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PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. JULY 29, 1998
As Supplemented
February 10, 1999
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OFFITBANK VIF-U.S. GOVERNMENT SECURITIES FUND
OFFITBANK VIF-U.S. Government Securities Fund (the "Fund") is an investment
portfolio of the OFFITBANK Variable Insurance Fund, Inc. (the "Company"), an
open-end, management investment company consisting of ten separate portfolios.
The Fund's investment objective is to seek current income consistent with
preservation of capital. The Fund seeks to achieve its objective by investing,
under normal circumstances, at least 80% of its total assets in U.S. Government
Obligations. There can be no assurance that the Fund's investment objective
will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Fund's investment adviser (the "Adviser"). The Adviser currently
manages approximately $10 billion in assets. The address of the Company is 400
Bellevue Parkway, Wilmington, Delaware 19809. Yield and other information
regarding the Fund may be obtained by calling 1-800-618-9510.
SHARES OF THE FUND ARE SOLD ONLY TO CERTAIN LIFE INSURANCE COMPANIES
(COLLECTIVELY, "PARTICIPATING COMPANIES") AND THEIR SEPARATE ACCOUNTS
(COLLECTIVELY, THE "ACCOUNTS") TO FUND BENEFITS UNDER VARIABLE ANNUITY CONTRACTS
("CONTRACTS") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF THE FUND IN
ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND POLICY OWNERS
("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH ALLOCATION RIGHTS
ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS. SHARES ARE
REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE CONTRACTS AND
POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated July 29, 1998, as amended or supplemented from time to time,
has been filed with the Securities and Exchange Commission (the "Commission")
and is available to investors without charge by calling 1-800-618-9510. The
Statement of Additional Information is incorporated in its entirety by reference
into this Prospectus. This Prospectus, the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund is
available at the Commission's Website (http://www.sec.gov).
INVESTORS ARE ADVISED THAT (i) THE COMPANY IS NOT AUTHORIZED TO ENGAGE IN THE
BUSINESS OF BANKING AND (ii) SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR
ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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WHAT YOU NEED TO KNOW
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Highlights............................................. 2
The Company............................................ 3
Investment Objective and Policies...................... 3
Investment Policies and Techniques..................... 5
Special Risk Considerations............................ 7
Limiting Investment Risks.............................. 10
Management............................................. 11
About Your Investment.................................. 11
How the Company Values Its Shares...................... 12
How Distributions Are Made: Tax Information............ 12
Shareholder Communications............................. 13
Performance Information................................ 13
Counsel and Independent Accountants.................... 13
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HIGHLIGHTS
INTRODUCTION
OFFITBANK VIF-U.S. Government Securities Fund (the "Fund") is one of ten
separate investment portfolios of the OFFITBANK Variable Insurance Fund, Inc.
(the "Company") an open-end, management investment company. The Fund's
investment objective is to seek high current income with capital appreciation as
a secondary objective.
FUND MANAGEMENT
OFFITBANK, a New York State chartered trust company serves as the Fund's
Adviser.
SHARES OF THE FUND
Shares of the Fund are sold only to certain life insurance companies
(collectively, "Participating Companies") and their separate accounts
(collectively, the "Accounts") to fund benefits under variable annuity contracts
("Contracts") and variable life insurance policies ("Policies") to be offered by
the Participating Companies. The Accounts invest in shares of the Fund in
accordance with allocation instructions received from Contract and Policy owners
("Contract Owners" or "Policy Owners," as appropriate). Such allocation rights
are further described in the accompanying Account Prospectus. Shares are
redeemed to the extent necessary to provide benefits under the Contracts and
Policies.
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc., (the "Distributor") the Fund's Underwriter, to the Accounts
without any sales or other charge, at the Fund's net asset value on each day on
which the New York Stock Exchange ("NYSE") is open for business. The Company
will effect orders to purchase or redeem shares of the Fund, that are based on
premium payments, surrender and transfer requests and any other transaction
requests from Contract and Policy Owners, annuitants and beneficiaries, at the
Fund's net asset value per share next computed after the Account receives such
transaction request.
An Account may redeem all or any portion of the shares of the Fund in its
account at any time at the net asset value per share of the Fund calculated in
the manner described above.
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset value. See "About Your Investment."
RISK FACTORS
Investment in the Fund is subject to certain risks, as set forth in detail under
"Special Risk Considerations." The Fund invests at least 80% of its total
assets in U.S. Government obligations and may invest up to 20% of its total
assets in other high quality fixed income securities including, but not limited
to, mortgage-backed and asset-backed securities, sovereign obligations of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom. See "Investment Objective and Policies" and "Special Risk
Considerations."
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THE COMPANY
The Company is designed to serve as a funding vehicle for Contracts and Policies
offered by the Accounts of Participating Companies. Shares of the Fund are
offered only to the Accounts through the principal underwriter for the Company.
The Fund is a no-load investment portfolio of the Company, an open-end
management investment company. The Company is not authorized to engage in the
business of banking.
Shares of the Company are offered to Accounts of Participating Companies that
may not be affiliated with each other. The Participating Companies and their
Accounts may be subject to insurance regulation that varies between states and
to state insurance and federal tax or other regulation that varies between
Contracts and Policies. The Company does not currently foresee any
disadvantages to Contract or Policy Owners arising from these circumstances.
However, it is theoretically possible that the interests of Contract or Policy
Owners participating in the Company through the Accounts might at some time be
in conflict. In some cases, one or more Accounts might withdraw their
investment in the Fund, which could possibly force the Company to sell portfolio
securities at disadvantageous prices. The Company's Directors intend to monitor
events in order to identify any material irreconcilable conflicts that may
possibly arise and to determine what action, if any, should be taken in response
thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an investment objective which it pursues through investment
policies as described below. The objectives and policies of the Fund can be
expected to affect the return of the Fund and the degree of market and financial
risk to which the Fund is subject. For more information about the investment
strategies employed by the Fund, see "Investment Policies and Techniques." The
investment objectives and policies of the Fund may, unless otherwise
specifically stated, be changed by the Directors of the Company without a vote
of the shareholders. As a matter of fundamental policy, the Directors would not
materially change the investment objectives of the Fund without thirty days
prior written notification to shareholders. There is no assurance that the Fund
will achieve its objectives.
Additional portfolios may be created from time to time with different investment
objectives and policies for use as funding vehicles for the Accounts or for
other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Fund, with the classes being subject to different charges and expenses and
having such other different rights as the Directors may prescribe.
The Fund's investment objective is to seek current income consistent with
preservation of capital. The Fund seeks to achieve its objective by investing,
under normal circumstances, at least 80% of its total assets in U.S. Government
obligations. In addition, the Fund may invest up to 20% of its total assets in
other high quality fixed income securities including, but not limited to,
mortgage-backed and asset-backed securities, sovereign obligations of Australia,
Canada, Denmark, France, Germany, Japan, New Zealand and the United Kingdom.
Any fund investments denominated in any foreign currency will be hedged against
fluctuations in value versus the U.S. dollar. See "Limiting Investment Risks".
Obligations of the U.S. Government in which the Fund may invest are in two broad
categories and include the following: (1) direct obligations of the U.S.
Treasury, which differ only in their interest rates, maturities and times of
issuance, including U.S. Treasury Bills (maturities of one year or less), U.S.
Treasury Notes (maturities of one to ten years), and U.S. Treasury Bonds
(generally, maturities greater than ten years); and (2) obligations issued or
guaranteed by the agencies or instrumentalities of the U.S. Government which are
supported by: (a) the full faith and credit of the U.S. Government (e.g.,
Government National Mortgage Association ("GNMA") Certificates, See below); (b)
the right of the issuer to borrow an amount limited to a specific amount of
credit from the U.S. Government; (c) the credit of the instrumentality (e.g.,
bonds issued by the Federal National Mortgage Association ("FNMA")); or (d) the
discretionary authority of the U.S. Government to purchase certain obligations
of U.S. Government agencies or instrumentalities (collectively, "Government
Securities").
The agencies and instrumentalities that issue Government Securities include,
among others, Federal Land Banks, Farmers Home Administration, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Student Loan Marketing Association and U.S. Maritime Administration.
Securities issued by the U.S. Government differ with respect to maturity and
mode of payment. The modes of payment are coupon paying and capital
appreciation. Coupon paying bonds and notes pay a periodic interest payment,
usually semi-annually, and a final principal payment at maturity. Capital
appreciation bonds and Treasury bills accrue a daily amount of interest income,
and pay a stated face amount at maturity. Most U.S. Government capital
appreciation bonds were created as a result of the separation of coupon paying
bonds into distinct securities representing the periodic
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coupon payments and the final principal payments. This is referred to as
"stripping". The separate securities representing a specific payment to be made
by the U.S. Government on a specific date are also called "zero coupon bonds."
Current federal tax law requires the Fund to accrue as income daily a portion of
the original issue discount at which each zero coupon bond was purchased.
Amortization of this discount has the effect of increasing the Fund's income,
although it receives no actual cash payments. The Fund distributes this income
to its shareholders as income dividends and such income is reflected in the
Fund's quoted yield. (See "Investment Policies and Techniques - Zero Coupon
Securities and Discount Obligations").
At any given time, there is a relationship between the yield of the U.S.
Government obligation and its maturity. This is called the "yield curve".
Since Government Securities are assumed to have negligible credit risks, the
main determinant of yield differential between individual securities is
maturity. When the yield curve is such that longer maturities correspond to
higher yields, the yield curve has a positive slope and is referred to as a
"normal" yield curve. At certain times shorter maturities have high yields and
the yield curve is said to be "inverted". Even when the yield curve is "normal"
(i.e. has a positive slope), the relationship between yield and maturity for
some Government Stripped Securities is such that yields increase with maturity
up to some point, and then after peaking, decline so that the longest maturities
are not the highest yielding. This is called a "humped" curve. The highest
yielding point on the yield curve for such securities is referred to as the
"stripper's hump".
U.S. Government securities of the type in which the Fund may invest have
historically involved little risk of principal if held to maturity. The
Government's guarantee of the securities in the Fund, however, does not
guarantee the net asset value of the shares of the fund. There are market risks
inherent in all investments in securities and the value of an investment in the
fund will fluctuate over time. Normally, the value of the Fund's investments
varies inversely with changes in interest rates. For example, as interest rates
rise, the value of the Fund's investments will tend to decline and as interest
rates fall, the value of the Fund's investments will tend to increase. Because
of these factors, the Fund's share value and yield are not guaranteed and will
fluctuate. The magnitude of these fluctuations generally will be greater when
the average maturity of the Fund's portfolio securities is longer.
The Fund is not limited to the maturities of the securities in which it may
invest. Debt securities with longer maturities generally tend to produce higher
yields and are subject to greater market fluctuation as a result of changes in
interest rates than debt securities with shorter maturities.
The Advisor seeks an enhanced fixed income return through the active management
of portfolio duration and sector allocation. Investment decisions are based on
a continual evaluation of the supply and demand for capital, the current and
future shape of the yield curve, underlying trends in the direction of interest
rates and relative value among market sectors. The selection of individual
investment reflects the Advisor's view of relative value within and among market
sectors. The Advisor manages duration and maturity to take advantage of
interest rates and yield curve trends. A minimum of 80% of the Fund's total
assets will be invested in Government Securities.
Up to 20% of the Fund's total assets may be allocated to other fixed income
securities, each of which will be rated AAA by S&P or Aaa by Moody's, or will be
deemed of comparable quality by the Adviser, including: debt obligations issued
or guaranteed by foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom; debt obligations of supranational entities; non-U.S. dollar denominated
debt obligations of the U.S. Government; and corporate obligations including
asset-backed securities. Any Fund investment denominated in a foreign currency
will be hedged against fluctuations in value versus the U.S. dollar.
The obligations of foreign governmental entities, including supranational
issuers, have various kinds of government support. Obligations of foreign
governmental entities include obligations, issued or guaranteed by national,
provincial, state or other governments with taxing power or by their agencies.
These obligations may or may not be supported by the full faith and credit of a
foreign government. Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The
governmental agencies, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions, if the supranational entity is unable to
repay its borrowings. Each supranational entity's lending activities are
limited to a percentage of its total capital (including "callable capital"
contributed by members at the entity's call), reserves and net income.
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INVESTMENT POLICIES AND TECHNIQUES
ZERO COUPON SECURITIES AND DISCOUNT OBLIGATIONS
The Fund may invest in zero coupon securities and a substantial portion of the
Fund's sovereign debt securities may be acquired at a discount. These
investments involve special risk considerations. Zero coupon securities are
debt securities that pay no cash income but are sold at substantial discounts
from their value at maturity. When a zero coupon security is held to maturity,
its entire return, which consists of the amortization of discount, comes from
the difference between its purchase price and its maturity value. This
difference is known at the time of purchase, so that investors holding zero
coupon securities until maturity know at the time of their investment what the
return on their investment will be. Certain zero coupon securities also are
sold at substantial discounts from their maturity value and provide for the
commencement of regular interest payments at a deferred date.
Zero coupon securities and debt securities acquired at a discount are subject to
greater price fluctuations in response to changes in interest rates than are
ordinary interest-paying debt securities with similar maturities; the value of
zero coupon securities and debt securities acquired at a discount appreciates
more during periods of declining interest rates and depreciates more during
periods of rising interest rates. Under current federal income tax law, the
Fund is required to accrue as income each year the value of a portion of the
original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition,
the Fund will elect similar treatment for any market discount with respect to
debt securities acquired at a discount. Accordingly, the Fund may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate current cash to satisfy certain distribution requirements.
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund would sell portfolio securities to financial
institutions, such as banks and broker-dealers, and agree to repurchase them at
an agreed upon date, price and interest payment. When effecting reverse
repurchase transactions, liquid securities of a dollar amount equal in value to
the securities subject to the agreement will be maintained in a segregated
account with the Fund's custodian. A reverse repurchase agreement involves the
risk that the market value of the portfolio securities sold by the Fund may
decline below the price of the securities the Fund is obligated to repurchase,
which price is fixed at the time the Fund enters into such agreement.
SECURITIES LOANS, REPURCHASE AGREEMENTS, WHEN-ISSUED AND FORWARD COMMITMENTS
TRANSACTIONS
The Fund may lend portfolio securities in an amount up to 30% of its total
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.
MORTGAGE-RELATED SECURITIES
The Fund may invest all or a portion of the 20% of its total assets not required
to be invested in U.S. Government Obligations in mortgage-related securities.
Mortgage-related securities provide funds for mortgage loans made to residential
homeowners. These include securities which represent interests in pools of
mortgage loans made by lenders such as savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled for
sale to investors (such as the Fund) by various governmental, government-related
and private organizations. Interests in pools of mortgage-related securities
differ from other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these payments are
a "pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Prepayments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may in
addition be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect government
guarantees of payments in such pools. However, timely payment of interest
and/or principal of these pools is supported by various forms of insurance or
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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 and
Techniques - Mortgage-Related Securities" in the Statement of Additional
Information.
ASSET-BACKED SECURITIES
The Fund may invest all or a portion of the 20% of its total assets which are
not required to be invested in U.S. Government Obligations in asset-backed
securities. Asset-backed securities represent an undivided ownership interest
in a pool of installment sales contracts and installment loans collateralized
by, among other things, credit card receivables and automobiles. In general,
asset-backed securities and the collateral supporting them are of shorter
maturity than mortgage loans. As a result, investment in these securities
should result in greater price stability for the Fund.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional Information.
The Fund will not limit its investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally traded on a
national securities exchange, such securities are widely traded by brokers and
dealers, and to such extent will not be considered illiquid for the purposes of
the Fund's limitation on investment in illiquid securities.
FOREIGN SECURITIES
The Fund may invest all or a portion of the 20% of its total assets not required
to be invested in U.S. Government Obligations in securities of foreign issuers.
When the Fund invests in foreign securities, they may be denominated in foreign
currencies. Thus, the Fund's net asset value may be affected by changes in
exchange rates. See "Special Risk Considerations."
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund may use, as a portfolio management strategy, cross currency hedges,
interest rate transactions, commodity futures contracts in the form of futures
contracts on securities, securities indices and foreign currencies, and related
options transactions. The Fund also may enter into forward foreign currency
contracts and options transactions to hedge in connection with currency and
interest rate positions and in order to enhance the Fund's income or gain. See
"Special Risk Considerations-Hedging and Other Strategic Transactions."
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") as part of its portfolio investment strategy to hedge all
non-dollar investments with the U.S. dollar. A forward contract is an
obligation to purchase or sell a specific currency for an agreed price at a
future date which is individually negotiated and privately traded by currency
traders and their customers. The Fund may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S. dollar price of
the security ("transaction hedge"). Unanticipated changes in currency prices
may result in poorer overall performance for the Fund than if it had not entered
into such contracts. If the party with which the Fund enters into a forward
contract becomes insolvent or breaches its obligation under the contract, then
the Fund may lose the ability to purchase or sell a currency as desired.
ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities which are not readily marketable, time
deposits and repurchase agreements not terminable within seven days. Illiquid
assets are assets which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment. Securities that have readily available market quotations
are not
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deemed illiquid for purposes of this limitation (irrespective of any legal or
contractual restrictions on resale). The Fund may purchase securities that are
not registered under the Securities Act of 1933, as amended, but which can be
sold to qualified institutional buyers in accordance with Rule 144A under that
Act ("Rule 144A securities"). Rule 144A securities generally must be sold to
other qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% limitation on investment in illiquid securities. The ability to
sell Rule 144A securities to qualified institutional buyers is a recent
development and it is not possible to predict how this market will mature. The
Adviser will monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES
The Fund reserves the right to invest up to 10% of its total assets in the
securities of other investment companies. The Fund may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the voting securities of any other investment company. The Fund
does not intend to invest in such investment companies unless, in the judgment
of the Adviser, the potential benefits of such investment justify the payment of
any premium to net asset value of the investment company or of any sales charge.
The Fund will indirectly bear its proportionate share of any management fees and
other expenses paid by investment companies in which it invests in addition to
the advisory fee paid by the Fund.
FUTURE DEVELOPMENTS
The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the Fund's investment
objective and legally permissible for the Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.
TEMPORARY STRATEGIES
The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objective, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy,
the Fund temporarily may hold cash and/or invest up to 100% of its assets in
U.S. money market instruments and most or all of the Fund's investments may be
made in the United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Fund temporarily may hold cash and may
invest any portion of its assets in high quality domestic money market
instruments.
PORTFOLIO TURNOVER
The Fund will not trade in securities with the intention of generating
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. It is not anticipated that, under
normal conditions, the portfolio turnover rate for the Fund will exceed 100% in
any one year. A high rate of portfolio turnover (100% or more) involves
correspondingly greater brokerage commission expenses and/or markups and
markdowns, which will be borne directly by the Fund and indirectly by the Fund's
shareholders. High portfolio turnover may also result in the realization of
substantial net capital gains.
SPECIAL RISK CONSIDERATIONS
GENERAL
The Fund's net asset value will fluctuate, reflecting fluctuations in the market
value of its portfolio positions. The value of the Fund's fixed income
securities generally fluctuates inversely with interest rate movements and fixed
income securities with longer maturities tend to be subject to increased
volatility. There is no assurance that the Fund will achieve its investment
objectives.
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INTEREST RATE FLUCTUATIONS AND CREDIT RISK
The performance of the Fund depends in part on interest rate changes. As
interest rates increase, the value of the fixed income securities held by the
Fund tends to decrease. This effect will be more pronounced with respect to
investments by the Fund in mortgage-related securities, the value of which are
more sensitive to interest rate changes. There is no restriction on the
maturity of the Fund's portfolio or any individual portfolio security, and to
the extent the Fund invests in securities with longer maturities, the volatility
of the Fund in response to changes in interest rates can be expected to be
greater than if the Fund had invested in comparable securities with shorter
maturities. The performance of the Fund will also depend on the quality of its
investments. While U.S. Government securities generally are of high quality,
government securities that are not backed by the full faith and credit of the
U.S. Treasury may be affected by changes in the creditworthiness of the agency
that issued them. Guarantees of principal and interest on obligations that may
be purchased by the Fund are not guarantees of the market value of such
obligations, nor do they extend to the value of shares of the Fund. Other
fixed-income securities in which the Fund may invest, while of investment-grade
quality, may be of lesser credit quality than U.S. Government securities.
SOVEREIGN DEBT SECURITIES
Investing in sovereign debt securities will expose the Fund to the direct or
indirect consequences of political, social or economic changes in the countries
that issue the securities. The ability and willingness of sovereign obligors or
the governmental authorities that control repayment of their external debt to
pay principal and interest on such debt when due may depend on general economic
and political conditions within the relevant country. Additional factors which
may influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than U.S. dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign sovereign
obligor cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks and multilateral organizations, and inflows of
foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The Fund is authorized to use a variety of investment strategies to hedge
various market risks (such as interest rates, currency exchange rates and broad
or specific market movements), to manage the effective maturity or duration of
debt instruments held by the Fund, or, with respect to certain strategies, to
seek to increase the Fund's income or gain (such investment strategies and
transactions are referred to herein as "Hedging and Other Strategic
Transactions"). Currently, the Fund may use, as portfolio management
strategies, interest rate transactions, commodity futures contracts in the form
of futures contracts on securities, securities indices and foreign currencies,
and related options transactions. The Fund also may enter into forward foreign
currency contracts and options transactions to hedge in connection with currency
and interest rate positions and in order to enhance the Fund's income or gain.
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A discussion of the risks associated with Hedging and Other Strategic
Transactions follows below. The markets for certain of these securities are
relatively new and the ability to establish and close out positions is subject
to the maintenance of a liquid market that may not always be available.
Therefore, the Fund does not make any representation as to the availability of
these techniques at this time or at any time in the future. In addition, the
Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable rules and regulations of the
Commodity Futures Trading Commission ("CFTC") thereunder and the federal income
tax requirements applicable to regulated investment companies which are not
operated as commodity pools. To the extent not otherwise restricted by the
Commission, the CFTC, the Internal Revenue Code of 1986, as amended (the "Code")
or its investment objective and policies, the Fund may utilize, without
limitation, Hedging and Other Strategic Transactions. For further information
see "Additional Information on Portfolio Instruments and Techniques - Hedging
and Other Strategic Transactions" and "Additional Information Concerning Taxes"
in the Statement of Additional Information.
IN GENERAL
Subject to the constraints described above, the Fund may (if and to the extent
so authorized) purchase and sell (or write) exchange-listed and over-the-counter
put and call options on securities, index futures contracts, financial futures
contracts and fixed income indices and other financial instruments, and enter
into financial futures contracts, interest rate transactions and currency
transactions (collectively, these transactions are referred to in this
Prospectus as "Hedging and Other Strategic Transactions"). The Fund's interest
rate transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Hedging and Other Strategic Transactions may generally be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Although the Fund intends to fully
hedge its exposure to foreign currencies versus the U.S. dollar, the Fund may
use any or all types of Hedging and Other Strategic Transactions which it is
authorized to use at any time; no particular strategy will dictate the use of
one type of transaction rather than another, as use of any authorized Hedging
and Other Strategic Transaction will be a function of numerous variables,
including market conditions. The ability of the Fund to utilize Hedging and
Other Strategic Transactions successfully will depend on, in addition to the
factors described above, the Adviser's ability to predict pertinent market
movements, which cannot be assured. These skills are different from those
needed to select the Fund's securities. The Fund is not a "commodity pool"
(i.e., a pooled investment vehicle which trades in commodity futures contracts
and options thereon and the operator of which is registered with the Commodity
Futures Trading Commission (the "CFTC")) and Hedging and Other Strategic
Transactions involving futures contracts and options on futures contracts will
be purchased, sold or entered into only for bona fide hedging, and non-hedging
purposes to the extent permitted by CFTC regulations; provided that the Fund may
enter into futures contracts or options thereon for purposes other than bona
fide hedging if immediately thereafter, the sum of the amount of its initial
margin and premiums on open contracts would not exceed 5% of the liquidation
value of the Fund's portfolio; provided further, than in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. A detailed discussion of various
Hedging and Other Strategic Transactions, including applicable regulations of
the CFTC appears in the Statement of Additional Information.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
Hedging and Other Strategic Transactions have special risks associated with
them, including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of the Hedging and Other Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options could result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, or cause the Fund to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures
and options markets could be illiquid in some circumstances and certain over-
the-counter options could have no markets. As a result, in certain markets, the
Fund might not be able to close out a transaction without incurring substantial
losses. Although the Fund's use of futures and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time it will tend to limit any
9
<PAGE>
potential gain to the Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures
contracts create a greater ongoing potential financial risk than would purchases
of options, in which case the exposure is limited to the cost of the initial
premium.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Currency transactions are also
subject to risks different from those of other portfolio transactions. Because
currency control is of great importance to the issuing governments and
influences economic planning and policy, purchases and sales of currency and
related instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulations or
exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to the Fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures
contracts are subject to the same risks that apply to the use of futures
contracts generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures contracts is relatively new, and the ability
to establish and close out positions on these options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Losses resulting from the use of Hedging and Other Strategic Transactions will
reduce the Fund's net asset value, and possibly income, and the losses can be
greater than if Hedging and Other Strategic Transactions had not been used.
