disclosure
document may be amended or supplemented
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<PAGE>
from time to time, or in published reports for each Account which are in the
public domain or approved by the Company for distribution to Contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the prior written consent of the Company. In addition, all
written materials prepared by the Fund or the Underwriter that contain
information about or otherwise refer to the Contracts, the Accounts, or the
Company shall be submitted by telecopy or overnight delivery to the Company for
its prior written approval at least five (5) Business Days in advance of the
proposed date of first use of such materials; provided, that the Company shall
be deemed to have given its approval of such materials if it does not object to
the use of such materials with the five (5) day period.
4.4. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, SAI, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above, that
relate to the Fund or its shares, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
4.5. The Company will provide to the Fund at least one complete copy of
any registration statements, prospectuses, SAI, private placement memoranda or
any disclosure documents, reports, solicitations for voting instructions, sales
literature and other promotional materials, applications for exemptions,
requests for no action letters, and all amendments to any of the above, that
relate to the Contracts or the Accounts, contemporaneously with the filing of
such document with the SEC or other regulatory authorities.
4.6. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees (including dealer only materials),
and registration statements, prospectuses, SAI, shareholder reports, proxy
materials, and any disclosure documents.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this Agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or
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<PAGE>
other resources available to the Underwriter. No such payments shall be made
directly by the Fund. Currently, no such payments are contemplated.
5.2. Except as otherwise provided herein, all expenses incident to
performance by the Fund under this Agreement shall be paid by the Fund. The Fund
shall see to it that all its shares are registered and authorized for issuance
in accordance with applicable federal law and, if and to the extent deemed
advisable by the Fund or the Underwriter, in accordance with applicable state
laws prior to their sale. The Fund shall bear the expenses for the cost of
registration and qualification of the Fund's shares, preparation and filing of
the Fund's prospectus and registration statement, proxy materials and reports,
setting the prospectus in type, setting in type and printing the proxy materials
and reports to shareholders (including the costs of printing a prospectus that
constitutes an annual report), the preparation of all statements and notices
required by any federal or state law, and all taxes on the issuance or transfer
of the Fund's shares.
5.3. Except as otherwise provided herein, all expenses incident to
performance by the Company under this Agreement, including without limitation,
any fees and expenses required in connection with establishing the Accounts,
shall be borne by the Company.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts in such
a manner as to ensure that each Portfolio will meet the diversification
requirements of Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for life insurance contracts and
any amendments or other modifications to such Section or Regulations.
6.2. The Company agrees that if the Internal Revenue Service (the IRS)
asserts in writing in connection with any governmental audit or review of the
Company or, to the Company's knowledge, of any Contract owner, that any
Portfolio has failed to comply with the diversification requirements of Section
817(h) of the Code or the Company otherwise becomes aware of any facts that
could give rise to any claim against the Fund or its affiliates as a result of
such a failure or alleged failure, (i) the Company shall promptly notify the
Fund of such assertion or potential claim; (ii) the Company shall consult with
the Fund as to how to minimize any liability that may arise as a result of such
failure or alleged failure; (iii) the Company shall use its best efforts to
minimize any liability of the Fund or its affiliates resulting from such
failure, including, without limitation, attempting to demonstrate, pursuant to
Treasury Regulations Section 1.817-5(a)(2), to the Commissioner of the IRS that
such failure was inadvertent; (iv) the Company shall permit the Fund, its
affiliates, and their legal and accounting advisors to participate in any
conferences, settlement discussions, or other administrative or judicial
proceedings or contests (including judicial appeals thereof) with the IRS, any
Contract owner, or any other claimant regarding any claims that could give rise
to liability to the Fund or its affiliates as a result of such a failure or
alleged failure; (v) any written materials to be submitted by the Company to the
IRS, any Contract owner, or
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<PAGE>
any other claimant in connection with any of the foregoing proceedings or
contests (including, without limitation, any such materials to be submitted to
the IRS pursuant to Treasury Regulations Section 1.817-5(a)(2)), shall be
provided by the Company to the Fund (together with any supporting information or
analysis) at least ten (10) Business Days prior to the day on which such
proposed materials are to be submitted, and the Company and the Fund and its
affiliates shall cooperate in good faith to reach agreement on the content of
any materials to be submitted to the IRS, any Contract owner, or any other
