Registration Nos. 33-81748
811-8640
As filed via EDGAR with the Securities and Exchange Commission on January 21,
1998
================================================================================
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. 11
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12
(Check appropriate box or boxes)
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
(Exact name of Registrant as specified in charter)
125 West 55th Street
New York, New York 10019
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 618-9510
Stephen Brent Wells, Esq.
OFFITBANK
520 Madison Avenue
New York, New York 10022
(Name and Address of Agent for Service)
with a copy to:
Carl Frischling, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to paragraph (b)
[ ] on _______ pursuant to paragraph (b)
[ ] on _______ pursuant to paragraph (a)(i)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on _______ pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A Item No. Location
- ------------- --------
Part A Prospectus Caption
- ------ ------------------
With respect to the VIF-High Yield Fund and VIF-Emerging Markets Fund, the
Registrant has filed the information required in the prospectus in the
definitive filing of the prospectuses pursuant to Rule 497(c) of the Securities
Act of 1933 on August 7, 1997 and such prospectuses are hereby incorporated by
reference.
Item 1. Cover Page Cover Page
Item 2. Synopsis Not Applicable
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description of The Company; Investment
Registrant 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 How Distributions Are
Securities Made; Tax Information;
Shareholder
Communication
Item 7. Purchase of Securities
Being Offered About Your Investment;
How the Company Values
Its Shares
Item 8. Redemption or Repurchase About Your Investment;
Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
Statement of Additional
Part B Information Caption
- ------ -------------------
With respect to the VIF-U.S. Government Securities Fund, VIF-High Yield Fund and
VIF-Emerging Markets Fund, the Registrant has filed the information required in
the statement of additional information in the definitive filing of the combined
Statement of Additional Information pursuant to Rule 497(c) of the Securities
Act of 1933 on November 5, 1997 (accession number 0000922423-97-000912) and such
Statements of Additional Information is hereby incorporated by reference.
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not Applicable
Item 13. Investment Objectives and
Policies Additional Information on
Portfolio Instruments and
Techniques; Additional
Risk Considerations;
Investment Limitations
Item 14. Management of the Registrant Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities General Information
Item 16. Investment Advisory and
Other Services Management of the Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices
Item 18. Capital Stock and Other
Securities General Information
Item 19. Purchase, Redemption and
Pricing of Securities Management of the Fund;
Being Offered Purchase of Shares;
Redemption of Shares;
Item 20. Tax Status Additional Information
Concerning Taxes
Item 21. Underwriters Distributor
Item 22. Calculation of Performance
Data Performance Calculations
Item 23. Financial Statements Report of Independent
Accountants; Financial
Statements
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
<PAGE>
EXPLANATORY NOTE
THE PURPOSE OF THIS FILING IS TO FILE FUND PROFILES FOR THE FOLLOWING PORTFOLIOS
OF THE REGISTRANT: OFFITBANK VIF-EMERGING MARKETS FUND, OFFITBANK VIF-HIGH YIELD
FUND, OFFITBANK VIF-U.S. GOVERNMENT SECURITIES FUND AND OFFITBANK VIF-TOTAL
RETURN FUND, TO UPDATE THE PROSPECTUSES OF OFFITBANK VIF- U.S. GOVERNMENT
SECURITIES FUND AND OFFITBANK VIF-TOTAL RETURN FUND AND THE STATEMENT OF
ADDITIONAL INFORMATION OF OFFITBANK VIF-TOTAL RETURN FUND.
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
THE OFFITBANK VIF-TOTAL RETURN FUND
FUND PROFILE
JANUARY 21, 1998
THIS FUND PROFILE CONTAINS KEY INFORMATION ABOUT THE FUND. IF YOU WOULD LIKE
MORE INFORMATION BEFORE YOU INVEST, PLEASE CONSULT THE FUND'S ACCOMPANYING
PROSPECTUS. FOR DETAILS ABOUT THE FUND'S HOLDINGS OR RECENT INVESTMENT
STRATEGIES, PLEASE REVIEW THE FUND'S MOST RECENT ANNUAL OR SEMIANNUAL REPORT.
THE REPORTS MAY BE OBTAINED AT NO COST BY CALLING THE FUND AT 1-800-618-9510.
1. What is the Fund's goal?
The Fund's goal is to maximize total return from a combination of capital
appreciation and current income. The Total Return Fund will seek to achieve this
objective by investing primarily in a portfolio of fixed-income securities of
varying maturities and by giving OFFITBANK, its investment adviser, broad
discretion to deploy the Fund's assets among those segments of the fixed-income
market that the Adviser believes will best contribute to the achievement of the
Total Return Fund's objective.
2. How is the Portfolio invested?
The "total return" sought by the Fund will consist of interest from underlying
securities, and capital appreciation on its holdings. The investment objective
of the Fund is to maximize total return from a combination of capital
appreciation and current income. The Fund will seek to achieve its objective by
investing primarily in a portfolio of fixed income securities of varying
maturities and by giving the Adviser broad discretion to deploy the Fund's
assets among certain market segments of the fixed income market that the Adviser
believes will best contribute to the achievement of this objective.
Based on the Adviser's analysis of current economic and market conditions and
the relative risks and opportunities, the Fund will invest under normal market
conditions in the following securities: U.S. Government securities, investment
grade fixed income securities (including asset-backed and mortgage-backed
securities), high yield securities, international fixed income securities
including corporate and sovereign debt instruments of developed and emerging
market issuers, convertible securities, loan participations and assignments,
certificates of deposit and cash equivalents. To provide the Adviser with
flexibility in managing the Fund's assets, the Fund may invest directly in the
securities in these market segments or indirectly through investing in the other
Funds of the Company (VIF-U.S. Government Securities Fund, VIF-High Yield Fund
and VIF-Emerging Markets Fund).
<PAGE>
3. What are the risks of investing in the Fund?
Since the Fund may invest across a broad range of market segments, there are a
number of risks involved. As interest rates increase, the value of securities in
the Fund tends to decrease. Additionally, government securities that are not
backed by the full faith and credit of the U.S. Treasury may be adversely
affected by changes in the creditworthiness of the issuing agency.
The investment characteristics of mortgage-related securities differ from
traditional debt securities, which can result in significantly greater price and
yield volatility than those of traditional fixed income securities. The major
differences typically include more frequent interest and principal payments and
the possibility that prepayments of principal may be made at any time, as
influenced by current interest rates and economic, geographic, and social
factors.
The Fund may invest all or substantially all of its assets in securities which
are either below investment grade or unrated, and considered speculative by the
major ratings agencies. These securities generally offer yields that are
superior to those of higher rated securities, but also carry greater risk of
default and illiquidity in the secondary market than investment grade issues.
To the extent that the Fund may invest in the securities of non-U.S. issuers,
the Fund will be exposed to the consequences of political, social or economic
changes in the countries of corporations that issue the securities, as well as
changes in any applicable foreign currency exchange rates.
4. Is the Fund appropriate for you?
The Fund is appropriate for investors seeking maximum total return from a
combination of capital appreciation and current income.
5. What are the Fund's expenses?
The Advisory Agreement provides that the Adviser is entitled to receive a
monthly fee at the annual rate of 0.80 of 1% of the average daily net assets of
the Fund. In addition to the Investment Advisory Fees, the Fund is subject to
expenses relating to administration, custody, transfer agency, legal, audit and
accounting, directors fees and other miscellaneous expenses. Such expenses may
be subject to waiver by the relevant service provider or reimbursement by the
Adviser or Administrator. Please refer to the Separate Account Prospectus for
further information about Separate Account charges. The Separate Account sets
out examples of aggregate Fund and Separate Account charges.
2
<PAGE>
6. How has the Fund performed?
The VIF - Total Return Fund has not yet commenced operations and therefore does
not have a performance history.
7. Who manages the Fund?
The Fund is managed by OFFITBANK, a New York State chartered trust company. 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 $9.3 billion in assets. Jack D. Burks
serves as the portfolio manager for the Fund. Mr. Burks is a Managing Director
of the Adviser and has been associated with the Adviser since 1984.
8. How can you buy shares?
Shares of the Fund are sold only to certain life insurance companies and their
separate accounts to fund benefits under variable annuity contracts and variable
life insurance policies to be offered by the Participating Companies. Shares of
the Fund are offered on a continuous basis directly by Offit Funds Distributor,
Inc., the Fund's Principal Underwriter
9. How can you sell shares?
Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through separate
accounts of Participating Insurance Companies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on how to redeem monies from the applicable contract or policy.
10. When will you receive distributions?
The Fund will declare and distribute dividends from net investment income and
will distribute its net capital gains, if any, at least annually to the Separate
Account. Income and capital gains distributions will be made in shares of the
Fund.
3
<PAGE>
11. What investor services are available?
Contract or Policy Owners will receive from the Participating Companies 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. In addition, Contract or Policy owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 am and 6:00 pm, New York time.
4
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
THE OFFITBANK VIF-EMERGING MARKETS FUND
FUND PROFILE
JANUARY 21, 1998
THIS FUND PROFILE CONTAINS KEY INFORMATION ABOUT THE FUND. IF YOU WOULD LIKE
MORE INFORMATION BEFORE YOU INVEST, PLEASE CONSULT THE FUND'S ACCOMPANYING
PROSPECTUS. FOR DETAILS ABOUT THE FUND'S HOLDINGS OR RECENT INVESTMENT
STRATEGIES, PLEASE REVIEW THE FUND'S MOST RECENT ANNUAL OR SEMIANNUAL REPORT.
THE REPORTS MAY BE OBTAINED AT NO COST BY CALLING THE FUND AT 1-800-618-9510.
1. WHAT IS THE FUND'S GOAL?
The Fund's goal is to provide a competitive total investment return by focusing
on current yield and opportunities for capital appreciation. It seeks to achieve
its objective by investing primarily in corporate and sovereign debt instruments
of emerging markets countries.
2. HOW IS THE PORTFOLIO INVESTED?
The VIF-Emerging Markets Fund is actively managed to seek to achieve competitive
U.S. dollar total investment return while reducing relative volatility. 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. Through credit analysis, the Adviser seeks to protect principal and to
minimize market and individual credit risk, as well as to identify opportunities
for capital appreciation. In selecting particular debt instruments for the Fund,
the Adviser considers factors such as liquidity, price volatility, tax
implications, interest rate sensitivity, foreign currency exchange risks,
counterparty risks, and technical market considerations.
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 assets in equity
securities. As used in its 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 be invested in at least 3 different countries.
Subject to the restriction that the Fund will not invest 25% or more of
1
<PAGE>
its total assets in obligations issued by any one country, its agencies,
instrumentalities, or political subdivisions, there is no limit on the amount
the Fund may invest in issuers located in any one country, or in securities
denominated in the currency of any one country, in order to take advantage of
what the Adviser believes to be favorable yields, currency exchange conditions
or total investment return potential. The Fund's investment may be denominated
in any currency, including U.S. 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.
3. WHAT ARE THE RISKS OF INVESTING IN 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. The Fund's net asset
value will fluctuate, reflecting fluctuations in the market value of its
portfolio positions and its net currency exposure. The Fund's investment in
securities of foreign governmental entities and supranational issuers that are
not backed by the full faith and credit of a foreign government may be adversely
affected by changes in the creditworthiness of the issuing agency. Investments
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. In addition, investment in local-currency-denominated
foreign securities can be substantially more volatile than domestic issues and
the Fund's net asset value can be expected to fluctuate according to changes in
foreign exchange rates.