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.
FOREIGN TAXES
The Fund's investment income from foreign issuers may be subject to non-U.S.
withholding taxes, thereby reducing the Fund's net investment income. For more
information about tax risks related to the Fund, see "How Distributions are
Made: Tax Information" below and "Additional Information Concerning Taxes" in
the Statement of Additional Information.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may (a) borrow in an amount up to 25% of its total
assets (including the amount borrowed), less all liabilities and
indebtedness other than the borrowing and (b) enter into reverse
repurchase agreements.
2. The Fund may not invest an amount equal to 15% or more of the
current value of its net assets in investments that are illiquid.
The foregoing investment limitations described immediately above and certain of
those described in the Statement of Additional Information under "Investment
Limitations" are fundamental policies of the Fund that may be changed only when
permitted by law and approved by the holders of a "majority" of the Fund's
outstanding shares. If a percentage restriction on investment or use of assets
contained in these investment limitations or elsewhere in this Prospectus or
Statement of Additional Information is adhered to at the time a transaction is
effected, later changes in percentage resulting from any cause other than
actions by the Fund will not be considered a violation; provided, that the
restrictions on borrowing described in (2) above shall apply at all times. As
used in this Prospectus and in the Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting the Fund (e.g., approval of investment
advisory contracts), means the vote of the lesser of (i) 67% or more of the
shares of the Fund represented at a meeting if the holders of more than 50% of
the
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<PAGE>
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 .35% of
the average daily net assets of the Fund. The investment advisory fee for the
Fund is higher than that paid by most investment companies, but is comparable to
that paid by other investment companies that have strategies focusing on high
yield and international investments.
The Adviser is a New York State chartered trust company. Under its charter, the
Adviser may neither accept deposits nor make loans except for deposits or loans
arising directly from its exercise of the fiduciary powers granted it under the
New York Banking Law. The Adviser's principal business is the rendering of
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. The Adviser
specializes in global assets management and offers its clients a complete range
of investments in capital markets throughout the world. The Adviser currently
manages approximately $10 billion in assets and serves as investment adviser to
twenty-one registered investment companies (or portfolios thereof). The
principal business address of the Adviser is 520 Madison Avenue, New York, New
York 10022.
PORTFOLIO MANAGER. Jack D. Burks will serve as the portfolio manager for the
Fund. Mr. Burks is a Managing Director of the Adviser and has been associated
with the Adviser since 1985.
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN.
PFPC Inc., an indirect wholly owned subsidiary of PNC Bank Corp., serves as the
Company's adminsitrator. PFPC also provides transfer agency and dividend
disbursing services to the Company. The Bank of New York serves as custodian of
the assets of the Fund. PFPC is entitled to an annual fee calculated daily and
paid monthly which will not exceed .125% of aggregate average daily net assets
of the Company as compensation for its services as administrator. The principal
business address of PFPC is 400 Bellevue Parkway, Wilmington, Delaware 19809.
The principal business address of The Bank of New York is 90 Washington Street,
New York, New York 10286
FUND EXPENSES
In addition to the fees described above with respect to the Investment
Advisory Agreement, the Fund will be responsible for expenses relating to
administration, transfer agency, custody, 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 "Distributor"), the Fund's Principal Underwriter, to the
Accounts without any sales or other charge, at the Fund's net asset value on
each day on which the New York Stock Exchange ("NYSE") is open for business.
The Company will effect orders to purchase or redeem shares of the Fund, that
are based on premium payments, surrender and transfer requests and any other
transaction requests from Contract and Policy Owners, annuitants and
beneficiaries, at the Fund's net asset value per share next computed after the
Account receives such transaction request. Any orders to purchase or redeem
Fund shares that are not based on actions by Contract or Policy Owners,
annuitants, and beneficiaries will be effected at the Fund's net asset value per
share next computed after the order is received by the Distributor. The Fund
reserves the right to suspend the sale of the Fund's shares in response to
conditions in the securities markets or for other reasons.
Individuals may not place orders directly with the Fund. Please refer to the
appropriate Account Prospectus of the Participating Company for more information
on the purchase of Fund 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.
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<PAGE>
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 Commission determines that trading thereon
is restricted, or for any period during which an emergency (as determined by the
Commission) exists as a result of which disposal by the Fund of securities is
not reasonably practicable or as a result of which it is not reasonably
practicable for the Company fairly to determine the value of the Fund's net
assets, or for such other periods as the Commission may by order permit for the
protection of security holders of the Company.
EXCHANGE PRIVILEGE
A Contract or Policy Owner investing through an Account may exchange shares of
the Fund for shares of any of the other investment portfolios of the Company on
the basis of their respective net asset values.
HOW THE COMPANY VALUES ITS SHARES
The net asset value per share of the Fund is calculated once daily at 4:15 p.m.,
New York time, Monday through Friday, each day the NYSE is open. The net asset
value per share of the Fund is computed by dividing the value of the net assets
of the Fund by the total number of Fund shares outstanding. Equity securities
held by the Fund are valued at the last sale price on the exchange or in the
principal over-the-counter market in which such securities are traded, as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price. Debt securities held by the Fund
generally are valued based on quoted bid prices. Short-term debt investments
having maturities of 60 days or less are amortized to maturity based on their
cost, and if applicable, adjusted for foreign exchange translation. Foreign
securities are valued on the basis of quotations from the primary market in
which they are traded and are translated from the local currency into U.S.
dollars using prevailing exchange rates.
Securities for which market quotations are not readily available are valued at
fair value determined in good faith by or under the direction of the Company's
Board of Directors (as may be delegated from time to time to a pricing committee
designated by the Board of Directors). Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics.
HOW DISTRIBUTIONS ARE MADE: TAX INFORMATION
DISTRIBUTIONS
The Fund will declare and distribute dividends from net investment income
annually 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 intends to continue to qualify as a regulated investment company under
the Code so that it will not be subject to federal income tax on its earnings
and capital gains that are distributed to its shareholders. In addition, the
Fund intends to comply with the diversification requirements of the Code and
Treasury Regulations in order to maintain the tax-deferred status of the
Accounts.
Shares of the Fund must be purchased through Policies or Contracts. As a
result, it is anticipated that any dividend or capital gains distribution from
the Fund will be exempt from current taxation if left to accumulate within a
Policy or Contract. The Fund is managed without regard to tax ramifications.
Withdrawals from Contracts or Policies may be subject to ordinary income tax
plus a 10% penalty tax if made before age 59 1/2.
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, administrative or judicial action. As the foregoing
discussion is for general information only, a prospective investor should also
review the more detailed discussion of federal income tax considerations that is
contained in the Statement of Additional Information. In addition, each
prospective investor should consult with his own tax adviser as to the tax
consequences of investments in the Fund, including the application of state and
local taxes which may differ from the federal income tax consequences described
above.
THE TAX STATUS OF YOUR INVESTMENT IN THE FUND DEPENDS UPON THE FEATURES OF YOUR
POLICY OR CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE ACCOUNT OR
POLICY PROSPECTUS.
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<PAGE>
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of the Fund are the investment vehicle,
reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 a.m. and 6:00 p.m., New York time. Specially
trained representatives will answer questions and provide information about
Contract and Policy Owners' accounts.
Each Account owning shares of the Fund will vote its shares in accordance with
instructions received from Contract or Policy Owners, annuitants and
beneficiaries. Fund shares held by an Account as to which no instructions have
been received will be voted for or against any proposition, or in abstention, in
the same proportion as the shares of that Account as to which instructions have
been received. Fund shares held by an Account that are not attributable to
Contracts or Policies will also be voted for or against any proposition in the
same proportion as the shares for which voting instructions are received by the
Account. If the Participating Insurance Company determines, however, that it is
permitted to vote any such shares of the Fund in its own right, it may elect to
do so, subject to the then current interpretation of the 1940 Act and the rules
thereunder.
PERFORMANCE INFORMATION
From time to time the Fund may advertise certain information about its
performance. The Fund may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Fund may make available information as to its
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be higher than the yield because of the compounding effect of
this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. The performance
information may also include evaluations of the Fund published by nationally
recognized ranking services and by various national or local financial
publications, such as BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR,
MONEY, THE WALL STREET JOURNAL, BARRON'S, KIPLINGER'S, MORNINGSTAR, MUTUAL FUND
VALUES, U.S.A. TODAY OR THE NEW YORK TIMES or other industry or financial
publications.
THE FUND'S PERFORMANCE INFORMATION IS HISTORICAL, WILL FLUCTUATE AND SHOULD NOT
BE CONSIDERED AS REPRESENTATIVE OF FUTURE RESULTS. The Commission's formulas for
calculating performance are described under "Performance Information" in the
Statement of Additional Information. Quotations of the Fund's performance will
not reflect charges levied at the Account level.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York, serves
as counsel to the Company. PricewaterhouseCoopers LLP serves as the independent
accountants to the Company. PricewaterhouseCoopers LLP is located at 1177
Avenue of the Americas, New York, New York 10036.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND
OR BY THE DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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THE OFFITBANK VARIABLE INSURANCE FUND, INC.
400 Bellevue Parkway
Wilmington, Delaware 19809
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
July 29, 1998
As Supplemented
February 10, 1999
The OFFITBANK Variable Insurance Fund, Inc. (the "Company") is a no load mutual
fund consisting of ten portfolios whose shares are available to participating
life insurance companies ("Participating Companies") and their separate accounts
("Accounts") to fund benefits under variable annuity contracts ("Contracts") and
variable life insurance policies ("Policies") issued by the Participating
Companies. The portfolios are DJG Value Equity Fund (the "Value Equity Fund"),
OFFITBANK VIF-U.S. Government Securities Fund ("U.S. Government Fund") ,
OFFITBANK VIF-U.S. Small Cap Fund ("U.S. Small Cap Fund"), OFFITBANK VIF-High
Yield Fund ("High Yield Fund"), OFFITBANK VIF-Emerging Markets Fund ("Emerging
Markets Fund"), OFFITBANK VIF-Global Convertible Fund ("Global Convertible
Fund"), OFFITBANK VIF-Total Return Fund ("Total Return Fund"), OFFITBANK VIF-
Latin America Equity Fund (the "Latin America Equity Fund"), OFFITBANK VIF-CVO
Greater China Fund (the "Greater China Fund") and OFFITBANK VIF-Mortgage
Securities Fund (the "Mortgage Securities Fund").
This Statement of Additional Information should be read in conjunction with the
individual Prospectuses offering shares of the following portfolios only: Value
Equity Fund, U.S. Government Fund, U.S. Small Cap Fund, High Yield Fund,
Emerging Markets Fund and Global Convertible Fund. The U.S. Small Cap Fund,
U.S. Government Fund, High Yield Fund, Emerging Markets Fund, Global Convertible
Fund, Total Return Fund, Latin America Equity Fund and Mortgage Securities Fund
are advised by OFFITBANK. OFFITBANK has retained Rockefeller & Co., Inc.
("Rockefeller & Co.") as Sub-Adviser to the U.S. Small Cap Fund. The Value
Equity Fund is advised by David J. Greene & Company, LLC ("DJ Greene"). The
Greater China Fund is advised by CVO Greater China Partners, L.P. As used
herein, the term "Adviser" shall mean, with respect to each Fund, the entity
responsible for portfolio management.
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Prospectus
offering each Fund. Any reference to the "Prospectus" in this Statement of
Additional Information is a reference to the Prospectus or Prospectuses offering
a Fund or Funds to which this Statement pertains. In each instance, the
specific Prospectus or Prospectuses referred to are referenced by the
surrounding text, which identifies a specific Fund or Funds.
<PAGE>
This Statement of Additional Information is NOT a prospectus and is only
authorized for distribution when preceded or accompanied by an effective
Prospectus. Copies of each Prospectus may be obtained by an investor without
charge by writing or calling the Company at the address and telephone number set
forth above.
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TABLE OF CONTENTS
<TABLE>
PAGE
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<S> <C>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND TECHNIQUES. . . . . . . . . . . . . . . . . . . . . . . . . . 3
ADDITIONAL RISK CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . 17
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . 20
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . 21
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . 30
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 32
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 32
PERFORMANCE CALCULATIONS . . . . . . . . . . . . . . . . . . . . . . . 32
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . 34
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . 35
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 39
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</TABLE>
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND
TECHNIQUES
Information concerning each Fund's investment objective is set forth in each
fund's Prospectus under the heading "Investment Objectives and Policies." There
can be no assurance that any Fund will achieve its objective. The principal
features of each Fund's investment program and the primary risks associated with
that program are discussed in the Prospectus. The following discussion of
investment policies supplements the discussion of investment objectives and
policies set forth in each Fund's Prospectus.
REPURCHASE AGREEMENTS
If and to the extent authorized to do so, each Fund may enter into repurchase
agreements. A repurchase agreement is a transaction in which the seller of a
security commits itself at the time of the sale to repurchase that security from
the buyer at a mutually agreed upon time and price. The Funds will enter into
repurchase agreements only with dealers, domestic banks or recognized financial
institutions which, in the opinion of OFFITBANK, DJ Greene, or Rockefeller &
Co., as the case may be, based on guidelines established by the Company's Board
of Directors, present minimal credit risks. The relevant Adviser will monitor
the value of the securities underlying the repurchase agreement at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the securities always exceeds the
repurchase price plus accrued interest. In the event of default by the seller
under the repurchase agreement, each Fund may incur costs and experience time
delays in connection with the disposition of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
If and to the extent authorized to do so, each Fund may enter into reverse
repurchase agreements. A reverse repurchase agreement is a borrowing
transaction in which a Fund transfers possession of a security to another party,
such as a bank or broker/dealer, in return for cash, and agrees to repurchase
the security in the future at an agreed upon price, which includes an interest
component. Whenever a Fund enters into a reverse repurchase agreement as
described in the Prospectus, it will place in a segregated custodian account
liquid assets having a value equal to the repurchase price (including accrued
interest) and will subsequently monitor the account to ensure such equivalent
value is maintained. Reverse repurchase agreements are considered to be
borrowings by a Fund under the 1940 Act.
DOLLAR ROLL TRANSACTIONS
In order to enhance portfolio returns and manage prepayment risks, if and to the
extent authorized to do so, each Fund may engage in dollar roll transactions
with respect to mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar
roll transaction, a Fund sells a mortgage security held in the portfolio to a
financial institution such as a bank or broker-dealer,
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and simultaneously agrees to repurchase a substantially similar security (same
type, coupon and maturity) from the institution at a later date at an agreed
upon price. The mortgage securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. During the period
between the sale and repurchase, a Fund will not be entitled to receive interest
and principal payments on the securities sold. Proceeds of the sale will be
invested in short-term instruments, and the income from these investments,
together with any additional fee income received on the sale, could generate
income for a Fund exceeding the yield on the sold security. When a Fund enters
into a dollar roll transaction, cash or liquid securities of the Fund, in a
dollar amount sufficient to make payment for the obligations to be repurchased,
are segregated with its custodian at the trade date. These securities are
marked to market daily and are maintained until the transaction is settled.
ASSET-BACKED SECURITIES
If and to the extent authorized to do so, each Fund may invest in Asset-Backed
Securities. Asset-backed securities are generally issued as pass through
certificates, which represent undivided fractional ownership interests in the
underlying pool of assets, or as debt instruments, and are generally issued as
the debt of a special purpose entity organized solely for the purpose of owning
such assets and issuing such debt. Asset-backed securities are often backed by
a pool of assets representing the obligations of a number of different parties.
Payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the services to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. If the letter of
credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized. Because asset-backed securities are relatively new,
the market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
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CREDIT SUPPORT. Asset-backed securities often contain elements of credit support
to lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories: (1)
liquidity protection and (2) protection against losses resulting from ultimate
default by an obligor on the underlying asset. Liquidity protection ensures that
the pass through of payments due on the installment sales contracts and
installment loans which comprise the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The Funds will not pay any additional fee for
such credit support. The existence of credit support may increase the market
price of the security.
MORTGAGE-BACKED SECURITIES
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). If and to the extent authorized
to do so, each Fund may invest in CMOs. CMOs are debt obligations
collateralized by certificates issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, but also may be collateralized by whole loans or private
pass-through securities (such collateral collectively referred to as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass pass-
through securities. CMOs may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid on all classes of the CMOs on a monthly, quarterly or semi-
annual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, for example, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"). If and to the extent authorized
to do so, each Fund may invest in SMBS. SMBS are derivative multiclass mortgage
securities. SMBS may be
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issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the principal from the Mortgage Assets, while the other
classes will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only class) while the other class will receive all of the
principal ("PO" or principal-only class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and a rapid rate of principal
payments may have a material adverse effect on such securities' yield to
maturity and result in a loss to the investor.
Under the Internal Revenue Code of 1986, as amended, POs may generate taxable
income from the current accrual of original issue discount, without a
corresponding distribution of cash to a Fund. In addition, the Staff of the
United States Securities and Exchange Commission (the "SEC") considers privately
issued SMBS to be illiquid securities.
Mortgage-backed and asset-backed securities are generically considered to be
derivative securities.
DEPOSITORY RECEIPTS
If and to the extent authorized to do so, each Fund may hold equity securities
of foreign issuers in the form of American Depository Receipts ("ADRs"),
American Depository Shares ("ADSs") and European Depository Receipts ("EDRs"),
or other securities convertible into securities of eligible issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. ADRs and ADSs typically are issued
by an American bank or trust company which evidences ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depository Receipts ("CDRs"), are receipts issued in Europe
typically by foreign banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs and ADSs in registered form are
designed for use in United States securities markets and EDRs, and CDRs in
bearer form are designed for use in European securities markets. For purposes of
each Fund's investment policies, each Fund's investments in ADRs, ADSs, EDRs,
and CDRs will be deemed to be investments in the equity securities representing
securities of foreign issuers into which they may be converted.
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WARRANTS OR RIGHTS
Warrants or rights may be acquired by a Fund in connection with other securities
or separately, and provide the Fund with the right to purchase at a later date
other securities of the issuer. Warrants or rights acquired by a Fund in units
or attached to securities will be deemed to be without value for purpose of this
restriction. These limits are not fundamental policies of the Funds and may be
changed by the Company's Board of Directors without shareholder approval.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, if and to the extent authorized
to do so, each Fund may make secured loans of portfolio securities amounting to
not more than 30% of its total assets. Each Fund may make loans which are short-
term (nine months or less) or long-term. Securities loans are made to
broker/dealers or institutional investors pursuant to agreements requiring that
the loans continuously be secured by collateral at least equal at all times to
the value of the securities lent plus any accrued interest, "marked to market"
on a daily basis. The collateral received will consist of cash, U.S. short-term
government securities, bank letters of credit or such other collateral as may be
permitted under each Fund's investment program and by regulatory agencies and
approved by the Company's Board of Directors. While the securities loan is
outstanding, each Fund will continue to receive the equivalent of the interest
or dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. Each Fund has the right
to call each loan and obtain the securities on five business days' notice. To
the extent applicable, each Fund will not have the right to vote equity
securities while they are being lent, but it will call in a loan in anticipation
of any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans only will be made to
firms deemed by the Adviser to be of good standing and will not be made unless,
in the judgment of the Adviser, the consideration to be earned from such loans
would justify the risk.
UNITED STATES GOVERNMENT OBLIGATIONS
If and to the extent authorized to do so, each Fund may invest in securities
issued or guaranteed by the U.S. government or by its agencies or
instrumentalities. Such securities in general include a wide variety of U.S.
Treasury obligations consisting of bills, notes and bonds, which principally
differ only in their interest rates, maturities and times of issuance.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities are debt securities issued by agencies or instrumentalities
established or sponsored by the U.S. government.
In addition to the U.S. Treasury obligations described above, each Fund may
invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program,
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the interest components are individually numbered and separately issued by the
U.S. Treasury at the request of depository financial institutions, which then
trade the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (1) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association), (2) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks) or (3) only the credit of the issuer or guarantor
(e.g., obligations of the Federal Home Loan Mortgage Corporation). In the case
of obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and that
have been established or sponsored by the U.S. government include, in addition
to those identified above, the Bank for Cooperatives, the Export-Import Bank,
the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
As stated in the Prospectus, bank obligations that may be purchased by a Fund
include certificates of deposit, bankers' acceptances and fixed time deposits. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party. The Funds do not consider fixed time
deposits illiquid for purposes of the restriction on investment in illiquid
securities.
Banks are subject to extensive governmental regulations that may limit both the
amounts and types of loans and other financial commitments that may be made and
the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of funding lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation.
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Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by each
Fund, the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by each Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.
With the exception of the U.S. Small Cap Fund, the Funds will not purchase
securities which the relevant Adviser believes, at the time of purchase, will be
subject to exchange controls or foreign withholding taxes; however, there can be
no assurance that such laws may not become applicable to certain of each Fund's
investments. In the event unforeseen exchange controls or foreign withholding
taxes are imposed with respect to each Fund's investments, the effect may be to
reduce the income received by each Fund on such investments.
CONVERTIBLE SECURITIES
GENERAL. Under normal market circumstances, each Fund may invest in convertible
securities (the U.S. Small Cap Fund will limit its investment to up to 10% of
its total assets in such securities and the U.S. Government Fund may invest only
in convertible securities rated AAA). Set forth below is additional information
concerning convertible securities.
Convertible securities are issued and traded in a number of securities markets.
For the past several years, the principal markets have been the United States,
the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since each Fund's investments are expected to be
primarily in the U.S. market or the Euromarket where convertible bonds have been
primarily denominated in U.S. dollars, it is expected that ordinarily a
substantial portion of the convertible securities held by each Fund will be
denominated in U.S. dollars. However, the underlying equity securities
typically will be quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share price
is quoted will affect the value of the convertible security. Each Fund may
enter into foreign currency hedging transactions in which they may seek to
reduce the impact of such fluctuations.
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Apart from currency considerations, the value of convertible securities is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (I.E., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent there are changes in interest rates or yields of similar non-convertible
securities, the investment value of the convertible security typically will
fluctuate. However, at the same time, the value of the convertible security
will be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the
underlying common stock. If, because of a low price of the underlying common
stock, the conversion value is below the investment value of the convertible
security, the price of the convertible security is governed principally by its
investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.
Holders of convertible securities have a claim on the assets of the issuer prior
to the common stockholders but may be subordinated to similar non-convertible
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Special Risk Considerations - Hedging and
Other Strategic Transactions," each Fund may enter into transactions in options,
futures, and forward contracts on a variety of instruments and indexes, in order
to hedge various market risks and/or in the case of Funds other than the U.S.
Small Cap Fund, to manage the effective maturity or duration of debt instruments
held by a Fund. In addition, the Value Equity Fund may enter into transactions
to seek to increase a Fund's income or gain. The U.S. Government Fund currently
intends to pursue such transactions only to hedge its exposure to foreign
currencies versus the U.S. dollar. The discussion below supplements the
discussion in each Fund's Prospectus.
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Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each
of the particular types of options discussed in greater detail below. In
addition, many Hedging and Other Strategic Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts".
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect a Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase the instrument. An "American" style put or call option
may be exercised at any time during the option period, whereas a "European"
style put or call option may be exercised only upon expiration or during a fixed
period prior to expiration. Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's inability to close out its position as a purchaser or seller of an OCC-
issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options; (2) restrictions on transactions imposed by an
exchange; (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits; (4)
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interruption of the normal operations of the OCC or an exchange; (5) inadequacy
of the facilities of an exchange or the OCC to handle current trading volume; or
(6) a decision by one or more exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the relevant market
for that option on that exchange would cease to exist, although any such
outstanding options on that exchange would continue to be exercisable in
accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-
listed options, which generally have standardized terms and performance
mechanics, all of the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guarantees and security, are
determined by negotiation of the parties. It is anticipated that any Fund
authorized to use OTC options will generally only enter into OTC options that
have cash settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with a Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Thus, the Adviser must assess the creditworthiness of each such Counterparty or
any guarantor or credit enhancement of the Counterparty's credit to determine
the likelihood that the terms of the OTC option will be met. A Fund will enter
into OTC option transactions only with U.S. government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers", or
broker-dealers, domestic or foreign banks, or other financial institutions that
are deemed creditworthy by the Adviser. In the absence of a change in the
current position of the staff of the SEC, OTC options purchased by a Fund and
the amount of the Fund's obligation pursuant to an OTC option sold by the Fund
(the cost of the sell-back plus the in-the-money amount, if any) or the value of
the assets held to cover such options will be deemed illiquid. If a Fund sells
a call option, the premium that it receives may serve as a partial hedge, to the
extent of the option premium, against a decrease in the value of the underlying
securities or instruments held by the Fund or will increase the Fund's income.
