Rule 497(e)
Registration No. 33-81748
PROSPECTUS
2
THE OFFITBANK VARIABLE INSURANCE FUND, INC. JULY 29, 1997
AS SUPPLEMENTED ON JANUARY 26, 1998
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OFFITBANK VIF-EMERGING MARKETS FUND
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OFFITBANK VIF - Emerging Markets Fund (the "Fund") is an investment portfolio of
the OFFITBANK Variable Insurance Fund, Inc. (the "Company"), an open-end,
management investment company consisting of ten separate investment portfolios.
The Fund's investment objective is to seek to provide investors with a
competitive total investment return by focusing on current yield and
opportunities for capital appreciation primarily by investing in corporate and
sovereign debt securities of emerging market countries. Under normal
circumstances, the Fund will invest at least 80% of its total assets in debt
instruments, but may invest up to 20% of its total assets in equity securities.
THE FUND MAY INVEST PRIMARILY IN HIGH YIELD, HIGH RISK CORPORATE DEBT SECURITIES
AND SOVEREIGN DEBT OBLIGATIONS WHICH ARE CONSIDERED SPECULATIVE AND SUBJECT TO
CERTAIN RISKS. SEE "INVESTMENT OBJECTIVE AND POLICIES" AND "SPECIAL RISK
CONSIDERATIONS." There can be no assurance that the Fund's investment objective
will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Fund's investment adviser (the "Adviser"). The Adviser currently
manages in excess of $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 Funds may be obtained by calling 1-888-428-3008.
SHARES OF THE FUND ARE SOLD ONLY TO CERTAIN LIFE INSURANCE COMPANIES
(COLLECTIVELY, "PARTICIPATING COMPANIES") AND THEIR SEPARATE ACCOUNTS
(COLLECTIVELY, THE "ACCOUNTS") TO FUND BENEFITS UNDER VARIABLE ANNUITY CONTRACTS
("CONTRACTS") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF ONE OR MORE OF THE
FUNDS IN ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND
POLICY OWNERS ("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH
ALLOCATION RIGHTS ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS.
SHARES ARE REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE
CONTRACTS AND POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated January 31, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the
"Commission") and is available to investors without charge by calling
1-888-428-3008. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus. INVESTORS ARE ADVISED THAT (A) THE
COMPANY IS NOT AUTHORIZED TO ENGAGE IN THE BUSINESS OF BANKING AND (B) SHARES OF
THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY,
OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR ARE THEY FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WHAT YOU NEED TO KNOW
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Highlights................................................................ 2
Financial Highlights...................................................... 3
The Company............................................................... 4
Investment Objective and Policies......................................... 4
Investment Policies and Techniques........................................ 6
Special Risk Considerations............................................... 12
Limiting Investment Risks................................................. 21
Management................................................................ 22
About Your Investment..................................................... 23
How the Company Values Its Shares......................................... 24
How Distributions are Made: Tax Information............................... 24
Shareholder Communications ............................................... 25
Performance Information................................................... 25
Counsel; Independent Accountants.......................................... 26
Appendix A................................................................ A-1
<PAGE>
HIGHLIGHTS
INTRODUCTION
OFFITBANK VIF-Emerging Markets Fund (the "Fund") is one of ten separate
investment portfolios of the OFFITBANK Variable Insurance Fund, Inc. (the
"Company") an open-end, management investment company. The Fund's investment
objective is to provide a competitive total investment return by focusing on
current yield and opportunities for capital appreciation.
FUND MANAGEMENT
OFFITBANK, a New York State chartered trust company, serves as the Fund's
Adviser.
SHARES OF THE FUND
Shares of the Fund are sold only to certain life insurance companies
(collectively, "Participating Companies") and their separate accounts
(collectively, the "Accounts") to fund benefits under variable annuity contracts
("Contracts") and variable life insurance policies ("Policies") to be offered by
the Participating Companies. The Accounts invest in shares of the Fund in
accordance with allocation instructions received from Contract and Policy owners
("Contract Owners" or "Policy Owners," as appropriate). Such allocation rights
are further described in the accompanying Account Prospectus. Shares are
redeemed to the extent necessary to provide benefits under the Contracts and
Policies.
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc., the Fund's Underwriter, to the Accounts without any sales or
other charge, at the Fund's net asset value on each day on which the New York
Stock Exchange ("NYSE") is open for business. The Company will effect orders to
purchase or redeem shares of the Fund, that are based on premium payments,
surrender and transfer requests and any other transaction requests from Contract
and Policy Owners, annuitants and beneficiaries, at the Fund's net asset value
per share next computed after the Account receives such transaction request.
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above.
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset value. See "About Your Investment."
RISK FACTORS
Investment in the Fund is subject to certain risks, as set forth in detail under
"Special Risk Considerations". The Fund will invest at least 80% of its assets
in debt instruments, but may invest up to 20% of its total assets in equity
securities. See "Investment Objective and Policies" and "Special Risk
Considerations".
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FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights of the Fund for the period ended March 31, 1997. The
information below has been derived from financial statements included in the
Annual Report to Shareholders for the period ended March 31, 1997. Such
information has been audited by Price Waterhouse LLP, independent auditors for
the Company. The Annual Report is incorporated by reference into the Statement
of Additional Information. The information set forth below is for a share of the
Fund outstanding for the period indicated. Further information about the
performance of the Company is included in the Annual Report to Shareholders
which may be obtained by calling 1-888-428-3008.
<TABLE>
<CAPTION>
VIF-EMERGING
MARKETS FUND
For the period August
Selected ratios and data for a share of capital stock outstanding 28, 1996* through
through the period: March 31, 1997
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<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD.................................... $10.00
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Net investment income.............................................. 0.48
Net realized and unrealized gains on investments................... 0.34
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Total from investment operations.................................. 0.82
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LESS DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.............................................. (0.48)
Realized Gains..................................................... (0.04)
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Total dividends and distributions.................................. (0 .52)
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NET ASSET VALUE, END OF PERIOD.......................................... $10.30
TOTAL INVESTMENT RETURN+............................................... 8.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................... $4,346
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................................... 1.50%(1)(2)
Net investment income.............................................. 8.04%(1)
PORTFOLIO TURNOVER RATE................................................. 96%
</TABLE>
* Commencement of Operations.
(1) Annualized
(2) If the Fund had borne all expenses that were assumed or waived by the
Adviser and Administrator, the above expense ratio would have been 4.87%
for the Fund.
+ Total return is based on the change in net asset value during the period
and assumes reinvestment of all dividends and distributions.
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<PAGE>
THE COMPANY
The Company, a Maryland corporation formed on July 1, 1994, is designed to serve
as a funding vehicle for Contracts and Policies offered by the Accounts of
Participating Companies. Shares of the Fund are offered only to the Accounts
through OFFIT Funds Distributor, Inc. (the "Distributor"), the principal
underwriter for the Company. The Fund is a no-load, separate, non-diversified
investment portfolio of the Company, an open-end management investment company.