The Fund may invest all or substantially all of its assets in securities which
are either below investment grade or unrated, and considered speculative by the
major ratings agencies. These securities generally offer yields that are
superior to those of higher rated securities, but also carry greater risk of
default and illiquidity in the secondary market than investment grade issues.
In addition, 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
a 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 that currency,
and will cause an overall decline in the Fund's net asset value and any
shareholder distributions.
4. IS THE FUND APPROPRIATE FOR YOU?
The Fund is appropriate for investors seeking high current yield and capital
appreciation.
2
<PAGE>
5. WHAT ARE THE FUND'S EXPENSES?
The Advisory Agreement provides that the Adviser is entitled to receive a
monthly fee at the annual rate of 0.90 of 1% of the first $200,000,000 of the
average daily net assets of the Fund and 0.80 of 1% in excess thereof. In
addition to the Investment Advisory Fees, the Fund is subject to expenses
relating to administration, custody, transfer agency, legal, audit and
accounting, directors fees and other miscellaneous expenses. Such expenses may
be subject to waiver by the relevant service provider or reimbursement by the
Adviser or Administrator. Please refer to the Separate Account Prospectus for
further information about Separate Account charges. The Separate Account sets
out examples of aggregate Fund and Separate Account charges.
6. HOW HAS THE FUND PERFORMED?
As of September 30, 1997 the returns for the OFFITBANK VIF - Emerging Markets
Fund, and by comparison, for J.P. Morgan Latin Eurobond Index are as follows:
QUARTER YEAR-TO-DATE SINCE INCEPTION* AVG. ANNUAL*
VIF-EM FUND 3.86% 12.39% 19.07% 16.13%
JPM LEI 4.54 13.33 22.16 18.71
*Inception: August 28, 1996
Please note that performance information presented for the Fund should not be
compared directly with performance information of other products without taking
into account insurance-related charges and expenses payable under the variable
annuity contracts and variable life insurance policy.
7. WHO MANAGES THE FUND?
The Fund is managed by OFFITBANK, a New York State chartered trust company. 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 $9.3 billion in assets. Dr. Wallace
Mathai-Davis and Richard M. Johnston serve as portfolio mangers for 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.
8. HOW CAN YOU BUY SHARES?
Individuals may not place orders directly with the Fund. Shares of the Fund are
sold only to certain insurance companies and their separate accounts to fund
benefits under variable annuity contracts and variable life insurance policies
to be offered by the Participating
3
<PAGE>
Companies. Please refer to the appropriate Account Prospectus of the
Participating Company for more information on the purchase of Portfolio shares.
9. HOW CAN YOU SELL SHARES?
Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through separate
accounts of Participating Insurance Companies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on how to redeem monies from the applicable contract or policy.
10. WHEN WILL YOU RECEIVE DISTRIBUTIONS?
The Fund will declare dividends from net investment income daily and will
distribute its net capital gains, if any, at least annually to the Separate
Account. Income and capital gains distributions are made in shares of the Fund.
11. WHAT INVESTOR SERVICES ARE AVAILABLE?
Contract or Policy Owners will receive from the Participating Companies 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. In addition, Contract or Policy owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 am and 6:00 pm, New York time.
4
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
THE OFFITBANK VIF-HIGH YIELD FUND
FUND PROFILE
JANUARY 21, 1998
THIS FUND PROFILE CONTAINS KEY INFORMATION ABOUT THE FUND. IF YOU WOULD LIKE
MORE INFORMATION BEFORE YOU INVEST, PLEASE CONSULT THE FUND'S ACCOMPANYING
PROSPECTUS. FOR DETAILS ABOUT THE FUND'S HOLDINGS OR RECENT INVESTMENT
STRATEGIES, PLEASE REVIEW THE FUND'S MOST RECENT ANNUAL OR SEMIANNUAL REPORT.
THE REPORTS MAY BE OBTAINED AT NO COST BY CALLING THE FUND AT 1-800-618-9510.
1. WHAT IS THE FUND'S GOAL?
The Fund's goal is to achieve high current income, with capital appreciation as
a secondary objective. The Fund seeks to realize this objective by investing,
under normal market conditions, at least 65% of its total assets in U.S.
corporate fixed income securities which are rated below investment grade or are
unrated at the time of investment.
2. HOW IS THE PORTFOLIO INVESTED?
The Fund is managed for total return and safety and does not seek the highest
yield available. Rather, the Fund intends to buy and hold better quality high
yield issues that the Adviser expects will earn above average returns over time,
while minimizing the broad market risk to high yield investments. The Fund will
invest primarily in "seasoned" high yield issues--those whose issuers have been
operating in their current form for two or more years. Generally, the Adviser
seeks to invest in issues that have one or more of the following
characteristics: at least $50 million in earnings before interest, taxes, and
depreciation (EBITDA); at least two times EBITDA coverage; a capital structure
at least 25% subordinated to the selected security; approximately five times
maximum total debt to EBITDA. The Fund's investments are typically structured to
include higher quality high yield issues with intermediate maturities, in order
to avoid the risks associated with lower quality, longer dated securities.
Although the Fund's investments will be primarily in U.S. corporate securities,
it may also invest in foreign debt securities, sovereign and mortgage-backed
debt, and municipal obligations having many of the characteristics of its
portfolio.
<PAGE>
3. WHAT ARE THE RISKS OF INVESTING IN 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. The Fund's net asset
value will fluctuate, reflecting fluctuations in the market value of its
portfolio positions and its currency exposure. The Fund may invest all or
substantially all of its assets in securities which are either below investment
grade or unrated, and considered speculative by the major ratings agencies
(i.e., junk bonds). These securities generally offer yields that are superior to
those of higher rated securities, but also carry greater risk of default and
illiquidity in the secondary market than investment grade issues. In addition,
these securities may be more sensitive to individual corporate developments and
changes in economic conditions than higher-rated securities.
The Fund's investment in securities of foreign governmental entities and
supranational issuers that are not backed by the full faith and credit of a
foreign government may be adversely affected by changes in the creditworthiness
of the issuing agency. Investments 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. In addition, investment in
local-currency-denominated foreign securities can be substantially more volatile
than domestic issues and the Fund's net asset value can be expected to fluctuate
according to changes in foreign exchange rates.
4. IS THE FUND APPROPRIATE FOR YOU?
The Fund is appropriate for investors seeking high current income and capital
appreciation.
5. WHAT ARE THE FUND'S EXPENSES?
The Advisory Agreement provides that the Adviser is entitled to receive a
monthly fee at the annual rate of 0.85 of 1% of the first $200,000,000 of the
average daily net assets of the Fund and 0.75 of 1% in excess thereof. In
addition to the Investment Advisory Fees, the Fund is subject to expenses
relating to administration, custody, transfer agency, legal, audit and
accounting, directors fees and other miscellaneous expenses. Such expenses may
be subject to waiver by the relevant service provider or reimbursement by the
Adviser or Administrator. Please refer to the Separate Account Prospectus for
further information about Separate Account charges. The Separate Account sets
out examples of aggregate Fund and Separate Account charges.
2
<PAGE>
6. HOW HAS THE FUND PERFORMED?
As of September 30, 1997 the returns for the OFFITBANK VIF - High Yield Fund,
and by comparison, for the Merrill Lynch BB High Yield 5-7 Year Index and the
Merrill Lynch 5 Year Treasury are as follows:
QUARTER YEAR-TO-DATE SINCE INCEPTION* AVG. ANNUAL*
VIF-HIGH YIELD FUND 4.00% 9.52% 21.91% 14.12%
ML HY BB 5-7 YEAR 3.48 8.75 17.48 11.34
ML 5 YEAR TREASURY 3.00 5.24 9.46 6.21
*Inception: April 1, 1996
Please note that performance information presented for the Fund should not be
compared directly with performance information of other products without taking
into account insurance-related charges and expenses payable under the variable
annuity contracts and variable life insurance policy.
7. WHO MANAGES THE FUND?
The Fund is managed by OFFITBANK, a New York State chartered trust company. 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 $9.3 billion in assets. Stephen T.
Shapiro serves as the portfolio manager for the Fund. Mr. Shapiro is a Managing
Director and co-founder of OFFITBANK.
8. HOW CAN YOU BUY SHARES?
Individuals may not place orders directly with the Fund. Shares of the Fund are
sold only to certain insurance companies and their separate accounts to fund
benefits under variable annuity contracts and variable life insurance policies
to be offered by the Participating Companies. Please refer to the appropriate
Account Prospectus of the Participating Company for more information on the
purchase of Portfolio shares.
9. HOW CAN YOU SELL SHARES?
Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through separate
accounts of Participating Insurance Companies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on how to redeem monies from the applicable contract or policy.
3
<PAGE>
10. WHEN WILL YOU RECEIVE DISTRIBUTIONS?
The Fund will declare dividends from net investment income and will distribute
its net capital gains, if any, at least annually to the Separate Account. Income
and capital gains distributions will be made in shares of the Fund.
11. WHAT INVESTOR SERVICES ARE AVAILABLE?
Contract or Policy Owners will receive from the Participating Companies 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. In addition, Contract or Policy owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 am and 6:00 pm, New York time.
4
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
THE OFFITBANK VIF-U.S. GOVERNMENT SECURITIES FUND
FUND PROFILE
JANUARY 21, 1998
THIS FUND PROFILE CONTAINS KEY INFORMATION ABOUT THE FUND. IF YOU WOULD LIKE
MORE INFORMATION BEFORE YOU INVEST, PLEASE CONSULT THE FUND'S ACCOMPANYING
PROSPECTUS. FOR DETAILS ABOUT THE FUND'S HOLDINGS OR RECENT INVESTMENT
STRATEGIES, PLEASE REVIEW THE FUND'S MOST RECENT ANNUAL OR SEMIANNUAL REPORT.
THE REPORTS MAY BE OBTAINED AT NO COST BY CALLING THE FUND AT 1-800-618-9510.
1. What is the Fund's goal?
The Fund's goal is to seek current income consistent with preservation of
capital. It seeks to achieve this objective by investing, under normal
circumstances, at least 80% of its total assets in obligations of the U.S.
Government and its agencies.
2. How is the Portfolio invested?
Under normal circumstances, the Fund invests at least 80% of its total assets in
U.S. Government Securities which are either direct obligations of the U.S.
Treasury or obligations, including mortgage-backed securities, issued or
guaranteed by the agencies or instrumentalities of the U.S. Government. 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, 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.
3. What are the risks of investing in 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. The Fund's net asset
value will fluctuate, reflecting fluctuations in the market value of its
portfolio positions. While 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 DOES NOT
GUARANTEE THE NET ASSET VALUE OF THE SHARES OF THE FUND.
The performance of the Fund also depends in part on interest rate changes and
the average maturity of the Fund's portfolio of securities. The longer the
average maturity,
<PAGE>
the more likely the price of the Fund's investment will tend to fluctuate. As
interest rates increase, the value of securities in the Fund tends to decrease.
In addition, foreign governmental entities and supranational issuers that are
not backed by the full faith and credit of a foreign government may be adversely
affected by changes in the creditworthiness of the issuing agency. Investments
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.
4. Is the Fund appropriate for you?
The Fund is appropriate for investors seeking current income consistent with
preservation of capital.
5. What are the Fund's expenses?
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive a monthly fee at the annual rate of .40 of 1% of the
average daily net assets of the Fund. In addition to the Investment Advisory
Fees, the Fund is subject to expenses relating to administration, custody,
transfer agency, legal, audit and accounting, directors fees and other
miscellaneous expenses. Such expenses may be subject to waiver by the relevant
service provider or reimbursement by the Adviser or Administrator. Please refer
to the Separate Account Prospectus for further information about Separate
Account charges. The Separate Account sets out examples of aggregate Fund and
Separate Account charges.