Similarly, the sale of put options can also provide Fund gains.
If and to the extent authorized to do so, a Fund may purchase and sell call
options on securities and on Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the
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OTC markets, and on securities indices, currencies and futures contracts. All
calls sold by a Fund must be "covered", that is, the Fund must own the
securities subject to the call, must own an offsetting option on a futures
position, or must otherwise meet the asset segregation requirements described
below for so long as the call is outstanding. Even though a Fund will receive
the option premium to help protect it against loss, a call sold by a Fund will
expose a Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the Fund to hold a security or instrument that it
might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, each Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. In selling put
options, a Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate, currency or market changes, for duration
management and for permissible non-hedging purposes. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract and obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC and generally will be entered into only
for bona fide hedging, risk management (including duration management) or other
permissible non-hedging purposes. Maintaining a futures contract or selling an
option on a futures contract will typically require a Fund to deposit with a
financial intermediary, as security for its obligations, an amount of cash or
other specified assets ("initial margin") that initially is from 1% to 10% of
the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter daily as the mark-to-market value of the futures contract fluctuates.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a
13
<PAGE>
futures contract it will be obligated to post initial margin (and potentially
variation margin) for the resulting futures position just as it would for any
futures position. Futures contracts and options thereon are generally settled
by entering into an offsetting transaction, but no assurance can be given that a
position can be offset prior to settlement or that delivery will occur.
No Fund will enter into a futures contract or option thereon for purposes other
than bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums required to maintain permissible non-hedging
positions in futures contracts and options thereon would exceed 5% of the
liquidation value of the Fund's net assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below under "Use
of Segregated and Other Special Accounts".
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, each Fund may purchase and sell call
and put options on securities indices and other financial indices. In so doing,
each Fund can achieve many of the same objectives it would achieve through the
sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
CURRENCY TRANSACTIONS
If and to the extent authorized to do so, each Fund may engage in currency
transactions with Counterparties to hedge the value of portfolio securities
denominated in particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange-listed and OTC options
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange
14
<PAGE>
cash flows based on the notional difference among two or more currencies and
operates similarly to an interest rate swap, which is described below under
"Swaps, Caps, Floors and Collars". Each Fund may enter into currency
transactions only with Counterparties that are deemed creditworthy by the
Adviser.
Except as provided in its Prospectus, each Fund's dealings in forward currency
contracts and other currency transactions such as futures contracts, options,
options on futures contracts and swaps will be limited to hedging and other non-
speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
If and to the extent authorized to do so, a Fund may cross-hedge currencies by
entering into transactions to purchase or sell one or more currencies that are
expected to increase or decline in value relative to other currencies to which
the Fund has or in which the Fund expects to have exposure. To reduce the
effect of currency fluctuations on the value of existing or anticipated holdings
of its securities, a Fund may also engage in proxy hedging. Proxy hedging is
often used when the currency to which a Fund's holdings is exposed is difficult
to hedge generally or difficult to hedge against the dollar. Proxy hedging
entails entering into a forward contract to sell a currency, the changes in the
value of which are generally considered to be linked to a currency or currencies
in which some or all of a Fund's securities are or are expected to be
denominated, and to buy dollars. The amount of the contract would not exceed
the market value of the Fund's securities denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions. If a Fund enters into a currency hedging transaction, the Fund
will comply with the asset segregation requirements described in the Prospectus
under "Use of Segregated and Other Special Accounts".
COMBINED TRANSACTIONS
If and to the extent authorized to do so, each Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Other Strategic Transaction, as part of a single or combined strategy when,
in the judgment of the Adviser, it is in the best interests of the Fund to do
so. A combined transaction will usually
15
<PAGE>
contain elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a Fund based on
the Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase the risks or hinder
achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
If and to the extent authorized to do so, each Fund may be authorized to enter
into interest rate, currency and index swaps, the purchase or sale of related
caps, floors and collars. Each Fund will enter into these transactions
primarily to seek to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities a Fund anticipates purchasing at a later date. Each Fund will use
these transactions for non-speculative purposes and will not sell interest rate
caps or floors if it does not own securities or other instruments providing the
income a Fund may be obligated to pay. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). A currency swap is an
agreement to exchange cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the purchaser
to receive payments on a notional principal amount from the party selling the
cap to the extent that a specified index exceeds a predetermined interest rate.
The purchase of an interest rate floor entitles the purchaser to receive
payments of interest on a notional principal amount from the party selling the
interest rate floor to the extent that a specified index falls below a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling the floor to the extent that a specific index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return with a predetermined range of interest
rates or values.
Provided the contract so permits, a Fund will usually enter into interest rate
swaps on a net basis, that is, the two payments streams are netted out in a cash
settlement on the payment date or dates specified in the instrument, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. A
Fund will not enter into any swap, cap, floor, collar or other derivative
transaction unless the Counterparty is deemed creditworthy by the Adviser. If a
Counterparty defaults, a Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid.
16
<PAGE>
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.
The liquidity of swap agreements will be determined by the Adviser based on
various factors, including: (1) the frequency of trades and quotations; (2) the
number of dealers and prospective purchasers in the marketplace; (3) dealer
undertakings to make a market; (4) the nature of the security (including any
demand or tender features); and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 15% restriction on investments in securities that are not
readily marketable.
A Fund will maintain cash and appropriate liquid assets (i.e., high grade debt
securities) in a segregated custodial account to cover its current obligations
under swap agreements. If a Fund enters into a swap agreement on a net basis,
it will segregate assets with a daily value at least equal to the excess, if
any, of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If a Fund enters
into a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement. See "Use of Segregated and Other Special Accounts".
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, each Fund may make investments in
Eurodollar instruments, which are typically dollar-denominated futures contracts
or options on those contracts that are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
ADDITIONAL RISK CONSIDERATIONS
POLITICAL AND ECONOMIC RISKS
Investing in securities of non-U.S. companies may entail additional risks due to
the potential political and economic instability of certain countries and the
risks of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country.
17
<PAGE>
FOREIGN INVESTMENT RESTRICTIONS
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as each of the Funds. For example, certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
by foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Moreover, the national policies of certain countries may
restrict investment opportunities in issuers or industries deemed sensitive to
national interests. In addition, some countries require governmental approval
for the repatriation of investment income, capital or the proceeds of securities
sales by foreign investors. A Fund could be adversely affected by delays in, or
a refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions on investments.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ in some cases significantly from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the securities held by a Fund will not be
registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by a
Fund than is available concerning U.S. issuers. In instances where the financial
statements of an issuer are not deemed to reflect accurately the financial
situation of the issuer, the Adviser will take appropriate steps to evaluate the
proposed investment, which may include interviews with its management and
consultations with accountants, bankers and other specialists. There is
substantially less publicly available information about foreign companies than
there are reports and ratings published about U.S. companies and the U.S.
government. In addition, where public information is available, it may be less
reliable than such information regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS
Securities of many foreign issuers may be less liquid and their prices more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities exchanges and brokers generally are subject to less governmental
supervision and regulation than in the United States, and foreign securities
exchange transactions usually are subject to fixed commissions, which generally
are higher than negotiated commissions on U.S. transactions. In addition,
foreign securities exchange transactions may be subject to difficulties
associated with the settlement of such transactions. Delays in settlement could
result in temporary periods when assets of a Fund
18
<PAGE>
are uninvested and no return is earned thereon. The inability of a Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to a Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. The Adviser will consider such difficulties when
determining the allocation of such Fund's assets, though the Adviser does not
believe that such difficulties will have a material adverse effect on the
Fund's portfolio trading activities.
NON-U.S. WITHHOLDING TAXES
If and to the extent a Fund is authorized to invest in securities of foreign
issuers, the Fund's net investment income from foreign issuers may be subject to
non-U.S. withholding taxes thereby reducing the Fund's net investment income.
See "Additional Information Concerning Taxes".
ILLIQUID SECURITIES
If and to the extent authorized to do so, each Fund may invest up to 15% of its
net assets in illiquid securities. See "Limiting Investment Risks" in the
Prospectus. The sale of restricted or illiquid securities requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than the sale of securities eligible for trading on securities
exchanges or in the over-the-counter markets. Restricted securities often sell
at a price lower than similar securities that are not subject to restrictions on
resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, are liquid or illiquid. The Board has delegated the
function of making day to day determinations of liquidity to the Adviser,
pursuant to guidelines reviewed by the Board. The relevant Adviser takes into
account a number of factors in reaching liquidity decisions, including, but not
limited to: (1) the frequency of trading in the security; (2) the number of
dealers who make quotes for the security; (3) the number of dealers who have
undertaken to make a market in the security; (4) the number of other potential
purchasers; and (5) the nature of the security and how trading is effected
(e.g., the time needed to sell the security, how offers are solicited and the
mechanics of transfer). The relevant Adviser will monitor the liquidity of
securities in each Fund's portfolio and report periodically on such decisions to
the Board of Directors.
19
<PAGE>
INVESTMENT LIMITATIONS
In addition to the restrictions described under "Limiting Investment Risks" in
the Prospectus, each Fund may not:
(1) purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase and sell currency forward
contracts, options on foreign currencies and may otherwise engage in
transactions in foreign currencies;
(2) make loans, except that a Fund may: (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances); (b) invest in loans
and participations in accordance with its investment objectives and
policies; (c) make loans of portfolio securities; and (d) enter into
repurchase agreements with respect to portfolio securities;
(3) underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with a Fund's investment
program may be deemed to be an underwriting;
(4) purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein);
(5) purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5% of
a Fund's net assets in the case of any one other investment company
and 10% of such net assets in the case of all other investment
companies in the aggregate. This restriction shall not apply to
investment company securities received or acquired by a Fund pursuant
to a merger or plan of reorganization;
(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary
for the clearance of transactions, and except for initial and
variation margin payments in connection with the use of options,
futures contracts, options thereon or forward currency contracts; a
Fund may also make deposits of margin in connection with futures and
forward contracts and options thereon);
(7) sell securities short (except for short positions in a futures
contract or forward contract);
(8) invest for the purpose of exercising control over management of any
company;
20
<PAGE>
(9) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;
(10) pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings;
(11) invest in stock or bond futures and/or options on futures unless not
more than 5% of a Fund's total assets are required as deposit to
secure obligations under such futures and/or options on futures
contracts, provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing such 5%; and
(12) invest in puts, calls straddles or spreads, except as described in
(11) above.
With respect to the U.S. Government Fund, the U.S. Government Fund has adopted
the following fundamental investment restriction: the Fund will not purchase
the securities of any issuer (other than securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, or repurchase
agreements secured thereby) if, as a result, more than 25% of the value of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. Note that each of the
Funds is also subject to this fundamental restriction as described under
"Limiting Investment Risks" in each such Funds' Prospectus.
If a percentage restriction on investment or use of assets set forth above is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
Investment restrictions (1) through (5) described above and those set forth in
the Prospectus under "Limiting Investment Risks" are fundamental policies of
each Fund which may be changed only when permitted by law and approved by the
holders of a majority of each Fund's outstanding voting securities, as described
under "General Information-Capital Stock". Restrictions (7) through (12) are
nonfundamental policies of each Fund, and may be changed by a vote of the
Company's Board of Directors.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the Company
for the past five years are listed below.
21
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) PRINCIPAL
- --------------------- HELD WITH OCCUPATION(S)
THE COMPANY PAST 5 YEARS
----------- ------------
<S> <C> <C>
Morris W. Offit, 61* Chairman of the President and Director,
OFFITBANK Board, President OFFITBANK (1983 - present);
520 Madison Avenue and Director Chairman of the Board,
New York, NY 10022 President and Director of The
OFFITBANK Investment Fund,
Inc.; Chairman of the Board,
President and Director of CVO
Greater China Fund, Inc.
Edward J. Landau, 70 Director Member, Lowenthal, Landau
Lowenthal, Landau, Fischer & Bring, P.C. (1960 -
Fischer & Bring, P.C. present); Director, Revlon
250 Park Avenue Group Inc. (cosmetics), Revlon
New York, NY 10177 Consumer Products Inc.
(cosmetics), Pittsburgh
Annealing Box (metal
fabricating) and Clad Metals
Inc. (cookware).
The Very Reverend Director Retired, formerly Dean of
James Parks Morton, 58 Cathedral of St. John the
Cathedral of St. John Divine (1972 - 1996)
the Divine
1047 Madison Avenue
New York, NY 10025
Wallace Mathai-Davis, 53 Secretary and Managing Director, OFFITBANK
OFFITBANK Treasurer (1986 - present). Secretary
520 Madison Avenue and Treasurer of The OFFITBANK
New York, NY 10022 Investment Fund, Inc.
Stephen Brent Wells, 53 Assistant Managing Director, OFFITBANK
OFFITBANK Treasurer (1994 - present); General
520 Madison Avenue Counsel, Gabelli Funds, Inc.
New York, NY 10022 (1993 - 1994); General Counsel
and President, Funds Group,
Goldman Sachs Asset Management
(1989 - 1993)
Vincent M. Rella, 45 Assistant Managing Director, OFFITBANK
OFFITBANK Treasurer (1997 to present); Controller,
520 Madison Avenue OFFITBANK
New York, NY 10022 (1986 - present)
22
<PAGE>
Stephen M. Wynne, 43 Assistant Chairman of PFPC Trustee &
PFPC Inc. Treasurer Custodial Services Ltd. (since
400 Bellevue Parkway 1995); Executive Vice President
Wilmington, DE 19809 and Chief Accounting Officer
(since 1993) and Senior Vice
President and Chief Accounting
Officer (from 1991 to 1993) of
PFPC Inc.; Executive Vice
President (from 1993 to 1995) of
PFPC International.
David D. Marky, 32 Assistant Vice President and Director of
PFPC Inc. Treasurer Accounting (since 1996) of PFPC
103 Bellevue Parkway Inc.; Assistant Vice President
Wilmington, DE 19809 and Accounting Conversion Manager
(since 1992) of PFPC Inc.
Gary M. Gardner, 47 Assistant Chief Counsel (since 1994) of
PFPC Inc. Secretary PFPC Inc.; Associate General
400 Bellevue Parkway Counsel (from 1992 to 1994) of
Wilmington, DE 19809 The Boston Company, Inc.
David C. Lebisky, 26 Assistant Regulatory Administrator (since
PFPC Inc. Secretary 1996) of PFPC Inc.; Legal
400 Bellevue Parkway Assistant(1994 to 1996) with the
Wilmington, DE 19809 law firm of Drinker Biddle &
Reath; BA Candidate (1990 to
1994) LaSalle University.
</TABLE>
- -------------------
*"Interested person" as defined in the 1940 Act.
The Board of Directors has designated an audit committee to advise the full
Board with respect to accounting, auditing and financial matters affecting the
Company. The Audit Committee is comprised of Mr. Landau and The Very Reverend
Morton and meets periodically.
The Company pays each Director who is not also an officer or affiliated person
an annual fee of $3,000 and a fee of $500 for each Board of Directors and Board
committee meeting attended and are reimbursed for all out-of-pocket expenses
relating to attendance at meetings. Directors who are affiliated with the
Adviser do not receive compensation from the Company but are reimbursed for all
out-of-pocket expenses relating to attendance at meetings.
23
<PAGE>
ESTIMATED DIRECTOR COMPENSATION
(FOR CALENDAR YEAR 1998)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
AGGREGATE BENEFITS ESTIMATED REGISTRANT AND
COMPENSATION ACCRUED AS ANNUAL FUND COMPLEX*
FROM PART OF FUND BENEFITS UPON PAID TO
NAME OF PERSON REGISTRANT EXPENSES RETIREMENT DIRECTORS
-------------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Morris W. Offit $0 0 N/A $0
Edward J. Landau $5,500 0 N/A $28,500
The Very Reverend $5,500 0 N/A $28,500
James Parks Morton
</TABLE>
* For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.
INVESTMENT ADVISER
U.S. SMALL CAP FUND, U.S. GOVERNMENT FUND, HIGH YIELD FUND, EMERGING MARKETS
FUND AND GLOBAL CONVERTIBLE FUND
The Company has retained OFFITBANK, a New York State chartered trust company, to
act as its investment adviser (the "Adviser") for the U.S. Small Cap Fund, U.S.
Government Fund, High Yield Fund, Emerging Markets Fund and Global Convertible
Fund. The advisory agreement (the "Advisory Agreement") between the Adviser and
the Company provides that the Adviser shall manage the operations of the
Company, subject to policies established by the Board of Directors of the
Company. Pursuant to the Advisory Agreement, except in the case of the U.S.
Small Cap Fund, the Adviser manages the Company's investment portfolios, directs
purchases and sales of the portfolio securities and reports thereon to the
Company's officers and directors regularly. In addition, the Adviser pays the
compensation of the Company's officers, employees and directors affiliated with
the Adviser. The Company bears all other costs of its operations, including the
compensation of its directors not affiliated with the Adviser.
For its services under the Advisory Agreement, the Adviser receives from each
Fund an advisory fee. The fee is payable monthly at an annual rate of 1.00% of
U.S. Small Cap Fund's average daily net assets, 0.35% of U.S. Government Fund's
average daily net assets, 0.85% of the first
24
<PAGE>
$200,000,000 and 0.75% on amounts in excess thereof of VIF-High Yield Fund's
average daily net assets, 0.90% of the first $200,000,000 and 0.80% on amounts
in excess thereof of VIF-Emerging Markets Fund's average daily net assets and
0.90% of VIF-Global Convertible Fund's average daily net assets. The Adviser
may waive all or part of its fee from time to time in order to increase a Fund's
net investment income available for distribution to shareholders. The Funds
will not be required to reimburse the Adviser for any advisory fees waived. For
the fiscal year ended March 31, 1998, the Adviser earned fees of $239,489 and
waived fees of $77,746 for the High Yield Fund, and earned and waived fees of
$49,468 and $10,796 for the Emerging Markets and Small Cap Funds, respectively.
For the period ended March 31, 1997, the Adviser earned and waived fees of
$76,943 and $13,449 for the High Yield and Emerging Markets Funds, respectively.
The Advisory Agreement was approved by the Company's Board of Directors for an
initial two year period and, unless sooner terminated, the Advisory Agreement
will continue in effect as to a particular Fund for consecutive one year terms
thereafter, provided such continuance is approved at least annually by the
Company's Board of Directors or by a vote of a majority (as defined under
"General Information-Capital Stock") of the outstanding shares of each Fund,
and, in either case, by a majority of the directors who are not parties to the
contract or "interested persons" (as defined in the 1940 Act) of any party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreement may be terminated by the Company or the Adviser on 60 days' written
notice, and will terminate immediately in the event of its assignment.
VALUE EQUITY FUND
David J. Greene & Company, LLC ("DJ Greene") is responsible for managing the
investment portfolio of the Value Equity Fund. DJ Greene is a registered
investment adviser under the 1940 Act and a member of the New York Stock
Exchange. The advisory agreement (the "DJ Greene Agreement") between DJ Greene
and the Company provides that DJ Greene shall manage the investment operations
of the Company, subject to policies established by the Board of Directors of the
Company. Pursuant to the DJ Greene Agreement, DJ Greene manages the Company's
Value Equity Fund, directs purchases and sales of the portfolio securities for
the Value Equity Fund and reports regularly thereon to the Company's officers
and directors. The Company bears all other costs of its operations.
DJ Greene is an investment adviser and broker-dealer registered with the SEC and
the NASD. The Firm is located at 599 Lexington Avenue, New York, N.Y. 10022.
As of June 30, 1998, DJ Greene had investment management authority with respect
to approximately $2 billion of assets for pension, profit sharing, endowment and
individual accounts. DJ Greene consists of fifteen principals and a staff of
twenty-three professional and support persons, all of whom devote their full
time to the business. DJ Greene specializes in equity management with a value
style orientation.
25
<PAGE>
For its services under the Advisory Agreement, DJ Greene receives an advisory
fee. The fee is payable monthly at an annual rate of .80% of the Value Equity
Fund's average daily net assets. DJ Greene may waive all or part of its fee
from time to time in order to increase the Value Equity Fund's net investment
income available for distribution to shareholders. The Value Equity Fund will
not be required to reimburse DJ Greene for any advisory fees waived. For the
fiscal year ended March 31, 1998, DJ Greene earned and waived fees of $10,934.
The DJ Greene Agreement was approved by the Company's Board of Directors for an
initial two year period. Unless sooner terminated, the Advisory Agreement will
continue in effect with respect to the Company from year to year thereafter if
such continuance is approved at least annually by the Company's Board of
Directors or by a vote of a majority (as defined under "General Information" -
Capital Stock") of the outstanding shares of the Value Equity Fund, and, in
either case, by a majority of the directors who are not parties to the contract
or "interested persons" (as defined in the 1940 Act) of any party by votes case
in person at a meeting called for such purpose. The Advisory Agreement may be
terminated by the Company or DJ Greene on 60 days' written notice and will
terminate immediately in the event of its assignment.
SUB-ADVISER - U.S. SMALL CAP FUND
Rockefeller & Co., Inc. subject to the review and overall supervision of the
Adviser, is responsible for managing the investment portfolio of the U.S. Small
Cap Fund. Rockefeller & Co. is a registered investment adviser under the
Investment Advisers Act of 1940. Its earliest predecessor was established in
the 19th century for the benefit of John D. Rockefeller and his family. Today,
Rockefeller & Co. is a private investment advisory and management firm that
serves the needs of the Rockefeller family and those of a small number of other
persons and institutions. As of June 30, 1998, Rockefeller & Co. managed
approximately $4.3 billion in assets. Rockefeller & Co., with offices at 30
Rockefeller Plaza, New York, New York 10112, is a wholly-owned subsidiary of
Rockefeller Financial Services, Inc., all of the voting shares of which are
owned by the Rockefeller Family Trust. The Rockefeller Family Trust was
established in 1979, primarily for the benefit of the grandchildren of John D.
Rockefeller, Jr. and their descendants. The grantors of the trust property are
the senior members of the Rockefeller Family. In 1980, Rockefeller & Co. was
registered as an investment adviser and commenced providing management services
to non-Rockefeller Family clients. Rockefeller & Co. provides comprehensive
investment management services in the global equity and fixed-income markets.
It allocates capital to asset classes with superior investment return potential,
commensurate with the overall financial objectives and risk tolerances of its
clients. Each asset class employed is managed by a specialized investment unit
with dedicated investment and research professionals suited to its particular
asset class or geographic region. Rockefeller & Co. is located in New York
City.
Rockefeller & Co. has been retained to provide sub-advisory services to the U.S.
Small Cap Fund pursuant to an agreement between Rockefeller & Co. and OFFITBANK
(the "Sub-Advisory Agreement"). Pursuant to the Sub-Advisory Agreement,
OFFITBANK has delegated
26
<PAGE>
to Rockefeller & Co. the authority and responsibility to make and execute
portfolio investment decisions for the U.S. Small Cap Fund within the framework
of the U.S. Small Cap Fund's investment objectives, policies and restrictions,
and subject to review by OFFITBANK and the Board of Directors of the Company.
The Sub-Advisory Agreement provides that OFFITBANK, and not the U.S. Small Cap
Fund will pay to Rockefeller & Co. monthly compensation based on the average
daily net assets of the U.S. Small Cap Fund at the annual rate of 1.00%. For
the fiscal year ended March 31, 1998, OFFITBANK earned and waived fees of
$10,976 with respect to the U.S. Small Cap Fund. Accordingly, Rockefeller & Co.
received no fees for the fiscal year ended March 31, 1998.
The Sub-Advisory Agreement, dated September 3, 1996, was approved by the Fund's
Directors on July 17, 1996. The Sub-Advisory Agreement provides that it may be
terminated without penalty by either the Fund or Rockefeller & Co. at any time
by the giving of 60 days' written notice to the other and terminates
automatically in the event of "assignment", as defined in the 1940 Act or upon
termination of the Advisory Agreement. The Sub-Advisory Agreement provides
that, unless sooner terminated, it shall continue in effect for an initial two
year period, and from year to year thereafter only so long as such continuance
is specifically approved at least annually by either the Board of Directors of
the Company or by a vote of the majority of the outstanding voting securities of
the Fund, provided, that in either event, such continuance is also approved by
the vote of the majority of the Directors who are not parties to the
Sub-Advisory Agreement or "interested persons" of such parties cast in person at
a meeting called for the purpose of voting on such approval.