The Company is not authorized to engage in the business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any disadvantages
to Contract or Policy Owners arising from these circumstances. However, it is
theoretically possible that the interests of Contract or Policy Owners
participating in the Company through the Accounts might at some time be in
conflict. In some cases, one or more Accounts might withdraw their investment in
the Funds, which could possibly force the Company to sell portfolio securities
at disadvantageous prices. The Company's Directors intend to monitor events in
order to identify any material irreconcilable conflicts that may possibly arise
and to determine what action, if any, should be taken in response thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an objective which it pursues through investment policies as
described below. The objectives and policies of the Fund can be expected to
affect the return of the Fund and the degree of market and financial risk to
which the Fund is subject. For more information about the investment strategies
employed by the Fund, see "Investment Policies and Techniques." The investment
objective and policies of the Fund may, unless otherwise specifically stated, be
changed by the Directors of the Company without a vote of the shareholders. As a
matter of policy, the Directors would not materially change the investment
objective of the Fund without shareholder approval. There is no assurance that
the Fund will achieve its objective.
Additional portfolios may be created from time to time with different investment
objectives and policies for use as funding vehicles for the Accounts or for
other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Fund, with the classes being subject to different charges and expenses and
having such other different rights as the Directors may prescribe.
The Fund may utilize many of the same investment techniques and invest in
similar securities. Investors should note, however, that the Fund will invest
their assets in accordance with their respective investment objectives and
policies described below. Accordingly, the Adviser expects that the Fund's
investment portfolios will be distinct, notwithstanding their ability to invest
in comparable instruments.
The investment objective of the Fund is to provide a competitive total
investment return by focusing on current yield and opportunities for capital
appreciation. The Fund will seek to achieve its objective by investing primarily
in corporate and sovereign debt instruments of emerging market countries. Under
normal circumstances, the Fund will invest at least 80% of its total assets in
debt instruments, but may invest up to 20% of its total assets in equity
securities. As used in this Prospectus, an "emerging market country" is any
country that is considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (the "World Bank") or the
International Finance Corporation, or is determined by the Adviser to have per
capita gross domestic product below $7,500 (in 1994 dollars). Under normal
circumstances, the Fund will invest at least 25% of its total assets in
securities of issuers whose primary business activity is in the banking
industry. The Fund will not invest 25% or more of its total assets in
obligations issued by any one country, its agencies, instrumentalities or
political subdivisions. See "Special Risk Considerations - Concentration" and
"Limiting Investment Risks."
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The Fund seeks to benefit from investment opportunities deriving from long-term
improving economic and political conditions, and other positive trends and
developments in emerging market countries. Accordingly, the Fund is intended
primarily for long-term investors and should not be considered as a vehicle for
trading purposes. The continuation of a long-term international trend
encouraging greater market orientation and economic growth may result in local
or international political, economic or financial developments that could
benefit the capital markets in emerging market countries.
An "emerging market country" debt instrument or equity security, as used in this
Prospectus, means an instrument or security (a) of an issuer organized or with
more than 50% of its business activities in such emerging market country; (b)
denominated in such country's currency or with a primary trading market in such
emerging market country; (c) of a company which derives at least 50% of its
gross revenues from goods produced, sales made, services performed or
investments in such emerging market country; or (d) issued or guaranteed by the
government of such emerging market country, its agencies, political subdivisions
or instrumentalities, or the central bank of such country. Determinations as to
eligibility will be made by the Adviser based on publicly available information
and inquiries made to companies. See "Special Risk Considerations--Foreign
Securities" in this Prospectus and "Additional Risk Considerations--Non-Uniform
Corporate Disclosure Standards and Governmental Regulation" in the Statement of
Additional Information for a discussion of the nature of publicly available
information for non-U.S.
companies.
DEBT INSTRUMENTS. The Fund intends to invest in debt instruments including
bonds, notes, bills, debentures, convertible securities, debt with attached
warrants, bank obligations, short-term paper, loan participations and
assignments, trust and partnership interests, money market instruments and other
similar instruments. Such instruments may be issued or guaranteed by the
governments of emerging market countries, their agencies, instrumentalities or
political subdivisions, international organizations or business entities located
in such countries, including financial institutions, or companies located in
emerging market countries that are subsidiaries of multinational business
entities. Such obligations may be payable in U.S. dollars, Eurocurrencies or
other currencies (including currencies of emerging market countries which may be
indexed to the U.S. dollar). The Adviser will be free to invest in debt
securities of any maturity and duration and the interest rates on such
securities may be fixed or floating. The Fund's debt instruments may or may not
be listed or traded on a securities exchange.
In selecting particular debt instruments for the Fund, the Adviser intends to
consider factors such as liquidity, price volatility, tax implications, interest
rate sensitivity, foreign currency exchange risks, counterparty risks and
technical market considerations. Debt instruments in which the Fund may invest
will not be required to meet a minimum rating standard and a substantial amount
of such instruments are expected to be non-investment grade securities (i.e.,
rated BB or lower by S&P or D&P, or Ba or lower by Moody's, or if unrated, of
comparable quality as determined by the Adviser). See Appendix A to this
Prospectus for a description of ratings of S&P, Moody's and D&P. Investments in
high yield, high risk debt securities involve comparatively greater risks,
including price volatility and the risk of default in the timely payment of
interest and principal, than higher rated securities. Some of such investments
may be non-performing when purchased. See "Special Risk Considerations--High
Yield Securities."
EQUITY SECURITIES. The Fund may invest up to 20% of its total assets in common
stocks, preferred stocks, detachable warrants and other equity securities that
may or may not be listed or traded on a recognized securities exchange. The Fund
intends that such investments in equity securities often will be related to the
Fund's investments in debt instruments, such as those equity securities received
upon the exercise of convertible debt instruments or attached warrants, or those
equity securities acquired pursuant to investment opportunities deriving from
the Fund's activities in emerging market debt markets. The equity securities
purchased by the Fund may include American Depositary Receipts, European
Depositary Receipts and interests in investment companies.
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<PAGE>
GENERAL. As indicated above, the Fund is generally managed in the style similar
to other open-end investment companies which are managed by OFFITBANK and whose
shares are generally offered to the public. These other OFFITBANK Funds may,
however, employ different investment practices and may invest in securities
different from those in which their counterpart Fund invests, and, as such, may
not have identical portfolios or experience identical investment results.
INVESTMENT POLICIES AND TECHNIQUES
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. When the Fund invests in
foreign securities, they may be denominated in foreign currencies. Thus, the
Fund's net asset value will be affected by changes in exchange rates.
See "Special Risk Considerations."