claimant; (vi) the Company shall provide the Fund or its affiliates and their
accounting and legal advisors with such cooperation as the Fund shall reasonably
request (including, without limitation, by permitting the Fund and its
accounting and legal advisors to review the relevant books and records of the
Company) in order to facilitate review by the Fund or its advisors of any
written submissions provided to it pursuant to the preceding clause or of the
validity or amount of any claim against it arising from such a failure or
alleged failure; (vii) the Company shall not with respect to any claim of the
IRS or any Contract owner that would give rise to a claim against the Fund or
its affiliates (a) compromise or settle any claim, (b) accept any adjustment on
audit, or (c) forego any allowable administrative or judicial appeals, without
the express written consent of the Fund or its affiliates, which shall not be
unreasonably withheld, provided that the Company shall not be required to appeal
any adverse judicial decision unless the Fund or its affiliates shall have
provided an opinion of independent counsel to the effect that a reasonable basis
exists for taking such appeal; and (viii) the Fund and its affiliates shall have
no liability as a result of such failure or alleged failure if the Company fails
to comply with any of the foregoing clauses or if the Company and the Fund or
its affiliates fail to reach an agreement on the content of the materials
described in paragraph (v) above, and such failure or such materials described
in paragraph (v) above could be shown to have materially contributed to the
liability. Should the Fund or any of its affiliates refuse to give its written
consent to any compromise or settlement of any claim or liability hereunder, the
Company may, in its discretion, authorize the Fund or its affiliates to act in
the name of the Company in and to control the conduct of, such conferences,
discussions, proceedings, contests, or appeals and all administrative or
judicial appeals thereof, and in that event the Fund or its affiliates shall
bear the fees and expenses associated with the conduct of the proceedings that
it is so authorized to control; provided further that in no event shall any
liability to the Company exceed the amount which would have otherwise attached
had the proposed settlement or compromise been accepted by the Fund. As used in
this Agreement, the term affiliates shall have the same meaning as affiliated
person as defined in Section 2(a)(3) of the 1940 Act.
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant
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proceeding; (d) the manner in which the investments of any Portfolio are being
managed; (e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded. The Company agrees to carry out these responsibilities with a view
only to the interests of Contract owners.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested directors, that a material irreconcilable conflict exists, the
Company and any other Participating Insurance Companies whose contract owners
are also affected shall, at their expense and to the extent reasonably
practicable (as determined by a majority of the disinterested directors), take
whatever steps are necessary to remedy or eliminate the irreconcilable material
conflict, up to and including: (1) withdrawing the assets allocable to some or
all of the Accounts from the Fund or any Portfolio and reinvesting such assets
in a different investment medium, including (but not limited to) another
Portfolio of the Fund, or submitting the question whether such segregation
should be implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group (i.e., life
insurance contract owners, or variable contract owners of any Participating
Insurance Companies) that votes in favor of such segregation, or offering to the
affected contract owners the option of making such a change; and (2)
establishing a new registered management investment company or managed separate
account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. No
penalty or charge will be imposed as a result of such withdrawal. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period, the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the
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Fund and terminate this Agreement with respect to such Account within six (6)
months after the Board informs the Company in writing that it has determined
that such decision has created an irreconcilable material conflict; provided,
however, that such withdrawal and termination shall be limited to the extent
required by the foregoing material irreconcilable conflict as determined by a
majority of the disinterested members of the Board. Until the end of the
foregoing six month period, the Underwriter and Fund shall continue to accept
and implement orders by the Company for the purchase (and redemption) of shares
of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund or its affiliates be required to establish a new funding
medium for the Contracts. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Contracts if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely affected
by the irreconcilable material conflict. In the event that the Board determines
that any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination; provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
The Company agrees that any remedial action taken by it in resolving
any material irreconcilable conflict will be carried out at its expense and with
a view only to the interests of Contract owners.
7.7. The Company shall at least annually submit to the Board such
reports, materials, or data as the Board may reasonably request so that it may
carry out the obligations imposed on it by the Shared Funding Exemptive Order,
and said reports, materials, and data shall be submitted at any reasonable time
deemed appropriate by the Board.
