CONNECTICUT MUTUAL FINANCIAL SERVICES SERIES FUND I, INC.
140 GARDEN STREET - HARTFORD, CONNECTICUT 06154
1-800-234-5606
MAY 1, 1995, AS REVISED SEPTEMBER 1, 1995
Connecticut Mutual Financial Services Series Fund I, Inc. (Company) is an
open-end management investment company which offers to purchasers of certain
variable annuity or variable insurance life contracts (Variable Contracts) a
range of investment alternatives through its nine distinct mutual funds,
including the three "life span" portfolios which are offered in this Prospectus
(LifeSpan Portfolios or Portfolios):
LIFESPAN CAPITAL APPRECIATION PORTFOLIO (CAPITAL APPRECIATION PORTFOLIO)... is
designed for the investor seeking capital appreciation. The Capital Appreciation
Portfolio seeks LONG-TERM CAPITAL APPRECIATION through a strategically allocated
portfolio consisting primarily of equity securities. Current income is not a
primary consideration.
LIFESPAN BALANCED PORTFOLIO (BALANCED PORTFOLIO)... is designed for the investor
seeking a blend of capital appreciation and income. The Balanced Portfolio seeks
a BLEND OF CAPITAL APPRECIATION AND INCOME through a strategically allocated
portfolio of equity securities and fixed-income securities with a slightly
stronger emphasis on equity securities.
LIFESPAN DIVERSIFIED INCOME PORTFOLIO (DIVERSIFIED INCOME PORTFOLIO)... is
designed for the investor with a relatively low tolerance for risk who is
seeking current income with some long-term inflation protection. The Diversified
Income Portfolio seeks HIGH CURRENT INCOME, WITH OPPORTUNITIES FOR CAPITAL
APPRECIATION, through a strategically allocated portfolio consisting primarily
of fixed-income securities.
PLEASE READ THIS PROSPECTUS BEFORE INVESTING AND KEEP IT ON FILE FOR FUTURE
REFERENCE. The Prospectus contains important information, about how the
Portfolios invest. A Statement of Additional Information (SAI), dated May 1,
1995, as revised September 1, 1995, has been filed with the Securities and
Exchange Commission (SEC) and is incorporated herein by reference (and is
legally considered a part of this Prospectus). The SAI is available free upon
request by calling 1-800-234-5606.
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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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SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE PORTFOLIOS INVOLVE INVESTMENT
RISKS, INCLUDING FLUCTUATIONS IN VALUE AND THE POSSIBLE LOSS OF SOME OR ALL OF
THE PRINCIPAL INVESTMENT.
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CONNECTICUT MUTUAL FINANCIAL SERVICES SERIES FUND I, INC.
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PROSPECTUS
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TABLE OF CONTENTS
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PAGE
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INTRODUCTION......................................................................................... 3
INVESTMENT OBJECTIVES AND POLICIES................................................................... 3
YOUR ACCOUNT......................................................................................... 11
Opening an Account................................................................................. 11
Share Price........................................................................................ 11
Investments in Shares of the Portfolio............................................................. 12
Redemptions........................................................................................ 12
MANAGEMENT........................................................................................... 13
The Manager and the Subadvisers.................................................................... 13
Breakdown of Expenses.............................................................................. 16
DISTRIBUTIONS AND TAXES.............................................................................. 17
THE COMPANY.......................................................................................... 18
Performance........................................................................................ 19
RISK FACTORS, SECURITIES AND INVESTMENT TECHNIQUES................................................... 20
APPENDIX A: DESCRIPTION OF SECURITIES RATINGS....................................................... A-1
</TABLE>
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INTRODUCTION
The Company offers a range of investment vehicles for Variable Contracts of
insurance companies, three of which are offered by means of this Prospectus
(Portfolios or LifeSpan Portfolios). Each Portfolio's shares may be used only as
the investment vehicle for insurance companies' Variable Contracts.
The shares of all three Portfolios are sold without a sales charge to
insurance company separate accounts established by Connecticut Mutual Life
Insurance Company (CML) and C.M. Life Insurance Company (C.M. Life). These
separate accounts fund benefits under Variable Contracts. Shares are available
for sale to CML and C.M. Life separate accounts as set forth in the appropriate
separate account prospectus. Shares of the Company may, in the future, be sold
to other separate accounts established by CML or C.M. Life or to other issuers
of Variable Contracts who are not affiliated with CML or C.M. Life (CML, C.M.
Life and other non-affiliated insurance companies, each, an Insurance Company
and together, the Insurance Companies). The interest of owners of Variable
Contracts with respect to the Company is subject to the terms of the respective
Contracts and is described in the prospectus of the separate account. Please
read your Insurance Company's separate account prospectus and Contract for
discussions relating to insurance regulations and instructions on how to invest
in and redeem from each Portfolio and certain tax benefits that you may enjoy by
purchasing a Variable Contract.
The prospectus for the Variable Contract describes the relationship between
increases or decreases in the net asset value of shares of a Portfolio and any
distributions on such shares, and the benefits provided under the Contract. The
rights of a separate account as a shareholder should be distinguished from the
rights of Variable Contract owners which are described in the Contracts. As long
as shares of a Portfolio are sold only to one or more of the separate accounts,
the terms "shareholder" or "shareholders" in this Prospectus shall refer to the
Insurance Companies issuing the separate account Variable Contracts.
INVESTMENT OBJECTIVES AND POLICIES
Each LifeSpan Portfolio has its own investment objective and policies which
are designed to meet specific investment goals. There can be no guarantee,
however, that the LifeSpan Portfolios will meet their investment goals. Each
Portfolio's share price, yield and total return fluctuate and an investment in a
Portfolio may be worth more or less than your original cost when shares are
redeemed. The Manager of each LifeSpan Portfolio is G.R. Phelps, an indirect
subsidiary of Connecticut Mutual Life Insurance Company (Connecticut Mutual or
CML). The Manager has engaged Scudder, Stevens & Clark, Inc. (Scudder, Stevens),
Pilgrim Baxter & Assoc. Ltd. (Pilgrim Baxter) and BEA Associates as subadvisers
to assist in the investment management of three of the components of these
LifeSpan Portfolios. See "Management--The Manager and Subadvisers."
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CAPITAL APPRECIATION PORTFOLIO SEEKS LONG-TERM CAPITAL APPRECIATION.
BALANCED PORTFOLIO SEEKS A BLEND OF CAPITAL APPRECIATION AND INCOME.
DIVERSIFIED INCOME PORTFOLIO SEEKS HIGH CURRENT INCOME, WITH OPPORTUNITIES
FOR CAPITAL APPRECIATION.
THE LIFESPAN PORTFOLIOS
The LifeSpan Portfolios are each asset allocation funds. Such funds have been
a basic tool of investment professionals and are differentiated by the use of
investment management strategies and techniques that range from the least
aggressive to the most aggressive. The LifeSpan Portfolios offer you a
convenient way to own a diversified professionally managed portfolio tailored to
your specific investment goals.
The CAPITAL APPRECIATION PORTFOLIO is designed for the investor willing and
able to take higher risks in the pursuit of long-term capital appreciation. Such
investors generally have many years until retirement, are relatively young and
have a long-term investment plan and/or discretionary assets. The BALANCED
PORTFOLIO offers a blend of capital appreciation and income for the investor
seeking diversification while maintaining a balance between growth and income.
Investors in the Balanced Portfolio tend to have a middle-career profile or are
mid-life in the life cycle and may be saving for their children's education,
their elderly parents' care or both. The DIVERSIFIED INCOME PORTFOLIO is
expected to be the least volatile of the three LifeSpan Portfolios designed for
the investor with a lower tolerance for risk. Investment in the Diversified
Income Portfolio is intended for those further along in the life cycle or closer
to retirement and seeking higher income from their investments. This Portfolio
may also be a suitable investment for young adults saving for a home or others
who have cash flow requirements over a short-term time horizon.
INVESTMENT STRATEGY OF THE LIFESPAN PORTFOLIOS
Each LifeSpan Portfolio is a carefully selected and professionally managed
diversified mix of equity (stock) and fixed-income (bond) Components that are
structured to achieve certain risk and return objectives. There is a normal
percentage of each LifeSpan Portfolio that is allocated between the broad equity
class of investments and the broad fixed-income class of investments. See the
chart on page 5. This allocation or asset mix is determined by the Manager to be
the optimal combination of stocks and bonds that produces diversification of
risk and potential return for three distinct investment objectives: capital
appreciation, a blend of capital appreciation and current income or high current
income with lesser opportunities for capital appreciation.
The Portfolios' normal allocations generally correlate to different levels of
investment risk and return. In determining normal asset allocations, the Manager
has looked at broad market and economic variables such as inflation and interest
rates and has used the information to determine the overall mix of each
Portfolio's assets between the two general asset classes: broad equity class and
broad fixed-income class. Equity securities have the potential to outperform
fixed-income securities over the long-term. Equity securities have the greatest
potential for growth of capital, yet are generally
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the most volatile of the two broad asset types. Fixed-income securities
sometimes move in the opposite direction of equity securities and may provide
investment balance to a Portfolio. Additionally, fixed-income securities can
provide regular income to investors. The risks of each broad asset class will
vary.
The normal asset allocation represents the way each Portfolio's investments
will generally be allocated over the long-term. As market and economic
conditions change, however, the Manager may adjust the asset mix between the
broad equity and broad fixed-income classes within a normal asset allocation
range as long as the relative risk and return characteristics of the three
Portfolios remain distinct and each Portfolio's investment objective is
preserved. The Manager will review normal allocations between broad equity and
broad fixed-income investments quarterly and will rebalance, if necessary, at
that time. Additional adjustments may be made if an asset allocation shift of 5%
or more is warranted.
The Manager will diversify the broad equity class of each Portfolio by
allocating the Portfolio's portfolio of equity securities among four Components:
international stocks, value/growth stocks, growth and income stocks and
small-capitalized growth stocks (Small Cap). Each Component in the broad equity
class is also permitted to invest a portion of its assets in fixed-income
securities when the Subadviser determines that increased flexibility in
portfolio management is required to enhance appreciation or income. The Manager
will diversify a Portfolio's broad fixed-income class by allocating a
Portfolio's portfolio of fixed-income securities among three Components:
government and corporate bonds, high yield/high risk bonds and short-term bonds.
There is no requirement that the Manager allocate a Portfolio's assets among all
Components at all times. These Components have been selected because the Manager
believes that this additional level of asset diversification will provide each
Portfolio with the potential for higher returns with lower overall volatility.
Each Portfolio's normal allocation is shown in the chart below.
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CAPITAL DIVERSIFIED
APPRECIATION INCOME
PORTFOLIO BALANCED PORTFOLIO PORTFOLIO
------------------- --------------------- --------------
NORMAL NORMAL NORMAL
ASSET CLASS ALLOCATION RANGE ALLOCATION RANGE ALLOCATION RANGE
----------------------------------- ---------- ------ ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BROAD EQUITY 80% 70-90% 60% 50-70% 25% 15-35%
COMPONENT
-International 20% 15-25% 15% 5-20% 0% 0%
-Value/Growth 20% 15-30% 15% 10-25% 0% 0%
-Growth/Income 20% 15-30% 15% 10-25% 25% 15-35%
-Small Cap 20% 15-25% 15% 5-20% 0% 0%
FIXED-INCOME 20% 10-30% 40% 30-50% 75% 65-85%
COMPONENT
-Government/Corporate 10% 5-15% 15% 10-25% 35% 30-45%
-High Yield/High Risk Bonds 10% 5-15% 15% 5-20% 15% 5-20%
-Short Term Bonds 0% 0% 10% 5-20% 25% 15-30%
</TABLE>
All percentage limitations are applied at the time of purchase. The Manager
may rebalance the asset allocations quarterly to realign them in response to
market conditions. Once the Manager has determined the weighting of the general
asset classes and the Components of each Portfolio, the
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Manager or the respective Subadviser will then select the individual securities
to be included in each Component. Each Subadviser will manage the portion of a
Portfolio's assets in the particular Components assigned to it by the Manager.
As to the date of this Prospectus, the Manager has assigned the management of
the Components as follows:
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SUBADVISER COMPONENT OF INVESTMENTS
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Scudder, Stevens......................................... International Stocks
Pilgrim Baxter........................................... Small-Cap Stocks
BEA Associates........................................... High Yield/High Risk Bonds
</TABLE>
The Manager will manage the remaining Components using its own investment
management personnel. See "Management -- The Manager and Subadvisers" for
additional information.
THE BROAD EQUITY CLASS
Each LifeSpan Portfolio will invest those assets which are allocated to the
broad equity class among four Components each of which invests principally in
equity securities but which differ with respect to capitalization, country and
investment style. The four Components in the broad equity class are expected
from time to time to have a portion of their assets in fixed-income securities.
EQUITY SECURITIES GENERALLY. While equity securities have historically
experienced a higher level of volatility risk than fixed-income securities, they
have also historically produced higher levels of total return. Longer term,
investors with diversified stock portfolios have a higher probability of
achieving their investment goals with lower levels of volatility than those who
have not diversified. Diversification can be achieved through active equity
management strategies. A growth oriented strategy generally involves buying
companies with rapidly growing sales, earnings or cash flows which are enhancing
their value by reinvesting profits in the company. A value oriented strategy
focuses on securities selling at low prices relative to current, normal or
discounted future earnings. A value strategy could also focus on companies with
above-average yields, or those that are able to maintain and increase dividend
payments. A growth and income strategy generally seeks to achieve returns
through price appreciation and dividend income of companies with a higher than
average market dividend yield and a history of stable and growing dividend
payments.