BRADY BONDS
The Fund may invest in "Brady Bonds" which are debt securities issued or
guaranteed by foreign governments in exchange for existing external commercial
bank indebtedness under a plan announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989. To date, over $154 billion (face amount) of Brady
Bonds have been issued by the governments of 15 countries, the largest
proportion having been issued by Argentina, Brazil, Mexico and Venezuela. Brady
Bonds have been issued only recently, and accordingly, they do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market.
The Fund may invest in either collateralized or uncollateralized Brady Bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least six months of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds which have been issued to date are rated BB or
B by S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may use, as portfolio management strategies, cross currency hedges,
interest rate transactions, commodity futures contracts in the form of futures
contracts on securities, securities indices and foreign currencies, and related
options transactions. The Fund also may enter into forward foreign currency
contracts and options transactions to hedge in connection with currency and
interest rate positions and in order to enhance the Fund's income or gain.
See "Special Risk Considerations--Hedging and Other Strategic Transactions."
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign entity and one or more financial
institutions ("Lenders"). The majority of the Fund's investments in Loans in
emerging markets is expected to be in the form of participations
("Participations") in Loans and assignments ("Assignments") of portions of Loans
from third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower government.
The Fund will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the
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<PAGE>
terms of the loan agreement relating to the loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by the Adviser
to be creditworthy. Creditworthiness will be judged based on the same credit
analysis performed by the Adviser when purchasing marketable securities. When
the Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Fund as the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Fund anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Funds' ability to dispose of particular
Assignments or Participations when necessary to meet the Funds' liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets, respectively. See "Illiquid Securities" below.
STRUCTURED PRODUCTS
The Fund may invest in interests in entities organized and operated solely for
the purpose of restructuring the investment characteristics of certain debt
obligations. This type of restructuring involves the deposit with or purchase by
an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("structured products") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured products to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to structured products is dependent on the extent
of the cash flow on the underlying instruments. The Fund may invest in
structured products which represent derived investment positions based on
relationships among different markets or asset classes.
The Fund may also invest in other types of structured products, including among
others, inverse floaters, spread trades and notes linked by a formula to the
price of an underlying instrument or currency. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent) (the "reference
rate"). As an example, inverse floaters may constitute a class of collateralized
mortgage obligations with a coupon rate that moves inversely to a designated
index, such as LIBOR (London Interbank Offered Rate) or the Cost of Funds Index.
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
A spread trade is an investment position relating to a difference in the prices
or interest rates of two securities or currencies where the value of the
investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities or
currencies. When the Fund invests in notes linked to the price of an underlying
instrument or currency, the price of the underlying security or the exchange
rate of the currency is determined by a multiple (based on a formula) of the
price of such underlying security or exchange rate of such currency. Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security. Total return on the
structured product is derived by linking return to one or
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more characteristics of the underlying instrument. Although the Fund's purchase
of structured products would havea similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leverage for purposes of the limitations placed on the extent of the Fund's
assets that may be used for borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). As a result, the Fund's investment in these structured products may
be limited by the restrictions contained in the 1940 Act. See "Other Investment
Companies" below. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which the Fund invests may
be deemed illiquid and subject to the 15% limitation described below under
"Illiquid Securities."
DEPOSITORY RECEIPTS AND DEPOSITORY SHARES
The Fund may invest in American Depository Receipts ("ADRs") or other similar
securities, such as American Depository Shares and Global Depository Shares,
convertible into securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. Generally, ADRs
in registered form are designed for use in U.S. securities markets. As a result
of the absence of established securities markets and publicly-owned corporations
in certain foreign countries as well as restrictions on direct investment by
foreign entities, the Fund may be able to invest in such countries solely or
primarily through ADRs or similar securities and government approved investment
vehicles. The Adviser expects that the Fund, to the extent of its investment in
ADRs, will invest predominantly in ADRs sponsored by the underlying issuers. The
Fund, however, may invest in unsponsored ADRs. Issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, which are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
have several unique investment characteristics such as (1) higher yields than
common stocks, but lower yields than comparable nonconvertible securities, (2) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) the potential for capital appreciation if
the market price of the underlying common stock increases.
The Fund has no current intention of converting any convertible securities they
may own into equity securities or holding them as an equity investment upon
conversion, although they may do so for temporary purposes. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by the Fund is called for redemption, the Fund may be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-related securities, consistent with their
respective investment objectives and policies, that provide funds for mortgage
loans made to residential homeowners. These include securities which represent
interests in pools of mortgage loans made by lenders such as savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled for sale to investors (such as the Fund) by various
governmental, government-related and private organizations. Interests in pools
of mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in
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fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide amonthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Prepayments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payments in such pools. However, timely payment of
interest and/or principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool or hazard
insurance. There can be no assurance that the private insurers can meet their
obligations under the policies. The Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experience
and practices of the poolers the Adviser determines that the securities meet the
Fund's investment criteria. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
The Adviser expects that governmental, governmental-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-term fixed rate mortgages. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with the Fund's investment objective and policies, consider
making investments in such new types of securities. For additional information
regarding mortgage-related securities and the risks associated with investment
in such instruments, see "Additional Information on Portfolio Instruments -
Mortgage-Related Securities" in the Statement of Additional Information.
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities in accordance with its investment
objective and policies. Asset-backed securities represent an undivided ownership
interest in a pool of installment sales contracts and installment loans
collateralized by, among other things, credit card receivables and automobiles.
In general, asset-backed securities and the collateral supporting them are of
shorter maturity than mortgage loans. As a result, investment in these
securities should result in greater price stability for the Fund.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional Information.
The Fund will not limit their investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally traded on a
national securities exchange, such securities are widely traded by brokers and
dealers, and to such extent will not be considered illiquid for the purposes of
the Fund's limitation on investment in illiquid securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge"). Additionally, for example,
when the Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward sale contract to sell an
amount of
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that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in suchforeign currency. Conversely, when the
Fund believes that the U.S. dollar may suffer a substantial decline against
foreign currency, it may enter into a forward purchase contract to buy that
foreign currency for a fixed dollar amount ("position hedge"). In this
situation, the Fund may, in the alternative, enter into a forward contract to
sell a different foreign currency for a fixed U.S. dollar amount where such Fund
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which portfolio securities of the Fund are denominated
("cross-hedge"). The Fund's custodian will place cash not available for
investment or U.S. government securities or other high quality debt securities
in a segregated account having a value equal to the aggregate amount of the
Fund's commitments under forward contracts entered into with respect to position
hedges, cross-hedges and transaction hedges, to the extent they do not already
own the security subject to the transaction hedge. If the value of the
securities placed in a segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to such
contracts. As an alternative to maintaining all or part of the segregated
account, the Fund may purchase a call option permitting such Fund to purchase
the amount of foreign currency being hedged by a forward sale contract at a
price no higher than the forward contract price or the Fund may purchase a put
option permitting the Fund to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the forward contract
price. Unanticipated changes in currency prices may result in poorer overall
performance for the Fund than if it had not entered into such contracts. If the
party with which the Fund enters into a forward contract becomes insolvent or
breaches its obligation under the contract, then the Fund may lose the ability
to purchase or sell a currency as desired.