REGULATORY MATTERS
OFFITBANK is a trust company chartered under the New York Banking Law and is
supervised and examined thereunder by the New York Banking Department.
OFFITBANK is prohibited by its charter from accepting deposits other than
deposits arising directly from its exercise of the fiduciary powers granted
under the New York Banking Law and, accordingly, is not an insured depository
institution for purposes of the Federal Deposit Insurance Act or any other
banking law or regulation.
Banking laws and regulations, as currently interpreted by the New York Banking
Department, prohibit New York State chartered trust companies from controlling,
or distributing the shares of, a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit such trust
companies generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such trust companies from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. OFFITBANK believes that it may perform the services
described in this Prospectus with respect to the Company without violation of
such laws or regulations. OFFITBANK is not a member of the Federal Reserve
System and is not subject to the Glass-Steagall Act, the Bank Holding Company
Act of 1956 or any other federal banking law or regulation that might affect its
ability to perform such
27
<PAGE>
services.
If the Adviser, DJ Greene or Rockefeller & Co. were prohibited from performing
the services described in this Prospectus with respect to the Funds, it is
expected that the Company's Board of Directors would recommend to each Fund's
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board of Directors. The
Company does not anticipate that investors would suffer any adverse financial
consequences as a result of these occurrences.
DISTRIBUTOR
OFFIT Funds Distributor, Inc., (the "Distributor"), a wholly-owned subsidiary of
Provident Distributors, Inc., with its principal office at Four Falls Corporate
Center, 6th Floor, West Conshohocken, Pennsylvania 19428-2961, distributes the
shares of the Company. Under a distribution agreement with the Company (the
"Distribution Agreement"), the Distributor is not obligated to sell any specific
amount of shares of the Company. The Distributor, as agent of the Company,
agrees to use its best efforts as sole distributor of the Company's shares.
The Distribution Agreement will continue in effect with respect to a particular
Fund from year to year if such continuance is approved at least annually by the
Company's Board of Directors and by a majority of the Directors who have no
direct or indirect financial interest in the Agreement ("Qualified Directors")
and who are not "interested persons" (as defined in the 1940 Act) of any party
by votes cast in person at a meeting called for such purpose. In approving the
continuance of the Distribution Agreement, the Directors must determine that the
Agreement is in the best interest of the shareholders of the Fund. There is no
fee payable under the Distribution Agreement.
ADMINISTRATION, TRANSFER AGENCY AND CUSTODY SERVICES
PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of PNC Bank Corp.
performs administrative and fund accounting services for the Company, and is
responsible for certain clerical, record keeping and bookkeeping services,
except those performed by OFFITBANK, DJ Greene, Rockefeller & Co. or by The
Chase Manhattan Bank, N.A. ("Chase") or The Bank of New York ("BONY") in their
capacity as custodians of the Company. PFPC has no role in determining the
investment polices of the Company or which securities are to be purchased or
sold by the Funds. The services provided by PFPC include regulatory compliance,
assistance in the preparation and filing of post-effective amendments to the
Company's registration statement with the Commission, preparation of annual,
semi-annual and other reports to shareholders and the Commission, filing of
federal and state income tax returns, preparation of financial and management
reports, preparation of board meeting materials, preparation and filing of blue
sky registrations and monitoring compliance with the amounts and conditions of
each state's qualification. For the administrative and fund accounting services
PFPC provides to the Company, PFPC is paid an annual fee calculated daily and
paid monthly which is expected to
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<PAGE>
approximately .125% of net assets. From time to time, the Administrator may
waive all or a portion of its fees.
From January 1, 1997 to June 1, 1998, BISYS Fund Service Limited Partnership
("BISYS") served as the Company's administrator. Prior to January 1, 1997,
Furman Selz LLC ("Furman Selz") served as the Company's administrator. Pursuant
to an administration agreement with the Company, for the fiscal year ended March
31, 1998, BISYS was entitled to fees of $42,263 and waived fees of $23,302 for
the High Yield Fund and earned and waived fees of $8,245, $2,050 and $1,619 for
the Emerging Markets, Value Equity and U.S. Small Cap Funds, respectively.
Pursuant to a fund accounting agreement with the Company, for the fiscal year
ended March 31, 1998, BISYS also earned fees of $32,308, $30,000, $30,154 and
$30,685 for the High Yield, Emerging Markets, Value Equity and U.S. Small Cap
Funds, respectively. From January 1, 1997 to March 31, 1997, BISYS earned
administrative services fees and fund accounting fees, amounting to $6,868 and
$7,500, respectively, for the High Yield Fund and $1,236 and $7,500,
respectively, for the Emerging Markets Fund. During the same period, BISYS
waived the administrative service fees for each Fund. Pursuant to an
administration agreement with the Company, for the period from April 1, 1996 to
December 31, 1996, Furman Selz earned and waived fees of $6,710 for the High
Yield Fund and for the period from August 26, 1996 to December 31, 1996, earned
and waived fees of $1,005 for the Emerging Markets Fund. For its accounting
services, Furman Selz earned fees of $22,500 with respect to the High Yield Fund
for the period April 1, 1996 to December 31, 1996 and $7,500 with respect to the
Emerging Markets Fund for the period August 26, 1996 to December 31, 1996.
PFPC also serves as the Company's Transfer Agent and Dividend Disbursing Agent
pursuant to a transfer agency agreement (the "Transfer Agency Agreement") with
the Company. Under the Transfer Agency Agreement, PFPC has agreed, among other
things, to: (1) process shareholder purchase and redemption orders; (2) issue
periodic statements to shareholders; (3) process transfers, exchanges and
dividend payments; and (4) maintain all shareholder records for each account in
the Company. From January 1, 1997 to June 1, 1998, BISYS Fund Services Limited
Partnership ("BISYS") served as the Company's transfer agent. Prior to January
1, 1997 Furman Selz served as the Company's transfer agent.
BONY serves as the Company's custodian, with respect to all Funds, other than
the Emerging Markets Fund, pursuant to a custodian agreement (the "BONY
Custodian Agreement") with the Company. BONY is located at 90 Washington Street,
New York, New York 10286. Under the BONY Custodian Agreement, BONY has agreed
to: (1) maintain a segregated account or accounts in the name of each Fund; (2)
hold and disburse portfolio securities on account of each Fund; (3) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio securities; (4) respond to correspondence relating to its
duties; and (5) make periodic reports to the Company's Board of Directors
concerning the Funds' operations. BONY is authorized under the BONY Custodian
Agreement to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Funds, provided that BONY remains responsible for
the performance of all of its duties under the BONY Custodian Agreement.
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<PAGE>
BONY is entitled to receive such compensation from the Funds as may be agreed
upon from time to time.
Chase serves as the Company's custodian, with respect to the Emerging Markets
Fund only, pursuant to a custodian agreement (the "Chase Custodian Agreement")
with the Company. Chase is located at 4 MetroTech Center, 18th Floor, Brooklyn,
New York 11245. Under the Chase Custodian Agreement, Chase has agreed to: (1)
maintain a segregated account or accounts in the name of each Fund; (2) hold and
disburse portfolio securities on account of each Fund; (3) collect and receive
all income and other payments and distributions on account of each Fund's
portfolio securities; (4) respond to correspondence relating to its duties; and
(5) make periodic reports to the Company's Board of Directors concerning the
Funds' operations. Chase is authorized under the Chase Custodian Agreement to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Funds, provided that Chase remains responsible for the performance of all
of its duties under the Chase Custodian Agreement.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by any or all of each of the Funds to the
organizations retained to provide services for each of the Funds may be waived
from time to time in order to increase such Funds' net investment income
available for distribution to shareholders or total return.
Except as otherwise noted, OFFITBANK and PFPC bear all expenses in connection
with the performance of their advisory and administrative services respectively.
The Company bears the expenses incurred in its operations, including: taxes;
interest; fees (including fees paid to its directors who are not affiliated with
the Company); fees payable to the SEC; costs of preparing prospectuses for
regulatory purposes and for distribution to shareholders; advisory and
administration fees; charges of its custodian and transfer agent; certain
insurance costs; auditing and legal expenses; fees of independent pricing
services; costs of shareholders' reports and shareholder meetings, including
proxy statements and related materials; and any extraordinary expenses. The
Company also pays for brokerage fees and commissions, if any, in connection with
the purchase of portfolio securities.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, except as stated below, the
Adviser is primarily responsible for the Company's portfolio decisions and the
placing of the Company's portfolio transactions. DJ Greene is primarily
responsible for the portfolio decisions and the placing of the portfolio
transaction for the Value Equity Fund. Rockefeller & Co., however, under the
supervision of the Adviser, is primarily responsible for the portfolio decisions
and the placing of the portfolio transactions for the U.S. Small Cap Fund.
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<PAGE>
With respect to the U.S. Government Fund High Yield Fund, Emerging Markets Fund,
Global Convertible Fund and Total Return Fund, portfolio securities normally
will be purchased or sold from or to dealers at a net price, which may include
dealer spreads and underwriting commissions. With respect to the U.S. Small Cap
Fund, Value Equity Fund, purchases and sales of securities on a stock exchange
are effected through brokers who charge a commission. In the over-the-counter
market, securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In placing orders, it
is the policy of the Company to obtain the best results taking into account the
dealer's general execution and operational facilities, the type of transaction
involved and other factors such as the dealer's risk in positioning the
securities involved. While the Adviser, DJ Greene and Rockefeller & Co. each
generally seeks a competitive price in placing its orders, the Company may not
necessarily be paying the lowest price available.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless the transaction is conducted in accordance with procedures established by
the Company's Board of Directors and complies in all other respects with certain
criteria or an exemptive order allowing such transactions is obtained from the
SEC. Affiliated persons of the Company, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for the
Company as agent. Subject to the considerations discussed above and in
accordance with procedures adopted by the Board of Directors, in order for such
an affiliated person to be permitted to effect any portfolio transactions for
the Company, the commissions, fees or other remuneration received by such
affiliated person must be reasonable and fair compared to the commissions, fees
and other remuneration received by other brokers in connection with comparable
transactions. This standard would allow such an affiliated person to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker in a commensurate arm's-length agency transaction.
Investment decisions for the Company are made independently from those for other
funds and accounts advised or managed by the Adviser, DJ Greene or Rockefeller &
Co., as the case may be. Such other funds and accounts may also invest in the
same securities as the Company. If those funds or accounts are prepared to
invest in, or desire to dispose of, the same security at the same time as the
Company, however, transactions in such securities will be made, insofar as
feasible, for the respective funds and accounts in a manner deemed equitable to
all. In some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by the Company or the price paid or received by the
Company. In addition, because of different investment objectives, a particular
security may be purchased for one or more funds or accounts when one or more
funds or accounts are selling the same security. To the extent permitted by law,
the Adviser, DJ Greene and Rockefeller & Co. may aggregate the securities to be
sold or purchased for the Company with those to be sold or purchased for other
funds or accounts in order to obtain best execution.
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<PAGE>
Portfolio turnover may vary from year to year as well as within a year. The
turnover rate for the High Yield Fund for the period April 1, 1996 (commencement
of operations) through March 31, 1997 was 4%. The turnover rate for the
Emerging Markets Fund for the period August 28, 1996 (commencement of
operations) through March 31, 1997 was 96%. For the fiscal year ended March 31,
1998 the turnover rates for the High Yield, Emerging Markets, Value Equity and
U.S. Small Cap Funds were 32%, 53%, 33% and 51%, respectively.
PURCHASE OF SHARES
The Company reserves the right, in its sole discretion, to suspend the offering
of shares of each of its Funds and reject purchase orders when, in the judgment
of management, such suspension or rejection is in the best interest of the
Company.
REDEMPTION OF SHARES
The Company may suspend redemption privileges or postpone the date of payment
(1) during any period that the New York Stock Exchange (the "NYSE") or the bond
market is closed, or trading on the NYSE is restricted as determined by the SEC,
(2) during any period when an emergency exists as defined by the rules of the
SEC as a result of which it is not reasonably practicable for a Fund to dispose
of securities owned by it, or fairly to determine the value of its assets, and
(3) for such other periods as the SEC may permit.
Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of a Fund, such Fund may pay the
redemption price, in whole or in part, by a distribution in kind.
PERFORMANCE CALCULATIONS
The Company may from time to time quote various performance figures to
illustrate the past performance of each of its Funds. Performance quotations by
investment companies are subject to rules adopted by the SEC, which require the
use of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the SEC methods for computing performance follows.
TOTAL RETURN
A Fund's average annual total return is determined by finding the average annual
compounded rates of return over 1, 5 and 10 year periods (or, if sooner, the
period since inception of the Fund) that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The calculation assures that
all dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each 1, 5 and 10 year period
(or, if
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<PAGE>
shorter, the period since inception of the Fund) and the deduction of all
applicable Fund expenses on an annual basis. Average annual total return is
calculated according to the following formula:
n
P (1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the stated period
A Fund may also calculate total return on an aggregate basis which reflects the
cumulative percentage change in value over the measuring period. The formula for
calculating aggregate total return can be expressed as follows:
Aggregate Total Return = [( ERV ) - 1]
---
P
In addition to total return, a Fund may quote performance in terms of a 30-day
yield. The yield figures provided will be calculated according to a formula
prescribed by the SEC and can be expressed as follows:
6
Yield = 2 [ (a-b +1) - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the minimum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Fund at a discount or premium, the
formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations.
The total return of the High Yield Fund for the fiscal year ended March 31, 1998
and for the period from April 1, 1996 (inception) to March 31, 1997 was 14.84%
and 11.90%, respectively. The total return of the Emerging Markets Fund for the
fiscal year ended March 31, 1998 and for the period from August 28, 1996
(inception) to March 31, 1997 was 11.26%
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<PAGE>
and 8.29%, respectively. The total return of the Value Equity and U.S. Small
Cap Funds for the period from April 11, 1997 (inception) to March 31, 1998 was
49.40% and 41.40%, respectively.
The performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or other independent services which monitor the performance data
of investment companies, and may be quoted in advertising in terms of their
rankings in each applicable universe. In addition, the Company may use
performance reported in financial and industry publications, including BARRON'S,
BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY, MORNINGSTAR,
MUTUAL FUND VALUES, THE WALL STREET JOURNAL, THE NEW YORK TIMES and U.S.A.
TODAY.
Performance information presented for each of the Funds should not be compared
directly with performance information of other insurance products without taking
into account insurance-related charges and expenses payable under the variable
annuity contract and variable life insurance policy. These charges and expenses
are not reflected in the Funds' performance and would reduce an investor's
return under the annuity contract or life policy.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax considerations that
are not described in the Fund's Prospectuses and generally affect each Fund and
its shareholders. No attempt is made to present a detailed explanation of the
tax treatment of each Fund or its shareholders, and the discussions here and in
the Prospectuses are not intended as substitutes for careful tax planning.
Each Fund intends to qualify as a "regulated investment company" ("RIC") under
the Internal Revenue Code of 1986, as amended (the "Code"). If so qualified, a
Fund will not be subject to federal income tax on its investment company taxable
income and net capital gains to the extent that such investment company taxable
income and net capital gains are distributed in each taxable year to the
separate accounts of insurance companies that hold its shares. In addition, if
a Fund distributes annually to the separate accounts its ordinary income and
capital gain net income, in the manner prescribed in the Code, it also will not
be subject to the 4% federal excise tax otherwise applicable to a RIC on any of
its income or gains. Distributions of net investment income and net short-term
capital gains will be treated as ordinary income and distributions of net long-
term capital gains will be treated as long-term capital gain in the hands of the
insurance companies. Under current tax law, capital gains or dividends from a
Fund are not currently taxable when left to accumulate within a variable annuity
contact or variable life insurance policy.
Section 817(h) of the Code requires that investments of a segregated asset
account of an insurance company be "adequately diversified", in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of the
variable annuity contracts or variable life insurance policies investing in the
account to receive the tax-deferred or tax-free treatment
34
<PAGE>
generally afforded holders of annuities or life insurance policies under the
Code. The Department of the Treasury has issued Regulations under section
817(h) which, among other things, provide the manner in which a segregated asset
account will treat investments in a RIC for purposes of the applicable
diversification requirements. Under the Regulations, if a RIC satisfies certain
conditions, that RIC will not be treated as a single investment for these
purposes, but rather the segregated asset account will be treated as owning its
proportionate share of each of the assets of the RIC. Each Fund plans to
satisfy these conditions at all times so that each segregated asset account of a
life insurance company investing in the Funds will be treated as adequately
diversified under the Code and Regulations.
For information concerning the federal income tax consequences to the holders of
variable annuity contracts and variable life insurance policies, such holders
should consult the prospectuses used in connection with the issuance of the
particular contract or policy.
DETERMINATION OF NET ASSET VALUE
The Company values the shares of each Fund daily on each day the New York Stock
Exchange (the "NYSE") is open. Currently, the NYSE is closed Saturdays, Sundays
and the following holidays: New Year's Day, Reverend Martin Luther King, Jr.'s
Day, President's Day (Washington's Birthday), Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Company
determines net asset value as of the close of the NYSE. However, equity options
held by a Fund are priced as of the close of trading at 4:10 p.m, and futures on
U.S. government securities and index options held by a Fund are priced as of
their close of trading at 4:15 p.m.
Each Fund determines net asset value as follows: Securities for which market
quotations are readily available are valued at prices which, in the opinion of
the Directors, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sales price on or,
if no sales are reported (as in the case of some securities traded over-the-
counter) the last reported bid price, except that certain U.S. government
securities are stated at the mean between the reported bid and asked prices.
Short-term investments having remaining maturities of 60 days or less are stated
at amortized cost, which approximates market. All other securities and assets
are valued at their fair value following procedures approved by the Directors.
Liabilities are deducted from the total, and the resulting amount is divided by
the number of shares outstanding.
Reliable market quotations are not considered to be readily available for long-
term corporate bonds and notes, certain preferred stocks, tax-exempt securities,
or certain foreign securities. Securities for which reliable quotations are not
readily available and all other assets will be valued at their respective fair
market value as determined in good faith by, or under procedures established by,
the Company's Board of Directors.
If any securities held by a Fund are restricted as to resale, their fair value
will be determined in
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<PAGE>
good faith by, or under procedures established by, the Company's Board of
Directors. The Directors periodically review such valuations and procedures.
The fair value of such securities is generally determined as the amount which
Fund could reasonably expect to realize from an orderly disposition of such
securities over a reasonable period of time. The valuation procedures applied
in any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any registration
expenses that might be borne by the Fund in connection with such disposition).
In addition, specific factors are also generally considered, such as the cost of
the investment, the market value of any unrestricted securities of the same
class (both at the time of purchase and at the time of valuation), the size of
the holding, the prices of any recent transactions or offers with respect to
such securities and any available analysts' reports regarding the issuer.
To the extent a Fund invests in foreign securities, the calculation of the
Fund's net asset value may not take place contemporaneously with the
determination of the prices of certain of the portfolio securities used in the
calculation. Also, because of the amount of time required to collect and
process trading information as to large numbers of securities issues, the values
of certain securities (such as convertible bonds, U.S. government securities,
and tax-exempt securities) are determined based on market quotations collected
earlier in the day at the latest practicable time prior to the close of the
NYSE. Occasionally, events which affect the values of such securities (and,
with respect to foreign securities, the value of the currency in which the
security is denominated) may occur between the times at which they are
determined and the close of the NYSE and will therefore not be reflected in the
computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by, or under procedures
established by, the Company's Board of Directors. Similarly, market movements
can occur with respect to foreign securities on days on which an investor does
not have access to the Fund.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law.
As used in this Statement of Additional Information, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Company and all Funds, means the vote of the
lesser of (i) 67% or more of the Company's shares represented at a meeting if
the holders of more than 50% of the outstanding shares are present in person or
by proxy or (ii) more than 50% of the Company's outstanding shares. The term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting any single Fund (e.g., approval of Advisory
Agreements), means the vote of the lesser of (i) 67% or more of the
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<PAGE>
shares of the Fund represented at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy or (ii)
more than 50% of the outstanding shares of the Fund. Shareholders are entitled
to one vote for each full share held and fractional votes for fractional shares
held.
Each share of a Fund of the Company is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Fund as
are declared in the discretion of the Company's Board of Directors. In the event
of the liquidation or dissolution of the Company, shares of a Fund are entitled
to receive the assets allocable to that Fund which are available for
distribution, and a proportionate distribution, based upon the relative net
assets of the Funds, of any general assets not belonging to a Fund which are
available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-accessible, fully transferable and redeemable at the
option of the holder.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as the independent accountants for the
Company. PricewaterhouseCoopers LLP is located at 1177 Avenue of the Americas,
New York, New York 10036.
COUNSEL
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022,
serves as counsel to each of the Funds.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain all
the information included in the Registration Statement filed with the SEC under
the Securities Act of 1933 with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Statement of Additional Information pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
As of June 30, 1998, the Trustees and officers of the Company in the aggregate
owned less than 1% of the outstanding shares of any of the Portfolios. Also,
as of that date, the shareholders
37
<PAGE>
listed below owned of record more than five percent of the following Portfolios:
<TABLE>
<CAPTION>
Shares of % of
Shareholder Portfolio Owned Portfolio Owned
----------- --------------- ---------------
<S> <C> <C>
EMERGING MARKETS FUND:
CM Life 532,309 86%
c/o Continuum
301 West 11th Street
Kansas City, MO 64105-1634
Security Equity Life Insurance Company 86,918 14%
84 Business Park Drive
Armonk, NY 10504-1711
HIGH YIELD FUND:
CM Life 2,896,017 72%
c/o Continuum
301 West 11th Street
Kansas City, MO 64105-1634
Security Equity Life Insurance Company 1,124,295 28%
84 Business Park Drive
Armonk, NY 10504-1711
DJG VALUE EQUITY FUND:
Security Equity Life Insurance Company 144,118 100%
84 Business Park Drive
Armonk, NY 10504-1711
U.S. SMALL CAP FUND:
Security Equity Life Insurance Company 107,980 100%*
84 Business Park Drive
Armonk, NY 10504-1711
</TABLE>
- ----------------
38
<PAGE>
* May be deemed to "control" the Fund as that term is defined under the 1940
Act.
FINANCIAL STATEMENTS
The audited financial statements for the Company and the notes thereto for the
fiscal year ended March 31, 1998 are incorporated herein by reference to the
Company's Annual Report to Shareholders dated March 31, 1998. The March 31,
1998 financial statements are incorporated herein in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in auditing and accounting. Additional copies of the
Annual Report may be obtained at no charge by telephoning the Company at the
telephone number appearing on the front page of this Statement of Additional
Information.
39
<PAGE>
PROSPECTUS
THE OFFITBANK VARIABLE INSURANCE FUND, INC. JULY 29, 1998
As Supplemented
February 10, 1999
- --------------------------------------------------------------------------------
OFFITBANK VIF-MORTGAGE SECURITIES FUND
- --------------------------------------------------------------------------------
OFFITBANK VIF-Mortgage Securities Fund (the "Fund") is one of ten separate
non-diversified investment portfolios of the OFFITBANK Variable Insurance Fund,
Inc. (the "Company"), an open-end, management investment company. The Fund's
investment objective is to maximize total return from a combination of current
income and capital appreciation. The Fund will seek to achieve its objective by
investing at least 80% of its total assets in investment grade or comparable
mortgage-related securities issued by the U.S. government, its agencies and
instrumentalities, by private entities in the U.S., and by foreign governments
and governmental and private entities and may invest up to 20% of its total
assets in U.S. Government securities and investment grade or comparable fixed
income securities of foreign issuers.
The investment characteristics of mortgage-related securities differ from
traditional debt securities. These differences may subject the Fund to certain
risks not associated with investments in traditional fixed-income securities.
See "Investment Objective and Policies" and "Special Risk Considerations".
There can be no assurance that the Fund's investment objective will be achieved.
OFFITBANK, a trust company specializing in global fixed income management,
serves as the Fund's investment adviser (the "Adviser"). The Adviser currently
manages approximately $10 billion in assets principally invested in global fixed
income securities. The address of the Company is 400 Bellevue Parkway,
Wilmington, Delaware 19809. Yield and other information regarding the Fund may
be obtained by calling 1-800-618-9510.