7.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this
Agreement shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
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ARTICLE VIII. Indemnification
8.1. Indemnification by the Company
(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, the Underwriter, and each director and officer of the Fund, Adviser,
and Underwriter and each person, if any, who controls the Fund, Adviser, or
Underwriter within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in any
registration statement, prospectus or disclosure statement for the
Contracts or contained in the Contracts or sales literature for the
Contracts (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of the Fund or the
Underwriter for use in any registration statement, prospectus, or
disclosure document for the Contracts or in the Contracts or sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of the Fund not
supplied by the Company, or persons under its control) or wrongful
conduct of the Company or persons under its control, with respect to
the sale or distribution of the Contracts or Fund shares; or
(iii) arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature of the Fund or
any amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if
such a statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on behalf of
the Company; or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of this
Agreement; or
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(v) arise out of or result from any material breach of any
representation or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Company;
as limited by and in accordance with the provisions of Sections 8.1(b)
and 8.1(c) hereof.
(b) The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
the Fund, whichever may be applicable.
(c) The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
(d) The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
8.2. Indemnification by the Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims,
- 15 -
<PAGE>
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and;
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of the
Fund (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Underwriter
or Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in any
registration statement, prospectus, disclosure document or sales
literature for the Contracts not supplied by the Underwriter or
persons under its control) or wrongful conduct of the Underwriter
or persons under its control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in any registration statement,
prospectus, disclosure statement, or sales literature covering
the Contracts, or any amendment thereof or supplement thereto, or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
or statements therein not misleading, if such statement or
omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund;
or
(iv) arise as a result of any failure by the Underwriter to provide
the services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b), 8.2(c),
and 8.2(d) hereof.
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<PAGE>
(b) The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company or each Account, whichever may be applicable.
(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) In no event shall the Underwriter be liable under the
indemnification provisions contained in this Agreement to any individual or
entity, including without limitation, the Company or any Contract owner, with
respect to any losses, claims, damages, liabilities, or expenses that arise out
of or result from (i) the failure by the Fund or any Portfolio to qualify or
maintain its qualification as a regulated investment company under Subchapter M
of the Code or (ii) the failure by the Fund or any Portfolio to comply with the
diversification requirements of Section 817(h) of the Code.
(e) The Company agrees to notify promptly the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of Fund shares or the
Contracts or the operation of any Account.
8.3. Indemnification by the Fund
(a) The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject
- 17 -
<PAGE>
under any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of the Board
or any member thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement; or
(ii) arise out of or result from any material breach of any
representation or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b), 8.3(c),
and 8.3(d) hereof.
(b) The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company, the Fund, the Adviser, the Underwriter or each Account, whichever may
be applicable.
(c) The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
(d) In no event shall the Fund be liable under the indemnification
provisions contained in this Agreement to any individual or entity, including
without limitation, the Company or any Contract owner, with respect to any
losses, claims, damages, liabilities, or expenses that arise out of or result
from (i) the failure by the Fund or any Portfolio to qualify or maintain its
qualification as a regulated investment company under
- 18 -
<PAGE>
Subchapter M of the Code or (ii) the failure by the Fund or any Portfolio to
comply with the diversification requirements of Section 817(h) of the Code.
(e) The Company agrees to notify promptly the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Contracts, with respect to the operation of any Account, or the sale or
acquisition of shares of the Fund.
8.4. Indemnification by the Adviser
(a) The Adviser agrees to indemnify and hold harmless the Company, and
each director and officer of the Company and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.4) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Adviser) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Funds shares and:
(i) arise as a result of any failure by the Fund or any
Portfolio of the Fund to qualify or maintain its
qualification as a regulated investment company under
Subchapter M of the Code or to comply with the
diversification requirements of Section 817(h) of the Code;
or
(ii) arise out of or result from any material breach of any
representation or warranty made by the Adviser in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Adviser;
as limited by and in accordance with the provisions of Sections 8.4(b), 8.4(c),
and 8.4(d) hereof.
(b) The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance by that Indemnified Party of its duties or by reason of such
Indemnified Party's reckless disregard of its obligations and duties under this
Agreement or to the Adviser, the Fund, the Underwriter, or each Account,
whichever may be applicable.