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund would sell portfolio securities to financial
institutions, such as banks and broker-dealers, and agree to repurchase them at
an agreed upon date, price and interest payment. When effecting reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. A reverse repurchase agreement involves the risk that
the market value of the portfolio securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, which price is
fixed at the time the Fund enters into such agreement.
SECURITIES LOANS, REPURCHASE AGREEMENTS, WHEN-ISSUED AND FORWARD COMMITMENTS
TRANSACTIONS
The Fund may lend portfolio securities in an amount up to 30% of its assets to
broker-dealers, major banks or other recognized domestic institutional borrowers
of securities. The Fund may also enter into repurchase agreements with dealers,
domestic banks or recognized financial institutions which, in the opinion of the
Adviser, present minimal credit risks. These transactions must be fully
collateralized at all times, but involve some risk to the Fund if the other
party should default on its obligations and the Fund is delayed or prevented
from recovering the collateral. The Fund may also purchase securities on a
when-issued basis or for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of the securities
declines prior to the settlement date.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS
The Fund may invest in zero coupon securities and pay-in-kind bonds and a
substantial portion of the Fund's sovereign debt securities may be acquired at a
discount. These investments involve special risk considerations. Zero coupon
securities are debt securities that pay no cash income but are sold at
substantial discounts from their value at maturity. When a zero coupon security
is held to maturity, its entire return, which consists of the amortization of
discount, comes from the difference between its purchase price and its maturity
value. This difference is known at the time of purchase, so that investors
holding zero coupon securities until maturity know at the time of their
investment what the return on their investment will be. Certain zero coupon
securities also are sold at substantial discounts from their maturity value and
provide for the commencement of regular interest payments at a deferred date.
The Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a
portion of their interest in the form of debt or equity securities. The Fund may
receive payments from pay-in-kind
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bonds in the form of both debt and equity securities provided such equity
securities do not cause the Fund to exceed its 20% investment limitation in such
securities. Zero coupon securities and pay-in-kind bonds may be issued by a wide
variety of corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Fund is required to accrue as income each year the value of
securities received in respect of pay-in-kind bonds and a portion of the
original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Fund will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Fund may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements.
ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities which are not readily marketable, time
deposits and repurchase agreements not terminable within seven days. Illiquid
assets are assets which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment. Securities that have readily available market quotations
are not deemed illiquid for purposes of this limitation (irrespective of any
legal or contractual restrictions on resale). The Fund may purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Rule 144A securities generally must be sold
to other qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% limitation on investment in illiquid securities. The ability to
sell Rule 144A securities to qualified institutional buyers is a recent
development and it is not possible to predict how this market will mature. The
Adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES
The Fund reserves the right to invest up to 10% of its total assets in the
securities of other investment companies. The Fund may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company. The Fund
does not intend to invest in such investment companies unless, in the judgment
of the Adviser, the potential benefits of such investment justify the payment of
any premium to net asset value of the investment company or of any sales charge.
The Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by investment companies in which it invests in addition to
the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the Fund's investment
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
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quality debt securities or money market instruments of U.S. or foreign issuers,
and most or all of the Fund's investments may be made in the United States and
denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.
PORTFOLIO TURNOVER
The Fund will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. Because emerging markets can be
especially volatile, securities of emerging markets countries may at times be
held only briefly. It is not anticipated that, under normal conditions, the
portfolio turnover rates for the Fund will exceed 200% in any one year. A high
rate of portfolio turnover (100% or more) involves correspondingly greater
brokerage commission expenses and/or markups and markdowns, which will be borne
directly by the Fund and indirectly by the Fund's shareholders. High portfolio
turnover may also result in the realization of substantial net capital gains.
SPECIAL RISK CONSIDERATIONS
GENERAL
The Fund's net asset value will fluctuate, reflecting fluctuations in the market
value of its portfolio positions and its net currency exposure. The value of the
Fund's fixed income securities generally fluctuates inversely with interest rate
movements and fixed income securities with longer maturities tend to be subject
to increased volatility.
There is no assurance that the Fund will achieve its investment objective.
The Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of their
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk of
loss with respect to its portfolio securities as compared to a diversified fund.
The Fund, however, intends to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code") applicable
to segregated asset accounts underlying variable products under section 817(h)
of the Code and to regulated investment companies under Subchapter M of the
Code.
HIGH YIELD SECURITIES
GENERAL. The Fund may invest all or substantially all of its assets in high
yield, high risk debt securities, commonly referred to as "junk bonds."
Securities rated below investment grade and comparable unrated securities offer
yields that fluctuate over time, but generally are superior to the yields
offered by higher rated securities. However, securities rated below investment
grade also involve greater risks than higher rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which the Fund may invest may have, or be
considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's, S&P or D&P (i.e., rated C
by Moody's or CCC or lower by S&P or D&P). Under rating agency guidelines, these
securities are considered to have extremely poor prospects of ever attaining any
real investment standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay principal
when due in the event of adverse business, financial or economic conditions,
and/or to be in default or not current in the payment of interest or principal.
Such securities are considered speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. Unrated securities deemed comparable to these lower- and
lowest-rated securities will have similar characteristics. Accordingly, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by the Fund with a commensurate effect on
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<PAGE>
the value of their respective shares. Therefore, an investment in the Fund
should not be considered as a complete investment program for all investors.
The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on
the Fund's ability to dispose of particular portfolio investments and may limit
its ability to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If the Fund is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Company's Board of Directors to value the Fund's
portfolio securities and the Company's Directors may have to use a greater
degree of judgment in making such valuations. Furthermore, adverse publicity and
investor perceptions about lower-rated securities, whether or not based on
fundamental analysis, may tend to decrease the market value and liquidity of
such lower-rated securities. Less liquid secondary markets may also affect the
Fund's ability to sell securities at their fair value. In addition, the Fund may
invest up to 15% of its net assets, measured at the time of investment, in
illiquid securities, which may be more difficult to value and to sell at fair
value. If the secondary markets for high yield, high risk debt securities
contract due to adverse economic conditions or for other reasons, certain
previously liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may increase.
The ratings of fixed income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.