Diversification across the broad equity class will be achieved using a series
of Components, whose management strategies and investments are noted as follows.
INTERNATIONAL COMPONENT. This Component seeks long-term growth of capital
primarily through a diversified portfolio of marketable international equity
securities. The international Component invests in companies based outside
of the United States. The international Component intends to allocate
investments among several countries (usually between 8-12), primarily those
included in the Morgan Stanley Capital International (MSCI) Europe,
Australia and Far East (EAFE) Index and Canada. In addition, the Component
may invest up to 25% of its assets in equity and debt securities of
companies based in emerging countries. The Subadviser considers emerging
countries to include any country that is defined as an emerging or
developing economy
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by the International Bank for Reconstruction and Development, the
International Finance Committee (IFC), the United Nations or its
authorities, or the MSCI Emerging Markets Index. Stocks are purchased on the
basis of fundamental and valuation criteria, which include the integration
of three analytical disciplines. Global themes, identifying attractive
economic sectors and industries; country analysis, assessing opportunities
through quantitative and qualitative analysis; and unique situations, are
used to identify companies with exceptional growth opportunities. Issues are
sold because of changing fundamentals, overvaluation, performance issues, or
better relative opportunities. International securities further diversify a
portfolio's equity holdings and can help to reduce overall portfolio
volatility. The U.S. investor benefits from exposure to international equity
securities and foreign economies, which may be influenced by distinctly
different factors impacting a country's rate of economic growth, interest
rate structure, currency, industry and local stock market environment. In
addition, investments in the non-U.S. equity markets allow for further
diversification as many countries and regions have risk/reward
characteristics and market performance that are not highly correlated to
each other or to the U.S. market. International investments, however,
particularly in emerging countries, are subject to special risks not
generally present in domestic equity investments. See "Risk Factors,
Securities and Investment Techniques -- International Securities." In
appropriate circumstances, such as when a direct investment by the Component
in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Component may, consistent with the provisions of
the Investment Company Act of 1940, as amended, (1940 Act), invest in the
securities of closed-end investment companies that invest in foreign
securities. Since the Component's shareholders would be subject to
additional fees, including management fees, for any assets so invested, the
Subadviser will invest in such closed-end investment companies only where,
in its opinion, the potential returns justify incurring the additional
expense. A portion of the Component's investments may be held in cash and
short-term instruments. Current income is not a primary consideration but
income may be enhanced from time to time by investing a portion of the
Component's assets in corporate bonds and government securities of foreign
issuers.
VALUE/GROWTH COMPONENT. This Component seeks to achieve long-term growth
of capital by investing primarily in common stocks with low price-earnings
ratios and better than anticipated earnings. Realization of current income
is not a primary consideration in stock selection. Investments for the
value/growth Component are chosen using a highly disciplined and
quantitatively oriented investment management strategy in combination with
fundamental securities analysis. Stocks with low price-earnings ratios are
often out of favor in the market. When an out-of-favor company demonstrates
better earnings than what most analysts were expecting (referred to as a
favorable earnings surprise), an upward revaluation of both earnings
expectations and the price-earnings multiple often results, causing the
stock price to outperform the market averages. When the price-earnings ratio
of a stock held by the value/growth Component moves significantly above the
multiple of the overall stock market, or the company reports a meaningful
earnings disappointment, the stock becomes a candidate for sale. The
Subadviser to the value/growth Component may also invest a portion of the
Component's assets in international equities when the Subadviser determines
that opportunities exist in the international markets that will assist in
achieving the Component's investment objective. Such investments will be
limited to 15% of the
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Component's total assets and to those issuers which generally have a
substantial portion of their business in the United States, and to ADRs. See
"Risk Factors, Securities and Investment Techniques -- International
Securities" for a discussion of the risks of investing in international
securities. A portion of the Component's assets may be held in cash and in
short-term investments.
GROWTH/INCOME COMPONENT. This Component seeks to enhance each Portfolio's
total return through capital appreciation and dividend income by investing
primarily in common stocks with low price-earnings ratios,
better-than-anticipated earnings and better than market average dividend
yields. Investments are selected using a highly disciplined and
quantitatively oriented investment management strategy. Stocks with low
price-earnings ratios (below the price-earnings ratio of the S&P 500 Index),
favorable earnings surprises and above-average yields are identified by the
Manager who uses fundamental securities analysis to select individual stocks
for purchase in this Component. When the price-earnings ratio of a stock
held by the Component moves significantly above the multiple of the overall
stock market, or the company reports a meaningful earnings disappointment,
or when the yield drops significantly below the market yield, stocks in this
Component will normally be sold. The Subadviser to the growth/income
Component may also invest a portion of the Component's assets in
international equities when the Subadviser determines that opportunities
exist in the international markets that will assist in achieving the
Component's investment objective. Such investments will be limited to 15% of
the Component's total assets and to those issuers which generally have a
substantial portion of their business in the United States, and to ADRs. See
"Risk Factors, Securities and Investment Techniques -- International
Securities" for a discussion of the risks of investing in international
equity securities. In order to enhance the growth/income Component's
potential for total return by providing maximum investment flexibility to
the Subadviser, a portion of the growth/income Component's investments may
be held in investment grade or below investment grade convertible securities
and in corporate bonds and U.S. Government securities. A portion of the
Component's assets may also be held in cash and short-term instruments.
SMALL CAP COMPONENT. This Component seeks long-term growth of capital by
investing primarily in equity securities of companies with relatively small
market capitalizations, typically between $250 million to $1.5 billion.
Current income is a secondary consideration. When selecting individual
securities for the Component's portfolio, the Subadviser seeks companies
which have an outlook for strong growth in earnings and the potential for
significant capital appreciation, particularly in industry segments that are
experiencing rapid growth. Securities will be sold when the Subadviser
believes that anticipated appreciation is no longer probable and that
alternative investments offer superior appreciation prospects, or the risk
of a decline in market price is too great. Historical results tend to
confirm the benefits of investing in companies with small capitalizations.
Capitalization is the aggregate value of a company's stock, or its price per
share times the number of shares outstanding. Smaller capitalization
companies are generally represented in new or rapidly changing industries.
They may offer more profit opportunity in growing industries and during
certain economic conditions than do large and medium sized companies.
However, smaller capitalization companies also involve special risks. Often,
liquidity and overall business stability of a small capitalization company
may be less than that associated with larger capitalized companies. Small
capitalization stocks frequently involve smaller, rapidly growing companies
with high
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growth rates, negligible dividend yields and extremely high levels of
volatility. However, diversification by market capitalization improves
profit potential, and serves as a means for reducing volatility of equity
securities overall. A portion of the small cap Component's investments may
also be held in cash and short-term instruments.
THE BROAD FIXED-INCOME CLASS
Each LifeSpan Portfolio will invest those assets which are allocated to the
broad fixed-income class among three Components each of which invests in an
array of fixed-income securities.
FIXED-INCOME SECURITIES GENERALLY. Fixed-income securities, in general,
offer a fixed stream of cash flow and may provide good to moderate relative
total return benefits over time. The diversified approaches to bond management
are partly, but not completely, analogous to strategies in managing equities.
Most bond investments focus on generating income, while the potential for
capital appreciation is a secondary objective. The bond markets provide
diversification benefits to equity securities depending upon the characteristics
of the bonds comprising the broad fixed-income class of each Portfolio. In
addition to sector and quality characteristics, the bond market allows for
diversification by maturity across the yield curve, I.E., short term (0 to 3
years); intermediate term (3 to 10 years); and long term (10+ years). The value
of fixed-income securities generally fluctuates inversely with changes in
interest rates and other market and credit factors as well. See "Risk Factors,
Securities and Investment Techniques -- Fixed-Income Securities--General."
U.S. GOVERNMENT SECURITIES. U.S. Government securities may provide
opportunities for income with minimal credit risk. U.S. Government securities
are high quality instruments issued or guaranteed as to principal and interest
by the U.S. Government or by an agency or instrumentality of the U.S.
Government. U.S. Government securities are, however, not immune from the market
risk of principal fluctuation associated with rising interest rates. U.S.
Treasury securities are considered the safest of all Government securities. See
"Risk Factors, Securities and Investment Techniques -- U.S. Government
Securities" for a discussion of the types of securities, including
mortgage-backed securities, in which the Portfolios may invest.
CORPORATE BONDS. Investment in corporate bonds may provide relatively
higher levels of current income. These bonds are used by U.S. and foreign
corporate issuers to borrow money from investors. Corporate bonds have varying
degrees of quality and varying degrees of sensitivity to changes in interest
rates. The value of these investments fluctuates based on changes in interest
rates and in the underlying credit quality of the bond issuers represented in
the portfolio.
HIGH YIELD/HIGH RISK BONDS. These corporate and government obligations are
included in the broad fixed-income class to provide opportunities for higher
levels of current income. High yield/high risk bonds (often called junk bonds)
are generally regarded as those rated below Baa by Moody's Investor Service,
Inc. (Moody's) or BBB by Standard & Poor's Rating Group (S&P) or if unrated,
determined by the Subadviser to be of comparable credit quality. High yield/high
risk bonds are also considered "hybrid" securities because they can be
constructed with a bias toward income or with an orientation toward
appreciation. High yield/high risk bonds of small, young, growing companies
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emerging from bankruptcy or reorganization may tend to exhibit characteristics
of growth stocks. See "Risk Factors, Securities and Investment
Techniques--Fixed-Income Securities--High Yield/High Risk Bonds" for a
discussion of the risks of investing in these securities.
Diversification across the broad fixed-income class will be achieved through
a series of Components, whose investment and management strategies are noted as
follows:
GOVERNMENT/CORPORATE COMPONENT. This Component seeks current income and
the potential for capital appreciation by investment primarily in
fixed-income debt securities, including investment grade corporate debt
obligations of foreign and U.S. issuers and securities issued by the U.S.
Government and its agencies and instrumentalities and by foreign
governments. Though the government/corporate Component may invest in
securities with maturities across the entire slope of the yield curve,
including long bonds (10+ years), intermediate notes (3 to 10 years) and
short term notes (1 to 3 years), the Manager expects to maintain
characteristics of an intermediate average maturity and duration. In
assessing maturity, the Manager may take into account pre-payment features.
The Manager's investment strategy includes the purchase of bonds that are
underpriced relative to other debt securities having similar risk profiles.
The Manager utilizes a systematic and disciplined evaluation of a broad
array of factors, including maturity, creditworthiness, cash flow certainty
and interest rate volatility, and examines yield relationships in relation
to trends in the economy, the financial and commodity markets and interest
rates. The Component may also invest a portion of its assets in cash and
short-term instruments.
HIGH YIELD/HIGH RISK BOND COMPONENT. This Component seeks to earn as high
a level of current income as is consistent with the risks associated with
high yield investments. See "Risk Factors, Securities and Investment
Techniques -- Fixed-Income Securities--High Yield/High Risk Bonds." The
Component's assets are invested primarily in bonds rated BB or lower by S&P
or Ba or lower by Moody's or, if not rated, are deemed by the subadviser to
be of comparable quality. This Component may invest in bonds that are in
default. Bonds in default are not making interest or principal payments on
the date due; however, the Component will not invest in defaulted bond debt
or debt of distressed issuers. The Subadviser employs an active sector
rotational style utilizing all sectors of the high yield market, with an
emphasis on diversification to control risk. The Subadviser typically favors
higher quality companies in the non-investment grade market, senior debt
over junior debt, and secured over unsecured credits. The Subadviser will
screen individual securities for such characteristics as minimum yield and
issue size, issue liquidity and financial and operational strength. In-depth
credit research will then be conducted to arrive at a core group of
securities within the high yield universe from which the Component will be
constructed. Continuous credit monitoring and adherence to sell disciplines
associated with both price appreciation and depreciation will be utilized to
achieve the overall yield and price objectives of the Component. The
Component may also invest a portion of its assets in cash and short-term
instruments.
SHORT-TERM BOND COMPONENT. This Component seeks to obtain a high level of
current income consistent with prudent investment risk and preservation of
capital by investing primarily in debt obligations of foreign and U.S.
issuers and securities issued by the U.S. Government and its agencies and
instrumentalities and by foreign governments. In doing so, this Component
will
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invest primarily in fixed-income securities generally maturing within five
years of date of purchase, or with prepayment or similar features which, in
the view of the Manager, give the instrument an average life of five years.
It is anticipated that the average dollar weighted maturity of the Component
will generally range between two and three years.
The Manager's investment management process incorporates analysis of an
issuer's debt service capability, financial flexibility and liquidity, as
well as the fundamental trends and the outlook for an issuer and its
industry. Credit risk management is also an important factor, particularly
in the Manager's internal fixed-income analysis. The Manager conducts
intensive credit research, and carefully selects individual issues and
broadly diversifies portfolio holdings by industry sector and issuer. The
Manager believes that determination of an issue's attractiveness relative to
alternative issues and/or valuations within the marketplace are important
considerations in its investment decision-making. The Component may also
invest a portion of its assets in cash and money market securities.
INVESTMENT RESTRICTIONS. Each Portfolio is subject to certain fundamental
investment restrictions that are enumerated in detail in the SAI and may not be
changed without shareholder approval. In addition, each Portfolio also follows
certain non-fundamental limitations imposed by the Internal Revenue Service
(IRS) on separate accounts of insurance companies relating to the tax-deferred
status of Variable Contracts. More specific information may be contained in your
Insurance Company's separate account prospectus. Each Portfolio's investment
objective and policies are non-fundamental and may be changed by the Company's
Board of Directors without shareholder approval.