6. How has the Fund performed?
The VIF - U.S. Government Securities Fund has not yet commenced operations and
therefore does not have a performance history.
7. Who manages the Fund?
The Fund is managed by OFFITBANK, a New York State chartered trust company. 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 $9.3 billion in assets. Jack D. Burks
serves as the portfolio manager for the Fund. Mr. Burks is a Managing Director
of the Adviser and has been associated with the Adviser since 1984.
2
<PAGE>
8. How can you buy shares?
Shares of the Fund are sold only to certain insurance companies and their
separate accounts to fund benefits under variable annuity contracts and variable
life insurance policies to be offered by the Participating Companies. Shares of
the Fund are offered on a continuous basis directly by Offit Funds Distributor,
Inc., the Fund's Principal Underwriter.
9. How can you sell shares?
Investors may not redeem shares of the Fund directly, but only through variable
annuity contracts and variable life insurance policies offered through separate
accounts of Participating Insurance Companies. Investors should refer to the
prospectus of the Participating Insurance Company's separate account for
information on how to redeem monies from the applicable contract or policy.
10. When will you receive distributions?
The Fund will declare dividends from net investment income daily and pay monthly
and will distribute its net capital gains, if any, at least annually to the
Separate Account. Income and capital gains distributions will be made in shares
of the Fund.
11. What investor services are available?
Contract or Policy Owners will receive from the Participating Companies 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. In addition, Contract or Policy owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 am and 6:00 pm, New York time.
3
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. January 21, 1998
- --------------------------------------------------------------------------------
OFFITBANK VIF-Total Return Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFITBANK VIF-Total Return Fund (the "Total Return Fund") is one of ten separate
investment portfolios of the OFFITBANK Variable Insurance Fund, Inc. (the
"Company"), an open-end, management investment company. The Total Return Fund's
investment objective is to maximize total return from a combination of capital
appreciation and current income. The Total Return Fund will seek to achieve its
objective by investing primarily in a portfolio of fixed-income securities of
varying maturities and by giving OFFITBANK, the Fund's investment adviser (the
"Adviser"), broad discretion to deploy the Total Return Fund's assets among
certain segments of the fixed-income market that the Adviser believes will best
contribute to the achievement of the Total Return Fund's objective. The Total
Return Fund may invest directly in the markets and securities described is this
prospectus, or indirectly through investing in the following investment
portfolios of the Company, the OFFITBANK VIF-U.S. Government Securities Fund
(the "U.S. Government Securities Fund"), the OFFITBANK VIF-High Yield Fund (the
"High Yield Fund") and the OFFITBANK VIF-Emerging Markets Fund (the "Emerging
Markets Fund" and collectively with the Total Return Fund, U.S. Government
Securities Fund and High Yield Fund, the "Funds" and each individually, a
"Fund").
THE TOTAL RETURN 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 Total Return Fund's investment objective will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Total Return Fund's investment adviser. The Adviser currently
manages in excess of $9.3 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 Total Return Fund may
be obtained by calling 1-800-618-9510.
SHARES OF THE TOTAL RETURN 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 Total Return
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 21, 1998 , 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 TOTAL RETURN 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
Highlights....................................................................2
Financial Highlights......................................................... 3
The Company.................................................................. 4
Investment Objective and Policies............................................ 4
Investment Policies and Techniques........................................... 5
Special Risk Considerations..................................................10
Limiting Investment Risks....................................................17
Description of the Underlying Funds .........................................17
Management.................................................................. 19
About Your Investment....................................................... 20
How the Company Values Its Shares........................................... 20
How Distributions are Made: Tax Information................................. 21
Shareholder Communications ................................................. 21
Performance Information..................................................... 21
Counsel; Independent Accountants............................................ 22
Appendix A..................................................................A-1
<PAGE>
HIGHLIGHTS
INTRODUCTION
OFFITBANK VIF-Total Return Fund (the "Total Return Fund") is one of ten
separate investment portfolios of the OFFITBANK Variable Insurance Fund, Inc.
(the "Company") an open-end, management investment company. The Total Return
Fund's investment objective is to maximize total return from a combination of
capital appreciation and current income.
The Total Return Fund may invest directly in the markets and securities
described in this prospectus, or indirectly through investing in the U.S.
Government Securities Fund, the High Yield Fund and the Emerging Markets Fund
series of the Company.
FUND MANAGEMENT
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Total Return Fund's investment adviser.
SHARES OF THE FUND
Shares of the Total Return Fund are sold only to certain life insurance
companies (collectively, "Participating Companies") and their separate accounts
(collectively, the "Accounts") to fund benefits under variable annuity contracts
("Contracts") and variable life insurance policies ("Policies") to be offered by
the Participating Companies. The Accounts invest in shares of the Fund in
accordance with allocation instructions received from Contract and Policy owners
("Contract Owners" or "Policy Owners," as appropriate). Such allocation rights
are further described in the accompanying Account Prospectus. Shares are
redeemed to the extent necessary to provide benefits under the Contracts and
Policies.
Shares of the Total Return Fund are offered on a continuous basis directly by
OFFIT Funds Distributor, Inc., the Fund's Underwriter, to the Accounts without
any sales or other charge, at the Fund's net asset value on each day on which
the New York Stock Exchange ("NYSE") is open for business. The Company will
effect orders to purchase or redeem shares of the Fund, that are based on
premium payments, surrender and transfer requests and any other transaction
requests from Contract and Policy Owners, annuitants and beneficiaries, at the
Fund's net asset value per share next computed after the Account receives such
transaction request.
An Account may redeem all or any portion of the shares of the Total Return Fund
in its account at any time at the net asset value per share of the Fund
calculated in the manner described above.
A Contract or Policy Owner investing through an Account may exchange shares of
the Total Return Fund for shares of any of the other investment portfolios of
the Company on the basis of their respective net asset value. See "About Your
Investment."
RISK FACTORS
Investment in the Fund is subject to certain risks, as set forth in detail under
"Special Risk Considerations". The Total Return 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".
2
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights of the High Yield Fund and Emerging Markets Fund for the
period ending March 31, 1997. During that period, neither the Total Return Fund
nor the U.S. Government Securities Fund had commenced operations. The
information below has been derived from financial statements included in the
Annual Report to Shareholders for the period ending March 31, 1997. Such
information has been audited by Price Waterhouse LLP, independent accountants
for the Company. The Annual Report is incorporated by reference into the
Statement of Additional Information. The information set forth below is for a
share of each Fund outstanding for the period indicated. Further information
about the performance of the Company is included in the Annual Report to
Shareholders which may be obtained without charge by calling 1-800-618-9510.
<TABLE>
<CAPTION>
VIF-HIGH YIELD VIF-EMERGING
FUND MARKETS FUND
For the period For the period
from April 1, August 28,
Selected ratios and date for a share of capital 1996* through 1996* through
stock outstanding through the period: March 31, 1997 March 31, 1997
- -----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ 10.00 10.00
Net investment income................................... 0.78 0.48
Net realized and unrealized gains on investments........ 0.37 0.34
----- ----
Total from investment operations........................ 1.15 0.82
----- ----
LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income................................... (0.78) (0.48)
Total dividends and distribution........................ (0.78) (0.04)
------- ------
NET ASSET VALUE, END OF PERIOD.............................. $10.37 $10.30
TOTAL INVESTMENT RETURN+.................................. 11.90% 8.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $25,114 $4,346
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)............................................ 1.15% 1 .50%(1)
Net investment income................................... 7.45% 8.04%(1)
PORTFOLIO TURNOVER RATE..................................... 4% 96%
</TABLE>
* Commencement of Operations.
(1) Annualized
(2) If the Funds had borne all expenses that were paid or assumed by the
Adviser and Administrator, the above expense ratios would have been 2.25%
and 4.87% annualized for the VIF-High Yield and VIF-Emerging Markets Fund,
respectively.
+ Total return is based on the change in net asset value during the period
and assumes reinvestment of all dividends and distributions.
3
<PAGE>
THE COMPANY
The Company , a Maryland corporation formed on July 1, 1994, is designed to
serve as a funding vehicle for Contracts and Policies offered by the Accounts of
Participating Companies. Shares of the Total Return 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 Total Return 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 Total Return 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 of the Fund may not be changed except by a
vote of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"). The investment
policies of the Fund may, unless otherwise specifically stated, be changed by
the Directors of the Company without a vote of the 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
Total Return 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 Total Return Fund is to maximize total return
from a combination of capital appreciation and current income. The Fund will
seek to achieve its objective by investing primarily in a diversified portfolio
of fixed-income securities of varying maturities and by giving the Adviser broad
discretion to deploy the Fund's assets among certain segments of the
fixed-income market that the Adviser believes will best contribute to the
achievement of the Fund's objective. At any point in time, the Adviser will
deploy the Fund's assets based on the Adviser's analysis of current economic and
market conditions and the relative risks and opportunities present in the
following market segments: securities of the U.S. Government, its agencies and
instrumentalities, mortgage-backed and asset-backed securities, foreign
sovereign and multi-national debt obligations, including obligations of emerging
market and developing countries, debt instruments, convertible securities and
preferred stocks of domestic and foreign corporations, including high yield
securities, and local-currency denominated fixed income securities of issuers
located in developed and emerging markets. The Fund may also invest in the
securities of the other investment portfolios of the Company or investment
companies managed by the Adviser. The Fund may invest directly in the markets
and securities described in this prospectus, or indirectly through investing in
the U.S. Government Securities Fund, the High Yield Fund and the Emerging
Markets Fund series of the Company (the "underlying funds").
In evaluating proposed investments for the Total Return Fund, the Adviser will
seek to enhance the total return on the Fund's portfolio through the active
management of (i) portfolio duration, (ii) allocation of investments among the
various sectors of the fixed income market, (iii) yield curve positioning and
(iv) currency exposure. The Adviser will seek to maximize the Total Return
Fund's total return in terms of U.S. dollars. The Adviser intends to base its
investment decisions for the Total Return Fund on the continual evaluation of
various factors, including (i) the supply and demand for capital in various
capital markets, (ii) the shape of the global yield curve, (iii) "bottom up"
credit analysis of particular issuers, (iv) relative value between and within
global capital markets and (v) yield spreads among domestic high grade,
non-dollar and high yield sectors. Portfolio holdings will be concentrated in
areas of the fixed income market which the Adviser believes to be relatively
undervalued. 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. There can be no assurance that the Fund will achieve its investment
objective.
The "total return" sought by the Total Return Fund will consist of interest from
underlying securities, capital appreciation reflected in increases in the value
of portfolio securities or from the purchase and sale of securities, and use of
futures and options, or gains from favorable changes in foreign currency
exchange rates. Under normal market conditions, the Fund will invest its assets
in a variety of markets and instruments, including securities of other
investment companies, securities issued or guaranteed by the U.S.
4
<PAGE>
Government, its agencies or instrumentalities, investment grade fixed income
securities (including asset-backed and mortgage backed securities), high yield
securities and international fixed income securities.
The Total Return Fund may invest in any country where the Adviser sees potential
for total return. In making international fixed income securities investments,
the Adviser may consider, among other things, the relative growth and inflation
rates of different countries. The Adviser may also consider expected changes in
foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities denominated
in foreign currencies. The Adviser may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.