SHARES OF THE FUND ARE SOLD ONLY TO CERTAIN LIFE INSURANCE COMPANIES
(COLLECTIVELY, "PARTICIPATING COMPANIES") AND THEIR SEPARATE ACCOUNTS
(COLLECTIVELY, THE "ACCOUNTS") TO FUND BENEFITS UNDER VARIABLE ANNUITY CONTRACTS
("CONTRACTS") AND VARIABLE LIFE INSURANCE POLICIES ("POLICIES") TO BE OFFERED BY
THE PARTICIPATING COMPANIES. THE ACCOUNTS INVEST IN SHARES OF THE FUND IN
ACCORDANCE WITH ALLOCATION INSTRUCTIONS RECEIVED FROM CONTRACT AND POLICY OWNERS
("CONTRACT OWNERS" OR "POLICY OWNERS," AS APPROPRIATE). SUCH ALLOCATION RIGHTS
ARE FURTHER DESCRIBED IN THE ACCOMPANYING ACCOUNT PROSPECTUS. SHARES ARE
REDEEMED TO THE EXTENT NECESSARY TO PROVIDE BENEFITS UNDER THE CONTRACTS AND
POLICIES.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus in conjunction with the prospectus for the Contract or Policy which
accompanies this Prospectus and retain this Prospectus for future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated July 29, 1998, as amended or supplemented from time to time,
has been filed with the Securities and Exchange Commission (the "Commission")
and is available to investors without charge by calling 1-800-618-9510. The
Statement of Additional Information is incorporated in its entirety by reference
into this Prospectus. This Prospectus, the Statement of Addiutional
Information, material incorporated by reference and other information regarding
the Fund is available on the Commission's Website (http://www.sec.gov).
-------------------------
INVESTORS ARE ADVISED THAT SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, OFFITBANK OR ANY AFFILIATE OF OFFITBANK, NOR
ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THE COMPANY IS NOT AUTHORIZED TO
ENGAGE IN THE BUSINESS OF BANKING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
WHAT YOU NEED TO KNOW
---------------------
Highlights. . . . . . . . . . . . . . . . . . . . . . . . . 2
The Company . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objective and Policies . . . . . . . . . . . . . 3
Investment Policies and Techniques. . . . . . . . . . . . . 6
Special Risk Considerations . . . . . . . . . . . . . . . . 11
Limiting Investment Risks . . . . . . . . . . . . . . . . . 15
Management. . . . . . . . . . . . . . . . . . . . . . . . . 15
About Your Investment . . . . . . . . . . . . . . . . . . . 16
How the Company Values Its Shares . . . . . . . . . . . . . 16
How Distributions are Made: Tax Information . . . . . . . . 17
Shareholder Communications. . . . . . . . . . . . . . . . . 17
Performance Information . . . . . . . . . . . . . . . . . . 17
Counsel and Independent Accountants . . . . . . . . . . . . 18
Appendix A. . . . . . . . . . . . . . . . . . . . . . . . A-1
<PAGE>
HIGHLIGHTS
INTRODUCTION
OFFITBANK VIF-Mortgage Securities 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 maximize total return from a combination of current income and
capital appreciation.
FUND MANAGEMENT
OFFITBANK, a trust company specializing in global fixed income management,
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 total
assets in mortgage-related securities, which involve certain special risks not
associated with investments in traditional fixed-income securities. See
"Investment Objective and Policies" and "Special Risk Considerations."
2
<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, 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 Fund, which could possibly force the Company to sell portfolio
securities at disadvantageous prices. The Company's Directors intend to monitor
events in order to identify any material irreconcilable conflicts that may
possibly arise and to determine what action, if any, should be taken in response
thereto.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has an investment objective which it pursues through investment
policies as described below. The objective and policies of the Fund can be
expected to affect the return of the Fund and the degree of market and financial
risk to which the Fund is subject. For more information about the investment
strategies employed by the Fund, see "Investment Policies and Techniques." The
investment objective and policies of the Fund may, unless otherwise specifically
stated, be changed by the Directors of the Company without a vote of the
shareholders. As a matter of policy, the Directors would not materially change
the investment objective of the Fund without shareholder approval. There is no
assurance that the Fund will achieve its objective.
Additional portfolios may be created from time to time with different investment
objectives and policies for use as funding vehicles for the Accounts or for
other insurance products. In addition, the Directors may, subject to any
necessary regulatory approvals, create more than one class of shares in the
Fund, with the classes being subject to different charges and expenses and
having such other different rights as the Directors may prescribe.
The Fund may utilize many of the same investment techniques and invest in
similar securities as other investment portfolios of the Company. Investors
should note, however, that the Fund will invest its assets in accordance with
its investment objective and policies described below. Accordingly, the Adviser
expects that the Fund's investment portfolios will be distinct, notwithstanding
its ability to invest in comparable instruments.
The investment objective of the Fund is to maximize total return from a
combination of current income and capital appreciation. The Mortgage Securities
Fund seeks to achieve this investment objective by investing at least 80% of the
value of its assets in a diversified portfolio of investment grade or comparable
mortgage-related securities.
Mortgage-related securities are securities that, directly or indirectly,
represent participations in, or are secured by and payable from, loans secured
by residential or commercial property. Mortgage-related securities include
mortgage pass-through securities, adjustable rate mortgage securities,
collateralized mortgage obligations and stripped mortgage-backed securities.
These mortgage-related securities include derivative mortgage securities.
The Fund's primary emphasis will be on mortgage-related securities representing
interests in residential property. Residential mortgage-related securities in
the U.S. fall into three categories: (1) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
Federal Home Loan Mortgage Corporation ("FHLMC"); (2) those issued by
non-governmental issuers that represent interests in, or are collateralized by,
mortgage-related securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and (3) those issued by non-governmental
issuers that represent an interest in, or are collateralized by, whole mortgage
loans or mortgage-related securities without a government guarantee but usually
with over-collateralization or some other form of private credit enhancement.
Non-governmental issuers referred to in (2) and (3) above include originators of
and investors in mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
3
<PAGE>
The residential mortgage pass-through securities in which the Fund will invest
provide for the pass-through to investors of their pro-rata share of monthly
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans. The Fund invests both in
U.S. Government pass-through securities issued by GNMA, FNMA and FHLMC, and in
pass-through securities issued by non-governmental issuers. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to certificate holders.
GNMA and FNMA guarantee timely distributions of scheduled principal. FHLMC
generally guarantees only ultimate collection of principal of the underlying
mortgage loans.
The Fund may also invest in adjustable rate mortgage securities ("ARMS"). ARMS
are pass-through mortgage securities collateralized by residential mortgages
with interest rates that are adjusted from time to time. The adjustments
usually are determined in accordance with a predetermined interest rate index
and may be subject to certain limits. While the values of ARMS, like other debt
securities, generally vary inversely with changes in market interest rates
(increasing in value during periods of declining interest rates and decreasing
in value during periods of increasing interest rates), the values of ARMS should
generally be more resistant to price swings than other debt securities because
the interest rates of ARMS move with market interest rates. The adjustable rate
feature of ARMS will not, however, eliminate fluctuations in the prices of ARMS,
particularly during periods of extreme fluctuations in interest rates. Also,
since many adjustable rate mortgages only reset on an annual basis, it can be
expected that the prices of ARMS will fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable rate mortgages.
Commercial mortgage-related securities are generally multi-class debt or
pass-through securities backed by a mortgage loan or pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties and
cooperative apartments, hotels and motels, nursing homes, hospitals and senior
living centers. The commercial loans underlying these securities are generally
not amortizing or not fully amortizing. At their maturity date, repayment of
the remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or the sale of the property. Unlike most
single family residential mortgages, commercial real property loans often
contain provisions which substantially reduce the likelihood that such
securities will be prepaid.
The market for commercial mortgage-related securities developed more recently
and in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential mortgage-related securities. Many of the
risks of investing in commercial mortgage-related securities reflect the risks
of investing in real estate securing the underlying mortgage loans. These risks
reflect the effect of local and other economic conditions such as real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-related securities
may be less liquid and exhibit greater price volatility than other types of
mortgage-related securities.
Mortgage-related securities issued by private issuers in the U.S. may entail
greater risk than mortgage-related securities that are guaranteed by the U.S.
Government, its agencies or instrumentalities. Privately-issued mortgage
securities are issued by private originators of, or investors in, mortgage
loans, including mortgage bankers, commercial banks, investment banks, savings
and loan associations and special purpose subsidiaries of the foregoing. Since
privately-issued mortgage certificates are not guaranteed by an entity having
the credit status of GNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into
two categories: (1) liquidity protection; and (2) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to
reduction in the event of deterioration in the creditworthiness of the credit
enhancement provider even in cases where the delinquency and loss experience on
the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments of, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue
4
<PAGE>
is generally based on historical information with respect to the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that which is anticipated could adversely affect the return on an investment in
such security.
The Fund may invest in collateralized mortgage obligations ("CMOs") issued by
the U.S. entities. CMOs are debt obligations collateralized by mortgage loans
or mortgage pass-through securities. CMOs may be collateralized by GNMA, FNMA
or Freddie Mac Certificates, but also may be collateralized by whole loans or
private pass-throughs (such collateral collectively hereinafter referred to as
"Mortgage Assets"). Multiclass pass-through securities are interests in a trust
composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal and of interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full. The
Fund has no present intention to invest in CMO residuals.
The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designated to provide relatively predictable payment of principal provided that
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. Because of these features, PAC
Bonds generally are less subject to the risks of prepayment than are other types
of mortgage-related securities.
The Fund may purchase stripped mortgage securities which are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid and to such extent, together with any other
illiquid investments, will be subject to the Fund's applicable restriction on
investments in illiquid securities.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only class), while the other class will receive all of the
principal ("PO" or principal only class). The yield to maturity on IOs, POs and
other mortgage securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization.
In addition to the stripped mortgage securities described above, the Fund may
invest in similar securities such as Super POs and Levered IOs which are more
volatile than POs and IOs. Risks associated with instruments such as Super POs
are similar in nature to those risks related to investments in POs. Risks
connected with Levered IOs are similar in nature to those associated with IOs.
The Fund may also invest in other similar instruments developed in the future
that are deemed consistent with its investment objective,
5
<PAGE>
policies and restrictions. POs may generate taxable income from the current
accrual of original issue discount, without a corresponding distribution of cash
to the Fund.
Up to 20% of the Fund's total assets may be invested in investment grade or
comparable fixed income securities, including mortgage-related securities of
issuers located in Canada, the United Kingdom, Denmark or other countries which
may develop a mortgage securities market. Any Fund investment denominated in a
foreign currency will be hedged against fluctuations in value versus the U.S.
dollar.
INVESTMENT POLICIES AND TECHNIQUES
GOVERNMENT MORTGAGE-BACKED SECURITIES. The principal governmental (i.e., backed
by the full faith and credit of the United States Government) guarantor of
mortgage-related securities is GNMA. GNMA is a wholly owned United States
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee with the full faith and credit of the United
States Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United
States Government) guarantors include FNMA and FHLMC. FNMA and FHLMC are
government-sponsored corporations owned entirely by private stockholders.
Pass-through securities issued by FNMA and FHLMC are guaranteed as to timely
payment of principal and interest by FNMA and FHLMC but are not backed by the
full faith and credit of the United States Government.
The investment characteristics of mortgage-related securities differ from
traditional debt securities. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. The major differences typically include more frequent
interest and principal payments, usually monthly, the adjustability of interest
rates, and the possibility that prepayments of principal may be made at any
time. Prepayment rates are influenced by changes in current interest rates and
a variety of economic, geographic, social and other factors. During periods of
declining interest rates, prepayment rates can be expected to accelerate. Under
certain interest rate and prepayment rate scenarios, the Fund may fail to recoup
fully its investment in mortgage-backed securities (and incur capital losses)
notwithstanding a direct or indirect governmental or agency guarantee. In
general, changes in the rate of prepayments on a mortgage-related security will
change that security's market value and its yield to maturity. When interest
rates fall, high prepayments could force the Fund to reinvest principal at a
time when investment opportunities are not attractive. Thus, mortgage-backed
securities may not be an effective means for the Fund to lock in long-term
interest rates. Conversely, during periods when interest rates rise, slow
prepayments could cause the average life of the security to lengthen and the
value to decline more than anticipated. However, during periods of rising
interest rates, principal repayments by mortgage-backed securities allows the
Fund to reinvest at increased interest rates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by certificates issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, but also may be collateralized by whole loans or private
pass-through securities (such collateral collectively referred to as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid on all classes of the CMOs on a monthly, quarterly or
semi-annual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, for example, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"). SMBS are derivative multiclass
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
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SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the principal from the Mortgage Assets, while the other
classes will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only class) while the other class will receive all of the
principal ("PO" or principal-only class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and a rapid rate of principal
payments may have a material adverse effect on such securities' yield to
maturity and result in a loss to the investor.
Under the Internal Revenue Code of 1986, as amended, POs may generate taxable
income from the current accrual of original issue discount, without a
corresponding distribution of cash to the Fund. In addition, the Staff of the
United States Securities and Exchange Commission (the "SEC") considers privately
issued SMBS to be illiquid securities.
U.S. GOVERNMENT SECURITIES. The Fund may invest in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association ("GNMA") and the
Export-Import Bank of the United States, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA") are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Fund will invest in the obligations of such
agencies or instrumentalities only when the Adviser believes that the credit
risk with respect thereto is minimal.
INVESTMENT GRADE FIXED-INCOME SECURITIES. The Fund may invest up to 20% of its
total assets in investment grade or comparable fixed income securities of
foreign issuers. Such investments may include mortgage related securities that
are not U.S. Government Securities, asset backed securities and fixed income
securities that are rated Baa or higher by Moody's or BBB or higher by S&P or
that are of comparable quality in the opinion of the Adviser. Fixed-income
securities rated Baa by Moody's or BBB by S&P are considered investment grade
obligations which lack outstanding investment characteristics and may have
speculative characteristics as well. See Appendix A for the descriptions of
these rating categories.
The ratings of fixed income securities by Moody's and S&P are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. The rating of an issuer is heavily
weighted by past developments and dues not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference
in credit risk of securities within each rating category. See Appendix A for a
description of such ratings.
FOREIGN SECURITIES. The Fund may invest in securities of foreign issuers. When
the Fund invests in foreign securities, they may be denominated in foreign
currencies. Thus, the Fund's net asset value will be affected by changes in
exchange rates. See "Special Risk Considerations."
STRUCTURED PRODUCTS. The Fund may invest in interests in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of certain debt obligations. This type of restructuring involves the deposit
with or purchase by an entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans or Brady Bonds) and the issuance by
that entity of one or more classes of securities ("structured products") backed
by, or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued structured
products to create securities with different investment characteristics such as
varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured products is dependent on
the extent of the cash flow on the underlying instruments. The Fund may invest
in structured products which represent derived investment positions based on
relationships among different markets or asset classes.
The Fund may also invest in other types of structured products, including among
others, inverse floaters, spread trades and notes linked by a formula to the
price of an underlying instrument or currency. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent) (the "reference
rate"). As an example, inverse floaters may constitute a class of
collateralized mortgage obligations with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the Cost of
Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate. A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities or currencies where
the
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value of the investment position is determined by movements in the difference
between the prices or interest rates, as the case may be, of the respective
securities or currencies. When the Fund invests in notes linked to the price of
an underlying instrument or currency, the price of the underlying security or
the exchange rate of the currency is determined by a multiple (based on a
formula) of the price of such underlying security or exchange rate of such
currency. Because they are linked to their underlying markets or securities,
investments in structured products generally are subject to greater volatility
than an investment directly in the underlying market or security. Total return
on the structured product is derived by linking return to one or more
characteristics of the underlying instrument. Although the Fund's purchase of
structured products would have a similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leveraged for purposes of the limitations placed on the extent of the Fund's
assets that may be used for borrowing and other leveraging activities.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). As a result, the Fund's investment in these structured products
may be limited by the restrictions contained in the 1940 Act. See "Other
Investment Companies" below. Structured products are typically sold in private
placement transactions, and there currently is no active trading market for
structured products. As a result, certain structured products in which the Fund
invests may be deemed illiquid and subject to the 15% limitation described below
under "Illiquid Securities."
DEPOSITORY RECEIPTS AND DEPOSITORY SHARES. The Fund may invest in American
Depository Receipts ("ADRs") or other similar securities, such as American
Depository Shares and Global Depository Shares, convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. Generally, ADRs in registered form are designed
for use in U.S. securities markets. As a result of the absence of established
securities markets and publicly-owned corporations in certain foreign countries
as well as restrictions on direct investment by foreign entities, the Fund may
be able to invest in such countries solely or primarily through ADRs or similar
securities and government approved investment vehicles. The Adviser expects
that the Fund, to the extent of its investment in ADRs, will invest
predominantly in ADRs sponsored by the underlying issuers. The Fund, however,
may invest in unsponsored ADRs. Issuers of the stock of unsponsored ADRs are
not obligated to disclose material information in the United States and,
therefore, there may not be a correlation between such information and the
market value of such ADRs.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. The
convertible securities that may be held by a Fund include any corporate debt
security or preferred stock that may be converted into underlying shares of
common stock and include both traditional convertible securities and synthetic
convertible securities. The common stock underlying convertible securities may
be issued by a different entity than the issuer of the convertible securities.
Convertible securities entitle the holder to receive interest payments paid on
corporate debt securities or the dividend preference on a preferred stock until
such time as the convertible security matures or is redeemed or until the holder
elects to exercise the conversion privilege. "Synthetic"convertible securities,
as such term is used herein, are created by combining separate securities which
possess the two principal characteristics of a true convertible security, fixed
income and the right to acquire equity securities. Convertible securities have
several unique investment characteristics such as (1) higher yields than common
stocks, but lower yields than comparable nonconvertible securities, (2) a lesser
degree of fluctuation in value than the underlying stock since they have fixed
income characteristics, and (3) the potential for capital appreciation if the
market price of the underlying common stock increases.
HEDGING AND OTHER STRATEGIC TRANSACTIONS. The Fund may use, as a portfolio
management strategy, cross currency hedges, interest rate transactions,
commodity futures contracts in the form of futures contracts on securities,
securities indices and foreign currencies, and related options transactions.
The Fund also may enter into forward foreign currency contracts and options
transactions to hedge in connection with currency and interest rate positions
and in order to enhance the Fund's income or gain. See "Special Risk
Considerations - Hedging and Other Strategic Transactions."
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Fund may invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between a foreign
entity and one or more financial institutions ("Lenders"). The majority of the
Fund's investments in Loans in emerging markets is expected to be in the form of
participations ("Participations") in Loans and assignments ("Assignments") of
portions of Loans from third parties. Participations typically will result in
the Fund having a contractual relationship only with the Lender, not with the
borrower government. The Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Fund will acquire Participations only if the
Lender
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interpositioned between the Fund and the borrower is determined by the Adviser
to be creditworthy. Creditworthiness will be judged based on the same credit
analysis performed by the Adviser when purchasing marketable securities. When
the Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Fund as the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Fund anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of net
assets. See "Illiquid Securities" below.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities in
accordance with its investment objective and policies. Asset-backed securities
represent an undivided ownership interest in a pool of installment sales
contracts and installment loans collateralized by, among other things, credit
card receivables and automobiles. In general, asset-backed securities and the
collateral supporting them are of shorter maturity than mortgage loans. As a
result, investment in these securities should result in greater price stability
for the Fund.
Asset-backed securities are often structured with one or more types of credit
enhancement. For a description of the types of credit enhancement that may
accompany asset-backed securities, see the Statement of Additional Information.
The Fund will not limit its investments to asset-backed securities with credit
enhancements. Although asset-backed securities are not generally traded on a
national securities exchange, such securities are widely traded by brokers and
dealers, and to such extent will not be considered illiquid for the purposes of
the Fund's limitation on investment in illiquid securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may purchase or sell
forward foreign currency exchange contracts ("forward contracts") as part of its
portfolio investment strategy. A forward contract is an obligation to purchase
or sell a specific currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders and their
customers. The Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of the security
("transaction hedge"). Additionally, for example, when the Fund believes that a
foreign currency may suffer a substantial decline against the U.S. dollar, it
may enter into a forward sale contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Conversely, when the Fund
believes that the U.S. dollar may suffer a substantial decline against a foreign
currency, it may enter into a forward purchase contract to buy that foreign
currency for a fixed dollar amount ("position hedge"). In this situation, the
Fund may, in the alternative, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Fund believes that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the currency
in which portfolio securities of the Fund are denominated ("cross-hedge"). The
Fund's custodian will place cash not available for investment or U.S. government
securities or other high quality debt securities in a segregated account having
a value equal to the aggregate amount of the Fund's commitments under forward
contracts entered into with respect to position hedges, cross-hedges and
transaction hedges, to the extent they do not already own the security subject
to the transaction hedge. If the value of the securities placed in a segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Fund may purchase a call
option permitting the Fund to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the forward contract
price or the Fund may purchase a put option permitting the Fund to sell the
amount of foreign currency subject to a forward purchase contract at a price as
high or higher than the forward contract price. Unanticipated changes in
currency prices may result in poorer overall performance for the Fund than if it
had not entered into such contracts. If the party with which the Fund enters
into a forward contract becomes insolvent or breaches its obligation under the
contract, then the Fund may lose the ability to purchase or sell a currency as
desired.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow by entering into reverse
repurchase agreements. Pursuant to such agreements, the Fund would sell
portfolio securities to financial institutions, such as banks and
broker-dealers, and agree to repurchase them at an agreed upon date, price and
interest payment. When effecting reverse repurchase transactions, securities of
a dollar amount equal in value to the securities subject to the agreement will
be maintained in a segregated account with the Fund's custodian. A reverse
repurchase agreement involves the risk that the market value of the portfolio
securities sold by the Fund may
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decline below the price of the securities the Fund is obligated to repurchase,
which price is fixed at the time the Fund enters into such agreement.
SECURITIES LOANS, REPURCHASE AGREEMENTS, WHEN-ISSUED AND FORWARD COMMITMENTS
TRANSACTIONS. The Fund may lend portfolio securities in an amount up to 30% of
its assets to broker-dealers, major banks or other recognized domestic
institutional borrowers of securities. The Fund may make loans which are
short-term (nine months or less) or long-term. The Fund may also enter into
repurchase agreements with dealers, domestic banks or recognized financial
institutions which, in the opinion of the Adviser, present minimal credit risks.
These transactions must be fully collateralized at all times, but involve some
risk to the Fund if the other party should default on its obligations and the
Fund is delayed or prevented from recovering the collateral. The Fund may also
purchase securities on a when-issued basis or for future delivery, which may
increase its overall investment exposure and involves a risk of loss if the
value of the securities declines prior to the settlement date.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DISCOUNT OBLIGATIONS. The Fund
may invest in zero coupon securities and pay-in-kind bonds. These investments
involve special risk considerations. Zero coupon securities are debt securities
that pay no cash income but are sold at substantial discounts from their value
at maturity. When a zero coupon security is held to maturity, its entire
return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference
is known at the time of purchase, so that investors holding zero coupon
securities until maturity know at the time of their investment what the return
on their investment will be. Certain zero coupon securities also are sold at
substantial discounts from their maturity value and provide for the commencement
of regular interest payments at a deferred date. The Fund also may purchase
pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of their interest in
the form of debt or equity securities. The Fund will only purchase pay-in-kind
bonds that pay all or a portion of their interest in the form of debt
securities. Zero coupon securities and pay-in-kind bonds may be issued by a
wide variety of corporate and governmental issuers.
Zero coupon securities, pay-in-kind bonds and debt securities acquired at a
discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities; the value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates. Under current federal
income tax law, the Fund is required to accrue as income each year the value of
securities received in respect of pay-in-kind bonds and a portion of the
original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition,
the Fund will elect similar treatment for any market discount with respect to
debt securities acquired at a discount. Accordingly, the Fund may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate current cash to satisfy certain distribution requirements.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, including securities which are not readily
marketable, time deposits and repurchase agreements not terminable within seven
days. Illiquid assets are assets which may not be sold or disposed of in the
ordinary course of business within seven days at approximately the value at
which the Fund has valued the investment. Securities that have readily
available market quotations are not deemed illiquid for purposes of this
limitation (irrespective of any legal or contractual restrictions on resale).
The Fund may purchase securities that are not registered under the Securities
Act of 1933, as amended, but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act ("Rule 144A securities"). Rule 144A
securities generally must be sold to other qualified institutional buyers. If a
particular investment in Rule 144A securities is not determined to be liquid,
that investment will be included within the 15% limitation on investment in
illiquid securities. The ability to sell Rule 144A securities to qualified
institutional buyers is a recent development and it is not possible to predict
how this market will mature. The Fund may also invest in commercial obligations
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to institutional
investors such as the Fund who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. The Adviser will monitor the liquidity of
such restricted securities under the supervision of the Board of Directors.