YOUR ACCOUNT
OPENING AN ACCOUNT
SINCE YOU MAY NOT PURCHASE THE PORTFOLIOS' SHARES DIRECTLY, YOU SHOULD READ
THE PROSPECTUS OF THE INSURANCE COMPANY'S SEPARATE ACCOUNT TO OBTAIN
INSTRUCTIONS FOR PURCHASING A VARIABLE CONTRACT.
SHARE PRICE
A Portfolio's net asset value is the value of a single share. The net asset
value is computed by adding the value of the Portfolio's investments, cash, and
other assets, subtracting its liabilities, and then dividing the result by the
number of shares outstanding.
The assets of each Portfolio are valued primarily on the basis of market
quotations. If quotations are not readily available, assets are valued by a
method that the Board of Directors believes accurately reflects fair value.
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 current exchange rates.
Generally, trading in foreign securities is substantially completed each day
at various times prior to the close of regular trading on the New York Stock
Exchange (NYSE). The values of such securities
11
<PAGE>
used in computing the net asset value of a Portfolio's shares are determined as
of such times. Foreign currency exchange rates are also generally determined
prior to the close of regular trading on the NYSE. Occasionally, events which
affect the values of such securities and such exchange rates may occur between
the times at which they are determined and the close of regular trading on the
NYSE and will, therefore, not be reflected in the computation of a Portfolio's
net asset value. If events materially affecting the value of such securities
occur during such period, then these securities are valued at their fair value
as determined in good faith by a method approved by the Board of Directors.
INVESTMENTS IN SHARES OF THE PORTFOLIOS
Each Portfolio may sell its shares directly to separate accounts established
and maintained by Insurance Companies for the purpose of funding Variable
Contracts. Shares of the Portfolios are sold at net asset value without the
imposition of a sales charge. Charges and deductions made from purchase payments
for Variable Contracts are stated in the current prospectus for those Contracts.
Variable Contracts may or may not make investments in all the Portfolios
described in this Prospectus. Investments in each Portfolio are expressed in
terms of the full and fractional shares of the Portfolio purchased. Investments
in a Portfolio are credited to an Insurance Company's separate account
immediately upon acceptance of the investment by the Portfolio. Investments will
be processed at the net asset value next calculated after an order is received
and accepted by a Portfolio. The offering of shares of any Portfolio may be
suspended for a period of time and each Portfolio reserves the right to reject
any specific purchase order. Purchase orders may be refused if, in the Manager's
opinion, they are of a size that would disrupt the management of a Portfolio.
The Company currently does not foresee any disadvantages to investors arising
out of the fact that each Portfolio may offer its shares to Insurance Company
separate accounts that serve as the investment medium for their Variable
Contracts. Nevertheless, the Company's Board of Directors intends to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise, and to determine what action, if any, should be taken in
response to such conflicts. If such a conflict were to occur, one or more
Insurance Companies' separate accounts might be required to withdraw their
investments in one or more Portfolios and shares of another Portfolio may be
substituted. This might force a Portfolio to sell securities at disadvantageous
prices. In addition, the Board of Directors may refuse to sell shares of any
Portfolio to any separate account or may suspend or terminate the offering of
shares of any Portfolio if such action is required by law or regulatory
authority or is in the best interests of the shareholders of the Portfolio.
REDEMPTIONS
Shares of a Portfolio may be redeemed on any business day. Redemptions are
effected at the per share net asset value next determined after receipt and
acceptance of the redemption request by a Portfolio. Redemption proceeds will
normally be forwarded by bank wire to the redeeming Insurance Company on the
next business day after receipt of the redemption instructions by a Portfolio
but in no event later than seven days following receipt of instructions. Each
Portfolio may suspend redemptions or postpone payment dates during any period in
which any of the following conditions exist: the NYSE
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<PAGE>
is closed or trading on the NYSE is restricted; an emergency exists as a result
of which disposal by the Portfolio of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Portfolio to fairly
determine the value of its net assets; or the SEC, by order, so permits.
Please refer to the prospectus of your Insurance Company's separate account
for specific information on how to redeem shares from each Portfolio.
MANAGEMENT
THE MANAGER AND THE SUBADVISERS
Each Portfolio is managed by G.R. Phelps, the Manager, who handles their
business and administrative affairs. The Manager is responsible for the overall
management of the Portfolios' investments, including the allocation of the
Portfolios' assets both between and within asset classes for each Component. The
Manager is also responsible for the selection of portfolio investments for the
following Components: value/growth; growth/income; government/corporate bonds;
and short-term bond. The Manager has engaged Subadvisers to manage the other
Components.
The principal business address of the Manager is 10 State House Square,
Hartford, Connecticut. The Manager's mailing address is 140 Garden Street,
Hartford, Connecticut 06154. The Manager also manages the investments of six
other mutual funds offered by Connecticut Mutual Financial Services Series Fund
I, Inc. (Series Fund I), a diversified investment management company offering
its series of common stock as funding vehicles for variable annuity and variable
life contracts issued by Connecticut Mutual and C.M. Life. Connecticut Mutual is
the parent company for the Manager and C.M. Life.
The Manager has engaged three Subadvisers to assist in the selection of
portfolio investments for certain Components. Scudder, Stevens, 345 Park Avenue,
New York, NY 10154, the Subadviser to the international Component, has been
providing investment counseling services for over 70 years, since its founding
in 1919. Scudder, Stevens supervises assets for institutional clients,
investment companies and individuals and had over $90 billion in assets under
management as of December 31, 1994. BEA Associates, Citicorp Center, 153 East
53rd Street, 57th Floor, New York, NY 10022, the Subadviser to the high
yield/high risk bond Component, has been providing domestic and global
fixed-income and equity investment management services for institutional clients
and mutual funds since 1984. As of December 31, 1994 BEA Associates, together
with its global affiliate, had over $21 billion in assets under management.
Pilgrim Baxter, 1255 Drummers Lane, Wayne, PA 19087, the Subadviser to the small
cap Component, was established in 1982 to provide specialized equity management
for institutional investors including other investment companies. As of December
31, 1994, Pilgrim Baxter had $3.5 billion in assets under management.
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<PAGE>
The Manager provides supervision for the portfolio management of the LifeSpan
Portfolios through the Asset Allocation Committee, which consists of four
members who meet quarterly to evaluate, among other things, the asset allocation
between the broad asset classes of the LifeSpan Portfolios. The persons
primarily responsible for the day-to-day management of each Component in the
primary asset classes of each Portfolio are listed below.
<TABLE>
<CAPTION>
COMPONENT PORTFOLIO MANAGER BUSINESS EXPERIENCE (LAST 5 YEARS)
---------------------- --------------------------------- ------------------------------------------------
<S> <C> <C>
International Nicholas Bratt Managing Director and Director, Global Equity
(Scudder, Stevens) Group, Scudder, Stevens (since 1976)
Joan Gregory Vice President, Scudder, Stevens (since 1992);
Assistant Vice President, Scudder, Stevens
(1992-1995); and Assistant Portfolio Manager,
U.S. Trust Company, International Investment
Department (1989-1992)
Value/Growth (G.R. Peter Antos Vice President and Senior Portfolio Manager,
Phelps) Equities, G.R. Phelps (since 1989)
Michael C. Strathearn, C.F.A. Portfolio Manager, Equities -- CML
(1988-Present)
Kenneth B. White, C.F.A Portfolio Manager, Equities -- CML
(1992-Present), Senior Investment Officer,
Equities -- CML (1987-1992)
Growth/Income (G.R. Kenneth B. White, C.F.A. Portfolio Manager, Equities -- CML
Phelps) (1992-Present), Senior Investment Officer,
Equities -- CML (1987-1992)
Peter M. Antos, C.F.A. Vice President and Senior Portfolio Manager,
Equities, G.R. Phelps (since 1989)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
COMPONENT PORTFOLIO MANAGER BUSINESS EXPERIENCE (LAST 5 YEARS)
---------------------- --------------------------------- ------------------------------------------------
Small Cap Gary L. Pilgrim Director, Member of Executive Committee,
(Pilgrim Baxter) President and Chief Investment Officer, Pilgrim
Baxter (1985 to Present)
<S> <C> <C>
John F. Force Portfolio Manager/Analyst, Pilgrim Baxter (since
1993); and Vice President/Portfolio Manager,
Fiduciary Management Associates (1989 to 1993)
James M. Smith Portfolio Manager/Analyst, Pilgrim Baxter (since
1993); Senior Vice President/ Portfolio Manager,
Selected Financial Services (1992 to 1993); and
Vice President, Sears Investment Management
Company (Prior to 1992)
Michael D. Jones Portfolio Manager/Analyst, Pilgrim Baxter (since
1995); Vice President/Portfolio Manager, Bank of
New York (1990 to 1995)
Government Securities/ Stephen F. Libera, C.F.A. Vice President and Senior Portfolio Manager,
Corporate Bonds (G.R. Fixed-income, G.R. Phelps (1989-Present)
Phelps)
John W. Powell, Jr. Portfolio Manager, Money Market -- G.R. Phelps
(1994 to Present); Portfolio Manager,
Fixed-Income -- CML (1993 to Present);
Investment Officer, Fixed-Income -- CML (1990 to
1993); Registered Representative, Salesman,
Prudential Securities, Inc. (Prior to 1990)
High Yield Bonds Richard J. Lindquist Managing Director and High Yield Portfolio
(BEA Associates) Manager BEA Associates (1995); CS First Boston
(1989-1995)
Short-Term Bond (G.R. Stephen F. Libera, C.F.A. Vice President and Senior Portfolio Manager,
Phelps) Fixed-income -- G.R. Phelps (1989-Present)
John W. Powell, Jr. Portfolio Manager, Money Market -- G.R. Phelps
(1994 to Present); Portfolio Manager,
Fixed-Income -- CML (1993 to Present);
Investment Officer, Fixed-Income -- CML (1990 to
1993); Registered Representative, Salesman,
Prudential Securities, Inc. (Prior to 1990)
</TABLE>
Connecticut Mutual Financial Services, L.L.C., with its principal business at
140 Garden Street, Hartford, CT 06154, distributes shares of the Company and
shares of Connecticut Mutual Investment Accounts, Inc.
15
<PAGE>
BREAKDOWN OF EXPENSES
Like all mutual funds, each Portfolio pays fees and expenses related to its
daily operations. These Portfolio fees and expenses are neither billed directly
to shareholders nor deducted from individual shareholder accounts but are paid
out of a Portfolio's assets and are reflected in its share price or dividends.
Each Portfolio has entered into an investment advisory agreement with the
Manager pursuant to which the Portfolio pays a management fee to the Manager for
managing its investments and business affairs. The Manager provides
administrative services to each Portfolio, including providing accounting,
administrative and clerical personnel and monitoring the activities of the
transfer agent, custodian and independent auditors of the Portfolios. The
Portfolios also pay other expenses, which are explained below.
MANAGEMENT AND SUBADVISORY FEES
The Capital Appreciation Portfolio, Balanced Portfolio and Diversified Income
Portfolio each pay monthly to the Manager a fee equal on an annual basis to
.85%, .85% and .75%, respectively, of the respective Portfolio's average daily
net asset value up to $250 million and .75%, .75% and .65%, respectively, on
such assets over $250 million. While higher than advisory fees paid by most
mutual funds, these fees are comparable to those paid by mutual funds with
similar objectives and investment strategies.
SUBADVISORY FEES. The Manager pays out of its own assets the fees to the
Subadvisers for the services they provide to the Manager in managing certain
Components. The Manager pays Scudder, Stevens a subadvisory fee equal on an
annual basis to .75% of the first $10 million of assets under management; .70%
on the next $15 million of such assets; .65% on the next $15 million of such
assets; .50% on the next $60 million of such assets; and .35% on such assets
over $100 million. The Manager pays BEA Associates a subadvisory fee equal on an
annual basis to .45% on the first $25 million of assets under management; .40%
on the next $25 million of such assets; .35% on the next $50 million of such
assets; and .25% on all such assets over $100 million. The Manager pays Pilgrim
Baxter a subadvisory fee equal on an annual basis to 0.60% of assets under
management. For purposes of determining the applicable rate of the subadvisory
fee for Pilgrim Baxter and BEA Associates, assets under management include all
assets described above and the assets of the portfolios of Connecticut Mutual
Investment Accounts, Inc. managed by the respective Subadviser.
The Manager may, from time to time, voluntarily agree to maintain the total
of the management fees and other expenses, of a Portfolio at no more than a
specified limit. The Manager retains the ability to be repaid by a Portfolio if
expenses fall below the specified limit prior to the end of the fiscal year.
These expense limitation arrangements, which may be terminated at any time
without notice, can decrease a Portfolio's expenses and increase its
performance.
OTHER EXPENSES
Each Portfolio is also responsible for expenses not expressly stated to be
payable by the Manager under the Portfolio's Investment Advisory Agreement. Each
Portfolio pays other expenses, such as
16
<PAGE>
legal, audit and custodian fees, proxy solicitation costs and the compensation
of directors who are not affiliated with Connecticut Mutual. State Street Bank
and Trust Company (State Street) provides custodian services to each Portfolio.