PORTFOLIO RATINGS. During the fiscal period ended March 31, 1997, the percentage
of average annual assets of the Fund, calculated on a dollar-weighted basis,
which was invested in securities within the various ratings categories (based on
the higher of Standard & Poor's Corporation and Moody's Investor Service, Inc.
ratings as described in Appendix A), and in unrated securities determined to be
of comparable quality, was as follows:
BB/Ba.............................. 26.88%
B/B................................ 13.34%
Unrated............................ 39.17%
Cash/Cash Equivalents............... 20.61%
------
Total Average Annual Assets: ........... 100%
CORPORATE DEBT SECURITIES. While the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them, so
that their ability to service their debt obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. The risk
of loss due to default in payment of interest or principal by such issuers is
significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
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Many fixed income securities, including certain U.S. corporate fixed income
securities in which the Fund may invest, contain call or buy-back features which
permit the issuer of the security to call or repurchase it. Such securities may
present risks based on payment expectations. If an issuer exercises such a "call
option" and redeems the security, the Fund may have to replace the called
security with a lower yielding security, resulting in a decreased rate of return
for the Fund.
SOVEREIGN DEBT SECURITIES. Investing in sovereign debt securities will expose
the Fund to the direct or indirect consequences of political, social or economic
changes in the developing and emerging countries that issue the securities. The
ability and willingness of sovereign obligors in developing and emerging
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country. Countries
such as those in which the Funds may invest have historically experienced, and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's cash
flow situation, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of its debt service burden to the economy as a
whole, and its government's policy towards the International Monetary Fund, the
World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than U.S. dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign sovereign
obligor cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks and multilateral organizations, and inflows of
foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. These obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among
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other things, reducing and rescheduling interest and principal payments by
negotiating new or amended credit agreements or converting outstanding principal
and unpaid interest to Brady Bonds, and obtaining new credit to finance interest
payments. Holders of certain foreign sovereign debt securities may be requested
to participate in the restructuring of such obligations and to extend further
loans to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Fund may invest will not be
subject to similar defaults or restructuring arrangements which may adversely
affect the value of such investments. Furthermore, certain participants in the
secondary market for such debt may be directly involved in negotiating the terms
of these arrangements and may therefore have access to information not available
to other market participants.
In addition to high yield foreign sovereign debt securities, the Fund may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Foreign Securities" below.
FOREIGN SECURITIES
Most of the Fund's assets will be invested in the securities of non-U.S.
issuers. Investors should recognize that investing in securities of non-U.S.
issuers involves certain risks and special considerations, including those set
forth below, which are not typically associated with investing in securities of
U.S. issuers. Further, certain investments that the Fund may purchase, and
investment techniques in which it may engage, involve risks, including those set
forth below.
Social, Political and Economic Factors. Many countries in which the Fund will
invest, and the emerging market countries in particular, may be subject to a
substantially greater degree of social, political and economic instability than
is the case in the United States, Japan and Western European countries. Such
instability may result from, among other things, some or all of the following:
(i) authoritarian governments or military involvement in political and economic
decision-making, and changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies and terrorist activities; (iv)
hostile relations with neighboring countries; and (v) drug trafficking. Social,
political and economic instability could significantly disrupt the principal
financial markets in which the Funds invest and adversely affect the value of
the Fund's assets.
Individual foreign economies in general, and those of emerging market countries
in particular, may differ favorably or unfavorably and significantly from the
U.S. economy in such respects as the rate of growth of gross domestic product or
gross national product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, structural unemployment and balance of
payments position. Governments of many of these countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In some cases, the government owns or controls many companies, including
some of the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in many countries,
including emerging market countries, which could affect private sector companies
and the Fund, and on market conditions, prices and yields of securities in the
Fund's portfolio. There may be the possibility of nationalization or
expropriation of assets, or future confiscatory levels of taxation affecting the
Fund. In the event of nationalization, expropriation or other confiscation, the
Fund may not be fairly compensated for its loss and could lose its entire
investment in the country involved.
Investment and Repatriation Restrictions. Investment by the Fund in non-U.S.
issuers may be restricted or controlled to varying degrees. These restrictions
may limit or preclude investment in certain of such issuers or countries and may
increase the costs and expenses of the Fund. For example, certain countries
require governmental approval prior to investments by foreign persons in the
country or in a particular company or industry sector or limit investment by
foreign persons to only a specific class of securities of a company which may
have less advantageous terms (including price) than securities of the company
available for purchases by nationals. Certain countries may also restrict or
prohibit investment opportunities in issuers or industries deemed important
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to national interests. As a result of investment restrictions, the Fund may, in
certain countries (such as Mexico) invest through intermediary vehicles or
trusts. In addition, the repatriation of both investment income and capital from
some of these countries requires governmental approval and if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose temporary restrictions on foreign capital remittances abroad. Even
where there is no outright restriction on repatriation of capital, the mechanics
of repatriation may affect certain aspects of the operation of the Fund.
The Fund could be adversely affected by delays in, or a refusal to grant any
required governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, the Fund was unable to distribute
substantially all of its net investment income and long-term capital gains
within applicable time periods, the Fund could be subject to U.S. federal income
and excise taxes which would not otherwise be incurred and may cease to qualify
for the favorable tax treatment afforded to regulated investment companies under
the Code, in which case it would become subject to U.S. federal income tax on
all of its income and gains.
Currency Fluctuations. Because the Fund may invest a substantial portion of its
assets in the securities of foreign issuers which are denominated in foreign
currencies, the strength or weakness of the U.S. dollar against such foreign
currencies will account for part of the Fund's investment performance. A decline
in the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of the Fund's holdings of securities
denominated in such currency and, therefore, will cause an overall decline in
the Fund's net asset value and any net investment income and capital gains to be
distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.
Inflation. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and emerging
market countries in particular. In an attempt to control inflation, wage and
price controls have been imposed at times in certain countries.
Market Characteristics; Differences in Securities Markets. The securities
markets in many countries, and in emerging markets in particular generally have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies listed on such markets may be less liquid and more
volatile than equity securities of U.S. companies of comparable size. Some of
the stock exchanges outside of the United States and in emerging market
countries, to the extent that established securities markets even exist, are in
the earlier stages of their development. A high proportion of the shares of many
foreign companies may be held by a limited number of persons, which may limit
the number of shares available for investment by the Fund. A limited number of
issuers in most, if not all, of these securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
In addition, the application of certain 1940 Act provisions may limit the Fund's
ability to invest in certain non-U.S. issuers and to participate in public
offerings in these countries. The limited liquidity of certain non-U.S.
securities markets may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so.
Many companies traded on securities markets in many foreign countries are
smaller, newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market making and arbitrage activities are
generally less extensive in such markets and with respect to such companies,
which may contribute to increased volatility and reduced liquidity of such
markets or such securities. Accordingly, each of these markets and companies may
be subject to greater influence by adverse events generally affecting the
market, and by large investors trading significant blocks of securities, than is
usual in the United States. To the extent that any of these countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country
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<PAGE>
may trade at price-earning multiples higher than those of comparable companies
trading on securities markets in the United States, which may not be
sustainable. In addition, risks due to the lack of modern technology, the lack
of a sufficient capital base to expand business operations, the possibility of
permanent or temporary termination of trading, and greater spreads between bid
and ask prices may exist in such markets.