The Total Return Fund expects to primarily invest in income-producing
securities, together with certain futures, options and foreign currency
contracts and other investments described below. The Fund may also invest in
lower quality fixed income securities. Investments in these high yield, high
risk debt securities are considered to be speculative and involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of interest and principal, than investment grade securities or
securities of comparable value. Some of such investments may be non-performing
when purchased. See "Special Risk Considerations--High Yield Securities."
The Total Return 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").
INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES. The Funds and the underlying funds (collectively, the
"Funds") may invest in securities of foreign issuers. When the Funds invest in
foreign securities, they may be denominated in foreign currencies. Thus, each
Fund's net asset value may be affected by changes in exchange rates. See
"Special Risk Considerations."
MORTGAGE-RELATED SECURITIES. The Funds 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 Funds) 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 Funds 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
Funds' 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
5
<PAGE>
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 Funds may invest in asset-backed securities in
accordance with their respective investment objectives 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 a 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 Funds 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 each Fund's limitation on investment in illiquid securities
BRADY BONDS. Each Fund, except the U.S. Government Securities 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 Funds 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 Funds 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
Funds 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 Funds' income or gain. See "Special Risk
Considerations--Hedging and Other Strategic Transactions."
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Funds, except the U.S. Government
Securities 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 Funds' 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 a Fund having a
contractual relationship only with the Lender, not with the borrower government.
Such 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, a 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
such 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 Funds
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 Funds purchase
Assignments from Lenders, the Funds 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 Funds as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Funds may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Funds 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 each 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
6
<PAGE>
it more difficult for the Funds to assign a value to those securities for
purposes of valuing a Fund's portfolio and calculating its net asset value. The
investment of each Fund in illiquid securities, including Assignments and
Participations, is limited to 15% of net assets. See "Illiquid Securities"
below.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Funds may purchase or sell
forward foreign currency exchange contracts ("forward contracts") as part of
their portfolio investment strategies. 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. A 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 a 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 a 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 a Fund than if it
had not entered into such contracts. If the party with which a 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.
STRUCTURED PRODUCTS. The Funds, except the U.S. Government Securities 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 Funds may invest in structured products which
represent derived investment positions based on relationships among different
markets or asset classes.
The Funds 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 a 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 a 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 1940 Act. As a result, a 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 Funds invest may be deemed illiquid and subject to the 15% limitation
described below under "Illiquid Securities."
7
<PAGE>
DEPOSITORY RECEIPTS AND DEPOSITORY SHARES. The Funds, except the U.S. Government
Securities 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 Funds 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 Funds, to the extent of their investment
in ADRs, will invest predominantly in ADRs sponsored by the underlying issuers.
The Funds, 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.
REVERSE REPURCHASE AGREEMENTS. The Funds may borrow by entering into reverse
repurchase agreements. Pursuant to such agreements, a 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 a
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 make loans which are
short-term (nine months or less) or long-term. 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 Funds
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 Funds 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 Funds will only purchase pay-in-kind bonds that
pay all or a portion of their interest in the form of debt securities. Zero
coupon securities and pay-in-kind bonds may be issued by a wide variety of
corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Funds are 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
Funds will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Funds may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements.
ILLIQUID SECURITIES. No Fund will 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 a 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 Funds 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 Funds 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 Funds 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 Funds through or with the assistance of the issuer or
investment dealers who make a market in the
8
<PAGE>
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. Pursuant to an exemptive order from the Commission,
the Total Return Fund may purchase shares of any existing or future series of
the Company. The Fund currently intends to invest all or a portion of its assets
in shares of the underlying funds only. Allocations of the Total Return Fund's
assets among underlying funds will be made in accordance with the Total Return
Fund's investment objective. The underlying funds in which the Total Return Fund
may presently invest along with their respective investment objectives are
listed below:
(1) OFFITBANK VIF-U.S. GOVERNMENT SECURITIES FUND: The investment objective
of the U.S. Government Securities Fund 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.
(2) OFFITBANK VIF-HIGH YIELD FUND: The High Yield Fund seeks 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.
(3) OFFITBANK VIF-EMERGING MARKETS FUND: The Emerging Markets Fund seeks 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 Total Return Fund reserves the right to invest up to 10% of its total assets
in the securities of investment companies other than the underlying funds
("unaffiliated funds"). The Total Return Fund may not invest more than 5% of its
total assets in the securities of any one unaffiliated fund or acquire more than
3% of the voting securities of any unaffiliated fund. The Total Return Fund does
not intend to invest in unaffiliated funds 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 unaffiliated fund or any sales charge. The
Total Return Fund will indirectly bear its proportionate share of any management
fees and other expenses paid by unaffiliated funds in which it invests in
addition to the advisory fee paid by the Total Return Fund.
The U.S. Government Securities Fund, High Yield Fund and Emerging Markets Fund
may each invest up to 10% of their respective total assets in the securities of
other investment companies. The Funds may not invest more than 5% of their
respective 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 Funds do not intend to invest in other 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 any sales
charge. Each 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.
TEMPORARY STRATEGIES. Each Fund retains the flexibility to respond promptly to
changes in market and economic conditions. Accordingly, consistent with each
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 Funds temporarily may hold cash (U.S. dollars, foreign
currencies or multinational currency units) and/or invest up to 100% of their
respective assets in high quality debt securities or money market instruments of
U.S. or foreign issuers, and most or all of each 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, each 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 Funds 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 Total Return Fund, High Yield Fund, Emerging
Markets Fund and U.S. Government Securities Fund will exceed 100%, 75%, 200% and
100%, respectively, 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.
CONVERTIBLE SECURITIES. The High Yield Fund and Emerging Market 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)
9
<PAGE>
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 Funds have 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 a Fund is called for redemption, such 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.
U.S. MUNICIPAL SECURITIES. In circumstances where the Adviser determines that
investment in U.S. dollar-denominated municipal obligations would facilitate the
High Yield Fund's ability to accomplish its investment objectives, the Fund may
invest in such obligations, including municipal bonds issued at a discount.
SPECIAL RISK CONSIDERATIONS
GENERAL
Each Fund's net asset value will fluctuate, reflecting fluctuations in the
market value of its portfolio positions and its net currency exposure. In
addition, to the extent that the Total Return Fund holds shares of the
underlying funds the Total Return Fund will be subject to the same risks as
those funds. The value of the securities held by the Funds 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 Funds will achieve their investment
objectives.
NON-DIVERSIFIED FUND
Each 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
Funds may invest a greater proportion of their respective 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 their portfolio securities as compared to a
diversified fund. Each Fund, however, intends to comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended, (the
"Code") applicable to segregated asset accounts underlying variable products
under section 817(h) of the Code and to regulated investment companies under
Subchapter M of the Code.
FOREIGN SECURITIES
Most of the assets of the Emerging Markets Fund will be invested in the
securities of non-U.S. issuers. A portion of the assets of the High Yield Fund
and Total Return Fund may also be invested in the securities of non-U.S.
issuers. The U.S. Government Securities Fund may also invest up to 20% of its
assets 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 Funds 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 Funds invest
and adversely affect the value of a 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 Funds, and on market
conditions, prices and yields of securities in the Funds' portfolios. There may
be the possibility of nationalization or expropriation of assets, or future
confiscatory levels of taxation affecting the Funds. In the event of
nationalization, expropriation or other confiscation, a Fund may not be fairly
compensated for its loss and could lose its entire investment in the country
involved.
10
<PAGE>
INVESTMENT AND REPATRIATION RESTRICTIONS. Investment by the Funds 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 Funds 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 Funds.
The Funds 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 Funds were unable to distribute
substantially all of its net investment income and long-term capital gains
within applicable time periods, the Funds 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 Total Return Fund and High Yield Fund may
invest a portion of their respective assets, and the Emerging Markets 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 each 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 each
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 Funds value their assets daily in terms of U.S. dollars, the Funds
do not intend to convert their holdings of foreign currencies into U.S. dollars
on a daily basis. Each 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 a
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 Funds. 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 Funds'
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 Funds' 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,
11
<PAGE>
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 Funds 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 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 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 Funds 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 Funds, in which event the Funds 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 Commission are available in each of the
countries in which the Adviser intends to invest. In certain countries in which
the Funds may make investments, there may be legal restrictions or limitations
on the ability of the Funds 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 Funds to a risk of loss. Less information may be
available to the Funds than with respect to investments in the United States
and, in certain of these countries, less information may be available to the
Funds 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 Funds may also invest in
foreign sovereign debt securities, which involve certain additional risks. See
"Sovereign Debt Securities" below.
HIGH YIELD SECURITIES
GENERAL. The Funds, except the U.S. Government Securities Fund, may invest all
or a portion of their respective 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 Funds 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
12
<PAGE>
by the Funds with a commensurate effect on the value of their respective shares.
Therefore, an investment in the Funds 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
each 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 a 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 each
Fund's ability to sell securities at their fair value. In addition, the Funds
may invest up to 15% of their respective 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 each 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 Funds 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 Funds may have to
replace the called security with a lower yielding security, resulting in a
decreased rate of return for the Funds.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose
the Funds, including the U.S. Government Securities 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 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
13
<PAGE>
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 Funds 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 Funds, except
the U.S. Government Securities 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
Each 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, each 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. Each 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 Funds will not be obligated, however, to pursue
any of such strategies and the Funds make no representation as to the
availability of these techniques at this time or at any time in the future. In
addition, each 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 Funds 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 Funds 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 Funds' interest rate transactions may take the form of swaps, caps, floors
and collars, and the Funds' 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 Funds resulting from securities markets or currency exchange
rate fluctuations, to protect the Funds' 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 Funds may use any or all types
of Hedging and Other Strategic Transactions which they are 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 Funds to utilize Hedging and Other Strategic
Transactions successfully will depend on, in addition to the factors
14
<PAGE>
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 Funds' securities. The Funds are not "commodity pools" (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 Funds 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 Funds 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 Funds, 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 a 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 a
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,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although the Funds' 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 Funds 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 Funds 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 Funds are 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 Funds if they
are unable to deliver or receive currency or monies in settlement of obligations
and could also cause hedges they have 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 each 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 each 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 Funds will require, among other things, that the
Funds segregate cash, liquid high grade debt obligations or other assets with
its custodian, or a designated sub- custodian, to the extent each 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 Funds 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
15
<PAGE>
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 a 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 a 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 a Fund will require the Fund to
segregate liquid high grade debt obligations equal to the exercise price. Except
when a 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 Funds, including those on securities, currency,
financial instruments or indices, and OTC-issued and exchange-listed index
options will generally provide for cash settlement, although the Funds will not
be required to do so. As a result, when each Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OTC-issued and exchange-listed options sold by the Funds other than those
described above generally settle with physical delivery, and the Funds 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 Funds
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
Funds 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 each 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. Each
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. Each 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, each 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.
INTEREST RATE FLUCTUATIONS AND CREDIT RISK.
The performance of the Funds, especially the U.S. Government Securities Fund,
depends in part on interest rate changes. As interest rates increase, the value
of the fixed income securities held by the Funds tend to decrease. This effect
will be more pronounced with respect to investments by the Funds in
mortgage-related securities, the value of which are more sensitive to interest
rate changes. There is no restriction on the maturity of the portfolios of the
Funds or any individual portfolio security, and to the extent each 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 Funds 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 Funds are not
guarantees of the market value of such obligations, nor do they extend to the
value of shares of the Funds. Other fixed-income securities in which the Funds
may invest, while of investment-grade quality, may be of lesser credit quality
than U.S. Government securities.
CONCENTRATION
Under normal market conditions, the Emerging Markets Fund may invest greater
than 25% of its assets in securities of issuers whose primary business activity
is in the banking industry. 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.