PORTFOLIO TURNOVER RATES
Each Portfolio's portfolio securities in each Component may be changed
without regard to the holding period of such securities (subject to certain tax
restrictions) when the Manager deems it appropriate to do so in order to achieve
each Portfolio's normal allocation between the primary asset classes and the
Components in view of a change in the financial or business operations of an
issuer or changes in general market conditions. Under normal market conditions,
the portfolio turnover rates of the Capital Appreciation Portfolio and the
Diversified Income Portfolio are each expected to be 75%. The turnover rates of
the fixed income portion and the equity portion of the Balanced Portfolio are
expected to be 70% and 85%, respectively. High portfolio turnover rates, I.E.,
in excess of 100%, increase transaction costs. The Manager considers these
effects when evaluating the anticipated benefits of rebalancing a Portfolio's
normal allocation.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager and the Subadvisers are primarily responsible for placing orders
for the portfolio transactions of each Portfolio. In placing orders, it is the
policy of each Portfolio to obtain the most favorable net results, taking into
account various factors, including price, dealer spread or commissions, if any,
size of the transaction, difficulty of execution and other services rendered.
While the Manager and Subadvisers seek reasonably competitive spreads or
commissions, a Portfolio will not necessarily be paying the lowest spread or
commissions available. Subject to the requirements of best execution, brokerage
transactions may be directed to broker/dealers who also sell shares of the
Portfolios. Commission rates on foreign exchanges are generally fixed and are
generally higher than negotiated commission rates available in the United
States.
DISTRIBUTIONS AND TAXES
For a discussion of the tax status of your Variable Contract, including the
tax consequences of withdrawals or other payments, refer to the prospectus of
your Insurance Company's separate account. It is suggested you keep all
statements you receive to assist in your personal record keeping.
It is expected that shares of the Portfolios will be held by Insurance
Company separate accounts that fund Variable Contracts. Under current tax law,
dividends or capital gain distributions from any Portfolio are not currently
taxable if properly allocable to reserves for a Variable Contract.
Each Portfolio is treated as a separate entity for federal income tax
purposes and intends to elect to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (Code) and
to qualify for such treatment for each taxable year. To qualify as such, each
Portfolio must satisfy certain requirements relating to the sources of its
income, diversification of its assets and distribution of its income to
shareholders. As a regulated investment company, each
17
<PAGE>
Portfolio will not be subject to federal income tax on any net investment income
and net realized capital gains that are distributed to its shareholders in
accordance with certain timing requirements of the Code.
Each Portfolio intends to pay out all of its net investment income and net
realized capital gains for each year. The Portfolios distribute their dividends,
if any, each year. Normally, net realized capital gains, if any, are distributed
each year for the Portfolios. Such income and capital gains are reinvested in
additional shares of the Portfolios. Each Portfolio makes dividend and capital
gain distributions on a per-share basis. After every distribution from each of
these Portfolios, the Portfolio's share price drops by the amount of the
distribution. Since dividends and capital gain distributions are reinvested, the
total value of an account will not be affected by such distributions because,
although the shares will have a lower price, there will be correspondingly more
of them.
In addition to the above, each Portfolio also must follow certain portfolio
diversification requirements imposed by the IRS on separate accounts of
insurance companies relating to the tax-deferred status of Variable Contracts.
These requirements, which are in addition to the diversification requirements
imposed on the Portfolios by the 1940 Act and Subchapter M of the Code, place
certain limitations on the assets of a Portfolio that may be invested in
securities of a single issuer. More specific information on these
diversification requirements is contained in your insurance company's separate
account prospectus and in the SAI.
THE COMPANY
Each Portfolio is a mutual fund: an entity that pools shareholders' money and
invests it toward specified goals. In technical terms, each Portfolio is a
separate diversified portfolio or "series" of the Company, an open-end
management investment company which was organized as a corporation under the
laws of Maryland on August 17, 1981. The Company may create and classify the
Common Stock, par value $0.001 per share, into separate mutual funds (or
investment series or portfolios of shares), without further approval of the
Company's shareholders. As of the date of this prospectus, the Company has
established the following portfolios: the three LifeSpan Portfolios described in
this Prospectus; and six other portfolios offered by means of a separate
prospectus (Money Market Portfolio, Government Securities Portfolio, Income
Portfolio, Total Return Portfolio, Growth Portfolio and International Equity
Portfolio). The Board of Directors is authorized, without shareholder approval,
to establish additional series of the Company which may be added in the future.
Immediately after the effective date of this Prospectus, Connecticut Mutual and
its affiliates will own 100% of each LifeSpan Portfolio offered in this
Prospectus.
The Company is governed by a Board of Directors which is responsible for
protecting your interests as a shareholder. The directors are experienced
executives who meet at least quarterly to oversee the activities of each
Portfolio, review contractual arrangements with companies that provide services
to the Portfolios and review each Portfolio's performance. The majority of the
directors are not otherwise affiliated with Connecticut Mutual. The SAI contains
the names and general background of each director and executive officer of the
Company.
18
<PAGE>
The Company does not hold annual meetings of shareholders. The Company may
hold shareholder meetings, however, to elect or remove directors, change the
fundamental policies of a Portfolio, approve the management contract of a
Portfolio or for other purposes. On matters affecting only one Portfolio, only
the shareholders of that Portfolio are entitled to vote. On matters relating to
all of the Portfolios but affecting the Portfolios differently, separate votes
by each Portfolio are required. Shareholders holding more than 50% of the shares
of the Company can elect all of the Company's directors if they so choose. Each
share is entitled to one vote within each Portfolio. An Insurance Company
issuing a Variable Contract that participates in the Company will vote shares in
the separate account as required by law and interpretations thereof, as may be
amended or changed from time to time. In accordance with current law and
interpretations thereof, a participating Insurance Company is required to
request voting instructions from policy owners and must vote shares in the
separate account in proportion to the voting instructions received. Portfolio
shares for which no voting instructions have been received will be voted in the
same proportion as shares as to which instructions are received by the Insurance
Company with respect to Variable Contracts investing in the same Portfolio. For
a further discussion, please refer to your Insurance Company's separate account
prospectus.
PERFORMANCE
Each Portfolio's performance may be quoted in advertising in terms of yield
and total return if accompanied by performance for your Insurance Company's
separate account. Performance is based on historical results and is not intended
to indicate future performance.
For Balanced Portfolio and Diversified Income Portfolio, yield is a way of
showing the rate of income the Portfolio earns on its investments as a
percentage of the Portfolio's share price. To calculate yield, a Portfolio takes
the dividend and interest income, if any, it earned from its portfolio of
investments for a specified 30-day period (net of expenses), divides it by the
number of its shares entitled to receive dividends and expresses the result as
an annualized percentage rate based on the Portfolio's share price at the end of
the 30-day period. Yields are calculated according to accounting methods that
are standardized for all stock and bond funds. Because yield accounting methods
differ from the methods used for other accounting purposes, a Portfolio's yield
may not equal its distribution rate, the income paid to an account or the income
reported on the Portfolio's financial statements.
A Portfolio's total return is based on the overall dollar or percentage
change in value of a hypothetical investment in the Portfolio, including changes
in share price and assuming each Portfolio's dividends and capital gain
distributions are reinvested at net asset value. A cumulative total return
reflects a Portfolio's performance over a stated period of time. An average
annual total return reflects the hypothetical annually compounded return that
would have produced the same cumulative total return if a Portfolio's
performance had been constant over the entire period. Because average annual
returns tend to smooth out variations in a Portfolio's actual return, you should
recognize that they are not the same as actual year-by-year results. To
illustrate the components of overall performance, a Portfolio may separate its
cumulative and average annual returns into income results and capital gain or
loss.
19
<PAGE>
YIELDS AND TOTAL RETURNS QUOTED FOR THE PORTFOLIOS INCLUDE THE EFFECT OF
DEDUCTING EACH PORTFOLIO'S EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES
ATTRIBUTABLE TO ANY PARTICULAR INSURANCE PRODUCT. SINCE SHARES OF THE PORTFOLIOS
MAY BE PURCHASED PRIMARILY THROUGH A VARIABLE CONTRACT, YOU SHOULD CAREFULLY
REVIEW THE PROSPECTUS OF THE INSURANCE PRODUCT YOU HAVE CHOSEN FOR INFORMATION
ON RELEVANT CHARGES AND EXPENSES. Excluding these charges from quotations of
each Portfolio's performance has the effect of increasing the performance
quoted. You should bear in mind the effect of these charges when comparing a
Portfolio's performance to that of other mutual funds.
RISK FACTORS, SECURITIES AND INVESTMENT TECHNIQUES
The following discussions contain more detailed information about types of
instruments in which the Portfolios may invest and strategies the Manager and
Subadvisers may employ in pursuit of the Portfolios' investment objectives. A
summary of risks and restrictions associated with these instrument types and
investment practices is included as well. Policies and limitations are
considered at the time of purchase; the sale of instruments is not required in
the event of a subsequent change in circumstances. Some of the restrictions
described below are fundamental, I.E., subject to change only by shareholder
approval. These fundamental restrictions are set forth in greater detail in the
SAI. The Manager and Subadvisers may not buy all of these investments or use all
of these techniques to the full extent permitted unless it is believed that
doing so will help a Portfolio achieve its goals.
EQUITY SECURITIES. Each Portfolio may hold equity securities. Equity
securities may include common stocks, preferred stocks, convertible securities
and warrants. Common stocks represent an equity (ownership) interest in a
corporation. This ownership interest often gives a Portfolio the right to vote
on measures affecting the company's organization and operations. Although common
stocks generally have a history of long-term growth in value, their prices tend
to fluctuate in the short term, particularly those of smaller capitalization
companies. Preferred stocks represent a limited equity interest in a
corporation. Preferred stocks are often entitled only to dividends at a
specified rate, and have a preference over common stock, with respect to
dividends and on liquidation of assets. Preferred stocks generally have lesser
voting rights than common stocks. Because their dividends are often fixed, the
value of many preferred stocks fluctuates inversely with changes in interest
rates.
Convertible securities are bonds, preferred stocks and other securities that
pay a fixed rate of interest or dividend. As an additional feature, however,
they offer the buyer the option of converting the security into common stock.
The value of convertible securities depends partially on interest rate changes
and the credit quality of the issuer. The value of convertible securities is
also sensitive to company, market and other economic news, and will change based
on the price of the underlying common stock. For this reason, the Manager and
the Subadvisers consider the growth potential of the underlying stock when
selecting a Portfolio's investments. Convertible securities generally have less
potential for gain than common stock, but also less potential for loss, since
their income provides a cushion against the stock's price declines. However,
because the buyer is also exposed to the risk and reward potential of the
underlying stock, convertible securities generally pay less income than similar
non-convertible bonds.
20
<PAGE>
FIXED-INCOME SECURITIES. GENERAL. Each Portfolio may purchase fixed-income
securities consisting of corporate debt obligations, U.S. government securities,
municipal obligations, mortgage-backed and asset-backed securities, adjustable
rate securities, stripped securities, custodial receipts for Treasury
certificates, zero coupon bonds, equipment trust certificates, loan
participation notes, structured notes and money market instruments. Bonds and
other fixed-income instruments are used by issuers to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest,
and must repay the amount borrowed at maturity. Some fixed-income securities,
such as zero coupon bonds, do not pay current interest, but are purchased at a
discount from their face values. Zero coupon bonds accrue income for tax and
accounting purposes and such income must be distributed to shareholders. Because
no cash is received at the time of such accruals, a Portfolio may be required to
liquidate other securities to satisfy distribution obligations. Fixed-income
securities have varying degrees of quality and varying levels of sensitivity to
changes in interest rates. A decrease in interest rates will generally result in
an increase in the value of a Portfolio's portfolio of fixed-income securities,
and, conversely, during periods of rising interest rates, the value of a
Portfolio's portfolio of fixed-income securities will generally decline.
Longer-term bonds are generally more sensitive to interest rate changes than
shorter-term bonds. Changes by recognized agencies in the rating of any fixed-
income security and in the ability of an issuer to make payments of interest and
principal will also affect the value of these instruments.
HIGH YIELD/HIGH RISK BONDS. Each Portfolio may purchase lower quality and
unrated bonds. Bonds rated below investment grade (I.E., below Baa by Moody's
and BBB by S&P) (commonly called junk bonds) are often considered to be
speculative and involve greater risk of default or price changes than investment
grade securities due to changes in the issuer's creditworthiness and the outlook
for economic growth. Obligations rated below investment grade may provide
greater opportunities for investment income and higher yield than higher rated
obligations but are subject to risks not generally associated with an investment
in investment grade obligations. The market prices of these securities may
fluctuate more than higher quality securities and may decline significantly in
periods of general economic difficulty. An economic downturn could also disrupt
the high yield/high risk bond market generally and impair the ability of issuers
to repay principal and interest. An increase in interest rates would (as is the
case with fixed-income instruments generally) reduce market values of a
portfolio of lower rated fixed-income securities. The market price and liquidity
of lower rated fixed-income securities generally responds to short term
corporate and market developments to a greater extent than do higher rated
securities because such developments are perceived to have a more direct
relationship on the ability of an issuer of such lower rated securities to meet
its ongoing debt obligations. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield/high risk bonds, especially in a thinly traded market.
Reduced volume and liquidity in the high yield/high risk bond market or the
reduced availability of market quotations for such bonds may make it more
difficult to dispose of the bonds and to value accurately a Portfolio's assets.
The reduced availability of reliable, objective pricing data may increase a
Portfolio's reliance on management's judgment in valuing high yield/high risk
bonds. Prices for high yield/high risk securities may be affected by legislative
and regulatory developments. These laws could adversely affect the Portfolio's
net asset value and investment practices, the secondary market for high yield
securities, the financial condition of issuers of these securities and the value
of outstanding high
21
<PAGE>
yield/high risk securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of the
investments in high yield/high risk bonds and limiting the deductibility of
interest by certain corporate issuers of high yield/high risk bonds adversely
affected the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the portfolio to the risks of high yield/high
risk securities.