Trading practices in certain foreign securities markets are also significantly
different from those in the United States. Brokerage commissions and other
transaction costs on the securities exchanges in many countries are generally
higher than in the United States. In addition, securities settlements and
clearance procedures in certain countries, and, in particular, in emerging
market countries, are less developed and less reliable than those in the United
States and the Fund may be subject to delays or other material difficulties and
could experience a loss if a counterparty defaults. Delays in settlement could
result in temporary periods when assets of the Funds are uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. The inability to dispose of a portfolio security due
to settlement problems could result either in losses to the Fund due to
subsequent declines in the value of such portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
Non-U.S. Subcustodians. Rules adopted under the 1940 Act permit the Fund to
maintain its non-U.S. securities and cash in the custody of certain eligible
non-U.S. banks and securities depositories. Certain banks in non-U.S. countries
may not be eligible subcustodians for the Fund, in which event the Fund may be
precluded from purchasing securities in which they would otherwise invest, and
other banks that are eligible subcustodians may be recently organized or
otherwise lack extensive operating experience. At present, custody arrangements
complying with the requirements of the Securities and Exchange Commission (the
"Commission") are available in each of the countries in which the Adviser
intends to invest. In certain countries in which the Fund may make investments,
there may be legal restrictions or limitations on the ability of the Fund to
recover assets held in custody by subcustodians in the event of the bankruptcy
of the subcustodian.
Government Supervision; Legal Systems. Disclosure and regulatory standards in
certain foreign countries, including emerging market countries, are in many
respects less stringent than U.S. standards. There may be less government
supervision and regulation of securities exchanges, listed companies and brokers
in these countries than exists in the United States. Brokers in some countries
may not be as well capitalized as those in the United States, so that they may
be more susceptible to financial failure in times of market, political, or
economic stress, exposing the Fund to a risk of loss. Less information may be
available to the Fund than with respect to investments in the United States and,
in certain of these countries, less information may be available to the Fund
than to local market participants. In addition, existing laws and regulations
are often inconsistently applied. Foreign investors may be adversely affected by
new laws and regulations, changes to existing laws and regulations and
preemption of local
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laws and regulations by national laws. In circumstances where adequate laws
exist, it may not be possible to obtain swift and equitable enforcement of the
law.
Financial Information and Standards. Non-U.S. issuers may be subject to
accounting, auditing and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular,
the assets and profits appearing on the financial statements of certain non-U.S.
issuers may not reflect their financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting
rules may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Moreover,
substantially less information may be publicly available about non-U.S. issuers
than is available about U.S. issuers.
In addition to the foreign securities listed above, the Fund may also invest in
foreign sovereign debt securities, which involve certain additional risks. See
"Sovereign Debt Securities" above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may be authorized to use a variety of investment strategies to hedge
various market risks (such as interest rates, currency exchange rates and broad
or specific market movements), to manage the effective maturity or duration of
debt instruments held by the Fund, or, with respect to certain strategies, to
seek to increase the Fund's income or gain (such investment strategies and
transactions are referred to herein as "Hedging and Other Strategic
Transactions"). Currently, the Fund may use, as portfolio management strategies,
cross currency hedges, interest rate transactions, commodity futures contracts
in the form of futures contracts on securities, securities indices and foreign
currencies, and related options transactions. The Fund also may enter into
forward foreign currency contracts and options transactions to hedge in
connection with currency and interest rate positions and in order to enhance the
Fund's income or gain.
A discussion of the risks associated with Hedging and Other Strategic
Transactions follows below. The Fund will not be obligated, however, to pursue
any of such strategies and Fund makes no representation as to the availability
of these techniques at this time or at any time in the future. In addition, the
Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable rules and regulations of the
Commodity Futures Trading Commission ("CFTC") thereunder and the federal income
tax requirements applicable to regulated investment companies which are not
operated as commodity pools. To the extent not otherwise restricted by the
Commission, the CFTC, the Code or its investment objectives and policies, the
Fund may utilize, without limitation, Hedging and Other Strategic Transactions.
For further information see "Additional Information on Investment Policies and
Techniques - Hedging and Other Strategic Transactions" and "Additional
Information Concerning Taxes" in the Statement of Additional Information.
IN GENERAL
Subject to the constraints described above, the Fund may (if and to the extent
so authorized) purchase and sell (or write) exchange-listed and over-the-counter
put and call options on securities, index futures contracts, financial futures
contracts and fixed income indices and other financial instruments, and enter
into financial futures contracts, interest rate transactions and currency
transactions (collectively, these transactions are referred to in this
Prospectus as "Hedging and Other Strategic Transactions"). The Fund's interest
rate transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
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Hedging and Other Strategic Transactions may generally be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The Fund may use any or all types
of Hedging and Other Strategic Transactions which it is authorized to use at any
time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any authorized Hedging and Other Strategic
Transaction will be a function of numerous variables, including market
conditions. The ability of the Fund to utilize Hedging and Other Strategic
Transactions successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select the Fund's
securities. The Fund is not a "commodity pool' (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Other Strategic Transactions involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging, and non-hedging purposes to the extent
permitted by CFTC regulations; provided that the Fund may enter into futures
contracts or options thereon for purposes other than bona fide hedging if
immediately thereafter, the sum of the amount of its initial margin and premiums
on open contracts would not exceed 5% of the liquidation value of the Fund's
portfolio; provided further, than in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of certain Hedging and Other Strategic
Transactions will require that the Fund segregate cash, U.S. government
securities or other liquid high grade debt obligations to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. A detailed discussion of various
Hedging and Other Strategic Transactions, including applicable regulations of
the CFTC and the requirement to segregate assets with respect to these
transactions, appears in the Statement of Additional Information.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
Hedging and Other Strategic Transactions have special risks associated with
them, including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of the Hedging and Other Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options could result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, or cause the Fund to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses. Although the Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions.
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<PAGE>
Because currency control is of great importance to the issuing governments and
influences economic planning and policy, purchases and sales of currency and
related instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulations or
exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to the Fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures
contracts are subject to the same risks that apply to the use of futures
contracts generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures contracts is relatively new, and the ability
to establish and close out positions on these options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Losses resulting from the use of Hedging and Other Strategic Transactions will
reduce the Fund's net asset value, and possibly income, and the losses can be
greater than if Hedging and Other Strategic Transactions had not been used.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken as
part of non-U.S. Hedging and Other Strategic Transactions also could be
adversely affected by: (1) other complex foreign political, legal and economic
factors, (2) lesser availability of data on which to make trading decisions than
in the United States, (3) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Other Strategic Transactions by the Fund will require,
among other things, that the Fund segregate cash, liquid high grade debt
obligations or other assets with its custodian, or a designated sub- custodian,
to the extent the Fund's obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency. In
general, either the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by the Fund,
for example, will require the Fund to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid high grade debt obligations
equal to the excess of the index value over the exercise price on a current
basis. A put option on securities written by the Fund will require the Fund to
segregate liquid high grade debt obligations equal to the exercise price. Except
when the Fund enters into a forward contract in connection with the purchase or
sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold 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.