16
<PAGE>
LIMITING INVESTMENT RISKS
To further protect investors, the Total Return Fund has adopted the following
investment limitations:
1. The Total Return 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 Total Return 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 Total Return 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 Total Return 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.
DESCRIPTION OF THE UNDERLYING FUNDS
THE U.S. GOVERNMENT SECURITIES FUND. The investment objective of the U.S.
Government Securities Fund 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
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.
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").
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.
There is no restriction on the maturity of the Fund's portfolio or of any
individual portfolio security. 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.
Up to 20% of the Fund may be allocated to the sovereign obligations and other
fixed income securities, in each case denominated in non-U.S. currencies or
composite currencies, including: 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,
17
<PAGE>
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 HIGH YIELD FUND. The 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, i.e. any security whose issuers have
been operating in their current form for a considerable period of time, 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 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.
The higher yields sought by the 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 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.
THE EMERGING MARKETS FUND. The investment objective of the Emerging Markets 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 $10,000 (in 1997
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."
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 Emerging Markets 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 VIF-Emerging Markets 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,
18
<PAGE>
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 Emerging Markets 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.
MANAGEMENT
The business and affairs of the Funds are managed under the general direction
and supervision of the Company's Board of Directors. Each Fund's day-to-day
operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK provides investment advisory services to the Funds 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 Funds.
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive an advisory fee from the Total Return Fund, computed
daily and paid monthly, at the annual rate of 0.80% of the Fund's average daily
net assets. The advisory fee paid by the Total Return Fund is only with respect
to that portion of the Fund's assets invested directly in stocks, bonds, and
other instruments. The Adviser will waive its fee with respect to the portion of
the Total Return Fund's assets invested in the underlying funds. To the extent
that the Total Return Fund invests in the underlying funds, the Fund will
indirectly bear a pro rata share of fees and expenses incurred by the underlying
funds and the investment returns of the Total Return Fund will be net of the
expenses of the underlying funds.
The investment advisory agreements for the underlying funds provide that, as
compensation for services, the Adviser is entitled to receive from each
underlying fund a monthly fee at the following annual rates based upon the
average daily net assets of the underlying fund: 0.85% for the first
$200,000,000 of assets and 0.75% for amounts in excess thereof in the case of
the High Yield Fund, 0.90% for the first $200,000,000 of assets and 0.80% for
amounts in excess thereof in the case of the Emerging Markets Fund, and 0.40% of
the average daily net assets of the U.S. Government Securities Fund. The
investment advisory fee for each underlying 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
$9.3 billion in assets and serves as investment adviser to twenty-one other
registered investment companies (or portfolios thereof). The principal business
address of the Adviser is 520 Madison Avenue, New York, New York 10022.
PORTFOLIO MANAGER. Jack T. Burks will serve as the portfolio manager for the
Total Return Fund. Mr. Burks is a Managing Director of the Adviser and has been
associated with the Adviser in such capacity since 1984.
ADMINISTRATOR, FUND ACCOUNTING, CUSTODIAN AND TRANSFER AGENT
BISYS Fund Services Limited Partnership, d/b/a BISYS Fund Services ("BISYS")
serves as the Company's administrator and generally assists the Company in all
aspects of its administration and operation. The Bank of New York serves as
custodian of the assets of the Fund. Pursuant to an Administration Agreement
between the Company and BISYS, BISYS is entitled to a monthly fee, based on
annual rate of .15% of aggregate average daily net assets of the Company as
compensation for its administrative services. BISYS may waive this fee from time
to time. BISYS Fund Services, Inc. provides transfer agency services , dividend
disbursing services and fund accounting for the Fund. The principal business
address of BISYS and BISYS Fund Services, Inc. is 3435 Stelzer Road, Columbus,
Ohio 43219. The principal business address of The Bank of New York is 90
Washington Street, New York, New York 10286.
19
<PAGE>
FUND EXPENSES
In addition to the fees described above with respect to the Investment Advisory
Agreement, the Fund will be responsible for expenses relating to administration,
custody, transfer agency, legal, audit and accounting, Directors fees and other
miscellaneous expenses pursuant to written agreements with such service
providers or otherwise. Such expenses are subject to waiver by the relevant
service provider or reimbursement by the Adviser or Administrator.
ABOUT YOUR INVESTMENT
Shares of the Total Return 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 Total Return 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 Total Return Fund
in its account at any time at the net asset value per share of the Fu nd
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 Total Return 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 Total Return 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 Total Return 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 Total Return 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 TOTAL RETURN FUND. The Total Return 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
20
<PAGE>
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 Total Return 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 Total Return 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 Total Return 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 Total Return 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 Total Return Fund may be quoted and compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Fund published
by nationally recognized ranking services and by various national or local
financial publications, such as Business Week, Forbes, Fortune, Institutional
Investor, Money, The Wall Street Journal, Barron's, Changing Times, Morningstar,
Mutual Fund Values, U.S.A. Today or The New York Times or other industry or
financial publications.
Performance information presented for 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
21
<PAGE>
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.
The Total Return 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.
COUNSEL; INDEPENDENT ACCOUNTANTS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York, serves
as counsel to the Company. Price Waterhouse LLP serves as the independent
accountants to the Company. Price Waterhouse LLP is located at 1177 Avenue of
the Americas, New York, New York 10036.
22
<PAGE>
APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which the Fund
may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
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.
A-1
<PAGE>
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
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.
A-2
<PAGE>
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
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
A-3
<PAGE>
systems, the Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in this
Prospectus and in the Statement of Additional Information.
A-4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. JANUARY 21, 1998
- -------------------------------------------------------------------------------
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 consisting of ten separate portfolios.
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 $9.3 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................................................... 7
Limiting Investment Risks.....................................................10
Management....................................................................10
About Your Investment.........................................................11
How the Company Values Its Shares.............................................12
How Distributions Are Made: Tax Information...................................12
Shareholder Communications ...................................................13
Performance Information.......................................................13
Counsel; Independent Accountants..............................................13
<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 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").
2
<PAGE>
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.
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 total assets may be allocated to other fixed income
securities, each of which will be rated AAA by S&P or Aaa by Moody's, or will be
deemed of comparable quality by the Adviser, including: 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; non-U.S. dollar denominated
debt obligations of the U.S. Government; and corporate obligations including
asset-backed securities. Any Fund investment denominated in a foreign currency
will be hedged against fluctuations in value versus the U.S. dollar.
3
<PAGE>
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 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.
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.
4
<PAGE>
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.
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.
FOREIGN SECURITIES
The Fund may invest all or a portion of the 20% of its assets not required to be
invested 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."
5
<PAGE>
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.
6
<PAGE>
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Fund temporarily may hold cash 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
7
<PAGE>
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
8
<PAGE>
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.
9
<PAGE>
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken as
part of non-U.S. Hedging and Other Strategic Transactions also could be
adversely affected by: (1) other complex foreign political, legal and economic
factors, (2) lesser availability of data on which to make trading decisions than
in the United States, (3) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
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.
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
10
<PAGE>
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
$9.3 billion in assets and serves as investment adviser to twenty-one 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. Pursuant to an Administration Agreement
between the Company and BISYS, BISYS is entitled to a monthly fee, based on an
annual rate of .15% of aggregate average daily net assets of the Company as
compensation for its administrative services. BISYS may waive this fee from time
to time. BISYS Fund Services, Inc. provides transfer agency services and
dividend disbursing services for the Fund. The principal business address of
BISYS and BISYS Fund Services, Inc. is 3435 Stelzer Road, Columbus, Ohio 43219.
The principal business address of The Bank of New York is 90 Washington Street,
New York, New York 10286.
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.
10
<PAGE>
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.
12
<PAGE>
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 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.
13
<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 21, 1998
The OFFITBANK Variable Insurance Fund, Inc. (the "Company") is a no load mutual
fund consisting of ten portfolios whose shares are available to participating
life insurance companies ("Participating Companies") and their separate accounts
("Accounts") to fund benefits under variable annuity contracts ("Contracts") and
variable life insurance policies ("Policies") issued by the Participating
Companies. The portfolios are OFFITBANK VIF-High Yield Fund, OFFITBANK
VIF-Emerging Markets Fund, DJG Value Equity Fund, OFFITBANK VIF-U.S. Government
Securities Fund, OFFITBANK VIF-U.S. Small Cap Fund, OFFITBANK VIF-Global
Convertible Fund Income Fund , OFFITBANK VIF-Total Return Fund, OFFTIBANK
VIF-Latin America Equity Fund, OFFITBANK VIF-CVO Greater China Fund and
OFFITBANK VIF - Mortgage Securities Fund. This Statement of Additional
Information sets forth information about the Company applicable to the following
portfolio only: OFFITBANK VIF-Total Return Fund ( the "Total Return Fund").
This Statement of Additional Information is NOT a prospectus and is only
authorized for distribution when preceded or accompanied by the Company's
Prospectus dated January 21, 1998 (the "Prospectus"). This Statement of
Additional Information contains additional information to that set forth in the
Prospectus and should be read in conjunction with the Prospectus, additional
copies of which may be obtained without charge by writing or calling the Company
at the address and telephone number set forth above.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND TECHNIQUES............................................................. 2
ADDITIONAL RISK CONSIDERATIONS............................................. 16
INVESTMENT LIMITATIONS..................................................... 18
MANAGEMENT OF THE FUND..................................................... 20
PORTFOLIO TRANSACTIONS..................................................... 26
PURCHASE OF SHARES......................................................... 27
REDEMPTION OF SHARES....................................................... 27
PERFORMANCE CALCULATIONS................................................... 28
ADDITIONAL INFORMATION CONCERNING TAXES.................................... 29
DETERMINATION OF NET ASSET VALUE........................................... 30
GENERAL INFORMATION........................................................ 32
FINANACIAL STATEMENTS...................................................... 33
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND
TECHNIQUES
The Total Return Fund's investment objective is to maximize total return from a
combination of capital appreciation and current income. The Total Return Fund
will seek to achieve its objective by investing primarily in a diversified
portfolio of fixed-income securities of varying maturities and by giving
OFFITBANK, the Fund's investment adviser (the "Adviser"), broad discretion to
deploy the Total Return Fund's assets among certain segments of the fixed-income
market that the Adviser believes will best contribute to the achievement of the
Total Return Fund's objective. The Total Return Fund may invest directly in the
markets and securities described is this prospectus, or indirectly through
investing in the other investment portfolios of the Company, including the
OFFITBANK VIF-U.S. Government Securities Fund (the "U.S. Government Securities
Fund"), the OFFITBANK VIF-High Yield Fund (the "High Yield Fund") and the
OFFITBANK VIF-Emerging Markets Fund (the "Emerging Markets Fund" and
collectively with the Total Return Fund, U.S. Government Securities Fund and
High Yield Fund, the "Funds" and each individually, a "Fund").
There can be no assurance that the Total Return Fund will achieve its objective.
The principal features of the Total Return Fund's investment program and the
primary risks associated with
2
<PAGE>
that program are discussed in the Prospectus. The following discussion of
investment policies supplements the discussion of investment objectives and
policies set forth in the Prospectus.
REPURCHASE AGREEMENTS
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 (the "Adviser") based on guidelines established by the Company's Board
of Directors, present minimal credit risks. The 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
under the repurchase agreement, the Fund may incur costs and experience time
delays in connection with the disposition of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement is a borrowing transaction in which the 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 the Funds enter into reverse
repurchase agreements as described in the Prospectus, they will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained. Reverse repurchase
agreements are considered to be borrowings by the Funds under the 1940 Act.