Ratings by credit agencies focus on safety of principal and interest payments
and do not evaluate market risks. In addition, ratings by credit agencies may
not be changed by the agencies in a timely manner to reflect subsequent economic
events. By conducting intensive credit research, carefully selecting individual
issues and broadly diversifying portfolio holdings by industry sector and
issuer, the Subadviser believes that the default risk of lower rated securities
can be reduced. Emphasis on credit risk management involves the Subadviser's own
internal analysis to determine the debt service capability, financial
flexibility and liquidity of an issuer, as well as the fundamental trends and
outlook for the issuer and its industry. The Subadviser's rating helps it
determine the attractiveness of specific issues relative to the valuation by the
marketplace of similarly rated credits.
DERIVATIVE INSTRUMENTS. Each of the Accounts may invest in derivative
instruments which are securities or contracts that provide for payments based on
or "derived" from the performance of an underlying asset, index or other
economic benchmark. Transactions in derivative instruments can be, but are not
necessarily, riskier than investments in conventional stocks, bonds and money
market instruments. The use of derivative instruments for non-hedging purposes
or to generate additional income may be considered a speculative investment
practice. A derivative instrument is more accurately viewed as a way of
reallocating risk among different parties or substituting one type or risk for
another. Transactions in derivative instruments often enable an Account to take
investment positions that more precisely reflect the portfolio manager's
expectations concerning the future performance of the various investments
available to the Account. Derivative instruments can be a legitimate and often
cost-effective method of accomplishing the same investment goals as could be
achieved through other authorized investments in conventional securities.
Derivative securities include collateralized mortgage obligations, stripped
mortgage backed securities, asset backed securities, structured notes and
floating interest rate securities. Derivative contracts include futures
contracts, forward contracts, forward commitment and when-issued securities
transactions, forward foreign currency exchange contracts and interest rate
swaps. The principal risks associated with derivative instruments are:
-Market risk: The instrument will decline in value or that an alternative
investment would have appreciated more, but this is no different from the
risk of investing in conventional securities.
-Leverage and associated price volatility: Leverage causes increased
volatility in the price and magnifies the impact of adverse market changes,
but this risk may be consistent with the
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investment objective of even a conservative fund in order to achieve an
average portfolio volatility that is within the expected range for that
type of fund. The SEC has taken the position that the risk of leverage is
not an appropriate risk for a money market fund.
-Credit risk: The issuer of the instrument may default on its obligation to
pay interest and principal, but derivatives based on U.S. Government agency
mortgage securities may actually present less credit risk than some
conventional corporate debt securities.
-Liquidity and valuation risk: Many derivative instruments are traded in
institutional markets rather than on an exchange. Nevertheless, many
derivative instruments are actively traded and can be priced with as much
accuracy as conventional securities. Derivative instruments that are custom
designed to meet the specialized investment needs of a relatively narrow
group of institutional investors such as the Accounts are not readily
marketable and are subject to an Account's restrictions on illiquid
investments.
-Correlation risk: There may be imperfect correlation between the price of
the derivative and the underlying asset; for example, there may be price
disparities between the trading markets for the derivative contract and the
underlying asset.
INTERNATIONAL SECURITIES. Each Portfolio may purchase securities issued by
foreign issuers, denominated in foreign currency and traded primarily on foreign
markets. Investments in non-U.S. equity securities involve risks different from
those encountered when investing in securities of domestic issuers. Such risks
include: the adverse impact of trade balances and imbalances and related
economic policies; currency exchange rate fluctuations; adverse foreign exchange
control policies; nationalization, expropriation or confiscatory taxation;
income tax withholding at the source; limitations on the removal of funds or
other assets; political or social instability; difficulty in obtaining and
enforcing judgments abroad; restrictions on foreign investments in other
jurisdictions; price volatility; problems arising from the diverse structure and
illiquidity of securities markets in various countries and regions; and other
specific local, political and economic considerations. See the SAI for
additional discussion of the risks of investing in foreign markets.
The value of non-U.S. securities may be adversely affected by fluctuations in
the relative rates of exchange between the currencies of different nations and
by exchange control regulations. The investment performance of a Portfolio may
be affected depending on the extent to which it is invested in foreign
securities, either positively or negatively, by currency exchange rates because
the U.S. dollar value of securities denominated in a foreign currency will
increase or decrease in response to changes in the value of foreign currencies
in relation to the U.S. dollar. Also, there may be higher transaction costs in
foreign securities and less government regulation of foreign stock exchanges,
brokers, and issuers than is present in the United States. Equity securities
acquired in foreign markets will not, as a rule, be subject to registration
under the Securities Act of 1933 or be under the jurisdiction of the SEC.
Most foreign securities of a Portfolio are held outside the United States by
local foreign subcustodians that satisfy certain eligibility requirements.
However, foreign subcustodian arrangements are significantly more expensive than
domestic custody. In addition, foreign custody and settlement of securities
transactions is subject to local law and custom that is not, generally, as well
established or as reliable as U.S. regulation and custom applicable to custody
and settlements of securities transactions
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and, accordingly, there is generally perceived to be a greater risk of loss in
connection with securities custody and securities transactions in many foreign
countries. Finally, there may be less publicly available information about
foreign issuers, and such issuers may not be subject to the same accounting and
auditing standards as publicly held domestic issuers.
Scudder, Stevens, as the Subadviser to the international Subaccount, may
invest a portion of a Portfolio's assets in companies located in emerging
countries as described under "Investment Objectives and Policies." Compared to
the United States and other developed countries, emerging countries may have
relatively unstable governments, economies based on only a few industries, and
securities markets that are less liquid and trade a small number of securities.
Prices on these exchanges tend to be volatile and, in the past, securities in
these countries have offered greater potential for gain (as well as loss) than
securities of companies located in developed countries. All of the risks of
investing in international equity securities are present (and, in fact, may be
exacerbated) when investing in issuers in emerging countries. See the SAI for
additional information about the risks of investing in emerging countries.
Each Portfolio may invest in ADRs, EDRs and GDRs. ADRs are receipts issued by
a U.S. bank or trust company which evidence ownership of underlying securities
of foreign corporations. ADRs are traded on domestic exchanges or in the U.S.
over-the-counter market and, generally, are in registered form. To the extent
the Portfolio acquires ADRs through banks which do not have a contractual
relationship with the foreign issuer of the security underlying the ADR to issue
and service such ADRs, there may be an increased possibility that the Portfolio
would not become aware of and be able to respond in a timely manner to corporate
actions such as stock splits or rights offerings involving the foreign issuer.
In addition, the lack of information may result in inefficiencies in the
valuation of such instruments. The Portfolio may also invest in EDRs and GDRs,
which are receipts evidencing an arrangement with a non-U.S. Bank similar to
that for ADRs and are designed for use in non-U.S. securities markets. EDRs and
GDRs are not necessarily quoted in the same currency as the underlying security.
The Portfolios may also invest in obligations of foreign branches of U.S.
banks (Eurodollars) and U.S. branches of foreign banks (Yankee dollars) as well
as foreign branches of foreign banks. These investments involve risks that are
different from investments in securities of U.S. banks, including potential
unfavorable political and economic developments, different tax provisions,
seizure of foreign deposits, currency controls, interest limitations or other
governmental restrictions which might affect payment of principal or interest.
COVERED CALL OPTIONS. Each Portfolio may purchase and write (sell) exchange
traded covered call options on securities, securities indices and foreign
currencies, in each case as a hedge against decreases in prices of existing
portfolio securities or increases in prices of anticipated portfolio securities.
The International Equity Portfolio and the Capital Appreciation and Balanced
Portfolios (with respect to the international Subaccounts) may purchase options
on currency in the over-the-counter (OTC) markets. A call option on a security
gives the holder (purchaser) the right to buy, and obligates the writer (seller)
to sell (if the option is exercised), in return for a premium paid, the
underlying security at an exercise price during the option period. A call option
on a currency operates in a similar manner, except that delivery is made of the
specified currency. A call option on an index is
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also similar except that the value of the option depends on the weighted value
of the group of securities in the index and settlement of the option is made in
the form of cash rather than the delivery of a security.
Because call options will be used to generate additional income and to
attempt to reduce the effect of any adverse price movement in the securities or
currency subject to the option, they do involve certain risks that are different
in some respects from investment risks associated with similar funds which do
not engage in such activities. These risks include the following: for writing
covered call options, the inability to participate in the appreciation of the
underlying securities or currencies above the exercise price; and for purchasing
call options, possible loss of the entire premium paid. In addition, the
effectiveness of hedging through the purchase or sale of securities index
options, including options on the S&P 500 Index, will depend upon the extent to
which price movements in the portion of the securities portfolio being hedged
correlate with the price movements in the selected securities index. Perfect
correlation may not be possible because the securities held or to be acquired by
a Portfolio may not exactly match the composition of the securities index on
which options are written. If the forecasts of the Manager or Subadviser
regarding movements in securities prices, interest rates, or current exchange
rates are incorrect, a Portfolio's investment results may have been better
without the hedge transactions.
The ability of a Portfolio to terminate an over-the-counter option is more
limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position each
Portfolio will treat purchased over-the-counter options and all assets used to
cover written over-the-counter options as illiquid securities. However for
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the staff of the SEC. A further discussion of covered call options
is contained in the SAI.
INTEREST RATE SWAPS. Each Portfolio may enter into interest rate swaps both
for hedging and to seek to increase total return. Each Portfolio will typically
use interest rate swaps to change the effective duration of its portfolio.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, such as an exchange of
fixed rate payments for floating rate payments. Since interest rate swaps are
individually negotiated, a Portfolio expects to achieve an acceptable degree of
correlation between its portfolio investments and its interest rate swap
positions.
A Portfolio will enter into interest rate swaps only on a net basis, which
means that the two payment streams are netted out, with the Portfolio receiving
or paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate swaps is
limited to the net amount of interest payments that a Portfolio is contractually
obligated to make. If the other party to an interest rate swap defaults, the
Portfolio's risk of loss consists of the net amount of interest payments that a
Portfolio is contractually entitled to receive. A Portfolio will maintain in a
segregated account with a Portfolio's custodian cash and liquid high grade debt
securities equal to the net amount, if any, of the excess of the Portfolio's
obligations over its entitlements with respect to swap transactions.
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To the extent that the net amount of a swap is held in a segregated account
consisting of cash and high liquid grade debt securities, the Portfolios and the
Manager and Subadviser believe that swaps do not constitute senior securities
under the Act and, accordingly, will not treat them as being subject to a
Portfolio's borrowing restriction.
The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Manager or Subadviser is
incorrect in its forecasts of market values and interest rates, the investment
performance of the Portfolio would be less favorable than it would have been if
this investment technique were not used.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To hedge against
changes in interest rates, securities prices or currency exchange rates or for
non-hedging purposes, each Portfolio may, subject to its investment objectives
and policies, purchase and sell various kinds of futures contracts, and purchase
and write call and put options on any of such futures contracts. A Portfolio may
also enter into closing purchase and sale transactions with respect to any of
such contracts and options. Futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices. Each Portfolio may purchase and sell
futures contracts on stock indices and purchase and sell options on such
futures. Each Portfolio may purchase and sell interest rate futures and purchase
and sell options on such futures. In addition, each Portfolio that may invest in
securities that are denominated in foreign currency may purchase and sell
futures on currencies and purchase and sell options on such futures. A Portfolio
will engage in futures and related options transactions only for bona fide
hedging and non-hedging purposes as permitted in regulations of the Commodity
Futures Trading Commission. No Portfolio will enter into futures contracts or
options thereon for non-hedging purposes if, immediately thereafter, the
aggregate initial margin and premiums required to establish non-hedging
positions in futures contracts and options on futures will exceed 5 percent of
the net asset value of the Portfolio's portfolio, after taking into account
unrealized profits and losses on any such positions and excluding the amount by
which such options were in-the-money at the time of purchase.
The use of futures contracts entails certain risks, including but not limited
to the following: no assurance that futures contracts transactions can be offset
at favorable prices; possible reduction of the Portfolio's income due to the use
of hedging; possible reduction in value of both the securities hedged and the
hedging instrument; possible lack of liquidity due to daily limits on price
fluctuations; imperfect correlation between the contract and the securities
being hedged; and potential losses in excess of the amount initially invested in
the futures contracts themselves. If the expectations of the Manager or the
Subadviser regarding movements in securities prices or interest rates are
incorrect, a Portfolio may have experienced better investment results without
hedging. The use of futures contracts and options on futures contracts requires
special skills in addition to those needed to select portfolio securities. A
further discussion of futures contracts is set forth in the Portfolios' SAI.
FOREIGN CURRENCY TRANSACTIONS. Each Portfolio may, to the extent it invests
in foreign securities, enter into foreign currency transactions in order to
protect the U.S. dollar value of the Portfolio's foreign currency-denominated
portfolio securities against adverse changes in foreign currency exchange rates
between the U.S. dollar and any other foreign currency. A Portfolio will engage
in cross-
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hedging (I.E., dealing in foreign exchange between currencies of different
countries in which it has invested for the purpose of hedging against possible
variations in the foreign exchange rate between those countries) if Scudder
determines that there is a pattern of correlation between the two currencies.