(c) The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the action shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
- 19 -
<PAGE>
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser shall be entitled to participate,
at its own expense, in the defense thereof. The Adviser also shall be entitled
to assume the defense thereof (which shall include, without limitation, the
conduct of any ruling request and closing agreement or other settlement
proceeding with the IRS), with counsel approved by the Indemnified Party named
in the action, which approval shall not be unreasonably withheld. After notice
from the Adviser to such Indemnified Party of the Adviser's election to assume
the defense thereof, the Indemnified Party shall cooperate fully with the
Adviser and shall bear the fees and expenses of any additional counsel retained
by it, and the Adviser will not be liable to such Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof, other
than reasonable costs of investigation.
(d) In no event shall the Adviser be liable under the indemnification
provisions contained in this Agreement to any individual or entity, including
without limitation, the Company or any Contract owner, with respect to any
losses, claims, damages, liabilities, or expenses that arise out of or result
from (i) a breach of any representation, warranty, and/or covenant made by the
Company hereunder or by any Participating Insurance Company under an agreement
containing substantially similar representations, warranties, and covenants;
(ii) the failure by the Company or any Participating Insurance Company to
maintain its segregated asset account (which invests in any Portfolio) as a
legally and validly established segregated asset account under applicable state
law and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) the failure by the Company or any
Participating Insurance Company to maintain its variable annuity and/or variable
life insurance contracts (with respect to which any Portfolio serves as an
underlying funding vehicle) as life insurance, endowment, or annuity contracts
under applicable provisions of the Code.
(e) The Company agrees to notify promptly the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with this Agreement, the issuance or sale of the Fund
shares or the Contracts, or the operation of any Account.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
9.2. To the extent they are applicable, this Agreement shall be subject
to the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations
and rulings thereunder, including such exemptions from those statutes, rules and
regulations as the SEC may grant (including, but not limited to, the Shared
Funding Exemptive Order) and the terms hereof shall be interpreted and construed
in accordance therewith.
- 20 -
<PAGE>
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by six (6) months'
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund, the
Adviser, and the Underwriter with respect to any Portfolio based
upon the Company's determination that shares of such Portfolio
are not reasonably available to meet the requirements of the
Contracts; or
(c) termination by the Company by written notice to the Fund, the
Adviser, and the Underwriter with respect to any Portfolio in the
event any of the Portfolio's shares are not registered, issued or
sold in accordance with applicable state or federal law or such
law precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund, the
Adviser, and the Underwriter with respect to any Portfolio in the
event that such Portfolio ceases to qualify as a regulated
investment company under Subchapter M of the Code or under any
successor or similar provision, or if the Company reasonably
believes that the Fund may fail to so qualify; or
(e) termination by the Company by written notice to the Fund, the
Adviser, and the Underwriter with respect to any Portfolio in the
event that such Portfolio fails to meet the diversification
requirements specified in Article VI hereof; or
(f) termination by either the Fund, the Adviser, or the Underwriter
by written notice to the Company, if one or all of the Fund, the
Adviser, or the Underwriter, respectively, shall determine, in
their sole judgment exercised in good faith, that the Company or
its affiliated companies has suffered a material adverse change
in its business, operations, financial condition, or prospects
since the date of this Agreement or is the subject of material
adverse publicity; or
(g) termination by the Company by written notice to the Fund, the
Adviser, and the Underwriter, if the Company shall determine, in
its sole judgment exercised in good faith, that the Fund, the
Adviser, or the Underwriter has suffered a material adverse
change in its business,
- 21 -
<PAGE>
operations, financial condition, or prospects since the date of
this Agreement or is the subject of material adverse publicity;
or
(h) termination by the Fund, the Adviser, or the Underwriter by
written notice to the Company, if the Company gives the Fund, the
Adviser, and the Underwriter the written notice specified in
Section 1.7(b) hereof and at the time such notice was given there
was no notice of termination outstanding under any other
provision of this Agreement; provided, however, any termination
under this Section 10.1(h) shall be effective ninety (90) days
after the notice specified in Section 1.7(b) was given.