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OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when the Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option on a futures contract, the Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt securities or other acceptable assets. The
Fund will accrue the net amount of the excess, if any, of its obligations
relating to swaps over its entitlements with respect to each swap on a daily
basis and will segregate with its custodian, or designated sub-custodian, an
amount of cash or liquid high grade debt obligations having an aggregate value
equal to at least the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Hedging and Other Strategic Transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. The
Fund may also enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding obligation in
related options and Hedging and Other Strategic Transactions. The Fund could
purchase a put option, for example, if the strike price of that option is the
same or higher than the strike price of a put option sold by the Fund. Moreover,
instead of segregating assets if it holds a futures contracts or forward
contract, the Fund could purchase a put option on the same futures contract or
forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging and Other Strategic Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it terminates
prior to that time, assets equal to any remaining obligation would need to be
segregated.
CONCENTRATION
Under normal market conditions, the Fund may invest greater than 25% of its
assets in securities of issuers whose primary business activity is in the
banking industry (see "Limiting Investment Risks" below). As such, an investment
in the Fund should be made with an understanding of the characteristics of the
banking industry and the risks that such an investment may entail. Banks are
subject to extensive government regulations that may limit both the amounts and
types of loans and other financial commitments that may be made and the interest
rates and fees that may be charged. The profitability of this industry is
largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from financial
difficulties of borrowers might affect a bank's ability to meet its obligations.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic obligations. For a discussion of additional risks, see
"Foreign Securities" above.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there
is no limitation with respect to investment in obligations issued
or guaranteed by the U.S. government, its agencies or
instrumentalities; and provided further that, under
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normal market conditions, this limitation shall not apply with
respect to the purchase of securities of issuers whose primary
business activity is in the banking industry.
2. The Fund may not borrow money (except that they may enter into
reverse repurchase agreements) except from banks for temporary or
emergency purposes; provided, that (a) the amount of such
borrowing may not exceed 20% of the value of the Fund's total
assets and (b) the Fund will not purchase portfolio securities
while such outstanding borrowing exceeds 5% of the value of its
total assets.
3. The Fund may not invest an amount equal to 15% or more of the
current value of its net assets in investments that are illiquid.
The foregoing investment limitations and certain of those described in the
Statement of Additional Information under "Investment Limitations" are
fundamental policies of the Fund that may be changed only when permitted by law
and approved by the holders of a "majority" of the Fund's outstanding shares. If
a percentage restriction on investment or use of assets contained in these
investment limitations or elsewhere in this Prospectus or Statement of
Additional Information is adhered to at the time a transaction is effected,
later changes in percentage resulting from any cause other than actions by the
Fund will not be considered a violation; provided, that the restrictions on
borrowing described in (2) and the restrictions on illiquid investments
described in (3) above shall apply at all times. As used in this Prospectus and
in the Statement of Additional Information, the term "majority", when referring
to the approvals to be obtained from shareholders in connection with matters
affecting the Fund (e.g., approval of investment advisory contracts), means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting
if the holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. Shareholders are entitled to one vote for each full share held and
to fractional votes for fractional shares held.
MANAGEMENT
The business and affairs of the Fund are managed under the general direction and
supervision of the Company's Board of Directors. The Fund's day-to-day
operations are handled by the Company's officers.
INVESTMENT ADVISER
OFFITBANK provides investment advisory services to the Fund pursuant to an
Investment Advisory Agreement with the Company (the "Advisory Agreement").
Subject to such policies as the Company's Board of Directors may determine, the
Adviser makes investment decisions for the Fund.
The Advisory Agreement provides that, as compensation for services, the Adviser
is entitled to receive from the Fund a monthly fee at the annual rate of .90%
for the first $200,000,000 of assets and .80% for amounts in excess thereof
based upon the average daily net assets of the Fund. The investment advisory fee
for the Fund is higher than that paid by most investment companies, but is
comparable to that paid by other investment companies that have strategies
focusing on high yield and international investments.
The Adviser is a New York State chartered trust company. Under its charter, the
Adviser may neither accept deposits nor make loans except for deposits or loans
arising directly from its exercise of the fiduciary powers granted it under the
New York Banking Law. The Adviser's principal business is the rendering of
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. The Adviser specializes
in fixed income management and offers its clients a complete range of fixed
income investments in capital markets throughout the world. The Adviser
currently manages in excess of $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.
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<PAGE>
PORTFOLIO MANAGERS. Dr. Wallace Mathai-Davis and Richard M. Johnston serve as
portfolio managers of the Fund. Dr. Mathai-Davis is a Managing Director of the
Adviser and has been associated with the Adviser since 1986. Mr. Johnston is a
Managing Director of the Adviser and has been the director of Latin American
investments since 1992. From 1988 to 1992 Mr. Johnston was Vice President,
International Corporate Finance at Salomon Brothers Inc.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
serves as the Company's administrator and generally assists the Company in all
aspects of its administration and operation. The Chase Manhattan Bank, N.A.
serves as custodian of the assets of the Fund. BISYS Fund Services, Inc.
provides transfer agency services and dividend disbursing services for the Fund.
Pursuant to an Administration Agreement between the Company and BISYS, BISYS is
entitled to a monthly fee, based on an annual rate of .15% of aggregate average
daily net assets of the Company as compensation for its administrative services.
BISYS may waive this fee from time to time. The principal business address of
BISYS and BISYS Fund Services, Inc. is 3435 Stelzer Road, Columbus, Ohio 43219.
The principal business address of The Chase Manhattan Bank, N.A. is 4 Metrotech
Center, Brooklyn, New York 11245.
FUND EXPENSES
In addition to the fees described above with respect to the Investment Advisory
Agreement, the Fund will be responsible for expenses relating to administration,
custody, transfer agency, legal, audit and accounting, directors fees and other
miscellaneous expenses pursuant to written agreements with such service
providers or otherwise. Such expenses are subject to waiver by the relevant
service provider or reimbursement by the Adviser or Administrator.
ABOUT YOUR INVESTMENT
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc., the Fund's Principal Underwriter, to the Accounts without any
sales or other charge, at the Fund's net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for business. The Company will effect
orders to purchase or redeem shares of the Fund, that are based on premium
payments, surrender and transfer requests and any other transaction requests
from Contract and Policy Owners, annuitants and beneficiaries, at the Fund's net
asset value per share next computed after the Account receives such transaction
request. Any orders to purchase or redeem Fund shares that are not based on
actions by Contract or Policy Owners, annuitants, and beneficiaries will be
effected at the Fund's net asset value per share next computed after the order
is received by the Distributor. The Fund reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Individuals may not place orders directly with the Fund. Please refer to the
appropriate Account Prospectus of the Participating Company for more information
on the purchase of Portfolio shares.