DOLLAR ROLL TRANSACTIONS
In order to enhance portfolio returns and manage prepayment risks, a Fund may
engage in dollar roll transactions with respect to mortgage securities issued by
GNMA, FNMA and FHLMC. In a dollar roll transaction, the 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, the 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
3
<PAGE>
investments, together with any additional fee income received on the sale, could
generate income for the Fund exceeding the yield on the sold security. When the
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
Asset-backed securities are generally issued as pass through certificates, which
represent undivided fractional ownership interests in the underlying pool of
assets, or as debt instruments, and are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties. Payments
of principal and interest may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the services to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. If the letter of
credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized. Because asset-backed securities are relatively new,
the market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
Credit Support. Asset-backed securities often contain elements of credit support
to lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying asset. Liquidity protection ensures that
the pass through of payments due on the installment sales contracts and
installment loans which comprise the underlying pool occurs in a timely fashion.
Protection against losses
4
<PAGE>
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"). CMOs are debt obligations
collateralized by certificates issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, but also may be collateralized by whole loans or private
pass-through securities (such collateral collectively referred to as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid on all classes of the CMOs on a monthly, quarterly or
semi-annual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a series of a CMO in innumerable ways. In
one structure, for example, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full.
Stripped Mortgage-Backed Securities ("SMBS"). SMBS are derivative multiclass
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the principal from the Mortgage
5
<PAGE>
Assets, while the other classes will receive primarily interest and only a small
portion of the principal. In the most extreme case, one class will receive all
of the interest ("IO" or interest-only class) while the other class will receive
all of the principal ("PO" or principal-only class). The yield to maturity on an
IO class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying Mortgage Assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity and result in a loss to the investor.
Under the Internal Revenue Code of 1986, as amended, POs may generate taxable
income from the current accrual of original issue discount, without a
corresponding distribution of cash to a Fund. In addition, the Staff of the
United States Securities and Exchange Commission (the "SEC") considers privately
issued SMBS to be illiquid securities.
Mortgage-backed and asset-backed securities are generically considered to be
derivative securities.
DEPOSITORY RECEIPTS
The Funds, except U.S. Government Securities 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 the Fund's investment
policies, the 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.
6
<PAGE>
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, a Fund may make secured loans of
portfolio securities amounting to not more than 30% of its total assets.
Securities loans are made to broker/dealers or institutional investors pursuant
to agreements requiring that the loans continuously be secured by collateral at
least equal at all times to the value of the securities lent plus any accrued
interest, "marked to market" on a daily basis. The collateral received will
consist of cash, U.S. short-term government securities, bank letters of credit
or such other collateral as may be permitted under the Fund's investment program
and by regulatory agencies and approved by the Company's Board of Directors.
While the securities loan is outstanding, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities, as
well as interest on the investment of the collateral or a fee from the borrower.
The Fund has a right to call each loan and obtain the securities on five
business days' notice. To the extent applicable, the Fund will not have the
right to vote equity securities while they are being lent, but it will call in a
loan in anticipation of any important vote. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delay in receiving additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
Loans only will be made to firms deemed by the Adviser to be of good standing
and will not be made unless, in the judgment of the Adviser, the consideration
to be earned from such loans would justify the risk.
UNITED STATES GOVERNMENT OBLIGATIONS
Each Fund will 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, the Funds 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
7
<PAGE>
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 the Funds
include certificates of deposit, bankers' acceptances and fixed time deposits. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A banker's acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party. The Funds do not consider fixed time
deposits illiquid for purposes of the restriction on investment in illiquid
securities.
Banks are subject to extensive governmental regulations that may limit both the
amounts and types of loans and other financial commitments that may be made and
the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of funding lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by a Fund,
the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect
8
<PAGE>
adversely the payment of the principal of and interest on such securities held
by a 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.
The Funds will not purchase securities which the 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 the Funds' investments. In the event unforeseen exchange controls or
foreign withholding taxes are imposed with respect to the Funds' investments,
the effect may be to reduce the income received by the Funds on such
investments.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Special Risk Considerations - Hedging and
Other Strategic Transactions," each Fund may enter into transactions in options,
futures, and forward contracts on a variety of instruments and indexes, in order
to hedge various market risks, to manage the effective maturity or duration of
debt instruments held by the Fund, or, with respect to certain strategies, to
seek to increase the Fund's income or gain. The discussion below supplements the
discussion in the Prospectus.
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Hedging and Other Strategic Transactions involving options require
segregation of Fund assets in special accounts, as described below under "Use of
Segregated and Other Special Accounts".
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated
9
<PAGE>
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 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.
10
<PAGE>
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.
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 the Fund will expose the Fund during the term of the option
to possible loss of opportunity to realize appreciation in the market price of
the underlying security or instrument and may require the Fund to hold a
security or instrument that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, 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.
11
<PAGE>
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 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, a Fund may purchase and sell call and
put options on securities indices and other financial indices. In so doing, the
Fund can achieve many of the
12
<PAGE>
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, a 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
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars". A Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.
Except as provided in this Prospectus, a Fund's dealings in forward currency
contracts and other currency transactions such as futures contracts, options,
options on futures contracts and swaps will be limited to hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of 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.
13
<PAGE>
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, a Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single 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
A Fund may be authorized to enter into interest rate, currency and index swaps,
the purchase or sale of related caps, floors and collars. A Fund will enter into
these transactions primarily to seek to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. A Fund will use these transactions for non-speculative purposes and will
not sell interest rate caps or floors if it does not own securities or other
instruments providing the income the Fund may be obligated to pay. Interest rate
swaps involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate
14
<PAGE>
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 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.
Each Fund will maintain cash and appropriate liquid assets (i.e., high grade
debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If a Fund enters into a swap agreement on a
net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If a
Fund enters into a
15
<PAGE>
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, a 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.
ILLIQUID SECURITIES
A 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 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
16
<PAGE>
purchasers; and (v) the nature of the security and how trading is effected
(e.g., the time needed to sell the security, how offers are solicited and the
mechanics of transfer). The Adviser will monitor the liquidity of securities in
each Fund's portfolio and report periodically on such decisions to the Board of
Directors.
FOREIGN INVESTMENT RESTRICTIONS
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as the Funds. For example, certain countries require governmental approval
prior to investments by foreign persons, or limit 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.
17
<PAGE>
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. 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
A Fund's net investment income from foreign issuers may be subject to non-U.S.
withholding taxes thereby reducing the Fund's net investment income. See
"Additional Information Concerning Taxes."
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 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;
18
<PAGE>
(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 that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing such 5%; and
(12) invest in puts, calls straddles or spreads, except as described in
(11) above.
If a percentage restriction on investment or use of assets set forth above is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
19
<PAGE>
Investment restrictions (1) through (5) described above and those set forth in
the Prospectus under "Limiting Investment Risks" are fundamental policies of the
Funds which may be changed only when permitted by law and approved by the
holders of a majority of a Fund's outstanding voting securities, as described
under "General Information--Capital Stock". Restrictions (7) through (12) are
nonfundamental policies of the Funds, and may be changed by a vote of the
Company's Board of Directors.
MANAGEMENT OF THE FUND
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, 61* 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.
Edward J. Landau, 70 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 Retired, formerly Dean of
James Parks Morton, 67 Cathedral of St. John the Divine
Cathedral of St. John the (1972 - 1996).
Divine
1047 Madison Avenue
New York, NY 10025
- -----------------
* "Interested person" as defined in the 1940 Act.
20
<PAGE>
Wallace Mathai-Davis, 53 Secretary and Managing Director, OFFITBANK
OFFITBANK Treasurer (1986 - present). Secretary and
520 Madison Avenue Treasurer of OFFITBANK Investment
New York, NY 10022 Fund, Inc.
Stephen Brent Wells, 53 Assistant Managing Director, OFFITBANK
OFFITBANK Treasurer (1994 - present); General Counsel,
520 Madison Avenue Gabelli Funds, Inc. (1993 - 1994);
New York, NY 10022 General Counsel and President,
Funds Group, Goldman Sachs
Asset Management (1989 - 1993)
Vincent M. Rella, 45 Assistant Controller, OFFITBANK
OFFITBANK Treasurer (1986 - present)
520 Madison Avenue
New York, NY 10022
Martin R. Dean, 34 Assistant Employee of BISYS Fund Services
BISYS Fund Services Treasurer from May 1994 to present.Previously,
3435 Stelzer Road Senior Manager, KPMG Peat Marwick,
Columbus, Ohio 43219 LLP.
Ellen Stoutamire, 49 Assistant Vice President, Client Legal
BISYS Fund Services Secretary Services, BISYS Fund Services;
3435 Stelzer Road Associate Counsel, Franklin
Columbus, Ohio 43219 Templeton Mutual Funds; Vice
President and General Counsel,
Pioneer Western Corporation.
Matthew Constancio, 33 Assistant Associate Manager, Client Legal
BISYS Fund Services Secretary Services, BISYS Fund Services
3435 Stelzer Road (November 1996 to present);
Columbus, Ohio 43219 Previously, Mutual Fund
Administrator, Payden & Rygel
Investment Group.
Alaina Metz, 30 Assistant Chief Administrative Officer of
BISYS Fund Services Secretary BISYS Fund Services from June
3435 Stelzer Road 1995 to present. Previously,
Columbus, Ohio 43219 Supervisor of Blue Sky
Department at Alliance Capital
Management, May 1989 to June
1995.
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.
21
<PAGE>
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.
DIRECTOR COMPENSATION
(FOR CALENDAR YEAR 1997)
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
BENEFITS ANNUAL FROM REGISTRANT
AGGREGATE ACCRUED BENEFITS AND FUND
COMPENSATION AS PART OF FUND UPON COMPLEX* PAID
NAME OF PERSON FROM REGISTRANT EXPENSES RETIREMENT TO DIRECTORS
- -------------- --------------- ------------ ---------- -------------
Morris W. Offit $0 0 N/A $ 0
Edward J. Landau 6,000 0 N/A $28,853.26
The Very Reverend 6,000 0 N/A $29,353.26
James Parks Morton
* For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.
INVESTMENT ADVISER
The Company has retained OFFITBANK, a New York State chartered trust company, to
act as its investment adviser (the "Adviser"). 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 policy
established by the Board of Directors of the Company. Pursuant to the Advisory
Agreement, the Adviser manages the Company's investment portfolios, directs
purchases and sales of the portfolio securities and reports thereon to the
Company's officers and directors regularly. In addition, the Adviser pays the
compensation of the Company's officers, employees and directors affiliated with
the Adviser. The Company bears all other costs of its operations, including the
compensation of its directors not affiliated with the Adviser.
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive an advisory fee from the Total Return Fund, computed
daily and paid monthly, at the annual rate of 0.80% of the Fund's average daily
net assets. The advisory fee paid by the Total Return Fund is only with respect
to that portion of the Fund's assets invested directly in stocks,
22
<PAGE>
bonds, and other instruments. The Adviser will waive its fee with respect to the
portion of the Total Return Fund's assets invested in the underlying funds. To
the extent that the Total Return Fund invests in the underlying funds, the Fund
will indirectly bear a pro rata share of fees and expenses incurred by the
underlying funds and the investment returns of the Total Return Fund will be net
of the expenses of the underlying funds.