10.2. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund, or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in any of the Accounts) except (i) as necessary to implement Contract owner
initiated transactions, (ii) as required by state or federal laws or regulations
or judicial or other legal precedent of general application (hereinafter
referred to as "Legally Required Redemption"), or (iii) as permitted by an order
of the SEC pursuant to Section 26 of the 1940 Act. Upon request, the Company
will furnish promptly to the Fund and the Underwriter the opinion of counsel for
the Company (which counsel shall be reasonably satisfactory to the Fund and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, the Company shall not prevent Contract owners
from allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the Underwriter ninety (90) days
notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
- 22 -
<PAGE>
If to the Fund or the Adviser:
OFFITBANK
520 Madison Avenue
New York, NY 10022
Attention:
If to the Company:
Security Equity Life Insurance Company
84 Business Park Drive
Suite 303
Armonk, NY 10504
Attention: William C. Thater
If to the Underwriter:
OFFIT Funds Distributor, Inc.
c/o The OFFITBANK Variable Insurance Fund, Inc.
237 Park Avenue
Suite 910
New York, NY 10017
ARTICLE XII. Miscellaneous
12.1. All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents, or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate, or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
- 23 -
<PAGE>
12.5. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule, or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable life
insurance operations of the Company are being conducted in a manner consistent
with the California Variable Life Insurance Regulations and any other applicable
law or regulations.
12.7. The Fund and Underwriter agree that to the extent any fees
received by the Fund or the Underwriter are determined to be unlawful in legal
or administrative proceedings under the 1973 NAIC model variable life insurance
regulation in the states of California, Colorado, Maryland, or Michigan, the
Underwriter shall indemnify and reimburse the Company for any out of pocket
expenses and actual damages the Company has incurred as a result of any such
proceeding; provided, however, that the provisions of Section 8.2(b), 8.2(c),
and 8.2(d) shall apply to such indemnification and reimbursement obligation.
Such indemnification and reimbursement obligation shall be in addition to any
other indemnification and reimbursement obligations of the Fund or the
Underwriter under this Agreement.
12.8. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.9. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Underwriter may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company under common
control with the Underwriter, if such assignee is duly licensed and registered
to perform the obligations of the Underwriter under this Agreement.
12.10. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP")), as soon as
practical and in any event within ninety (90) days after the end
of each fiscal year;
- 24 -
<PAGE>
(b) the Company's quarterly statements (statutory and GAAP), as soon
as practical and in any event within forty-five (45) days after
the end of each quarterly period; and
(c) any financial statement, proxy statement, notice, or report of
the Company sent to stockholders or policyholders, as soon as
practical after the delivery thereof.
12.11. The schedules attached hereto, as they may be modified from time
to time, are hereby incorporated by reference and made a part of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
SECURITY EQUITY OFFITBANK VARIABLE
LIFE INSURANCE COMPANY INSURANCE FUND, INC.
By: /s/ William C. Thater By: /s/ Gordon Forrester
--------------------- --------------------
Name: William C. Thater Name: Gordon Forrester
Title: President Title: Assistant Treasurer
(SEAL) (SEAL)
OFFIT FUNDS DISTRIBUTOR, INC. OFFITBANK
By: /s/ Gordon Forrester By: /s/ Stephen Brent Wells
- ------------------------ ---------------------------
Name: Gordon Forrester Name: Stephen Brent Wells
Title: Vice President Title: Managing Director
(SEAL) (SEAL)
- 25 -
<PAGE>
Schedule A-1
Unregistered Accounts
Name of Account Date of Resolution of Company's Board