REDEMPTION OF SHARES
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above. Shares redeemed are entitled to earn dividends, if
any, up to and including the day redemption is effected. There is no redemption
charge. Payment of the redemption price will normally be made within seven days
after receipt of such tender for redemption.
The right of redemption may be suspended or the date of payment may be postponed
for any period during which the NYSE is closed (other than customary weekend and
holiday closings) or during which the SEC determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
SEC) exists as a result of which disposal by the Fund of securities is not
reasonably practicable or as a result of which it is not
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<PAGE>
reasonably practicable for the Company fairly to determine the value of the
Fund's net assets, or for such other periods as the SEC may by order permit for
the protection of security holders of the Company.
EXCHANGE PRIVILEGE
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset values.
HOW THE COMPANY VALUES ITS SHARES
The net asset value per share of the Fund is calculated once daily at 4:15 p.m.,
New York time, Monday through Friday, each day the NYSE is open. The net asset
value per share of the Fund is computed by dividing the value of the net assets
of the Fund by the total number of Fund shares outstanding. Equity securities
held by the Fund are valued at the last sale price on the exchange or in the
principal over-the-counter market in which such securities are traded, as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price. Debt securities held by the Fund
generally are valued based on quoted bid prices. Short-term debt investments
having maturities of 60 days or less are amortized to maturity based on their
cost, and if applicable, adjusted for foreign exchange translation. Foreign
securities are valued on the basis of quotations from the primary market in
which they are traded and are translated from the local currency into U.S.
dollars using prevailing exchange rates.
Securities for which market quotations are not readily available are valued at
fair value determined in good faith by or under the direction of the Company's
Board of Directors (as may be delegated from time to time to a pricing committee
designated by the Board of Directors). Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics.
HOW DISTRIBUTIONS ARE MADE: TAX INFORMATION
DISTRIBUTIONS
The Fund will declare dividends daily and pay the dividends quarterly from net
investment income and will distribute its net capital gains, if any, at least
annually. Such income and capital gains distributions will be made in shares of
the Fund.
TAX MATTERS
THE FUND. The Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code, as
amended (the "Code"), concerning the diversification of assets, distribution of
income, and sources of income. When the Fund qualifies as a regulated investment
company and all of its taxable income is distributed in accordance with the
timing requirements imposed by the Code, the Fund will not be subject to Federal
income tax. If, however, for any taxable year the Fund does not qualify as a
regulated investment company, then all of its taxable income will be subject to
tax at regular corporate rates (without any deduction for distributions to the
Accounts), and the receipt of such distributions will be taxable to the extent
that the distributing Fund has current and accumulated earnings and profits.
FUND DISTRIBUTIONS. Distributions by the Fund are taxable, if at all, to the
Accounts, and not to Contract or Policy Owners. An Account will include
distributions in its taxable income in the year in which they are received
(whether paid in cash or reinvested).
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts generally will
not result in gain or loss for the Accounts and will not result in gain or loss
for the Contract or Policy Owners.
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<PAGE>
SUMMARY. The foregoing discussion of Federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
Policies or Contracts qualify as life insurance policies or annuities,
respectively, under the Code. If the foregoing requirements are not met then the
Contract or Policy owners will be treated as recognizing income (from
distributions or otherwise) related to the ownership of Fund shares. The
foregoing discussion is for general information only; a more detailed discussion
of Federal income tax considerations is contained in the Statement of Additional
Information. Contract or Policy Owners must consult the prospectuses of their
respective Contract or Policy for information concerning the Federal income tax
consequences of owning such Contracts or Policies.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of one or more Funds are the investment
vehicle reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by calling toll-free
1-888-428-3008 between 8:15 a.m. and 6:00 p.m., New York time. Specially trained
representatives will answer questions and provide information about Contract and
Policy Owners accounts.
Each Account owning shares of the Fund will vote its shares in accordance with
instructions received from Contract or Policy Owners, annuitants and
beneficiaries. Fund shares held by an Account as to which no instructions have
been received will be voted for or against any proposition, or in abstention, in
the same proportion as the shares of that Account as to which instructions have
been received. Fund shares held by an Account that are not attributable to
Contracts or Policies will also be voted for or against any proposition in the
same proportion as the
shares for which voting instructions are received by the Account. If the
Participating Insurance Company determines, however, that it is permitted to
vote any such shares of the Fund in its own right, it may elect to do so,
subject to the then current interpretation of the 1940 Act and the rules
thereunder.
PERFORMANCE INFORMATION
From time to time the Fund may advertise certain information about its
performance. The Fund may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Fund may make available information as to their
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices, Morgan Stanley Capital International Europe,
Australia, Far East Index or Morgan Stanley Capital International World Index.
The performance information may also include evaluations of the Funds published
by nationally recognized ranking
- 25 -
<PAGE>
services and by various national or local financial publications, such as
Business Week, Forbes, Fortune, Institutional Investor, Money, The Wall Street
Journal, Barron's, Changing Times, Morningstar, Mutual Fund Values, U.S.A. Today
or The New York Times or other industry or financial publications.
Performance information presented for the Fund should not be compared directly
with performance information of other insurance products without taking into
account insurance-related charges and expenses payable under the variable
annuity contract and variable life insurance policy. These charges and expenses
are not reflected in the Fund's performance and would reduce an investor's
return under the annuity contract or life policy.
The Fund's performance information is historical, will fluctuate and should not
be considered as representative of future results. The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Quotations of the Fund's performance will
not reflect charges levied at the Account level.
COUNSEL; INDEPENDENT ACCOUNTANTS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York, serves
as counsel to the Company. Price Waterhouse LLP serves as the independent
accountants to the Company. Price Waterhouse LLP is located at 1177 Avenue of
the Americas, New York, New York 10036.
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<PAGE>
APPENDIX A
RATINGS
The following is a description of certain ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Duff & Phelps Credit
Rating Co. ("D&P") that are applicable to certain obligations in which certain
of the Company's Funds may invest.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the
A-1
<PAGE>
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Bonds rated D are in default. The D category is used when interest payments
or principal payments are not made on the date due even if the applicable grace
period has not expired. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
D&P CORPORATE BOND RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic stress.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB--Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
A-2
<PAGE>
B--Below investment grade and possessing risk that obligations will not be met
when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-3
<PAGE>
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3--Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
D&P COMMERCIAL PAPER RATINGS
Duff 1+ --Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3--Satisfactory liquidity and other protection factors qualify issue as
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Duff 4--Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Duff 5--Issuer failed to meet scheduled principal and/or interest payments.
------------------------
A-4
<PAGE>
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether a Fund should continue to
hold the security. To the extent that the ratings given by Moody's, S&P or D&P
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in this Prospectus and in the
Statement of Additional Information.
A-5
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