The investment advisory agreements for the underlying funds provide that, as
compensation for services, the Adviser is entitled to receive from each
underlying fund a monthly fee at the following annual rates based upon the
average daily net assets of the underlying fund: 0.85% for the first
$200,000,000 of assets and 0.75% for amounts in excess thereof in the case of
the High Yield Fund, 0.90% for the first $200,000,000 of assets and 0.80% for
amounts in excess thereof in the case of the Emerging Markets Fund, and 0.40% of
the average daily net assets of the U.S. Government Securities Fund. The
investment advisory fee for each underlying 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 Advisory Agreement was approved by the Company's Board of Directors on
October 17, 1994 and by the Fund's sole shareholder, OFFIT Funds Distributor, on
March 1, 1995. Unless sooner terminated, the Advisory Agreement will continue in
effect with respect to the Company until February 28, 1997, and from year to
year thereafter if such continuance is approved at least annually by the
Company's Board of Directors 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.
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
23
<PAGE>
purchasing shares of such a company as agent for and upon the order of a
customer. OFFITBANK believes that it may perform the services described in this
Prospectus with respect to the Company without violation of such laws or
regulations. OFFITBANK is not a member of the Federal Reserve System and is not
subject to the Glass-Steagall Act, the Bank Holding Company Act of 1956 or any
other federal banking law or regulation that might affect its ability to perform
such services.
If the Adviser were prohibited from performing the services described in this
Prospectus with respect to the Funds, it is expected that the Company's Board of
Directors would recommend to each Fund's shareholders that they approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board of Directors. The Company does not anticipate that
investors would suffer any adverse financial consequences as a result of these
occurrences.
DISTRIBUTOR
OFFIT Funds Distributor, Inc., (the "Distributor"), a wholly-owned subsidiary of
BISYS Fund Services Limited Partnership with its principal office at 125 West
55th Street, New York, 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 each 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
became effective January 1, 1997 and continue to be in effect until January 1,
1998 and from year to year thereafter if such continuances are approved at least
annually by the Company's Board of Directors and by a majority of the
24
<PAGE>
Directors who are not parties to such Agreement or "interested persons" (as
defined in the 1940 Act).
Pursuant to the Administration Agreement, BISYS performs certain administrative
and clerical services, including certain accounting services, facilitation of
redemption requests, exchange privileges, and account adjustments and
maintenance of certain books and records; and certain services to the Company's
shareholders, including assuring that investments and redemptions are completed
efficiently, responding to shareholder inquiries and maintaining a flow of
information to shareholders. BISYS also furnishes office space and certain
facilities reasonably necessary for the performance of its services under the
Administration Agreement, and provides the office space, facilities, equipment
and personnel necessary to perform the following services for the Company: SEC
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Company operations, including custodian,
accountants and counsel and other parties performing services or operational
functions for the Company. As compensation for its administrative services,
BISYS receives a monthly fee, based on an annual rate of .15% of aggregate
average daily net assets of the Funds plus an annual fee of $30,000 for each
Fund.
BISYS 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 the Funds' operations. The Funds pay 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
25
<PAGE>
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.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by any or all of the Funds to the organizations
retained to provide services for the Funds may be waived from time to time in
order to increase such Funds' net investment income available for distribution
to shareholders.
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 policy established
by the Company's Board of Directors, the Adviser is primarily responsible for
the Company's portfolio decisions and the placing of the Company's portfolio
transactions.
Portfolio securities normally will be purchased or sold from or to dealers
serving as market makers for the securities at a net price, which may include
dealer spreads and underwriting commissions. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission. In the
over-the-counter market securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While the Adviser generally seeks a
competitive price in placing its orders, the Company may not necessarily be
paying the lowest price available.
26
<PAGE>
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless the transaction is conducted in accordance with procedures established by
the Company's Board of Directors and complies in all other respects with certain
criteria or an exemptive order allowing such transactions is obtained from the
SEC. Affiliated persons of the Company, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for the
Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees and other remuneration received by other brokers in connection
with comparable transactions. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length agency
transaction.
Investment decisions for the Company are made independently from those for other
funds and accounts advised or managed by the Adviser. Such other funds and
accounts may also invest in the same securities as the Company. If those funds
or accounts are prepared to invest in, or desire to dispose of, the same
security at the same time as the Company, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Company or the price paid or received by the Company. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Company with those to be sold or
purchased for other funds or accounts in order to obtain best execution.
PURCHASE OF SHARES
The Company reserves the right, in its sole discretion, to (i) suspend the
offering of shares of its Funds, and (ii) reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interest of
the Company.
REDEMPTION OF SHARES
The Company may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange (the "NYSE") or the bond
market is closed, or trading on the NYSE is restricted as determined by the SEC,
(ii) during any period when an emergency exists as defined by the rules of the
SEC as a result of which it is not reasonably practicable for 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.
27
<PAGE>
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 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 finding the average annual
compounded rates of return over 1, 5 and 10 year periods (or, if sooner, the
period since inception of the Fund) that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The calculation assures that
all dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each 1, 5 and 10 year period
(or, if shorter, the period since inception of the Fund) and the deduction of
all applicable Fund expenses on an annual basis. Average annual total return is
calculated according to the following formula:
P (1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the stated period
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
28
<PAGE>
In addition to total return, a Fund may quote performance in terms of a 30-day
yield. The yield figures provided will be calculated according to a formula
prescribed by the SEC and can be expressed as follows:
a-b
Yield = (---- +1)^6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the minimum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Fund at a discount or premium, the
formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations.
The performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or other independent services which monitor the performance data
of investment companies, and may be quoted in advertising in terms of their
rankings in each applicable universe. In addition, the Company may use
performance reported in financial and industry publications, including Barron's,
Business Week, Forbes, Fortune, Institutional Investor, Money, Morningstar,
Mutual Fund Values, The Wall Street Journal, The New York Times and U.S.A.
Today.
Performance information presented for the Funds should not be compared directly
with performance information of other insurance products without taking into
account insurance-related charges and expenses payable under the variable
annuity contract and variable life insurance policy. These charges and expenses
are not reflected in the Funds' performance and would reduce an investor's
return under the annuity contract or life policy.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax considerations that
are not described in the Prospectus and generally affect each Fund and its
shareholders. No attempt is made to present a detailed explanation of the tax
treatment of each Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
Each Fund intends to qualify to be treated as a "regulated investment company"
("RIC") under the Internal Revenue Code of 1986 (the "Code"). If so qualified,
each Fund will not be subject to federal income tax on its investment company
taxable income and net capital gains to the extent that such investment company
taxable income and net capital gains are distributed in each
29
<PAGE>
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, Reverend Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Thanksgiving and Christmas. The Company determines net asset value as of the
close of the NYSE. However, equity options held by a Fund are priced as of the
close of trading at 4:10 p.m, and futures on U.S. government securities and
index options held by a Fund are priced as of their close of trading at 4:15
p.m.
Each Fund determines net asset value as follows: Securities for which market
quotations are readily available are valued at prices which, in the opinion of
the Directors, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sales price on or,
if no sales are reported (as in the case of some securities traded
30
<PAGE>
over-the-counter) the last reported bid price, except that certain U.S.
government securities are stated at the mean between the reported bid and asked
prices. Short-term investments having remaining maturities of 60 days or less
are stated at amortized cost, which approximates market. All other securities
and assets are valued at their fair value following procedures approved by the
Directors. Liabilities are deducted from the total, and the resulting amount is
divided by the number of shares outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. Securities for which reliable
quotations are not readily available and all other assets will be valued at
their respective fair market value as determined in good faith by, or under
procedures established by, the Company's Board of Directors.
If any securities held by a Fund are restricted as to resale, their fair value
will be determined in good faith by, or under procedures established by, the
Company's Board of Directors. The Directors periodically review such valuations
and procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental 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.
The Funds will invest in foreign securities, and as a result, the calculation of
the Funds' net asset value may not take place contemporaneously with the
determination of the prices of certain of the portfolio securities used in the
calculation. Also, because of the amount of time required to collect and process
trading information as to large numbers of securities issues, the values of
certain securities (such as convertible bonds, U.S. government securities, and
tax-exempt securities) are determined based on market quotations collected
earlier in the day at the latest practicable time prior to the close of the
NYSE. Occasionally, events which affect the values of such securities (and, with
respect to foreign securities, the value of the currency in which the security
is denominated) may occur between the times at which they are determined and the
close of the NYSE and will therefore not be reflected in the computation of a
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by, or under procedures established
by, the Company's Board of Directors. Similarly, market movements
31
<PAGE>
can occur with respect to foreign securities on days on which an investor does
not have access to the Fund.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law. As
used in this Statement of Additional Information, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Company and all Funds, means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of more than 50% of the outstanding shares are present in person or by
proxy or (ii) more than 50% of the Company's outstanding shares. The term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting any single Fund (e.g., approval of Advisory
Agreements), means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy or (ii) more than 50% of
the outstanding shares of the Fund. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Each share of a Fund of the Company is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Fund as
are declared in the discretion of the Company's Board of Directors. In the event
of the liquidation or dissolution of the Company, shares of a Fund are entitled
to receive the assets allocable to that Fund which are available for
distribution, and a proportionate distribution, based upon the relative net
assets of the Funds, of any general assets not belonging to a Fund which are
available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-accessible, fully transferable and redeemable at the
option of the holder.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Company.
Price Waterhouse LLP is located at 1177 Avenue of the Americas, New York, New
York 10036.
32
<PAGE>
COUNSEL
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022,
serves as counsel to the Funds.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain all
the information included in the Registration Statement filed with the SEC under
the Securities Act of 1933 with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Statement of Additional Information pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
The audited financial statements for the OFFITBANK VIF-Emerging Markets Fund and
the OFFITBANK VIF-High Yield Fund for the period ended March 31, 1997 are
incorporated herein by reference to the Company's Annual Report to Shareholders
dated March 31, 1997. The March 31, 1997 financial statements are incorporated
herein in reliance upon the report of Price Waterhouse LLP, independent
accountants, given on the authority of such firm as experts in auditing and
accounting.
33
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in the Prospectus:
With respect to the OFFITBANK VIF - Total Return Fund:
(1) Financial Highlights for the period ended March 31, 1997 for
the OFFITBANK VIF - Emerging Markets Fund and for the High
Yield Fund (audited).
Included in the Statement of Additional Information:
With respect to the OFFITBANK VIF - Emerging Markets Fund series
and the OFFITBANK VIF - High Yield Fund series of the Registrant
only, included in the Annual Report to Shareholders, and
incorporated by reference in the Statement of Additional
Information from the Rule 30-D filing made by the Registrant on
May 30, 1997 (Accession Number 0000922423-97-000479):
(1) Portfolio of Investments dated March 31, 1997 (audited).
(2) Statements of Assets and Liabilities dated March 31, 1997
(audited).
(3) Statements of Operations for the period ended March 31, 1997
(audited).
(4) Statement of Changes in Net Assets for the period ended
March 31, 1997 (audited).
(5) Financial Highlights for the period ended March 31, 1997
(audited).
(6) Notes to Financial Statements dated March 31, 1997
(audited).
(b) Exhibits:
Exhibit
Number Description
------ -----------
Ex-99.B1(a) -- Registrant's Articles of Incorporation (2)
Ex-99.B1(b) -- Registrant's Articles of Amendment (2)
Ex-99.B2 -- Registrant's Amended and Restated By-Laws (2)
Ex-99.B3 -- None.