which Established the Account
Separate Account 7 December 15, 1994
Separate Account 8 December 15, 1994
Separate Account 9 December 15, 1994
Separate Account 10 December 15, 1994
Separate Account 11 February 9, 1995
Separate Account 14 August 10, 1995
Separate Account 15 August 10, 1995
Separate Account 16 August 10, 1995
- 26 -
<PAGE>
Schedule A-2
Registered Accounts
Name of Account Date of Resolution of Company's Board which
Established the Account
Separate Account 13 December 30, 1994
- 27 -
<PAGE>
Schedule B-1
Contracts
1. Contract Form Numbers:
LCLI (G) 6000022
LCLI (I) 6000022
LCLIII (G) 60006
LCLIII (I) 60001
- 28 -
<PAGE>
Schedule B-2
Contracts
Contract Form Numbers:
LCLII
- 29 -
<PAGE>
Schedule B-3
Investment Options Currently Available Under Products Listed On Schedules B-1
and B-2
Tremont Partners Market Oriented/Hedged Fund
OFFITBANK VIF Emerging Markets Fund
OFFITBANK VIF High Yield Fund
OFFITBANK VIF Investment Grade Global Debt Fund
General American Capital Company
Money Market Fund
The GCG Trust
Emerging Markets Portfolio
Limited Maturity Bond Portfolio
Liquid Asset Portfolio
Life & Annuity Trust
Asset Allocation Portfolio
U.S. Government Allocation Portfolio
Variable Insurance Products Fund
Growth Portfolio
Variable Insurance Products Fund II
Investment Grade Bond Portfolio
Asset Manager Portfolio
Index 500 Portfolio
- 30 -
KRAMER, LEVIN, NAFTALIS, NESSEN, KAMIN & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022-3852
(212) 715-9100
ARTHUR H. AUFSES III Richard Marlin Sherwin Kamin
THOMAS D. BALLIETT Thomas E. Molner Arthur B. Kramer
JAY G. BARIS Thomas H. Moreland Maurice N. Nessen
SAUL E. BURIAN Ellen R. Nadler Founding Partners
BARRY MICHAEL CASS Gary P. Naftali Counsel
THOMAS E. CONSTANCE Michael J. Nassa --------
MICHAEL J. DELL Michael S. Nelson Martin Balsam
KENNETH H. ECKSTEIN Jay A. Neveloff Joshua M. Berman
CHARLOTTE M. FISCHMAN Michael S.Oberman Jules Buchwald
DAVID S. FRANKEL Paul S. Pearlman Rudolph De Winter
MARVIN E. FRANKEL Susan J. Penry-Williams Meyer Eisenberg
ALAN R. FRIEDMAN Bruce Rabb Arthur D. Emil
CARL FRISCHLING Allan E. Reznick Maxwell M. Rabb
MARK J. HEADLEY Scott S. Rosenblum James Schreiber
ROBERT M. HELLER Michele D. Ross Counsel
PHILIP S. KAUFMAN Max J. Schwartz -------
PETER S. KOLEVZON Mark B. Segall M. Frances Buchinsky
KENNETH P. KOPELMAN Judith Singer Debora K. Grobman
MICHAEL PAUL KOROTKIN Howard A. Sobel Christian S. Herzeca
KEVIN B. LEBLANG Steven C. Todrys Pinchas Mendelson
DAVID P. LEVIN Jeffrey S. Trachtman Lynn R. Saidenberg
EZRA G. LEVIN D. Grant Vingoe Jonathan M. Wagner
LARRY M. LOEB Harold P. Weinberger Special Counsel
MONICA C. LORD E. Lisk Wyckoff, Jr. -------
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
March 3, 1995
The OFFITBANK Variable Insurance Fund, Inc.
237 Park Avenue, Suite 910
New York, New York 10017
Gentlemen:
We have acted as counsel for The OFFITBANK Variable Insurance Fund,
Inc., a Maryland corporation (the "Fund"), in connection with the proposed
public offering of shares of common stock, $.001 par value (the "Common Stock")
of its OFFITBANK VIFHigh Yield Fund series (the "High Yield Fund" series),
OFFITBANK VIF-Investment Grade Global Debt Fund series (the "Global Debt Fund"
series) and OFFITBANK VIF-Emerging Markets Fund series (the "Emerging Markets
Fund" series) pursuant to a registration statement on Form N-1A (File No.
33-81748) (the "Registration Statement"), filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and the Investment
Company Act of 1940, as amended.
We have reviewed the Fund's Articles of Incorporation, its By-Laws,
its Amended and Restated By-Laws, resolutions of the Board of Directors of the
Fund, and the Registration Statement (including exhibits thereto). We have also
made such inquires and have examined originals, certified copies or copies
otherwise identified to our satisfaction of such documents, records and other
instruments as we have deemed necessary or appropriate for the purposes of this
opinion. For purposes of such examination, we have assumed the genuineness of
all signatures on original documents and the conformity to the original
documents of all copies submitted.
<PAGE>
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
The OFFITBANK Variable Insurance Fund, Inc.