Such contractual commitments may be forward contracts entered into directly
with another party or exchange-traded futures contracts. A Portfolio may also
purchase and sell options on futures contracts, forward contracts, or futures
contracts which are denominated in a particular currency to hedge the risk of
fluctuations in the value of another currency. A Portfolio's dealings in foreign
exchange will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of currency
with respect to specific receivables or payables of the Portfolio accruing in
connection with the purchase or sale of its portfolio securities. Position
hedging is the purchase or sale of currency with respect to portfolio security
positions denominated or quoted in a foreign currency. No Portfolio will
speculate in foreign exchange.
If a Portfolio enters into a forward foreign currency exchange contract to
buy foreign currency, the Portfolio will be required to place an amount of cash
or liquid, high grade debt securities equal to the Portfolio's obligations under
the contract in a segregated account with the Portfolio's custodian.
U.S. GOVERNMENT SECURITIES. Each Portfolio may purchase U.S. Government
securities. Government securities include: (1) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of issuance, U.S.
Treasury bills (maturity of one year or less), U.S. Treasury notes (maturities
of one to 10 years), and U.S. Treasury bonds (generally maturities of greater
than 10 years), all of which are backed by the full faith and credit of the
United States, and (2) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, some of which are backed by the full faith and
credit of the U.S. Treasury, such as direct pass-through certificates of the
Government National Mortgage Association; some of which are supported by the
right of the issuer to borrow from the U.S. Government, such as obligations of
Federal Home Loan Banks; and some of which are backed only by the credit of the
issuer itself, such as obligations of the Student Loan Marketing Association.
MORTGAGE-BACKED SECURITIES. The Portfolios may invest in mortgage
pass-through certificates and multiple-class pass-through securities, such as
real estate mortgage investment conduits ("REMIC") pass-through certificates,
collateralized mortgage obligations ("CMOs") and stripped mortgage-backed
securities ("SMBS"), and other types of "Mortgage-Backed Securities" that may be
available in the future.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. Guaranteed mortgage
pass-through securities represent participation interests in pools of
residential mortgage loans and are issued by U.S. Governmental or private
lenders and guaranteed by the U.S. Government or one of its agencies or
instrumentalities, including but not limited to the Government National Mortgage
Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie
Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Ginnie Mae
certificates are guaranteed by the full faith and credit of the United States
government for timely payment of principal and interest on the certificates.
Fannie Mae certificates are guaranteed by Fannie Mae, a federally chartered and
privately owned corporation, for full and timely payment of principal and
interest on the certificates. Freddie Mac certificates are
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guaranteed by Freddie Mac, a corporate instrumentality of the United States
government, for timely payment of interest and the ultimate collection of all
principal of the related mortgage loans. Guarantees do not extend to the value
of the securities.
MULTIPLE-CLASS PASS-THROUGH SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. CMOs and REMIC pass-through or participation certificates may be
issued by, among others, U.S. Government agencies and instrumentalities as well
as private lenders. CMOs and REMIC certificates are issued in multiple classes
and the principal of and interest on the mortgage assets may be allocated among
the several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates but also may be collateralized by other mortgage assets such as
whole loans or private mortgage pass-through securities. Debt service on CMOs is
provided from payments of principal and interest on collateral of mortgaged
assets and any reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages primarily secured by interests in real property and
other permitted investments. Investors may purchase "regular" and "residual"
interest shares of beneficial interest in REMIC trusts although the Portfolios
do not intend to invest in residual interests.
STRIPPED MORTGAGE-BACKED SECURITIES. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed-income securities. The staff of the SEC
considers privately issued SMBS to be illiquid.
RISK FACTORS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of 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
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments
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in a declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Portfolio may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental or agency guarantee. When a Portfolio reinvests amounts
representing payments and unscheduled prepayment of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment
rate will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
ASSET-BACKED SECURITIES. The Portfolios may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, pools of assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Asset-backed securities may also be collateralized by
a portfolio of U.S. Government securities, but are not direct obligations of the
U.S. Government, its agencies or instrumentalities. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
corporations. Payments or distributions of principal and interest on
asset-backed securities may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pool insurance policy issued by a
financial institution unaffiliated with the trust or corporation, or other
credit enhancements may be present; however privately issued obligations
collateralized by a portfolio of privately issued asset-backed securities do not
involve any government-related guarantee or insurance. In addition to the risks
similar to those associated with Mortgage-Backed Securities, asset-backed
securities present further risks that are not presented by the Mortgage-Backed
Securities because asset-backed securities generally do not have the benefit of
a security interest in collateral that is comparable to mortgage assets.
INVERSE FLOATING RATE INSTRUMENTS. The Portfolios may invest in inverse
floating rate debt instruments ("inverse floaters"), including leveraged inverse
floaters and inverse floating rate Mortgage-Backed Securities, such as inverse
floating rate "interest only" stripped Mortgage-Backed Securities. The interest
rate on inverse floaters resets in the opposite direction from the market rate
of interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values.
STRUCTURED NOTES. The Portfolios may invest in structured notes. The
distinguishing feature of a structured note is that the amount of interest
and/or principal payable on the notes is based on the performance of a benchmark
asset or market other than fixed-income securities or interest rates. Examples
of these benchmarks include stock prices, currency exchange rates and physical
commodity prices. Investing in a structured note allows a Portfolio to gain
exposure to the benchmark market
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while fixing the maximum loss that the Portfolio may experience in the event
that market does not perform as expected. Depending on the terms of the note,
the Portfolio may forego all or part of the interest and principal that would be
payable on a comparable conventional note; the Portfolio's loss cannot exceed
this foregone interest and/or principal. An investment in structured notes
involves risks similar to those associated with a direct investment in the
benchmark asset.
FORWARD COMMITMENTS. Securities may be purchased by all Portfolios on a
"when-issued" or on a "forward commitment" basis, which means it may take 60
days or more before the securities are delivered to a Portfolio. Securities
purchased on a "when-issued" or "forward commitment" basis involve a risk that
the value of the security to be purchased may decline prior to the settlement
date. Also, if the dealer through which the trade is made fails to consummate
the transaction, the Portfolio may lose an advantageous yield or price.
MONEY MARKET INSTRUMENTS. All Portfolios may invest in banker's
acceptances, certificates of deposit, time deposits and commercial paper.
Banker's acceptances are bills of exchange or time drafts drawn on and accepted
by a commercial bank. They are used by corporations to finance the shipment and
storage of goods and to furnish dollar exchanges. Banker's acceptances generally
mature in six months or less. Certificates of deposit are negotiable
interest-bearing instruments with specific maturities. Certificates of deposit
are issued by banks and savings and loan institutions in exchange for the
deposit of funds and normally can be traded in the secondary market, prior to
maturity. Time deposits are nonnegotiable receipts issued by a bank in exchange
for the deposit of funds. Like a certificate of deposit, it earns a specified
rate of interest over a definite period of time. Time deposits cannot be traded
in the secondary market. Commercial paper is the term used to designate
unsecured short-term promissory notes issued by corporations and other entities.
Maturities on commercial paper vary from a few days to nine months. Capital
Appreciation and Balanced Portfolios will only purchase money market instruments
denominated in a foreign currency whose issuers have at least one billion
dollars (U.S.) of assets.
REPURCHASE AGREEMENTS. In a repurchase agreement, a Portfolio buys a
security at one price and simultaneously agrees to sell it back at a higher
price. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent.
LENDING OF SECURITIES. For the purpose of realizing additional income, each
Portfolio may lend to broker-dealers portfolio securities amounting to not more
than 33 1/3% of its total assets taken at current value. These loans must be
fully collateralized at all times. The Portfolio may reinvest any cash
collateral in short-term highly liquid debt securities. However, lending of
securities may involve some credit risk to the Portfolio if the other party
should default on its obligation and the Portfolio is delayed in or prevented
from recovering the collateral. Securities loaned by the Portfolio will remain
subject to fluctuations of market value.
RESTRICTED AND ILLIQUID SECURITIES. Each Portfolio may invest up to 15% of
its net assets in illiquid investments, which includes repurchase agreements
maturing in more than seven days, restricted securities and securities not
readily marketable. Each Portfolio may also invest in restricted securities
eligible for resale to certain institutional investors pursuant to Rule 144A
under the Securities Act of 1933.
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WARRANTS. Each Portfolio may purchase rights and warrants, which represent
rights to purchase the common stock of companies at designated prices. Each
Portfolio will not purchase such rights and warrants if the Portfolio's holding
of warrants (valued at the lower of cost or market) would exceed 5% of the value
of the Portfolio's total assets as a result of the purchase. In addition, each
Portfolio will not purchase a warrant or right which is not listed on the New
York or American Stock Exchanges if the purchase would result in the Portfolio's
owning unlisted warrants in an amount exceeding 2% of its total assets.
TEMPORARY DEFENSIVE POSITION. When, in the opinion of the Manager and the
Subadvisers, market conditions warrant, each Portfolio may invest substantially
all of its assets in cash or short-term money market instruments for temporary
defensive purposes.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
As described in the Prospectus, the debt securities purchased by a Portfolio
may include securities in the lower rating categories (that is, rated below Baa
or lower by Moody's or BBB or lower by S&P, or unrated).
MOODY'S DESCRIBES ITS LOWER RATINGS FOR CORPORATE BONDS AS FOLLOWS:
Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
S&P DESCRIBES ITS LOWER RATINGS FOR CORPORATE BONDS AS FOLLOWS:
Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
Debt rated BB, B, CCC, or CC is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
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MOODY'S DESCRIBES ITS THREE HIGHEST RATINGS FOR COMMERCIAL PAPER AS FOLLOWS:
Issuers rated P-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by the following
characteristics: (1) leading market positions in well-established
industries; (2) high rates of return on funds employed; (3) conservative
capitalization structures and moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and (5) well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated P-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term 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.
S&P DESCRIBES ITS THREE HIGHEST RATINGS FOR COMMERCIAL PAPER AS FOLLOWS:
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong.
A-2. Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated A-1.
A-3. Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
A-2
CONNECTICUT MUTUAL FINANCIAL SERVICES
SERIES FUND I, INC.
(the "Company")
MONEY MARKET PORTFOLIO
INCOME PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
TOTAL RETURN PORTFOLIO
GROWTH PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
(collectively, the "CMFS Portfolios")
LIFESPAN CAPITAL APPRECIATION PORTFOLIO
LIFESPAN BALANCED PORTFOLIO
LIFESPAN DIVERSIFIED INCOME PORTFOLIO
(collectively, the "LifeSpan Portfolios")
(each, a "Portfolio" and collectively, the "Portfolios")
140 Garden Street
Hartford, Connecticut 06154
1-800-234-5606
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995,
AS REVISED
SEPTEMBER 1, 1995
This Statement of Additional Information (the "SAI") (Part B of the
Registration Statement) is not a prospectus, but should be read in
conjunction with the Company's Prospectus for the CMFS Portfolios dated May
1, 1995 and the Prospectus for the LifeSpan Portfolios dated May 1, 1995, as
revised September 1, 1995 together, the "Prospectuses"). Copies of the
Prospectuses can be obtained free of charge from your insurance company.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Page
1. General Information B-1
2. Investment Objectives and Policies B-1
3. Investment Restrictions B-21
4. Management B-27
5. Investment Advisory Arrangements B-31
6. Portfolio Expenses B-35
7. Distribution Arrangements B-35
8. Portfolio Transactions and Brokerage B-36
9. Determination of Net Asset Value B-38
10. Investment Performance B-39
11. Taxes B-48
12. Custodian B-48
13. Independent Certified Public Accountants B-48
14. Other Information B-48
15. Financial Statements B-49
</TABLE>
____________________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
GENERAL INFORMATION
The Company is an open-end management investment company offering nine
distinct mutual funds, each of which is an investment vehicle for variable
annuity and variable life insurance contracts ("Variable Contracts") of
various insurance companies ("Insurance Companies"). This Statement of
Additional Information ("SAI") relates to nine funds: the following six
CMFS Portfolios -- Money Market Portfolio, Income Portfolio, Government
Securities Portfolio, Total Return Portfolio, Growth Portfolio and
International Equity Portfolio (collectively, the "CMFS Portfolios"); and
three "life span" portfolios -- LifeSpan Capital Appreciation Portfolio,
LifeSpan Balanced Portfolio and LifeSpan Diversified Income Portfolio
(collectively, the "LifeSpan Portfolios"). Each CMFS Portfolio and each
LifeSpan Portfolio is referred to herein individually as a "Portfolio" and
collectively as the "Portfolios." Each Portfolio is managed for investment
purposes as if it were a separate mutual fund issuing its own shares.
Insurance Companies are the record holders of shares of beneficial interest
in each Portfolio of the Company. In accordance with any limitations set
forth in their Variable Contracts, contract holders may direct through their
Insurance Companies the allocations of amounts available for investment
among the Company's Portfolios. Instructions for any such allocation, or
for the purpose of redemption of shares of a Portfolio, must be made through
the investor's Insurance Company as the record holder of the Portfolio's
shares. The rights of Insurance Companies as record holders of shares of a
Portfolio are different from the rights of Variable Contract holders. The
term "shareholder" in this SAI refers only to Insurance Companies and not to
contract holders. The Company reserves the right to limit the types of
separate accounts that may invest in any Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
G.R. Phelps & Co. ("G.R. Phelps" or the "Manager") is the investment manager
for each of the Portfolios. The Manager has also engaged Scudder, Stevens &
Clark, Inc. ("Scudder"), BEA Associates and Pilgrim, Baxter & Assoc. Ltd.
("Pilgrim") as subadvisers) to assist in the management of the LifeSpan
Portfolios. Scudder also serves as subadviser to the International Equity
Portfolio. Scudder, BEA Associates and Pilgrim are sometimes referred to
herein as the "Subadvisers".