Ex-99.B4 -- Form of Specimen Share Certificates (2)
Ex-99.B5(a) -- Advisory Agreement between Registrant and OFFITBANK (2)
Ex-99.B5(b) -- Investment Advisory Agreement between the Registrant
and David J. Greene and Company (4)
Ex-99.B5(c) -- Investment Management Agreement between OFFITBANK, the
Registrant and Rockefeller & Co. Inc. (4)
EX-99.B5(d) -- Form of Investment Advisory Agreement between the
Registrant and CVO Greater China Partners, L.P. (6)
Ex-99.B6 -- Distribution Agreement between Registrant and OFFIT
Funds Distributor, Inc. (3)
Ex-99.B7 -- None.
<PAGE>
Ex-99.B8(a) -- Form of Custodian Agreement between Registrant and The
Chase Manhattan Bank, N.A. (1)
EX-99.B8(b) -- Custody Agreement between Registrant and The Bank of
New York (3)
Ex-99.B9(a) -- Administration Agreement between Registrant and BISYS
Fund Services Limited Partnership (3)
Ex-99.B9(b) -- Transfer Agency Agreement between Registrant and BISYS
Fund Services, Inc. (3)
Ex-99.B9(c) -- Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITBANK, C.M. Life Insurance Company, Connecticut
Mutual Life Insurance Company and Connecticut Mutual
Financial Services, L.L.C. (2)
Ex-99.B9(d) -- Participation Agreement among OFFITBANK Variable
Insurance Funds, Inc., OFFIT Funds Distributor, Inc.,
OFFITBANK and Security Equity Life Insurance
Company (2)
Ex-99.B9(e) -- Fund Accounting Agreement between the Registrant and
BISYS Fund Services, Inc. (3)
Ex-99.B10 -- Opinion of Kramer, Levin, Naftalis, Nessen, Kamin &
Frankel (2)
Ex-99.B11(a) -- Consent of Kramer, Levin, Naftalis & Frankel (6)
Ex-99.B11(b) -- Consent of Price Watrerhouse LLP (6)
Ex-99.B12 -- None.
Ex-99.B13 -- Purchase Agreement between Registrant and OFFIT Funds
Distributor, Inc. (2)
Ex-99.B14 -- None.
Ex-99.B15 -- None.
Ex-99.B16 -- Schedules for computation of performance quotation for
the VIF-U.S. Small Cap Fund and DJG Value Equity Fund.
(5)
Ex-B. P of A -- Powers of Attorney (2)
Ex-27 -- Financial Data Schedules (6)
- --------------------------------
(1) Filed as an Exhibit to Registrant's Pre-Effective Amendment No. 1 on
March 6, 1995 and incorporated herein by reference.
(2) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 6 filed
electronically on January 31, 1997, accession number 0000922423-97-
000053 and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 7 filed
electronically on February 13, 1997, accession number 0000922423-97-
000090 and incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 9 filed
electronically on July 29, 1997, accession number 0000922423-97-000638
and incorporated herein by reference.
(5) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 10
filed electronically on October 29, 1997, accession number 0000922423-
97-000893 and incorporated herein by reference.
(6) Filed herewith.
(7) To be filed by Amendment.
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
<PAGE>
Item 26. Number of Holders of Securities
As of January 6, 1998
OFFITBANK VIF-High Yield Fund 3
OFFITBANK VIF-Emerging Markets Fund 3
OFFITBANK VIF-Total Return Fund 0
OFFITBANK VIF-Global Convertible Fund 0
OFFITBANK VIF-U.S. Government Securities Fund 0
OFFITBANK VIF-U.S. Small Cap Fund 1
DJG Value Equity Fund 1
OFFITBANK VIF-Latin American Equity Fund N/A
OFFITBANK VIF-CVO Greater China Fund N/A
OFFITBANK VIF-Mortgage Securities Fund N/A
Item 27. Indemnification
Reference is made to Article VII of Registrant's Articles of
Incorporation (filed as an Exhibit to Registrant's Post-Effective Amendment No.
6 filed electronically on January 31, 1997, accession number 0000922423-
97-000053 and incorporated herein by reference) and Article VIII of Registrant's
Amended and Restated By-Laws (filed as an Exhibit to Registrant's Post-Effective
Amendment No. 6 filed electronically on January 31, 1997, accession number
0000922423-97-000053 and incorporated herein by reference).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
The Adviser provides a wide range of asset management services to
individuals, institutions and retirement benefit plans.
<PAGE>
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
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.
<PAGE>
(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.
125 West 55th Street
New York, New York 10019
(Records relating to the Company)
(2) OFFITBANK
520 Madison Avenue
New York, New York 10022
(advisory records)
(3) OFFIT Funds Distributor, Inc. 125 West 55th Street New York, New
York 10019 (records of principal underwriter)
(4) Rockefeller & Co., Inc.
30 Rockefeller Plaza
New York, New York 10112
(records relating to its functions as investment
subadviser for OFFITBANK VIF-U.S. Small Cap Fund only)
(5) David J. Greene & Company
599 Lexington Avenue
New York, New York 10022
(records relating to its functions as investment
adviser for DJG Value Equity Fund only)
(6) CVO Greater China Partners, L.P.
520 Madison Avenue
New York, New York 10022
(records relating to its functions as investment
adviser for OFFITBANK VIF-CVO Greater China Fund only)
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not Applicable
(b) None.
(c) The Registrant undertakes to furnish each person to whom a
prospectus is delivered, a copy of the Registrant's latest annual
report to shareholders which will include the information
required by item 5A, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all the requirements for effectiveness of this 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 21st day of January, 1998.
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
By /s/ Morris W. Offit
-------------------
Morris W. Offit, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to its Registration Statement has been signed below by the
following persons in the capacities indicated and on the 21st day of January,
1998.
SIGNATURE TITLE
- --------- -----
/s/ Morris W. Offit Director, Chairman of
- ------------------- the Board and President
Morris W. Offit (Principal Executive Officer)
/s/Edward J. Landau
- ----------------------- Director
Edward J. Landau
*
- ----------------------- Director
The Very Reverend James Parks Morton
/s/Wallace Mathai-Davis Secretary and Treasurer
- ----------------------- (Principal Financial and
Wallace Mathai-Davis Accounting Officer)
/s/ Morris W. Offit
- -----------------------
Morris W. Offit
Attorney-in-fact
* Attorney-in-Fact pursuant to powers of attorney filed as an exhibit
to Registrant's Post-Effective Amendment No. 6 filed electronically
on January 31, 1997, accession number 0000922423-97-000053 and
incorporated herein by reference.
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
EX-99.B11(b) Consent of Price Waterhouse LLP
EX-27 Financial Data Schedules
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
Arthur H. Aufses III Monica C. Lord Sherwin Kamin
Thomas D. Balliett Richard Marlin Arthur B. Kramer
Jay G. Baris Thomas E. Molner Maurice N. Nessen
Philip Bentley Thomas H. Moreland Founding Partners
Saul E. Burian Ellen R. Nadler Counsel
Barry Michael Cass Gary P. Naftalis _____
Thomas E. Constance Michael J. Nassau
Michael J. Dell Michael S. Nelson Martin Balsam
Kenneth H. Eckstein Jay A. Neveloff Joshua M. Berman
Charlotte M. Fischman Michael S. Oberman Jules Buchwald
David S. Frankel Paul S. Pearlman Rudolph de Winter
Marvin E. Frankel Susan J. Penry-Williams Meyer Eisenberg
Alan R. Friedman Bruce Rabb Arthur D. Emil
Carl Frischling Allan E. Reznick Maria T. Jones
Mark J. Headley Scott S. Rosenblum Maxwell M. Rabb
Robert M. Heller Michele D. Ross James Schreiber
Philip S. Kaufman Howard J. Rothman Counsel
Peter S. Kolevzon Max J. Schwartz _____
Kenneth P. Kopelman Mark B. Segall
Michael Paul Korotkin Judith Singer M. Frances Buchinsky
Shari K. Krouner Howard A. Sobel Abbe L. Dienstag
Kevin B. Leblang Jeffrey S. Trachtman Ronald S. Greenberg
David P. Levin Jonathan M. Wagner Debora K. Grobman
Ezra G. Levin Harold P. Weinberger Christian S. Herzeca
Larry M. Loeb E. Lisk Wyckoff, Jr. Jane Lee
Pinchas Mendelson
Lynn R. Saidenberg
Special Counsel
-----
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
January 21, 1998
The OFFITBANK Variable Insurance Fund, Inc.
125 West 55th Street
New York, New York 10019
Re: Post-Effective Amendment No. 11 to
Registration Statement on Form N-1A
File No. 33-81748
Gentlemen:
We hereby consent to the reference to our firm as counsel to this
Registration Statement on Form N-1A.
Very truly yours,
/s/Kramer, Levin, Naftalis & Frankel
------------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting part of this Post-Effective Amendment No. 11
to the registration statement on Form N-1A (the "Registration Statement") of our
report dated May 9, 1997, relating to the financial statements and financial
highlights of OFFITBANK VIF-High Yield Fund and OFFITBANK VIF-Emerging Markets
Fund (each constituting a portfolio of The OFFITBANK Variable Insurance Fund,
Inc.), which are also incorporated by reference in such Statement of Additional
Information. We also consent to the references to us under the headings
"Independent Accountants" and "Financial Statements" in such Statement of
Additional Information and to the references to us under the headings "Counsel;
Independent Accountants" in the Prospectuses for OFFITBANK VIF-U.S. Government
Securities Fund and "Financial Highlights" and "Counsel; Independent
Accountants" in the Prospectus for OFFITBANK VIF-Total Return Fund, each of
which also constitutes part of this Registration Statement.
/s/PRICE WATERHOUSE LLP
- -----------------------
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 21, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> OFFITBANK VIF-HIGH YIELD FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 17877
<INVESTMENTS-AT-VALUE> 17876
<RECEIVABLES> 779
<ASSETS-OTHER> 7453
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26108
<PAYABLE-FOR-SECURITIES> 878
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 116
<TOTAL-LIABILITIES> 994
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25082
<SHARES-COMMON-STOCK> 2421
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 25
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1)
<NET-ASSETS> 25114
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 782
<OTHER-INCOME> 0
<EXPENSES-NET> 105
<NET-INVESTMENT-INCOME> 677
<REALIZED-GAINS-CURRENT> 25
<APPREC-INCREASE-CURRENT> (1)
<NET-CHANGE-FROM-OPS> 701
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 677
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2459
<NUMBER-OF-SHARES-REDEEMED> 107
<SHARES-REINVESTED> 65
<NET-CHANGE-IN-ASSETS> 25081
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 77
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 205
<AVERAGE-NET-ASSETS> 9186
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.78
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> 0.78
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.37
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> OFFITBANK VIF-EMERGING MARKETS FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> AUG-28-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 3462
<INVESTMENTS-AT-VALUE> 3509
<RECEIVABLES> 497
<ASSETS-OTHER> 441
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4447
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 101
<TOTAL-LIABILITIES> 101
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4273
<SHARES-COMMON-STOCK> 422
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 12
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50
<NET-ASSETS> 4346
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 143
<OTHER-INCOME> 0
<EXPENSES-NET> 22
<NET-INVESTMENT-INCOME> 121
<REALIZED-GAINS-CURRENT> 29
<APPREC-INCREASE-CURRENT> 50
<NET-CHANGE-FROM-OPS> 200
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 121
<DISTRIBUTIONS-OF-GAINS> 12
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 408
<NUMBER-OF-SHARES-REDEEMED> 1
<SHARES-REINVESTED> 12
<NET-CHANGE-IN-ASSETS> 4312
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 73
<AVERAGE-NET-ASSETS> 2353
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.34
<PER-SHARE-DIVIDEND> 0.48
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.30
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>