March 3, 1995
Page 2
We are members of the Bar of the State of New York and do not hold
ourselves out as experts as to the law of any other state or jurisdiction. We
have received and relied upon an opinion from Venable, Baetjer and Howard, LLP,
Special Maryland Counsel, a copy of which is attached herewith, concerning the
organization of the Fund and the authorization and issuance of the Common Stock.
Based upon and subject to the foregoing, we are of the opinion, and so
advise you as follows:
i. The Fund is duly organized and validly existing as a corporation
in good standing under the laws of the State of Maryland.
ii. The shares of High Yield Fund series Common Stock, the shares of
Global Debt Fund series Common Stock and the shares of Emerging
Markets Fund series Common Stock of the Fund to be offered for
sale pursuant to the Prospectus are, duly authorized and, when
sold, issued and paid for as contemplated by the Prospectus, will
have been validly and legally issued and will be fully paid and
nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
<PAGE>
[LETTERHEAD OF VEANBLE, BAETJER AND HOWARD, LLP]
March 3, 1995
Kramer, Levin, Naftalis, Nessen,
Kamin & Frankel
919 Third Avenue
New York, NY 10022-3852
Re: The Offitbank Variable Insurance Fund, Inc.
-------------------------------------------
Ladies and Gentlemen:
We have acted as special Maryland counsel for The Offitbank Variable
Insurance Fund, Inc., a Maryland corporation (the "Fund"), in connection with
the organization of the Fund and the issuance of shares of its common stock of
the Offitbank VIF - High Yield Fund series, Offitbank VIF - Investment Grade
Global Debt Fund series, and Offitbank VIF - Emerging Markets Fund series, all
with a par value of $.001 per share (collectively, the "Common Stock").
As Maryland counsel for the Fund, we are familiar with its Charter and
Bylaws. We have examined the prospectus included in its Registration Statement
on Form N-1A, File Nos. 33-81748; 811-8640 (the "Registration Statement"),
substantially in the form in which it is to become effective (the "Prospectus").
We have further examined and relied upon a certificate of the Maryland State
Department of Assessments and Taxation to the effect that the Fund is duly
incorporated and existing under the laws of the State of Maryland and is in good
standing and duly authorized to transact business in the State of Maryland.
We have also examined and relied upon such corporate records of the
Fund and other documents and certificates with respect to factual matters as we
have deemed necessary to render the opinion expressed herein. We have assumed,
without independent verification, the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, and the conformity
with originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion and so advise you
that:
1. The Fund is duly organized and validly existing as a corporation
in good standing under the laws of the State of Maryland.
<PAGE>
2. The 3,333,3,333 and 3,334 presently issued and outstanding shares
of Common Stock of the Offitbank VIF - High Yield Fund series,
Offitbank VIF - Investment Grade Global Debt Fund series, and
Offitbank VIF - Emerging Markets Fund series, respectively, have
been validly and legally issued and are fully paid and
nonassessable.
3. The shares of Common Stock of the Fund to be offered for sale
pursuant to the Prospectus are, to the extent of the number of
shares of each of the Offitbank VIF - High Yield Fund series,
Offitbank VIF - Investment Grade Global Debt Fund series, and
Offitbank VIF - Emerging Markets Fund series, respectively,
authorized to be issued by the Fund in its Articles of
Incorporation, duly authorized and, when sold, issued and paid
for as contemplated by the Prospectus, will be validly and
legally issued and will be fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock. It does not extend to the securities or "blue sky" laws
of Maryland, to federal securities laws or to other laws.
You may rely upon our foregoing opinion in rendering your opinion to
the Fund that is to be filed as an exhibit to the Registration Statement. We
consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Venable, Baetjer and Howard, LLP
- 2 -
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
-------------
January 30, 1997
The OFFITBANK Variable Insurance Fund, Inc.