The investment objective of each of the Portfolios is set forth as
appropriate in the Prospectuses. A further description of certain of the
policies described in the Prospectuses is set forth below.
FOREIGN SECURITIES AND EMERGING COUNTRIES
(All Portfolios except the Money Market Portfolio and the Government
Securities Portfolio)
Each Portfolio (other than the Money Market Portfolio and the Government
Securities Portfolio) and, in particular, the International Equity
Portfolio, may invest in securities of foreign issuers including debt and
equity securities of corporate and governmental issuers of countries with
emerging economies or securities markets. Each Portfolio, except the
International Equity Portfolio, is subject to restrictions on the amount of
its assets that may be invested in foreign securities. See "Investment
Restrictions."
B-1
<PAGE>
Investing in securities of non-U.S. issuers, and in particular in emerging
countries, may entail greater risks than investing in securities of issuers
in the United States. These risks include (i) less social, political and
economic stability; (ii) the small current size of the markets for many such
securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and in greater price volatility; (iii) certain
national policies which may restrict a Portfolio's investment opportunities,
including restrictions on investment in issuers or industries deemed
sensitive to national interests; (iv) foreign taxation; and (v) the absence
of developed structures governing private or foreign investment or allowing
for judicial redress for injury to private property.
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 Portfolio could lose its entire
investment in any such country.
In addition, even though opportunities for investment may exist in foreign
countries, and in particular emerging markets, any change in the leadership
or policies of the governments of those countries or in the leadership or
policies of any other government which exercises a significant influence
over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging countries previously
expropriated large quantities of real and personal property similar to the
property which may be represented by the securities purchased by the
Portfolios. The claims of property owners against those governments were
never finally settled. There can be no assurance that any property
represented by foreign securities purchased by a Portfolio will not also be
expropriated, nationalized, or otherwise confiscated. If such confiscation
were to occur, a Portfolio could lose a substantial portion of its
investments in such countries. A Portfolio's investments would similarly be
adversely affected by exchange control regulation in any of those countries.
Certain countries in which the Portfolios may invest may have vocal
minorities that advocate radical religious or revolutionary philosophies or
support ethnic independence. Any disturbance on the part of such
individuals could carry the potential for widespread destruction or
confiscation of property owned by individuals and entities foreign to such
country and could cause the loss of a Portfolio's investment in those
countries.
Certain countries prohibit or impose substantial restrictions on investments
in their capital markets, particularly their equity markets, by foreign
entities such as the Portfolios. As illustrations, certain countries
require governmental approval prior to investments by foreign persons, or
limit the amount of investment by foreign persons in a particular company,
B-2
<PAGE>
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 Portfolio 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.
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 foreign securities
held by the Portfolios will not be registered with the Securities and
Exchange Commission (the "SEC") and such issuers thereof will not be subject
to the SEC's reporting requirements. Thus, there may be less available
information concerning foreign issuers of securities held by the Portfolios
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 Manager or, in the case of the LifeSpan
Portfolios and the International Equity Portfolio, the relevant Subadviser
will take appropriate steps to evaluate the proposed investment, which may
include on-site inspection of the issuer, interviews with its management and
consultations with accountants, bankers and other specialists. There is
substantially less publicly available information about many 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.
Because the Portfolios may invest a portion of their total assets in
securities which are denominated or quoted in foreign currencies, the
strength or weakness of the U.S. dollar against such currencies may account
for part of the Portfolios' 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 a Portfolio's holdings of securities denominated in
such currency and, therefore, will cause an overall decline in the
Portfolio's net asset value and any net investment income and capital gains
to be distributed in U.S. dollars to shareholders of the Portfolio.
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 U.S., and other economic and financial conditions
affecting the world economy.
Although the Portfolios value their respective assets daily in terms of U.S.
dollars, the Portfolios do not intend to convert their holdings of foreign
currencies into U.S. dollars on a daily basis. However, the Portfolios may
do so from time to time, and investors should be aware of the costs of
B-3
<PAGE>
currency conversion. Although currency dealers do not charge a fee for
conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a Portfolio at one
rate, while offering a lesser rate of exchange should the Portfolio desire
to sell that currency to the dealer.
Securities of foreign issuers, and in particular many emerging country
issuers, may be less liquid and their prices more volatile than securities
of comparable U.S. issuers. In addition, foreign securities exchanges and
brokers are generally subject to less governmental supervision and
regulation than in the U.S., and foreign securities exchange transactions
are usually subject to fixed commissions, which are generally 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 Portfolio are uninvested and no return
is earned thereon. The inability of a Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to a
Portfolio due to subsequent declines in value of the portfolio security or,
if the Portfolio has entered into a contract to sell the security could
result in possible liability to the purchaser.
The Portfolios' investment income or, in some cases, capital gains from
foreign issuers may be subject to foreign withholding or other foreign
taxes, thereby reducing the Portfolios' net investment income and/or net
realized capital gains. See "Taxes."
FOREIGN CURRENCY EXCHANGE CONTRACTS
(All Portfolios except the Money Market Portfolio and the Government
Securities Portfolio)
Each Portfolio (other than the Money Market Portfolio and the Government
Securities Portfolio) may exchange currencies in the normal course of
managing its investments and may incur costs in doing so because a foreign
exchange dealer will charge a fee for conversion. A Portfolio may conduct
foreign currency exchange transactions on a "spot" basis (i.e., for prompt
delivery and settlement) at the prevailing spot rate for purchasing or
selling currency in the foreign currency exchange market. A Portfolio also
may enter into forward currency exchange contracts or other contracts to
purchase and sell currencies for settlement at a future date. A foreign
exchange dealer, in that situation, will expect to realize a profit based on
the difference between the price at which a foreign currency is sold to the
Portfolio and the price at which the dealer will cover the purchase in the
foreign currency market. Foreign exchange transactions are entered into at
prices quoted by dealers, which may include a mark-up over the price that
the dealer must pay for the currency.
A forward currency exchange contract involves an obligation to purchase or
sell 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. These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward currency exchange contract
B-4
<PAGE>
generally has no deposit requirement, and no commissions are generally
charged at any stage for trades.
At the maturity of a forward currency exchange contract a Portfolio may
either accept or make delivery of the currency specified in the contract or,
at or prior to maturity, enter into a closing purchase transaction involving
the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward currency exchange contracts are usually
effected with the currency trader who is a party to the original forward
currency exchange contract.
The Portfolios may enter into forward currency exchange contracts in several
circumstances for hedging and non-hedging purposes. First, when a Portfolio
enters into a contract for the purchase or sale of a security denominated in
a foreign currency, or when a Portfolio anticipates the receipt in a foreign
currency of dividend or interest payments on such a security which it holds,
the Portfolio may desire to "lock in" the U.S. dollar price of the security
or the U.S. dollar equivalent of such dividend or interest payment, as the
case may be. By entering into a forward currency exchange contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, a Portfolio will attempt
to protect itself against an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made
or received.
Additionally, when management of a Portfolio believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward currency exchange contract to sell, for
a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Portfolio's portfolio securities denominated in
such foreign currency. The precise matching of the forward currency
exchange contract amounts and the value of the securities involved will not
generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date on which the contract is entered into and
the date it matures. Using forward currency exchange contracts to protect
the value of a Portfolio's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which a
Portfolio can achieve at some future point in time. The precise projection
of short-term currency market movements is not possible, and short-term
hedging provides a means of fixing the dollar value of only a portion of a
Portfolio's foreign assets.
A Portfolio's custodian will place cash or liquid, high grade debt
securities ("High Grade Debt Securities") (i.e., securities rated in one of
the top three ratings categories by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("Standard & Poor's"), or a
comparable rating agency, or, if unrated, deemed by the Manager or, in the
case of the LifeSpan Portfolios and the International Equity Portfolio, the
relevant Subadviser to be of comparable credit quality) into a segregated
account of the Portfolio in an amount equal to the value of the Portfolio's
total assets committed to the consummation of forward currency exchange
contracts requiring the Portfolio to purchase foreign currencies or forward
B-5
<PAGE>
currency exchange contracts entered into for non-hedging purposes. If the
value of the securities placed in the 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 a Portfolio's
commitments with respect to such contracts. The segregated account will be
marked-to-market on a daily basis. Although the contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC
may in the future assert authority to regulate these contracts. In such
event, the Portfolios' ability to utilize forward currency exchange
contracts may be restricted.
The Portfolios generally will not enter into a forward currency exchange
contract with a term of greater than one year.
While the Portfolios will enter into forward currency exchange contracts to
reduce currency exchange rate risks, transactions in currency contracts
involve certain other risks. Thus, while the Portfolios may benefit from
currency transactions, unanticipated changes in currency prices may result
in a poorer overall performance for a Portfolio than if it had not engaged
in any such transactions. Moreover, there may be an imperfect correlation
between a Portfolio's portfolio holdings of securities denominated in a
particular currency and forward currency exchange contracts entered into by
the Portfolio. Such imperfect correlation may cause a Portfolio to sustain
losses which will prevent the Portfolio from achieving a complete hedge or
expose the Portfolio to risk of foreign exchange loss.
COVERED CALL OPTIONS ON SECURITIES, SECURITIES INDICES AND FOREIGN
CURRENCIES
(All Portfolios except the Money Market Portfolio)
Each Portfolio (other than the Money Market Portfolio) may write covered
call options. In addition, the Government Securities Portfolio and the
International Equities Portfolio may purchase covered call options. Such
options may relate to particular U.S. or non-U.S. securities, to various
U.S. or non-U.S. stock indices or to U.S. or non-U.S. currencies. To the
extent that a Portfolio engages in options transactions, the Portfolio may
purchase and write call options which are issued by the Options Clearing
Corporation (the "OCC") or which are traded on U.S. and non-U.S. exchanges.
The International Equity Portfolio may purchase options on currency in the
over-the-counter markets ("OTC Markets").
An option on a securities index provides the holder with the right to
receive a cash payment upon exercise of the option if the market value of
the underlying index exceeds the option's exercise price. The amount of
this payment will be equal to the difference between the closing price of
the index at the time of exercise and the exercise price of the option
expressed in U.S. dollars or a foreign currency, times a specified multiple.
A call option on a currency gives its holder the right to purchase an amount
(specified in units of the underlying currency) of the underlying currency
at the stated exercise price at any time prior to the option's expiration.
The International Equity Portfolio will engage in over-the-counter options
(the "OTC Options") only with broker-dealers deemed creditworthy by the
Portfolio's Manager or its Subadviser. Closing transactions in certain
options are usually effected directly with the same broker-dealer that
effected the original option transaction. A Portfolio bears the risk that
B-6
<PAGE>
the broker-dealer may fail to meet its obligations. There is no assurance
that a Portfolio will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the OCC, which performs the obligations of
its members who fail to do so in connection with the purchase or sale of
options. OTC Options will be deemed illiquid for purposes of a Portfolio's
limitation on investments in illiquid securities, except that with respect
to options written with primary dealers in U.S. Government securities
pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount of illiquid securities may be calculated with
reference to a formula approved by the staff of the SEC.
A Portfolio will write call options only if they are "covered". In the case
of a call option on a security, the option is "covered" if a portfolio owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or High Grade Debt
Securities in such amount as are held in a segregated account by the
Portfolio's custodian) upon conversion or exchange of other securities held
by the portfolio. For a call option on an index, the option is covered if
the Portfolio maintains cash or cash equivalents equal to the contract value
with the Portfolio's custodian. A call option on a security or an index is
also covered if the Portfolio holds a call on the same security or index as
the call written by the Portfolio where the exercise price of the call held
is (i) equal to or less than the exercise price of the call written, or (ii)
greater than the exercise price of the call written provided the difference
is maintained by the Portfolio in cash or cash equivalents in a segregated
account with the Portfolio's custodian. A call option on currency written
by a Portfolio is covered if the Portfolio owns an equal amount of the
underlying currency.
When a Portfolio purchases or writes an option, an amount equal to the net
premium (the premium less the commission paid by the Portfolio) received by
the Portfolio is included in the liability section of the Portfolio's
statement of assets and liabilities as a deferred credit. The amount of
this asset or deferred credit will be marked-to-market on an ongoing basis
to reflect the current value of the option purchased or written. The
current value of a traded option is the last sale price or, in the absence
of a sale, the average of the closing bid and asked prices. If an option
purchased by the Portfolio expires unexercised, the Portfolio realizes a
loss equal to the premium paid. If the Portfolio enters into a closing sale
transaction on an option purchased by it, the Portfolio will realize a gain
if the premium received by the Portfolio on the closing transaction is more
than the premium paid to purchase the option, or a loss if it is less. If
an option written by the Portfolio expires on the stipulated expiration date
or if the Portfolio enters into a closing purchase transaction, it will
realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by
the Portfolio is exercised, the proceeds to the Portfolio from the exercise
will be increased by the net premium originally received, and the Portfolio
will realize a gain or loss.
There are several risks associated with transactions in options on
securities, securities indices and currencies. For example, there are
significant differences between the securities markets, currency markets and
B-7
<PAGE>
the corresponding options markets that could result in imperfect
correlations, causing a given option transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded OTC or on a U.S. or non-U.S. securities exchange may be
absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an
exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or the OCC may not at all times be adequate to
handle current trading volume; or one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue
the trading of options (or a particular class or series of options), in
which event the secondary market on that exchange (or in that class or
series of options) would cease to exist, although outstanding options that
had been issued by the OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
No Portfolio shall write a covered call option if as a result thereof the
assets underlying calls outstanding (including the proposed call option)
would exceed 20% of the value of the assets of the Portfolio.