OTHER INVESTMENT COMPANIES. The Fund reserves the right to invest up to 10% of
its total assets in the securities of other investment companies. The Fund may
not invest more than 5% of its total assets in the securities of any one
investment company or acquire more than 3% of the voting securities of any other
investment company. The 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.
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SHORT SALES. The Fund may make short sales of securities "against the box." A
short sale is a transaction in which the Fund sells a security it does not own
in anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, the Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.
FUTURE DEVELOPMENTS. The Fund may, following notice to its shareholders, take
advantage of other investment practices which are not at present contemplated
for use by the Fund or which currently are not available but which may be
developed, to the extent such investment practices are both consistent with the
Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described above.
TEMPORARY STRATEGIES. The Fund retains the flexibility to respond promptly to
changes in market and economic conditions. Accordingly, consistent with the
Fund's investment objective, the Adviser may employ a temporary defensive
investment strategy if it determines such a strategy is warranted. Under such a
defensive strategy, the Fund temporarily may hold cash (U.S. dollars, foreign
currencies or multinational currency units) and/or invest up to 100% of its
assets in high quality debt securities or money market instruments of U.S. or
foreign issuers, and most or all of the Fund's investments may be made in the
United States and denominated in U.S. dollars.
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.
PORTFOLIO TURNOVER. The Fund will not trade in securities with the intention of
generating short-term profits but, when circumstances warrant, securities may be
sold without regard to the length of time held. It is not anticipated that,
under normal conditions, the portfolio turnover rate for the Fund will exceed
100% in any one year. A high rate of portfolio turnover (100% or more) involves
correspondingly greater brokerage commission expenses and/or markups and
markdowns, which will be borne directly by the Fund and indirectly by the Fund's
shareholders. High portfolio turnover may also result in the realization of
substantial net capital gains.
SPECIAL RISK CONSIDERATIONS
GENERAL. The Fund's net asset value will fluctuate, reflecting fluctuations in
the market value of its portfolio positions and its net currency exposure. The
value of the securities held by the Fund generally fluctuates, to varying
degrees, based on, among other things, (1) interest rate movements, (2) changes
in the actual and perceived creditworthiness of the issuers of such securities,
(3) changes in any applicable foreign currency exchange rates, (4) social,
economic or political factors, (5) factors affecting the industry in which the
issuer operates, such as competition or technological advances and (6) factors
affecting the issuer directly, such as management changes or labor relations.
There is no assurance that the Fund will achieve its investment objective.
MORTGAGE SECURITIES. The investment characteristics of mortgage-related
securities differ from traditional debt securities. These differences can
result in significantly greater price and yield volatility than is the case with
traditional fixed income securities. The major differences typically include
more frequent interest and principal payments, usually monthly, the
adjustability of interest rates, and the possibility that prepayments of
principal may be made at any time. Prepayment rates are influenced by changes
in current interest rates and a variety of economic, geographic, social and
other factors. During periods of declining interest rates, prepayment rates can
be expected to accelerate. Under certain interest rate and prepayment rate
scenarios, the Fund may fail to recoup fully its investment in mortgage-backed
securities (and incur capital losses) notwithstanding a direct or indirect
governmental or agency guarantee. In general, changes in the rate of
prepayments on a mortgage-related security will change that security's market
value and its yield to maturity. When interest rates fall, high prepayments
could force the Fund to reinvest principal at a time when investment
opportunities are not attractive. Thus, mortgage-backed securities may not be
an effective means for the Fund to lock in long-term interest rates.
Conversely, during periods when interest rates rise, slow prepayments could
cause the average life of the security to lengthen and the value to decline more
than anticipated. However, during periods of rising interest rates, principal
repayments by mortgage-backed securities allows the Fund to reinvest at
increased interest rates.
NON-DIVERSIFIED FUND. The Fund is classified as a "non-diversified" fund under
the 1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Fund may invest a greater proportion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities as compared to a
diversified fund. The Fund, however, intends to comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended, (the
"Code") applicable to segregated asset accounts underlying variable products
under section 817(h) of the Code and to regulated investment companies under
Subchapter M of the Code.
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FOREIGN SECURITIES. The Fund may invest in mortgage-related or other
fixed-income securities of non-U.S. issuers. Investors should recognize that
investing in securities of non-U.S. issuers involves certain risks and special
considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. issuers. Further, certain
investments that the Fund may make, and investment techniques in which they may
engage, involve risks, including those set forth below.
FOREIGN TAXES. The Fund's investment income from foreign issuers may be subject
to non-U.S. withholding taxes, thereby reducing the Fund's net investment
income. For more information about tax risks related to the Fund, see "How
Distributions are Made: Tax Information" below and "Additional Information
Concerning Taxes" in the Statement of Additional Information.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Some countries in which the Fund may
invest may be subject to a substantially greater degree of social, political and
economic instability than is the case in the United States, Japan and Western
European countries. Such instability may result from, among other things, some
or all of the following: (1) authoritarian governments or military involvement
in political and economic decision-making, and changes in government through
extra-constitutional means; (2) popular unrest associated with demands for
improved political, economic and social conditions; (3) internal insurgencies
and terrorist activities; (4) hostile relations with neighboring countries; and
(5) drug trafficking. Social, political and economic instability could
significantly disrupt the principal financial markets in which the Fund invests
and adversely affect the value of the Fund's assets.
CURRENCY FLUCTUATIONS. Because the Fund may invest a portion of its assets in
the securities of foreign issuers which are denominated in foreign currencies,
the strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the Fund's investment performance. A decline in the value
of any particular currency against the U.S. dollar will cause a decline in the
U.S. dollar value of the Fund's holdings of securities denominated in such
currency and, therefore, will cause an overall decline in the Fund's net asset
value and any net investment income and capital gains to be distributed in U.S.
dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.
INFLATION. Inflation and rapid fluctuations in inflation rates may have very
negative effects on the economies and securities markets of countries in which
the Fund may invest. In an attempt to control inflation, wage and price
controls have been imposed at times in certain countries.
In addition to the foreign securities listed above, the Fund may also invest in
foreign sovereign debt securities, which involve certain additional risks. See
"Sovereign Debt Securities" below.
HEDGING AND OTHER STRATEGIC TRANSACTIONS. The Fund may be authorized to use a
variety of investment strategies to hedge various market risks (such as interest
rates, currency exchange rates and broad or specific market movements), to
manage the effective maturity or duration of debt instruments held by the Fund,
or, with respect to certain strategies, to seek to increase the Fund's income or
gain (such investment strategies and transactions are referred to herein as
"Hedging and Other Strategic Transactions"). Currently, the Fund may use, as
portfolio management strategies, cross currency hedges, interest rate
transactions, commodity futures contracts in the form of futures contracts on
securities, securities indices and foreign currencies, and related options
transactions. The Fund also may enter into forward foreign currency contracts
and options transactions to hedge in connection with currency and interest rate
positions and in order to enhance the Fund's income or gain.
A discussion of the risks associated with Hedging and Other Strategic
Transactions follows below. The Fund will not be obligated, however, to pursue
any of such strategies and the Fund makes any representation as to the
availability of these techniques at this time or at any time in the future. In
addition, the Fund's ability to pursue certain of these strategies may be
limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools. To the extent not otherwise
restricted by the Commission, the CFTC, the Code or its investment objective and
policies, the Fund may utilize, without limitation, Hedging and Other Strategic
Transactions. For further information see "Additional Information on
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Portfolio Instruments and Techniques - Hedging and Other Strategic Transactions"
and "Additional Information Concerning Taxes" in the Statement of Additional
Information.
IN GENERAL. Subject to the constraints described above, the Fund may (if and to
the extent so authorized) purchase and sell (or write) exchange-listed and
over-the-counter put and call options on securities, index futures contracts,
financial futures contracts and fixed income indices and other financial
instruments, and enter into financial futures contracts, interest rate
transactions and currency transactions (collectively, these transactions are
referred to in this Prospectus as "Hedging and Other Strategic Transactions").
The Fund's interest rate transactions may take the form of swaps, caps, floors
and collars, and the Fund's currency transactions may take the form of currency
forward contracts, currency futures contracts, currency swaps and options on
currencies or currency futures contracts.
Hedging and Other Strategic Transactions may generally be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to manage the effective maturity or duration of the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The Fund may use any or all types
of Hedging and Other Strategic Transactions which it is authorized to use at any
time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any authorized Hedging and Other Strategic
Transaction will be a function of numerous variables, including market
conditions. The ability of the Fund to utilize Hedging and Other Strategic
Transactions successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select the Fund's
securities. The Fund is not a "commodity pool" (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Hedging and Other Strategic Transactions involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging, and non-hedging purposes to the extent
permitted by CFTC regulations; provided that the Fund may enter into futures
contracts or options thereon for purposes other than bona fide hedging if
immediately thereafter, the sum of the amount of its initial margin and premiums
on open contracts would not exceed 5% of the liquidation value of the Fund's
portfolio; provided further, than in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of certain Hedging and Other Strategic
Transactions will require that the Fund segregate cash, U.S. government
securities or other liquid high grade debt obligations to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. A detailed discussion of various
Hedging and Other Strategic Transactions, including applicable regulations of
the CFTC and the requirement to segregate assets with respect to these
transactions, appears in the Statement of Additional Information.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS. Hedging and Other Strategic
Transactions have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of the Hedging and Other Strategic Transactions could result in losses
greater than if they had not been used. Use of put and call options could
result in losses to the Fund, force the sale or purchase of portfolio securities
at inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, or cause the
Fund to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures
and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses. Although the Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures
contracts create a greater ongoing potential financial risk than would purchases
of options, in which case the exposure is limited to the cost of the initial
premium.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or
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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.
Over-the-counter ("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
14
<PAGE>
a put option on the same futures contract or forward contract with a strike
price as high or higher than the price of the contract held. Other Hedging and
Other Strategic Transactions may also be offset in combinations. If the
offsetting transaction terminates at the time of or after the primary
transaction, no segregation is required, but if it terminates prior to that
time, assets equal to any remaining obligation would need to be segregated.
LIMITING INVESTMENT RISKS
To further protect investors, the Fund has adopted the following investment
limitations:
1. The Fund may not invest 25% or more of the value of its total assets
in securities of issuers in any one industry; provided that there is
no limitation with respect to investment in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
2. The Fund may not borrow money (except that it may enter into reverse
repurchase agreements) except from banks for temporary or emergency
purposes; PROVIDED, that (a) the amount of such borrowing may not
exceed 20% of the value of the Fund's total assets and (b) the Fund
will not purchase portfolio securities while such outstanding
borrowing exceeds 5% of the value of its total assets.
3. The Fund may not invest an amount equal to 15% or more of the current
value of its net assets in investments that are illiquid.
The foregoing investment limitations and certain of those described in the
Statement of Additional Information under "Investment Limitations" are
fundamental policies of the Fund that may be changed only when permitted by law
and approved by the holders of a "majority" of the Fund's outstanding shares.
If a percentage restriction on investment or use of assets contained in these
investment limitations or elsewhere in this Prospectus or Statement of
Additional Information is adhered to at the time a transaction is effected,
later changes in percentage resulting from any cause other than actions by the
Fund will not be considered a violation; provided, that the restrictions on
borrowing described in (2) 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 a fee from the Fund, computed daily and paid monthly, at
the annual rate of .40% of the Fund's average daily net assets.
The Adviser is a New York State chartered trust company. Under its charter, the
Adviser may neither accept deposits nor make loans except for deposits or loans
arising directly from its exercise of the fiduciary powers granted it under the
New York Banking Law. The Adviser's principal business is the rendering of
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. The Adviser
specializes in fixed income management and offers its clients a complete range
of fixed income investments in capital markets throughout the world. The
Adviser currently manages approximately $10 billion in assets and serves as
investment adviser to twenty-one other registered investment companies (or
portfolios thereof). The principal address of the Adviser is 520 Madison
Avenue, New York, New York 10022.
PORTFOLIO MANAGER. Jack D. Burks will serve as the portfolio manager for the
Fund. Mr. Burks is a Managing Director of the Adviser and has been associated
with the Adviser since 1985.
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN. PFPC Inc., an indirect, wholly
owned subsidiary of PNC Bank Corp., serves as the Company's administrator. PFPC
also provides transfer agency and dividend disbursing services to the Company.
The Bank of
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New York serves as custodian of the assets of the Fund. PFPC is entitled to an
annual fee calculated daily and paid monthly which will not exceed .125% of
aggregate average daily net assets of the Company as compensation for its
services as administrator. The Bank of New York serves as custodian of the
assets of the Fund. The principal business address of PFPC is 400 Bellevue
Parkway, Wilmington, Delaware 19809. The principal business address of The Bank
of New York is 90 Washington Street, New York, New York 10286.
FUND EXPENSES. In addition to the fees described above with respect to the
Investment Advisory Agreement, the Fund will be responsible for expenses
relating to administration, transfer agency, custody, 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 Advisor or
Administrator.
ABOUT YOUR INVESTMENT
Shares of the Fund are offered on a continuous basis directly by OFFIT Funds
Distributor, Inc. (the "Distributor"), the Fund's Principal Underwriter, to the
Accounts without any sales or other charge, at the Fund's net asset value on
each day on which the New York Stock Exchange ("NYSE") is open for business.
The Company will effect orders to purchase or redeem shares of the Fund, that
are based on premium payments, surrender and transfer requests and any other
transaction requests from Contract and Policy Owners, annuitants and
beneficiaries, at the Fund's net asset value per share next computed after the
Account receives such transaction request. Any orders to purchase or redeem
Fund shares that are not based on actions by Contract or Policy Owners,
annuitants, and beneficiaries will be effected at the Fund's net asset value per
share next computed after the order is received by the Distributor. The Fund
reserves the right to suspend the sale of the Fund's shares in response to
conditions in the securities markets or for other reasons.
Individuals may not place orders directly with the Fund. Please refer to the
appropriate Account Prospectus of the Participating Company for more information
on the purchase of Portfolio shares.
REDEMPTION OF SHARES. An Account may redeem all or any portion of the shares of
the Fund in its account at any time at the net asset value per share of the Fund
calculated in the manner described above. Shares redeemed are entitled to earn
dividends, if any, up to and including the day redemption is effected. There is
no redemption charge. Payment of the redemption price will normally be made
within seven days after receipt of such tender for redemption.
The right of redemption may be suspended or the date of payment may be postponed
for any period during which the NYSE is closed (other than customary weekend and
holiday closings) or during which the SEC determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
SEC) exists as a result of which disposal by the Fund of securities is not
reasonably practicable or as a result of which it is not reasonably practicable
for the Company fairly to determine the value of the Fund's net assets, or for
such other periods as the SEC may by order permit for the protection of security
holders of the Company.
EXCHANGE PRIVILEGE. A Contract or Policy Owner investing through an Account may
exchange shares of the Fund for shares of any of the other investment portfolios
of the Company on the basis of their respective net asset values.
HOW THE COMPANY VALUES ITS SHARES
The net asset value per share of the Fund is calculated once daily at 4:15 p.m.,
New York time, Monday through Friday, each day the NYSE is open. The net asset
value per share of the Fund is computed by dividing the value 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.
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HOW DISTRIBUTIONS ARE MADE: TAX INFORMATION
DISTRIBUTIONS. The Fund will declare and distribute dividends from net
investment income and will distribute its net capital gains, if any, at least
annually. Such income and capital gains distributions will be made in shares of
the Fund.
TAX MATTERS
The Fund intends to continue to qualify as a regulated investment company under
the Code so that it will not be subject to federal income tax on its earnings
and capital gains that are distributed to its shareholders. In addition, the
Fund intends to comply with the diversification requirements of the Code and
Treasury Regulations in order to maintain the tax-deferred status of the
Accounts.
Shares of the Fund must be purchased through Policies or Contracts. As a
result, it is anticipated that any dividend or capital gains distribution from
the Fund will be exempt from current taxation if left to accumulate within a
Policy or Contract. The Fund is managed without regard to tax ramifications.
Withdrawals from Contracts or Policies may be subject to ordinary income tax
plus a 10% penalty tax if made before age 59 1/2.
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, administrative or judicial action. As the foregoing
discussion is for general information only, a prospective investor should also
review the more detailed discussion of federal income tax considerations that is
contained in the Statement of Additional Information. In addition, each
prospective investor should consult with his own tax adviser as to the tax
consequences of investments in the Fund, including the application of state and
local taxes which may differ from the federal income tax consequences described
above.
THE TAX STATUS OF YOUR INVESTMENT IN THE FUND DEPENDS UPON THE FEATURES OF YOUR
POLICY OR CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE ACCOUNT OR
POLICY PROSPECTUS.
SHAREHOLDER COMMUNICATIONS
It is expected that Contract or Policy Owners will receive from the
Participating Companies for which shares of the Fund are the investment vehicle,
reports that will include, among other things, the Company's unaudited
semi-annual financial statements and year-end financial statements audited by
the Company's independent accountants. Each report will show the investments
owned by the Fund and will provide other information about the Fund and its
operations. It is expected that the Company will pay a portion of the cost of
preparing certain of these reports. Contract and Policy Owners may obtain
information about their investment on any business day by calling toll-free
1-800-618-9510 between 8:15 a.m. and 6:00 p.m., New York time. Specially
trained representatives will answer questions and provide information about
Contract and Policy Owners' accounts.
Each Account owning shares of the Fund will vote its shares in accordance with
instructions received from Contract or Policy Owners, annuitants and
beneficiaries. Fund shares held by an Account as to which no instructions have
been received will be voted for or against any proposition, or in abstention, in
the same proportion as the shares of that Account as to which instructions have
been received. Fund shares held by an Account that are not attributable to
Contracts or Policies will also be voted for or against any proposition in the
same proportion as the shares for which voting instructions are received by the
Account. If the Participating Insurance Company determines, however, that it is
permitted to vote any such shares of the Fund in its own right, it may elect to
do so, subject to the then current interpretation of the 1940 Act and the rules
thereunder.
PERFORMANCE INFORMATION
From time to time the Fund may advertise certain information about its
performance. The Fund may present standardized and nonstandardized total return
in advertisements or other written material. Standardized total return is
calculated in accordance with the Commission's formula. Nonstandardized total
return differs from the standardized total return only in that it may be related
to a nonstandard period or is presented in the aggregate rather than as an
annual average. In addition, the Fund may make available information as to its
respective "yield" and "effective yield" over a thirty-day period, as calculated
in accordance with the Commission's prescribed formula. The "effective yield"
assumes that the income earned by an investment in the Fund is reinvested, and
will therefore be slightly higher than the yield because of the compounding
effect of this assumed reinvestment.
The performance of the Fund may be quoted and compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example,
performance information may be compared with data published by Lipper Analytical
Services, Inc. or to unmanaged indices of performance, including, but not
limited to, Value Line Composite, Lehman Brothers Bond, Government Corporate,
Corporate and Aggregate Indices, Merrill Lynch Government & Agency and
Intermediate Agency Indices,
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Morgan Stanley Capital International Europe, Australia, Far East Index or Morgan
Stanley Capital International World Index. The performance information may also
include evaluations of the Fund published by nationally recognized ranking
services and by various national or local financial publications, such as
BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY, THE WALL STREET
JOURNAL, BARRON'S, KIPLINGER'S, 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 AND INDEPENDENT ACCOUNTANTS
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York, serves
as counsel to the Company. PricewaterhouseCoopers LLP serves as the independent
accountants to the Company. PricewaterhouseCoopers LLP is located at 1177
Avenue of the Americas, New York, New York 10036.
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APPENDIX A
RATINGS
The following is a description of certain ratings of Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), and Duff &
Phelps Credit Rating Co. ("D&P") that are applicable to certain obligations in
which the Fund may invest.
COMMERCIAL PAPER RATINGS
A 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. The following summarizes the rating categories used by S&P for
commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure 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 supporting institutions) have a strong ability
for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
A-1
<PAGE>
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of D&P for investment grade commercial
paper and short-term debt are "D-1," "D-2" and "D-3." D&P employs three
designations, "D-1+," "D-1" and "D-1-," within the highest rating category. The
following summarizes the rating categories used by D&P for commercial paper:
"D-1+" - Debt possesses the 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.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses 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.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses 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.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
A-2
<PAGE>
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation 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" rating is also used upon
the filing of a bankruptcy petition or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." 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 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 possess many favorable investment attributes 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 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," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some
A-3
<PAGE>
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by D&P for
corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
A-4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR ITS DISTRIBUTORS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTORS IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
A-5
<PAGE>
THE OFFITBANK VARIABLE INSURANCE FUND, INC.
400 Bellevue Parkway
Wilmington, Delaware 19809
(800) 618-9510
STATEMENT OF ADDITIONAL INFORMATION
July 29, 1998
As Supplemented February 10, 1999
The OFFITBANK Variable Insurance Fund, Inc. (the "Company") is a no load mutual
fund consisting of ten portfolios whose shares are available to participating
life insurance companies ("Participating Companies") and their separate accounts
("Accounts") to fund benefits under variable annuity contracts ("Contracts") and
variable life insurance policies ("Policies") issued by the Participating
Companies. The portfolios are OFFITBANK VIF-High Yield Fund, OFFITBANK
VIF-Emerging Markets Fund, OFFITBANK - DJG Value Equity Fund, OFFITBANK VIF-U.S.
Government Securities Fund, OFFITBANK VIF-U.S. Small Cap Fund, OFFITBANK
VIF-Global Convertible Fund Income Fund, OFFITBANK VIF-Total Return Fund,
OFFITBANK VIF-Latin America Equity Fund, OFFITBANK VIF-CVO Greater China Fund,
and OFFITBANK VIF-Mortgage Securities Fund. This Statement of Additional
Information sets forth information about the Company applicable to the following
portfolios only: OFFITBANK VIF-Latin America Equity Fund, OFFITBANK VIF-CVO
Greater China Fund, and OFFITBANK VIF-Mortgage Securities Fund (individually, a
"Fund", and collectively, the "Funds").
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Company's
Prospectus dated July 29, 1998 (the "Prospectus"). This Statement of Additional
Information contains additional information to that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or calling the Company at the
address and telephone number set forth above.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ADDITIONAL RISK CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . 16
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PERFORMANCE CALCULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . . 29
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . 32
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
<PAGE>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND
TECHNIQUES
The OFFITBANK VIF-Latin America Equity Fund's primary investment objective is
capital appreciation. A secondary investment objective of the Fund is current
income. The Fund will seek to achieve its objective by investing primarily in
equity securities of Latin American issuers.
The OFFITBANK VIF-Mortgage Securities Fund's primary investment objective is to
maximize total return from a combination of current income and capital
appreciation. The Fund will seek to achieve its objective by investing at least
80% of the value of its assets in investment grade or comparable
mortgage-related securities issued by the U.S. Government, its agencies and
instrumentalities, by private entities in the U.S., and by foreign governments
and governmental and private entities.
The OFFITBANK VIF-CVO Greater China Fund's investment objective is to achieve
capital appreciation and income generation. The Fund will seek to achieve its
objective by investing primarily in publicly-traded equity securities of
companies which, in the opinion of the Adviser, will benefit from the economic
development and growth of the People's Republic of China, Hong Kong, Taiwan and
Singapore (collectively, the "Greater China Region").
There can be no assurance that any Fund will achieve its objective. The
principal features of each Fund's investment program and the primary risks
associated with that program are discussed in each Fund's Prospectus. The
following discussion of investment policies supplements the discussion of
investment objectives and policies set forth in the Prospectus.
REPURCHASE AGREEMENTS
If and to the extent authorized to do so, each Fund may enter into repurchase
agreements. A repurchase agreement is a transaction in which the seller of a
security commits itself at the time of the sale to repurchase that security from
the buyer at a mutually agreed upon time and price. A Fund will enter into
repurchase agreements only with dealers, domestic banks or recognized financial
institutions which, in the opinion of the investment adviser of the Fund (the
"Adviser") based on guidelines established by the Company's Board of Directors,
present minimal credit risks. The Adviser to each Fund will monitor the value of
the securities underlying the repurchase agreement at the time the transaction
is entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always exceeds the repurchase price plus
accrued interest. In the event of default by the seller under the repurchase
agreement, a Fund may incur costs and experience time delays in connection with
the disposition of the underlying securities.