237 Park Avenue
Suite 910
New York, New York 10017
Re: Post-Effevtive Amendment No. 5 to
Registration Statement on Form N-1A
File No. 33-81748
-----------------------------------
Gentlemen:
We hereby consent to the reference of our firm as counsel in this
Registration Statement on Form N-1A.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
PURCHASE AGREEMENT
The OFFITBANK Variable Insurance Fund, Inc., a Maryland corporation (the
"Company"), and OFFIT Funds Distributor, Inc., a Delaware corporation (the
"Distributor"), hereby agree as follows:
1. The Company hereby offers the Distributor and the Distributor hereby
purchases 3,333 shares of (par value $.001 per share) the Company, representing
3,333 shares in OFFITBANK VIF-High Yield Fund, 3,334 shares of (par value $.001
per share) the Company, representing 3,333 shares in OFFITBANK VIF-Emerging
Markets Fund and 3,333 shares of (par value $.001 per share) the Company,
representing 3,333 shares in OFFITBANK VIF-Investment Grade Global Debt Fund, at
$10.00 per share, (the "Shares"). The Distributor hereby acknowledges receipt of
a purchase confirmation reflecting the purchase of the Shares, and the Company
hereby acknowledges receipt from the Distributor of funds in the amount of
$100,000 in full payment for the Shares.
2. The Distributor represents and warrants to the Company that the
Shares are being acquired for investment purposes and not with a view to the
distribution thereof.
3. The Distributor agrees that if it or any direct or indirect
transferee of the Shares redeems the Shares prior to the fifth anniversary of
the date the Funds begins its investment activities, the Distributor will pay to
the Company an amount equal to the number resulting from multiplying each Fund's
total unamortized organizational expenses by a fraction, the numerator of which
is equal to the number of Shares redeemed by the Distributor or such transferee
and the denominator of which is equal to the number of shares of each Fund
outstanding as of the date of such redemption, as long as the administrative
position of the staff of the Securities and Exchange Commission requires such
reimbursement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 1st day of March, 1995.
The OFFITBANK Variable Insurance Fund, Inc.
Attest:
/s/Carrie Zuckerman By: /s/ Wallace Mathai-Davis
- ------------------- ------------------------
Name: Carrie Zuckerman Name: Wallace Mathai-Davis
Title: Secretary and Treasurer
Attest: OFFIT FUNDS DISTRIBUTOR, INC.
/s/ Carrie Zuckerman By: /s/ Gordon M. Forrester
- -------------------- -----------------------
Name: Carrie Zuckerman Name: Gordon M. Forrester
Title: Vice President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned Directors of
The OFFITBANK Variable Insurance Fund, Inc., a Maryland Corporation, (the
"Fund") constitute and appoint Carl Frischling and Morris W. Offit our true and
lawful attorneys-in-fact, with full power of substitution and resubstitution,
for us and in our name, place and stead, in any and all capacities as a Director
of the Fund, to sign for me and in our names in the appropriate capacities, any
and all Pre-Effective Amendments to any Registration Statement of the Fund, any
and all Post-Effective Amendments to said Registration Statements, any
Registration Statements on Form N-14, and any supplements or other instruments
in connection therewith, and generally to do all such things in my name and
behalf in connection therewith as said attorneys-in-fact deem necessary or
appropriate, to comply with the provisions of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, and all related
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes may do or cause
to be done by virtue hereof.
Witness our hands on this 17th day of October, 1994.
/s/ Edward J. Landau /s/ James Parks Morton
- -------------------- ----------------------
Edward J. Landau The Very Reverend James Parks Morton
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
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<NAME> OFFITBANK VIF-HIGH YIELD FUND
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<PERIOD-START> APR-01-1996
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<NET-CHANGE-FROM-OPS> 316
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<DISTRIBUTIONS-OF-INCOME> 157
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<NET-CHANGE-IN-ASSETS> 9178
<ACCUMULATED-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.39
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<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> OFFITBANK VIF EMERGING MARKETS FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> AUG-28-1996
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 530
<INVESTMENTS-AT-VALUE> 537
<RECEIVABLES> 18
<ASSETS-OTHER> 533
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1088
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 27
<TOTAL-LIABILITIES> 27
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1043
<SHARES-COMMON-STOCK> 104
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> 9
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 1061
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<NET-INVESTMENT-INCOME> 8
<REALIZED-GAINS-CURRENT> 9
<APPREC-INCREASE-CURRENT> 10
<NET-CHANGE-FROM-OPS> 26
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 100
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<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> 1028
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6
<AVERAGE-NET-ASSETS> 1043
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 0.18
<PER-SHARE-DIVIDEND> 0.07
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.18
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