3
<PAGE>
REVERSE REPURCHASE AGREEMENTS
If and to the extent authorized to do so, each Fund may enter into reverse
repurchase agreements. A reverse repurchase agreement is a borrowing
transaction in which a Fund transfers possession of a security to another party,
such as a bank or broker/dealer, in return for cash, and agrees to repurchase
the security in the future at an agreed upon price, which includes an interest
component. Whenever a Fund enters into reverse repurchase agreements as
described in the Prospectus, it will place in a segregated custodian account
liquid assets having a value equal to the repurchase price (including accrued
interest) and will subsequently monitor the account to ensure such equivalent
value is maintained. Reverse repurchase agreements are considered to be
borrowings by the Fund under the 1940 Act.
DOLLAR ROLL TRANSACTIONS
If and to the extent authorized to do so, in order to enhance portfolio returns
and manage prepayment risks, each Fund may engage in dollar roll transactions
with respect to mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar
roll transaction, a Fund sells a mortgage security held in the portfolio to a
financial institution such as a bank or broker-dealer, and simultaneously agrees
to repurchase a substantially similar security (same type, coupon and maturity)
from the institution at a later date at an agreed upon price. The mortgage
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with
different prepayment histories. During the period between the sale and
repurchase, a Fund will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be invested in
short-term instruments, and the income from these investments, together with any
additional fee income received on the sale, could generate income for a Fund
exceeding the yield on the sold security. When a Fund enters into a dollar roll
transaction, cash or liquid securities of the Fund, in a dollar amount
sufficient to make payment for the obligations to be repurchased, are segregated
with its custodian at the trade date. These securities are marked to market
daily and are maintained until the transaction is settled.
ASSET-BACKED SECURITIES
If and to the extent authorized to do so, each Fund may invest in asset-backed
securities. Asset-backed securities are generally issued as pass through
certificates, which represent undivided fractional ownership interests in the
underlying pool of assets, or as debt instruments, and are generally issued as
the debt of a special purpose entity organized solely for the purpose of owning
such assets and issuing such debt. Asset-backed securities are often backed by
a pool of assets representing the obligations of a number of different parties.
Payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
4
<PAGE>
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the services to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. If the letter of
credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized. Because asset-backed securities are relatively new,
the market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
CREDIT SUPPORT. Asset-backed securities often contain elements of credit support
to lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories: (1)
liquidity protection; and (2) protection against losses resulting from ultimate
default by an obligor on the underlying asset. Liquidity protection ensures that
the pass through of payments due on the installment sales contracts and
installment loans which comprise the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. A Fund will not pay any additional fee for such
credit support. The existence of credit support may increase the market price
of the security.
MORTGAGE-BACKED SECURITIES
If and to the extent authorized to do so, each Fund may invest in
mortgage-backed securities. Mortgage-backed securities are securities that
represent participations in, or are secured by and payable from, loans secured
by real property.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by certificates issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, but also may be collateralized by whole loans or private
pass-through securities (such collateral collectively referred to as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors
5
<PAGE>
in, mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid on all classes of the CMOs on a monthly, quarterly or
semi-annual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, for example, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"). SMBS are derivative multiclass
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
SMBS are structured with two or more classes of securities that receive
different proportions of the interest and principal distributions on a pool of
Mortgage Assets. A common type of SMBS will have at least one class receiving
only a small portion of the principal from the Mortgage Assets, while the other
classes will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only class) while the other class will receive all of the
principal ("PO" or principal-only class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and a rapid rate of principal
payments may have a material adverse effect on such securities' yield to
maturity and result in a loss to the investor. Under the Internal Revenue Code
of 1986, as amended, POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of cash to the
Fund. In addition, the Staff of the United States Securities and Exchange
Commission (the "SEC") considers privately issued SMBS to be illiquid
securities.
Mortgage-backed and asset-backed securities are generically considered to be
derivative securities.
DEPOSITORY RECEIPTS
If and to the extent authorized to do so, each Fund may hold equity securities
of foreign issuers in the form of American Depository Receipts ("ADRs"),
American Depository Shares ("ADSs") and European Depository Receipts ("EDRs"),
or other securities convertible into securities of eligible issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. ADRs and ADSs typically are issued
by an
6
<PAGE>
American bank or trust company which evidences ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depository Receipts ("CDRs"), are receipts issued in Europe
typically by foreign banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs and ADSs in registered form are
designed for use in United States securities markets and EDRs, and CDRs in
bearer form are designed for use in European securities markets. For purposes of
a Fund's investment policies, such Fund's investments in ADRs, ADSs, EDRs, and
CDRs will be deemed to be investments in the equity securities representing
securities of foreign issuers into which they may be converted.
WARRANTS OR RIGHTS
If and to the extent authorized to do so, warrants or rights may be acquired by
each Fund in connection with other securities or separately, and provide the
Fund with the right to purchase at a later date other securities of the issuer.
Warrants or rights acquired by a Fund in units or attached to securities will be
deemed to be without value for purpose of this restriction. These limits are not
fundamental policies of the Funds and may be changed by the Company's Board of
Directors without shareholder approval.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, the Mortgage Securities Fund and
the Latin America Equity Fund may make secured loans of portfolio securities
amounting to not more than 30% of each Fund's total assets. The CVO Greater
China Fund may make secured loans of portfolio securities amounting to not more
than 1/3 of its total assets. Securities loans are made to broker/dealers or
institutional investors pursuant to agreements requiring that the loans
continuously be secured by collateral at least equal at all times to the value
of the securities lent plus any accrued interest, "marked to market" on a daily
basis. The collateral received will consist of cash, U.S. short-term government
securities, bank letters of credit or such other collateral as may be permitted
under the Fund's investment program and by regulatory agencies and approved by
the Company's Board of Directors. While the securities loan is outstanding, the
Fund will continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund has a right to call each loan
and obtain the securities on five business days' notice. To the extent
applicable, the Fund will not have the right to vote equity securities while
they are being lent, but it will call in a loan in anticipation of any important
vote. Opportunities to engage in the lending of equity securities listed in
Greater China Region securities markets are restricted. For example, Hong Kong
permits such lending subject to a 14 day limit on the lending period. The risks
in lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the
borrower fail financially. Loans only will be made to firms deemed by the
Adviser to be of good standing and will not be made unless, in the judgment of
the Adviser, the consideration to be earned from such loans would justify the
risk.
7
<PAGE>
UNITED STATES GOVERNMENT OBLIGATIONS
If and to the extent authorized to do so, each Fund may invest in securities
issued or guaranteed by the U.S. government or by its agencies or
instrumentalities. Such securities in general include a wide variety of U.S.
Treasury obligations consisting of bills, notes and bonds, which principally
differ only in their interest rates, maturities and times of issuance.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities are debt securities issued by agencies or instrumentalities
established or sponsored by the U.S. government.
In addition to the U.S. Treasury obligations described above, a Fund may invest
in separately traded interest components of securities issued or guaranteed by
the U.S. Treasury. The interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") program. Under the STRIPS program, the interest components
are individually numbered and separately issued by the U.S. Treasury at the
request of depository financial institutions, which then trade the component
parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (1) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association), (2) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks) or (3) only the credit of the issuer or guarantor
(e.g., obligations of the Federal Home Loan Mortgage Corporation). In the case
of obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and that
have been established or sponsored by the U.S. government include, in addition
to those identified above, the Bank for Cooperatives, the Export-Import Bank,
the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
Subject to the investment limitations described in the Prospectus, bank
obligations that may be purchased by a Fund include certificates of deposit,
bankers' acceptances and fixed time deposits. A certificate of deposit is a
short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A banker's acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest
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in the deposit to a third party. The Funds do not consider fixed time deposits
illiquid for purposes of the restriction on investment in illiquid securities.
Banks are subject to extensive governmental regulations that may limit both the
amounts and types of loans and other financial commitments that may be made and
the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of funding lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by a Fund,
the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by the Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.
A Fund will not purchase securities which the Adviser to the Fund believes, at
the time of purchase, will be subject to exchange controls or foreign
withholding taxes; however, there can be no assurance that such laws may not
become applicable to certain of the Fund's investments. In the event unforeseen
exchange controls or foreign withholding taxes are imposed with respect to a
Fund's investments, the effect may be to reduce the income received by the Fund
on such investments.
BORROWING
Each Fund is authorized to borrow money from banks for temporary or emergency
purposes, denominated in any currency in an amount up to 10% of its total assets
(including the amount borrowed).
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Special Risk Considerations - Hedging and
Other Strategic Transactions," each Fund may enter into transactions in options,
futures, and forward contracts on a variety of instruments and indexes, in order
to hedge various market risks, to manage the effective maturity or duration of
debt instruments held by the Fund, or, with respect to certain strategies, to
seek to increase the Fund's income or gain. The discussion below supplements
the discussion in the Prospectus.
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Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each
of the particular types of options discussed in greater detail below. In
addition, many Hedging and Other Strategic Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts".
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued
by a regulated intermediary such as the Options Clearing Corporation ("OCC"),
which guarantees the performance of the obligations of the parties to the
options. The discussion below uses the OCC as an example, but is also
applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's inability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options; (2) restrictions on transactions imposed by an
exchange; (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits; (4) interruption of the normal operations
of the OCC or an exchange; (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (6) a decision by one or
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more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although any such outstanding options on that
exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to
exchange-listed options, which generally have standardized terms and performance
mechanics, all of the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guarantees and security, are
determined by negotiation of the parties. It is anticipated that any Fund
authorized to use OTC options will generally only enter into OTC options that
have cash settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with a Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Thus, the Adviser must assess the creditworthiness of each such Counterparty or
any guarantor or credit enhancement of the Counterparty's credit to determine
the likelihood that the terms of the OTC option will be met. A Fund will enter
into OTC option transactions only with U.S. government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers", or
broker-dealers, domestic or foreign banks, or other financial institutions that
are deemed creditworthy by the Adviser. In the absence of a change in the
current position of the staff of the SEC, OTC options purchased by a Fund and
the amount of the Fund's obligation pursuant to an OTC option sold by the Fund
(the cost of the sell-back plus the in-the-money amount, if any) or the value of
the assets held to cover such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
If and to the extent authorized to do so, each Fund may purchase and sell call
options on securities and on Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the OTC markets, and on securities indices,
currencies and futures contracts. All calls sold by the Fund must be "covered",
that is, the Fund must own the securities subject to the call, must own an
offsetting option on a futures position, or must otherwise meet the asset
segregation
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requirements described below for so long as the call is outstanding. Even
though the Fund will receive the option premium to help protect it against loss,
a call sold by the Fund will expose the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, each Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. In selling put
options, the Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, each Fund may trade financial futures
contracts or purchase or sell put and call options on those contracts as a hedge
against anticipated interest rate, currency or market changes, for duration
management and for permissible non-hedging purposes. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract and obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC and generally will be entered into only
for bona fide hedging, risk management (including duration management) or other
permissible non-hedging purposes. Maintaining a futures contract or selling an
option on a futures contract will typically require the Fund to deposit with a
financial intermediary, as security for its obligations, an amount of cash or
other specified assets ("initial margin") that initially is from 1% to 10% of
the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter daily as the mark-to-market value of the futures contract fluctuates.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
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A Fund will not enter into a futures contract or option thereon for purposes
other than bona fide hedging if, immediately thereafter, the sum of the amount
of its initial margin and premiums required to maintain permissible non-hedging
positions in futures contracts and options thereon would exceed 5% of the
liquidation value of the Fund's net assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below under "Use
of Segregated and Other Special Accounts".
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, each Fund may purchase and sell call
and put options on securities indices and other financial indices. In so doing,
the Fund can achieve many of the same objectives it would achieve through the
sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
CURRENCY TRANSACTIONS
If and to the extent authorized to do so, each Fund may engage in currency
transactions with Counterparties to hedge the value of portfolio securities
denominated in particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange-listed and OTC options
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash
flows based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars". A Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.
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Except as provided in the Prospectus, a Fund's dealings in forward currency
contracts and other currency transactions such as futures contracts, options,
options on futures contracts and swaps will be limited to hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
Each Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Fund's holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The
amount of the contract would not exceed the market value of the Fund's
securities denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions. If a Fund enters into a currency hedging transaction, the Fund
will comply with the asset segregation requirements described in the Prospectus.
COMBINED TRANSACTIONS
If and to the extent authorized to do so, each Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Other Strategic Transaction, as part of a single or combined strategy when,
in the judgment of the Adviser, it is in the best interests of the Fund to do
so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
will normally be entered into by a Fund based on the Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase the risks or hinder achievement of the portfolio management
objective.
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SWAPS, CAPS, FLOORS AND COLLARS
If and to the extent authorized to do so, each Fund may be authorized to enter
into interest rate, currency and index swaps, the purchase or sale of related
caps, floors and collars. A Fund will enter into these transactions primarily
to seek to preserve a return or spread on a particular investment or portion of
its portfolio, to protect against currency fluctuations, as a duration
management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. Each Fund will use
these transactions for non-speculative purposes and will not sell interest rate
caps or floors if it does not own securities or other instruments providing the
income the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (for example, an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal). A currency
swap is an agreement to exchange cash flows on a notional amount based on
changes in the values of the reference indices. The purchase of a cap entitles
the purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate. The purchase of an interest rate floor entitles the purchaser to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor to the extent that a specified index falls below
a predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling the floor to the extent that a specific index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return with a predetermined range of interest
rates or values.
Provided the contract so permits, the Fund will usually enter into interest rate
swaps on a net basis, that is, the two payments streams are netted out in a cash
settlement on the payment date or dates specified in the instrument, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. No
Fund will enter into any swap, cap, floor, collar or other derivative
transaction unless the Counterparty is deemed creditworthy by the Adviser. If a
Counterparty defaults, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the Adviser based on
various factors, including: (1) the frequency of trades and quotations; (2) the
number of dealers and prospective purchasers in the marketplace; (3) dealer
undertakings to make a market; (4) the nature of the security (including any
demand or tender features); and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the
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investment). Such determination will govern whether a swap will be deemed
within the 15% restriction on investments in securities that are not readily
marketable.
Each Fund will maintain cash and appropriate liquid assets (i.e., high grade
debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If a Fund enters into a swap agreement on a
net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If a
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts".
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, each Fund may make investments in
Eurodollar instruments, which are typically dollar-denominated futures contracts
or options on those contracts that are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
ADDITIONAL RISK CONSIDERATIONS
POLITICAL AND ECONOMIC RISKS
Investing in securities of non-U.S. companies may entail additional risks due to
the potential political and economic instability of certain countries and the
risks of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country.
FOREIGN INVESTMENT RESTRICTIONS
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as the Funds. For example, certain countries require governmental approval
prior to investments by foreign persons, or limit the amount of investment by
foreign persons in a particular company, or limit the investment by foreign
persons to only a specific class of securities of a company that may have less
advantageous terms than securities of the company available for purchase by
nationals. Moreover, the national policies of certain countries may restrict
investment opportunities in issuers or industries deemed sensitive to national
interests. In addition. some countries require governmental approval for the
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors. The Funds could be adversely affected by delays in, or a
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refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions on investments.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ in some cases significantly from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the securities held by the Funds will not be
registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by
the Funds than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, the Adviser will take appropriate steps to
evaluate the proposed investment, which may include interviews with its
management and consultations with accountants, bankers and other specialists.
There is substantially less publicly available information about foreign
companies than there are reports and ratings published about U.S. companies and
the U.S. government. In addition, where public information is available, it may
be less reliable than such information regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS
Securities of many foreign issuers may be less liquid and their prices more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities exchanges and brokers generally are subject to less governmental
supervision and regulation than in the United States, and foreign securities
exchange transactions usually are subject to fixed commissions, which generally
are higher than negotiated commissions on U.S. transactions. In addition,
foreign securities exchange transactions may be subject to difficulties
associated with the settlement of such transactions. Delays in settlement could
result in temporary periods when assets of the Fund are uninvested and no return
is earned thereon. The inability of any Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive
opportunities. Inability to dispose of a portfolio security due to settlement
problems either could result in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. The
Adviser will consider such difficulties when determining the allocation of such
Fund's assets, though the Adviser does not believe that such difficulties will
have a material adverse effect on the Fund's portfolio trading activities.
NON-U.S. WITHHOLDING TAXES
A Fund's net investment income from foreign issuers may be subject to non-U.S.
withholding taxes thereby reducing the Fund's net investment income. See
"Additional Information Concerning Taxes".
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ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. See
"Special Risks of Certain Fund Investments" in the Prospectus. The sale of
restricted or illiquid securities require more time and result in higher
brokerage charges or dealer discounts and other selling expenses than the sale
of securities eligible for trading on securities exchanges or in the
over-the-counter markets. Restricted securities often sell at a price lower than
similar securities that are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, are liquid or illiquid. The Board has delegated the
function of making day to day determinations of liquidity to the Adviser,
pursuant to guidelines reviewed by the Board. The Adviser takes into account a
number of factors in reaching liquidity decisions, including, but not limited
to: (i) the frequency of trading in the security; (ii) the number of dealers
who make quotes for the security; (iii) the number of dealers who have
undertaken to make a market in the security; (iv) the number of other potential
purchasers; and (v) the nature of the security and how trading is effected
(e.g., the time needed to sell the security, how offers are solicited and the
mechanics of transfer). The Adviser to each Fund will monitor the liquidity of
securities in that Fund's portfolio and report periodically on such decisions to
the Board of Directors.
INVESTMENT LIMITATIONS
In addition to the restrictions described under "Limiting Investment Risks" in
the Prospectus, each Fund may not:
(1) purchase or sell commodities or commodity contracts, except that
the Fund may purchase and sell financial and currency futures
contracts and options thereon, and may purchase and sell currency
forward contracts, options on foreign currencies and may
otherwise engage in transactions in foreign currencies;
(2) make loans, except that the Fund may: (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances); (b) invest in
loans and participations in accordance with its investment
objectives and policies; (c) make loans of portfolio securities;
and (d) enter into repurchase agreements with respect to
portfolio securities;
(3) underwrite the securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof
and later disposition of such securities in accordance with the
Fund's investment program may be deemed to be an underwriting;
(4) purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests
therein or securities issued by companies that invest in real
estate or interests therein);
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(5) purchase more than 3% of the stock of another investment company,
or purchase stock of other investment companies equal to more
than 5% of the Fund's net assets in the case of any one other
investment company and 10% of such net assets in the case of all
other investment companies in the aggregate. This restriction
shall not apply to investment company securities received or
acquired by the Fund pursuant to a merger or plan of
reorganization;
(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are
necessary for the clearance of transactions, and except for
initial and variation margin payments in connection with the use
of options, futures contracts, options thereon or forward
currency contracts; the Fund may also make deposits of margin in
connection with futures and forward contracts and options
thereon);
(7) sell securities short (except for short positions in a futures
contract or forward contract or short positions in stocks owned
by the Fund);
(8) invest for the purpose of exercising control over management of
any company;
(9) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases;
(10) pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure permitted borrowings;
(11) invest in stock or bond futures and/or options on futures unless
not more than 5% of the Fund's total assets are required as
deposit to secure obligations under such futures and/or options
on futures contracts, provided, however, that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing such 5%; and
(12) invest in puts, calls straddles or spreads, except as described
in (11) above.
If a percentage restriction on investment or use of assets set forth above is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
Investment restrictions (1) through (5) described above and those set forth in
the Prospectus under "Limiting Investment Risks" are fundamental policies of the
Fund which may be changed only when permitted by law and approved by the holders
of a majority of the Fund's outstanding voting securities, as described under
"General Information-Capital Stock". Restrictions (7) through (12) are
nonfundamental policies of the Fund, and may be changed by a vote of the
Company's Board of Directors.
19
<PAGE>
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the Company
for the past five years are listed below.
<TABLE>
<CAPTION>
POSITION(s) PRINCIPAL
HELD WITH OCCUPATION(s)
NAME, ADDRESS AND AGE THE COMPANY PAST 5 YEARS
- --------------------- ----------- ------------
<S> <C> <C>
Morris W. Offit, 61* Chairman of the President and Director,
OFFITBANK Board, President and OFFITBANK (1983 -
520 Madison Avenue Director present). Chairman of
New York, NY 10022 the Board, President and
Director of The OFFITBANK
Investment Fund, Inc.
Edward J. Landau, 70 Director Member, Lowenthal, Landau
Lowenthal, Landau, Fischer & Bring, P.C.
Fischer & Bring, P.C. (1960 - present);
250 Park Avenue Director, Revlon Group
New York, NY 10177 Inc. (cosmetics), Revlon
Consumer Products Inc.
(cosmetics), Pittsburgh
Annealing Box (metal
fabricating) and Clad
Metals Inc. (cookware).
The Very Reverend Director Retired, formerly Dean of
James Parks Morton, 58 Cathedral of St. John the
Cathedral of St. John Divine (1972 - 1996)
the Divine
1047 Madison Avenue
New York, NY 10025
Wallace Mathai-Davis, 53 Secretary and Managing Director, OFFITBANK
OFFITBANK Treasurer (1986 -present). Secretary
520 Madison Avenue and Treasurer of The
New York, NY 10022 OFFITBANK Investment Fund,
Inc.
Stephen Brent Wells, 53 Assistant Treasurer Managing Director,
OFFITBANK OFFITBANK (1994 -
520 Madison Avenue present); General
New York, NY 10022 Counsel, Gabelli Funds,
Inc. (1993 - 1994);
General Counsel and
President, Funds Group,
Goldman Sachs Asset
Management (1989 - 1993)
20
<PAGE>
Vincent M. Rella, 45 Assistant Treasurer Managing Director,
OFFITBANK OFFITBANK (1997 to
520 Madison Avenue present); Controller,
New York, NY 10022 OFFITBANK
(1986 - present)
Stephen M. Wynne, 43 Assistant Treasurer Chairman of PFPC Trustee
PFPC Inc. & Custodial Services Ltd.
400 Bellevue Parkway (since 1995); Executive
Wilmington, DE 19809 Vice President and Chief
Accounting Officer (since
1993) and Senior Vice
President and Chief
Accounting Officer (from
1991 to 1993) of PFPC
Inc.; Executive Vice
President (from 1993 to
1995) of PFPC
International.
David D. Marky, 32 Assistant Treasurer Vice President and
PFPC Inc. Director of Accounting
103 Bellevue Parkway g(since 1996) of PFPC
Wilmington, DE 19809 Inc., Assistant Vice
President and Accounting
Conversion Manager (since
1992) of PFPC Inc.
Gary M. Gardner, 47 Assistant Secretary Chief Counsel (since
PFPC Inc. 1994) of PFPC Inc.;
400 Bellevue Parkway Associate General Counsel
Wilmington, DE 19809 (from 1992 to 1994) of
The Boston Company, Inc.
David C. Lebisky, 26 Assistant Secretary Regulatory Administrator
PFPC Inc. (since 1996) of PFPC
400 Bellevue Parkway Inc.; Legal Assistant
Wilmington, DE 19809 (1994 to 1996) with the
law firm of Drinker
Biddle & Reath; BA
Candidate (1990 to 1994)
Lasalle University.
</TABLE>
- ---------------------
* "Interested person" as defined in the 1940 Act.
The Board of Directors has designated an audit committee to advise the full
Board with respect to accounting, auditing and financial matters affecting the
Company. The Audit Committee is comprised of Mr. Landau and The Very Reverend
Morton and meets periodically.
The Company pays each Director who is not also an officer or affiliated person
an annual fee of $3,000 and a fee of $500 for each Board of Directors and Board
committee meeting attended and are reimbursed for all out-of-pocket expenses
relating to attendance at meetings. Directors who are affiliated with the
Adviser do not receive compensation from the Company but are reimbursed for all
out-of-pocket expenses relating to attendance at meetings.
21
<PAGE>
ESTIMATED DIRECTOR COMPENSATION
(FOR CALENDAR YEAR 1998)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX* PAID TO
NAME OF PERSON FROM REGISTRANT EXPENSES RETIREMENT DIRECTORS
- -------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Morris W. Offit $0 0 N/A $0
Edward J. Landau $5,500 0 N/A $28,500
The Very Reverend James $5,500 0 N/A $28,500
Parks Morton
</TABLE>
* For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.
INVESTMENT ADVISER
CVO Greater China Partners, L.P. serves as investment adviser to the OFFITBANK
VIF-CVO Greater China Fund. OFFITBANK serves as investment adviser to the
OFFITBANK VIF-Latin America Equity Fund and the OFFITBANK VIF-Mortgage
Securities Fund. As the term is hereinafter used, "Adviser" shall refer to the
investment adviser to each Fund, respectively.
OFFITBANK
OFFITBANK, a New York State chartered trust company, acts as investment adviser
to OFFITBANK VIF-Latin America Equity Fund and OFFITBANK VIF-Mortgage Securities
Fund. The advisory agreement (the "Advisory Agreement") between the Adviser and
the Funds provides that the Adviser shall manage the operations of the Funds,
subject to policy established by the Board of Directors of the Company. Pursuant
to the Advisory Agreement, the Adviser manages the Funds' investment portfolios,
directs purchases and sales of the portfolio securities and reports thereon to
the Company's officers and directors regularly. In addition, the Adviser pays
the compensation of the Company's officers, employees and directors affiliated
with the Adviser. The Company bears all other costs of its operations, including
the compensation of its directors not affiliated with the Adviser.
For its services under the Advisory Agreement, the Adviser receives from each
Fund an advisory fee. The fee is payable monthly at an annual rate of .90% of
the OFFITBANK VIF-Latin America Equity Fund's average daily net assets and
.40% of the OFFITBANK VIF-Mortgage Securities Fund's average daily net
assets. The Adviser may waive all or part of its fee from time to time in
order to increase a Fund's net investment income available for distribution
to shareholders. The Fund will not be required to reimburse the Adviser for
any advisory fees waived.
22
<PAGE>
The Advisory Agreement was approved by the Company's Board of Directors for an
initial two year period and, unless sooner terminated, will continue in effect
with respect to a particular Fund for consecutive one year terms thereafter,
provided such continuance is approved at least annually by the Company's Board
of Directors or by a vote of a majority (as defined under "General
Information-Capital Stock") of the outstanding shares of the Fund, and, in
either case, by a majority of the directors who are not parties to the contract
or "interested persons" (as defined in the 1940 Act) of any party by votes cast
in person at a meeting called for such purpose. The Advisory Agreement may be
terminated by the Company or the Adviser on 60 days' written notice, and will
terminate immediately in the event of its assignment.
CVO GREATER CHINA PARTNERS, L.P.
CVO Greater China Partners, L.P. provides day-to-day management of the OFFITBANK
VIF- CVO Greater China Fund's portfolio and renders investment advisory services
to the Fund pursuant to an Advisory Agreement with the Fund (the "Advisory
Agreement"). Subject to such policies as the Fund's Board of Directors may
determine, the Adviser makes investment decisions for the Fund. The Advisory
Agreement provides that as compensation for services, the Adviser is entitled to
receive from the Fund a monthly fee at the annual rate of 1.25% of the average
daily net assets of the Fund.
The Adviser is a Delaware limited partnership formed in September 1994. The
Adviser's key investment team consists of experienced investment professionals
based in San Francisco. The Adviser's principal business is the rendering of
discretionary investment management services to the Fund. The Adviser's
principal business address is 520 Madison Avenue, New York, NY 10022.
CONTROL OF THE ADVISER. The Adviser is controlled by its two general partners:
OFFITBANK Greater China, Inc., a New York corporation established in August 1994
as a wholly-owned subsidiary of OFFITBANK, a New York State chartered trust
company ("OFFITBANK"), and ChinaVest Public Equities, LLC, a California limited
liability corporation established in January 1995 as a wholly-owned subsidiary
of ChinaVest Financial Services, Ltd., a Cayman Islands corporation ("ChinaVest
Ltd.").
The ChinaVest investment management group based in Hong Kong (the "ChinaVest
Group") was organized in 1985. The ChinaVest Group has ten years of experience
in managing private equity investments and shares certain common control persons
with ChinaVest Public Equities, LLC. The ChinaVest Group currently manages
approximately $300 million in assets. The ChinaVest Group is represented by
ChinaVest, Inc., whose principal business address is 160 Sansome Street, 18th
Floor, San Francisco, California 94104.
REGULATORY MATTERS
OFFITBANK is a trust company chartered under the New York Banking Law and is
supervised and examined thereunder by the New York Banking Department.
OFFITBANK is prohibited by
23
<PAGE>
its charter from accepting deposits other than deposits arising directly from
its exercise of the fiduciary powers granted under the New York Banking Law and,
accordingly, is not an insured depository institution for purposes of the
Federal Deposit Insurance Act or any other banking law or regulation.
Banking laws and regulations, as currently interpreted by the New York Banking
Department, prohibit New York State chartered trust companies from controlling,
or distributing the shares of, a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit such trust
companies generally from issuing, underwriting, selling or distributing
securities, but do not prohibit such trust companies from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company or from purchasing shares of such a company as agent for and upon the
order of a customer. OFFITBANK believes that it may perform the services
described in this Prospectus with respect to the Company without violation of
such laws or regulations. OFFITBANK is not a member of the Federal Reserve
System and is not subject to the Glass-Steagall Act, the Bank Holding Company
Act of 1956 or any other federal banking law or regulation that might affect its
ability to perform such services.
If the Adviser were prohibited from performing the services described in any
Prospectus with respect to any Fund, it is expected that the Company's Board of
Directors would recommend to such Fund's shareholders that they approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board of Directors. The Company does not anticipate that
investors would suffer any adverse financial consequences as a result of these
occurrences.
DISTRIBUTOR
OFFIT Funds Distributor, Inc., (the "Distributor"), a wholly-owned subsidiary of
Provident Distributors, Inc., with its principal office at Four Falls Corporate
Center, 6th Floor, West Conshohocken, Pennsylvania 19428-2961, distributes the
shares of the Company. Under a distribution agreement with the Company (the
"Distribution Agreement"), the Distributor is not obligated to sell any specific
amount of shares of the Company. The Distributor, as agent of the Company,
agrees to use its best efforts as sole distributor of the Company's shares.
The Distribution Agreement will continue in effect with respect to a particular
Fund from year to year if such continuance is approved at least annually by the
Company's Board of Directors and by a majority of the Directors who have no
direct or indirect financial interest in the Agreement ("Qualified Directors")
and who are not "interested persons" (as defined in the 1940 Act) of any party
by votes cast in person at a meeting called for such purpose. In approving the
continuance of the Distribution Agreement, the Directors must determine that the
Agreement is in the best interest of the shareholders of the Fund.
24
<PAGE>
ADMINISTRATION, TRANSFER AGENCY AND CUSTODY SERVICES
PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of PNC Bank Corp.,
performs administrative and fund accounting services for the Company, and is
responsible for certain clerical, record keeping and bookkeeping services,
except those performed by OFFITBANK, CVO Greater China Partners, L.P. or by The
Bank of New York ("BONY") in its capacity as custodian of the Company. PFPC has
no role in determining the investment policies of the Company or which
securities are to be purchased or sold by the Funds. The services provided by
PFPC as Administrator include regulatory compliance, assistance in the
preparation and filing of post-effective amendments to the Company's
registration statement with the Commission, preparation of annual, semi-annual
and other reports to shareholders and the Commission, filing of federal and
state income tax returns, preparation of financial and management reports,
preparation of board meeting materials, preparation and filing of blue sky
registrations and monitoring compliance with the amounts and conditions of each
state's qualification. For the administrative and fund accounting services PFPC
provides to the Company, PFPC is paid an annual fee calculated daily and paid
monthly which is expected to approximate .125% of net assets. From time to
time, the Administrator may waive all or a portion of its fees.
In addition to the services provided by PFPC to the Fund as Administrator, PFPC
also provides transfer agency and dividend disbursing services to the Fund
pursuant to a separate agreement.
BONY serves as the Company's custodian pursuant to a custodian agreement (the
"Custodian Agreement") with the Company. BONY is located at 90 Washington
Street, New York, New York 10286. Under the Custodian Agreement, BONY has agreed
to: (1) maintain a segregated account or accounts in the name of each Fund; (2)
hold and disburse portfolio securities on account of each Fund; (3) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio securities; (4) respond to correspondence relating to its
duties; and (5) make periodic reports to the Company's Board of Directors
concerning each Fund's operations. The Custodian is authorized under the
Custodian Agreement to select one or more banks or trust companies to serve as
sub-custodian on behalf of a Fund, provided that the Custodian remains
responsible for the performance of all of its duties under the Custodian
Agreement. The Custodian is entitled to receive such compensation from each Fund
as may be agreed upon from time to time.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by each Fund to the organizations retained to
provide services for the Fund may be waived from time to time in order to
increase the Fund's net investment income available for distribution to
shareholders.
Except as otherwise noted, OFFITBANK and PFPC pay all expenses in connection
with the performance of their advisory and administrative services respectively.
The Company bears the expenses incurred in its operations, including: taxes;
interest; fees (including fees paid to its directors who are not affiliated with
the Company); fees payable to the SEC; costs of preparing prospectuses for
regulatory purposes and for distribution; advisory and administration fees;
25
<PAGE>
charges of its custodian and transfer agent; certain insurance costs; auditing
and legal expenses; fees of independent pricing services; costs of shareholders'
reports and shareholder meetings, including proxy statements and related
materials; and any extraordinary expenses. The Company also pays for brokerage
fees and commissions, if any, in connection with the purchase of portfolio
securities.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policy established
by the Company's Board of Directors, the Adviser is primarily responsible for
the Company's portfolio decisions and the placing of the Company's portfolio
transactions.
Portfolio securities normally will be purchased or sold from or to dealers
serving as market makers for the securities at a net price, which may include
dealer spreads and underwriting commissions. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission. In the
over-the-counter market securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While the Adviser generally seeks a
competitive price in placing its orders, the Company may not necessarily be
paying the lowest price available.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless the transaction is conducted in accordance with procedures established by
the Company's Board of Directors and complies in all other respects with certain
criteria or an exemptive order allowing such transactions is obtained from the
SEC. Affiliated persons of the Company, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for the
Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees and other remuneration received by other brokers in connection
with comparable transactions. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length agency
transaction.
Investment decisions for the Company are made independently from those for other
funds and accounts advised or managed by the Adviser. Such other funds and
accounts may also invest in the same securities as the Company. If those funds
or accounts are prepared to invest in, or desire to dispose of, the same
security at the same time as the Company, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner
26
<PAGE>
deemed equitable to all. In some cases, this procedure may adversely affect the
size of the position obtained for or disposed of by the Company or the price
paid or received by the Company. In addition, because of different investment
objectives, a particular security may be purchased for one or more funds or
accounts when one or more funds or accounts are selling the same security. To
the extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for the Company with those to be sold or purchased for other funds
or accounts in order to obtain best execution.
PURCHASE OF SHARES
The Company reserves the right, in its sole discretion, to suspend the offering
of shares of its Funds and reject purchase orders when, in the judgment of
management, such suspension or rejection is in the best interest of the Company.
REDEMPTION OF SHARES
The Company may suspend redemption privileges or postpone the date of payment
(1) during any period that the New York Stock Exchange (the "NYSE") or the bond
market is closed, or trading on the NYSE is restricted as determined by the SEC,
(2) during any period when an emergency exists as defined by the rules of the
SEC as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or fairly to determine the value of its
assets, and (3) for such other periods as the SEC may permit.
Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of the Fund, such Fund may pay the
redemption price, in whole or in part, by a distribution in kind.
PERFORMANCE CALCULATIONS
The Company may from time to time quote various performance figures to
illustrate the past performance of its Funds. Performance quotations by
investment companies are subject to rules adopted by the SEC, which require the
use of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the SEC methods for computing performance follows.
TOTAL RETURN
A Fund's average annual total return is determined by finding the average annual
compounded rates of return over 1, 5 and 10 year periods (or, if sooner, the
period since inception of the Fund) that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The calculation assures that
all dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each 1, 5 and 10 year period
(or, if shorter, the period since inception of the Fund) and the deduction of
all applicable Fund expenses on an annual basis. Average annual total return is
calculated according to the following formula:
27
<PAGE>
n
P (1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the stated period
A Fund may also calculate total return on an aggregate basis which reflects the
cumulative percentage change in value over the measuring period. The formula for
calculating aggregate total return can be expressed as follows:
Aggregate Total Return = [( ERV ) - 1]
---
P
In addition to total return, each Fund may quote performance in terms of a
30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the SEC and can be expressed as follows:
6
Yield = 2 [ (a-b +1) - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the minimum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Fund at a discount or premium, the
formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations.
The performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or other independent services which monitor the performance data
of investment companies, and may be quoted in advertising in terms of their
rankings in each applicable universe. In addition, the Company may use
performance reported in financial and industry publications, including BARRON'S,
BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY, MORNINGSTAR,
MUTUAL FUND VALUES, THE WALL STREET JOURNAL, THE NEW YORK TIMES and U.S.A.
TODAY.
Performance information presented for a Fund should not be compared directly
with performance
28
<PAGE>
information of other insurance products without taking into account
insurance-related charges and expenses payable under the variable annuity
contract and variable life insurance policy. These charges and expenses are not
reflected in the Fund's performance and would reduce an investor's return under
the annuity contract or life policy.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax considerations that
are not described in the Funds' Prospectuses and generally affect each Fund and
its shareholders. No attempt is made to present a detailed explanation of the
tax treatment of a Fund or its shareholders, and the discussions here and in the
Prospectuses are not intended as substitutes for careful tax planning.
Each Fund intends to qualify as a "regulated investment company" ("RIC") under
the Internal Revenue Code of 1986, as amended (the "Code"). If so qualified, a
Fund will not be subject to federal income tax on its investment company taxable
income and net capital gains to the extent that such investment company taxable
income and net capital gains are distributed in each taxable year to the
separate accounts of insurance companies that hold its shares. In addition, if
a Fund distributes annually to the separate accounts its ordinary income and
capital gain net income, in the manner prescribed in the Code, it also will not
be subject to the 4% federal excise tax otherwise applicable to a RIC on any of
its income or gains. Distributions of net investment income and net short-term
capital gains will be treated as ordinary income and distributions of net
long-term capital gains will be treated as long-term capital gain in the hands
of the insurance companies. Under current tax law, capital gains or dividends
from a Fund are not currently taxable when left to accumulate within a variable
annuity contract or variable life insurance policy.
Section 817(h) of the Code requires that investments of a segregated asset
account of an insurance company be "adequately diversified", in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of the
variable annuity contracts or variable life insurance policies investing in the
account to receive the tax-deferred or tax-free treatment generally afforded
holders of annuities or life insurance policies under the Code. The Department
of the Treasury has issued Regulations under section 817(h) which, among other
things, provide the manner in which a segregated asset account will treat
investments in a RIC for purposes of the applicable diversification
requirements. Under the Regulations, if a RIC satisfies certain conditions,
that RIC will not be treated as a single investment for these purposes, but
rather the segregated asset account will be treated as owning its proportionate
share of each of the assets of the RIC. Each Fund plans to satisfy these
conditions at all times so that each segregated asset account of a life
insurance company investing in the Fund will be treated as adequately
diversified under the Code and Regulations.
For information concerning the federal income tax consequences to the holders of
variable annuity contracts and variable life insurance policies, such holders
should consult the prospectus used in connection with the issuance of the
particular contract or policy.
29
<PAGE>
FOREIGN TAX CREDITS
Dividends, interest and gains received by a Fund from foreign sources may give
rise to withholding and other taxes imposed by foreign countries. If a Fund
qualifies as a regulated investment company, if certain distribution
requirements are satisfied and if more than 50% of the value of the Fund's total
assets at the close of any taxable year consists of stocks or securities of
foreign corporations, the Fund may make an election for U.S. Federal income tax
purposes, to treat any foreign country's income or withholding taxes paid by the
Fund that can be treated as taxes on income under U.S. income tax principles, as
paid by its shareholders. In the absence of such an election, the Fund would
deduct such foreign taxes in computing the amount of its distributable income.
ADDITIONAL TAX INFORMATION APPLICABLE TO OFFITBANK VIF-CVO GREATER CHINA FUND
TAXES IMPOSED BY CHINA
INCOME TAXES. Under the Income Tax Law of the People's Republic of China
Concerning Foreign Investment Enterprises and Foreign Enterprises, which took
effect on July 1, 1991, the Fund's income from dividends and profit
distributions of companies in China will be subject to a 20% income tax.
Pursuant to regulations issued by the State Council in 1984, the income tax rate
is reduced to 10% on income received from sources in Shanghai, Shenzhen, Zhuhai,
Xiamen, Shantou and the 14 special coastal port cities. Accordingly, if the "B"
shares listed on the Shanghai or Shenzhen stock exchanges are issued by
companies established in Shanghai, Shenzhen, Zhuhai, Xiamen, Shantou or the 14
special coastal port cities, the income tax levied on income earned by overseas
investors (who have not set up offices in China) from such sources will be
reduced to 10%. Effective August 1, 1993, dividends from "B" shares of
companies are temporarily exempt from income tax.
Any gains (whether of a capital or trading nature) realized by the Fund from the
sale of any "B" shares are temporarily not subject to any income tax in China
based on tax regulations issued in August 1993.
TRANSFER TAXES AND FEES. The acquisition or sale by the Fund of "B" shares in a
Chinese company listed on the Shenzhen Stock Exchange is subject to a 0.3% stamp
tax and up to a 0.7% broker's commission on both the buyer and seller. The 0.7%
broker's commission will be reduced to 0.5% and 0.4%, respectively, if the
transaction value exceeds RMB 500," and RMB 5,000,000, respectively. For the
Shenzhen Stock Exchange, a purchaser of "B" shares is also subject to a transfer
registration fee levied at 0.3% of the transaction amount of the "B" shares
traded. For the Shanghai Stock Exchange, a transaction fee of 0.1% of the
actual transaction amount is levied. Clearing fees are handled in accordance
with the relevant regulations of the clearing bank based upon the actual amount
cleared. As of August 1, 1994, bank clearance charges were approximately US$42
in Shanghai, and ranged from HK$185 to HK$625 in Shenzhen.
30
<PAGE>
TAXES IMPOSED BY HONG KONG
TAXATION OF THE FUND. The Fund will be subject to Hong Kong profits tax if (i)
it carries on business in Hong Kong, and (ii) its profits are derived from a
Hong Kong source. Profits or capital gains derived from the sale of share or
other securities of, or dividends received from, companies listed on stock
exchanges outside Hong Kong are not subject to Hong Kong profits tax.
Transfers of shares of Hong Kong companies require the payment of a stamp duty
of 0.3% on the amount of the transfer, comprised of a 0.15% stamp duty on the
purchaser and a 0.15% stamp duty on the seller.
TAXATION OF SHAREHOLDERS. There is no tax in Hong Kong on capital gains arising
from the sale by an investor of shares of the Fund. However, for certain
investors (principally share traders, financial institutions and insurance
companies carrying on business in Hong Kong), such gains may be considered to be
part of the investor's normal business profits and in such circumstances will be
subject to Hong Kong profits tax at the rate of 16.5% for corporations and 15%
for individuals as of August 1, 1994.
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice.
TAXES IMPOSED BY TAIWAN
Under the Income Tax Law of Taiwan, dividend and interest income received by the
Fund from sources within Taiwan will be subject to income withholding tax. The
rate of withholding tax applicable to interest payments to a non-Taiwan resident
recipient is 20%. The rates of withholding tax applicable to dividend payments
to a non-Taiwan individual and a non-Taiwan corporate entity are 35% and 25%,
respectively. However, the rate of withholding tax applicable to dividend
payments to a qualified foreign institutional investor approved by the TSEC or a
non-resident investor approved by the Investment Commission of the Ministry of
Economic Affairs is 20%. Stock dividends are subject to an income tax which is
payable on receipt or. in certain cases, on disposal of the stock dividends.
Securities received as stock dividends will be treated for the purposes of the
capital gains income tax described below in the same way as other securities
held. Transactions in securities are not currently subject to any capital gains
tax, but there can be no assurance that a capital gains tax will not be imposed
in the future or that the Fund will continue to be exempt from such tax.
Profits on sales of Fund shares effected by non-resident foreigners wholly
outside Taiwan will not be subject to Taiwan income tax. However, on any sale
of stock effected in Taiwan, a securities transaction tax is payable by the
seller of such stock at the rate of 0.3% of the transaction stock price.
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TAXES IMPOSED BY SINGAPORE
The corporate income tax rate in Singapore is currently 26%. Under the Income
Tax Law of Singapore, dividends received by the Fund from sources in Singapore
are not subject to withholding tax, but interest received by the Fund will be
subject to a 15% withholding tax.
There is no tax on capital gains. Where there is a series of transactions, the
tax authorities may take the view that a business is being carried on and may
attempt to assess the gains as trading profits of the corporation. However, the
government of Singapore has incentives for securities companies, trust companies
and fund managers, which include tax exemptions or concessionary tax rates of
10% for qualifying income.
DETERMINATION OF NET ASSET VALUE
The Company values the shares of the Funds daily on each day the New York Stock
Exchange (the "NYSE") is open. Currently, the NYSE is closed Saturdays, Sundays
and the following holidays: New Year's Day, Reverend Martin Luther King, Jr.
Day, President's Day (Washington's Birthday), Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Company
determines net asset value as of the close of the NYSE. However, equity options
held by a Fund are priced as of the close of trading at 4:10 p.m, and futures on
U.S. government securities and index options held by the Fund are priced as of
their close of trading at 4:15 p.m.
Each Fund determines net asset value as follows: Securities for which market
quotations are readily available are valued at prices which, in the opinion of
the Directors, most nearly represent the market values of such securities.
Currently, such prices are determined using the last reported sales price on or,
if no sales are reported (as in the case of some securities traded
over-the-counter) the last reported bid price, except that certain U.S.
government securities are stated at the mean between the reported bid and asked
prices. Short-term investments having remaining maturities of 60 days or less
are stated at amortized cost, which approximates market. All other securities
and assets are valued at their fair value following procedures approved by the
Directors. Liabilities are deducted from the total, and the resulting amount is
divided by the number of shares outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, or certain foreign securities. Securities for which reliable
quotations are not readily available and all other assets will be valued at
their respective fair market value as determined in good faith by, or under
procedures established by, the Company's Board of Directors.
If any securities held by a Fund are restricted as to resale, their fair value
will be determined in good faith by, or under procedures established by, the
Company's Board of Directors. The Directors periodically review such valuations
and procedures. The fair value of such securities is generally determined as
the amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is
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generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Fund in connection with such disposition). In addition,
specific factors are also generally considered, such as the cost of the
investment, the market value of any unrestricted securities of the same class
(both at the time of purchase and at the time of valuation), the size of the
holding, the prices of any recent transactions or offers with respect to such
securities and any available analysts' reports regarding the issuer.
Each Fund may invest in foreign securities, and as a result, the calculation of
a Fund's net asset value may not take place contemporaneously with the
determination of the prices of certain of the portfolio securities used in the
calculation. Also, because of the amount of time required to collect and
process trading information as to large numbers of securities issues, the values
of certain securities (such as convertible bonds, U.S. government securities,
and tax-exempt securities) are determined based on market quotations collected
earlier in the day at the latest practicable time prior to the close of the
NYSE. Occasionally, events which affect the values of such securities (and,
with respect to foreign securities, the value of the currency in which the
security is denominated) may occur between the times at which they are
determined and the close of the NYSE and will therefore not be reflected in the
computation of the Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by, or under procedures
established by, the Company's Board of Directors. Similarly, market movements
can occur with respect to foreign securities on days on which an investor does
not have access to the Fund.
GENERAL INFORMATION
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law.
As used in this Statement of Additional Information, the term "majority", when
referring to the approvals to be obtained from shareholders in connection with
general matters affecting the Company and all Funds, means the vote of the
lesser of (i) 67% or more of the Company's shares represented at a meeting if
the holders of more than 50% of the outstanding shares are present in person or
by proxy or (ii) more than 50% of the Company's outstanding shares. The term
"majority", when referring to the approvals to be obtained from shareholders in
connection with matters affecting any single Fund (e.g., approval of Advisory
Agreements), means the vote of the lesser of (i) 67% or more of the shares of
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy or (ii) more
than 50% of the outstanding shares of the Fund. Shareholders are entitled to
one vote for each full share held and fractional votes for fractional shares
held.
Each share of any Fund of the Company is entitled to such dividends and
distributions out of the
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income earned on the assets belonging to that Fund as are declared in the
discretion of the Company's Board of Directors. In the event of the liquidation
or dissolution of the Company, shares of each Fund are entitled to receive the
assets allocable to that Fund which are available for distribution, and a
proportionate distribution, based upon the relative net assets of the Fund, of
any general assets not belonging to the Fund which are available for
distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-accessible, fully transferable and redeemable at the
option of the holder.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as the independent accountants for the
Company. PricewaterhouseCoopers LLP is located at 1177 Avenue of the Americas,
New York, New York 10036.
COUNSEL
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022,
serves as counsel to the Funds.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain all
the information included in the Registration Statement filed with the SEC under
the Securities Act of 1933 with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Statement of Additional Information pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
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