FUTURES CONTRACTS AND RELATED OPTIONS
(All Portfolios except the Money Market Portfolio)
To hedge against changes in interest rates, securities prices or currency
exchange rates, each Portfolio (other than the Money Market Portfolio) may,
subject to its investment objectives and policies, purchase and sell various
kinds of futures contracts and write covered call options on such contracts.
The International Equity Portfolio and the Government Securities Portfolio
may purchase and sell call and put options on any of such futures contracts.
A Portfolio may also enter into closing purchase and sale transactions with
respect to any of such contracts and options. The Government Securities
Portfolio, the Total Return Portfolio, the International Equity Portfolio
and the Growth Portfolio may purchase and sell stock index futures
contracts; and the Government Securities Portfolio, the Income Portfolio,
the Total Return Portfolio and International Equity Portfolio may purchase
and sell interest rate future contracts. In addition, each Portfolio that
may invest in securities that are denominated in a foreign currency may
purchase and sell futures on currencies and the International Equity
Portfolio may purchase and sell options on such futures. A Portfolio will
engage in futures and related options transactions only for bona fide
hedging purposes as defined in regulations promulgated by the CFTC. All
futures contracts entered into by the Portfolios are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the CFTC or
on foreign exchanges approved by the CFTC.
FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell a particular financial
instrument for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index
or otherwise not calling for physical delivery at the end of trading in the
contract). Futures contracts obligate the long or short holder to take or
make delivery of a specified quantity of a commodity or financial
B-8
<PAGE>
instrument, such as a security or the cash value of a securities index,
during a specified future period at a specified price.
When interest rates are rising or securities prices are falling, a Portfolio
can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, a Portfolio, through the purchase
of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated
purchases.
Positions taken in the futures markets are not normally held to maturity but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, the Portfolios may instead make, or take,
delivery of the underlying securities whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange
on which futures on securities are traded guarantees that, if still open,
the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
establish with more certainty the effective price and rate of return on
portfolio securities and securities that a Portfolio proposes to acquire.
The Portfolios may, for example, take a "short" position in the futures
market by selling futures contracts in order to hedge against an anticipated
rise in interest rates or a decline in market prices that would adversely
affect the value of a Portfolio's portfolio securities. Such futures
contracts may include contracts for the future delivery of securities held
by the Portfolio or securities with characteristics similar to those of the
Portfolio's portfolio securities. If, in the opinion of the Portfolio's
Manager or, in the case of the LifeSpan Portfolios and the International
Equity Portfolio, the relevant Subadviser, there is a sufficient degree of
correlation between price trends for a Portfolio's portfolio securities and
futures contracts based on other financial instruments, securities indices
or other indices, the Portfolio may also enter into such futures contracts
as part of its hedging strategy. Although under some circumstances prices
of securities in a Portfolio's portfolio may be more or less volatile than
prices of such futures contracts, the Manager or, in the case of the
LifeSpan Portfolios and the International Equity Portfolio, the relevant
Subadviser will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by
having the Portfolio enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price
changes affecting a Portfolio's securities portfolio. When hedging of this
character is successful, any depreciation in the value of portfolio
securities will be substantially offset by appreciation in the value of the
futures position. On the other hand, any unanticipated appreciation in the
value of a Portfolio's portfolio securities would be substantially offset by
a decline in the value of the futures position.
On other occasions, the Portfolios may take a "long" position by purchasing
futures contracts. This would be done, for example, when a Portfolio
anticipates the subsequent purchase of particular securities when it has the
necessary cash, but expects the prices then available in the applicable
market to be less favorable than prices that are currently available.
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OPTIONS ON FUTURES CONTRACTS. The writing of a call option on a futures
contract generates a premium which may partially offset a decline in the
value of a Portfolio's assets. By writing a call option, a Portfolio
becomes obligated, in exchange for the premium, to sell a futures contract
(if the option is exercised), which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures
contract generates a premium which may partially offset an increase in the
price of securities that a Portfolio intends to purchase. However, a
Portfolio becomes obligated to purchase a futures contract (if the option is
exercised) which may have a value lower than the exercise price. Thus, the
loss incurred by a Portfolio in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The Portfolios
will incur transaction costs in connection with the writing of options on
futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. The
Portfolios' ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
The Portfolios may use options on futures contracts solely for bona fide
hedging purposes as described below.
OTHER CONSIDERATIONS. The Portfolios will engage in futures and related
options transactions only for bona fide hedging as permitted by CFTC
regulations which permit principals of an investment company registered
under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), to engage in such transactions without registering as
commodity pool operators. A Portfolio will determine that the price
fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in
securities or instruments held by the Portfolio or securities or instruments
which they expect to purchase. The Portfolios' futures transactions will be
entered into for traditional hedging purposes -- i.e., futures contracts
will be sold to protect against a decline in the price of securities (or the
currency in which they are denominated) that a Portfolio owns or futures
contracts will be purchased to protect a Portfolio against an increase in
the price of securities (or the currency in which they are denominated) that
a Portfolio intends to purchase. As evidence of this hedging intent, each
Portfolio expects that, on 75% or more of the occasions on which it takes a
long futures or option position (involving the purchase of futures
contracts), the Portfolio will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated
in the related currency) in the cash market at the time when the futures or
option position is closed out. However, in particular cases, when it is
economically advantageous for a Portfolio to do so, a long futures position
may be terminated or an option may expire without the corresponding purchase
of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation now permits a Portfolio to elect to comply with a different
test under which the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures will not
exceed 5% of the net asset value of a Portfolio's portfolio, after taking
into account unrealized profits and losses on any such positions and
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excluding the amount by which such options were in-the-money at the time of
purchase. A Portfolio will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
for maintaining its qualification as a regulated investment company for
federal income tax purposes. See "Taxes."
A Portfolio will be required, in connection with transactions in futures
contracts and the writing of options on futures contracts, to make margin
deposits, which will be held by the Company's custodian for the benefit of
the futures commission merchant through whom the Portfolio engages in such
futures contracts and option transactions. These transactions involve
brokerage costs, require margin deposits and, in the case of futures
contracts and options obligating a Portfolio to purchase securities, require
a Portfolio to segregate cash or High Grade Debt Securities in an account
maintained with the Company's custodian to cover such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks.
Thus, unanticipated changes in interest rates or securities prices may
result in a poorer overall performance for a Portfolio than if it had not
entered into any futures contracts or options transactions. The other risks
associated with the use of futures contracts and options thereon are
(i) imperfect correlation between the change in market value of the
securities held by a Portfolio and the prices of the futures and options and
(ii) the possible absence of a liquid secondary market for a futures
contract or option and the resulting inability to close a futures position
prior to its maturity date.
In the event of an imperfect correlation between a futures position and
portfolio position which is intended to be protected, the desired protection
may not be obtained and the Portfolio may be exposed to risk of loss. The
risk of imperfect correlation may be minimized by investing in contracts
whose price behavior is expected to resemble that of a Portfolio's
underlying securities. The risk that the Portfolios will be unable to close
out a futures position will be minimized by entering into such transactions
on a national exchange with an active and liquid secondary market.
"WHEN-ISSUED" PURCHASES AND FORWARD COMMITMENTS
(All Portfolios except the Money Market Portfolio)
Securities may be purchased by all Portfolios (other than the Money Market
Portfolio) on a "when-issued" or on a "forward commitment" basis. These
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future
date (perhaps one or two months later), permit the Portfolio to lock in a
price or yield on a security, regardless of future changes in interest
rates. A Portfolio will purchase securities on a "when-issued" or forward
commitment basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed appropriate by the Manager
or, in the case of the LifeSpan Portfolios and the International Equity
Portfolio, the relevant Subadviser, however, a Portfolio may dispose of or
renegotiate a commitment after it is entered into, and may sell securities
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it has committed to purchase before those securities are delivered to the
Portfolio on the settlement date. In these cases, the Portfolio may realize
a gain or loss.
When a Portfolio agrees to purchase securities on a "when-issued" or forward
commitment basis, the Portfolio's custodian will set aside cash or High
Grade Debt Securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to
satisfy a purchase commitment, and in such a case the Portfolio may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of
the Portfolio's commitments. The market value of a Portfolio's net assets
may fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments then when it sets aside cash. Because a
Portfolio's liquidity and ability to manage its portfolio might be affected
when it sets aside cash or portfolio securities to cover such purchase
commitments, each Portfolio expects that its commitments to purchase when-
issued securities and forward commitments will not exceed 33% of the value
of its total assets absent unusual market conditions. When a Portfolio
engages in "when-issued" and forward commitment transactions, it relies on
the other party to the transaction to consummate the trade. Failure of such
party to do so may result in the Portfolio incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase or a
forward commitment to purchase securities, and any subsequent fluctuations
in their market value, are taken into account when determining the market
value of a Portfolio starting on the day the Portfolio agrees to purchase
the securities. The Portfolio does not earn interest or dividends on the
securities it has committed to purchase until the settlement date.
DEBT SECURITIES
(All Portfolios)
VARIABLE AND FLOATING RATE INSTRUMENTS. Debt instruments purchased by a
Portfolio may be structured to have variable or floating interest rates.
These instruments may include variable amount master demand notes that
permit the indebtedness to vary in addition to providing for periodic
adjustments in the interest rates. The Manager and, in the case of the
LifeSpan Portfolios and the International Equity Portfolio, the relevant
Subadviser will consider the earning power, cash flows and other liquidity
ratios of the issuers and guarantors of such instruments and, if the
instrument is subject to a demand feature, will continuously monitor their
financial ability to meet payment on demand. If deemed necessary by the
Manager or, in the case of the LifeSpan Portfolios and the International
Equity Portfolio, the relevant Subadviser to ensure that a variable or
floating rate instrument is equivalent to the quality standards applicable
to a Portfolio's fixed income investments, the issuer's obligation to pay
the principal of the instrument may be backed by an unconditional bank
letter or line of credit, guarantee or commitment to lend. Any bank
providing such a bank letter, line of credit, guarantee or loan commitment
will meet the Portfolio's investment quality standards relating to
investments in bank obligations. A Portfolio will invest in variable and
floating rate instruments only when the Manager or, in the case of the
LifeSpan Portfolios and the International Equity Portfolio, the relevant
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Subadviser deems the investment to adhere to the investment guidelines
applicable to the Portfolio. The Manager or the relevant Subadviser will
also continuously monitor the creditworthiness of issuers of such
instruments to determine whether a Portfolio should continue to hold the
investments.
The absence of an active secondary market for certain variable and floating
rate notes could make it difficult to dispose of the instruments, and a
Portfolio could suffer a loss if the issuer defaults or during periods in
which a Portfolio is not entitled to exercise its demand rights.
Variable and floating rate instruments held by a Portfolio will be subject
to the Portfolio's limitation on investments in illiquid securities when a
reliable trading market for the instruments does not exist and the Portfolio
may not demand payment of the principal amount of such instruments within
seven days.
YIELDS AND RATINGS. The yields on certain obligations, including the money
market instruments in which each Portfolio may invest (such as commercial
paper and bank obligations), are dependent on a variety of factors,
including general money market conditions, conditions in the particular
market for the obligation, the financial condition of the issuer, the size
of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Standard and Poor's, Moody's and other nationally and
internationally recognized rating service organizations represent their
respective opinions as to the quality of the obligations they undertake to
rate. Ratings, however, are general and are not absolute standards of
quality or value. Consequently, obligations with the same rating, maturity
and interest rate may have different market prices. See the Appendix to the
Prospectus for a description of the ratings provided by recognized
statistical ratings organizations.
Subsequent to its purchase by a Portfolio, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Portfolio. The Board of Directors, or the Portfolio's
Manager or, in the case of the LifeSpan Portfolios and the International
Equity Portfolio, the relevant Subadviser, pursuant to guidelines
established by the Board of Directors, will consider such an event in
determining whether the Portfolio should continue to hold the security in
accordance with the interests of the Portfolio and applicable regulations of
the SEC.
INTEREST RATE SWAPS. The Portfolios may enter into interest rate swaps for
hedging purposes and non-hedging purposes. Inasmuch as these transactions
are entered into for good faith hedging purposes or are offset by a
segregated account, the Portfolios, the Manager and, in the case of the
LifeSpan Portfolios and the International Equity Portfolio, the relevant
Subadviser believe that such obligations do not constitute senior securities
as defined in the Investment Company Act and, accordingly, will not treat
them as being subject to the Portfolios' borrowing restrictions.
A Portfolio will not enter into any interest rate swap transaction unless
the unsecured commercial paper, senior debt or the claims-paying ability of
the other party thereto is considered to be investment grade by the
Portfolio's Manager or the relevant Subadviser. If there is a default by
the other party to such a transaction, a Portfolio will have contractual
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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 in comparison with the markets for other similar
instruments which are traded in the interbank market. However, the staff of
the SEC takes the position that swaps are illiquid investments that are
subject to the Portfolios' limitation on such investments.
ZERO COUPON AND DEFERRED INTEREST BONDS. The Portfolios may invest in zero
coupon bonds and deferred interest bonds. Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from
face value. The original discount approximates the total amount of interest
the bonds will accrue and compound over the period until maturity or the
first interest accrual date at a rate of interest reflecting the market rate
of the security at the time of issuance. While zero coupon bonds do not
require the periodic payment of interest, deferred interest bonds generally
provide for a period of delay before the regular payment of interest begins.
Although this period of delay is different for each deferred interest bond,
a typical period is approximately one-third of the bond's term to maturity.
Such investments benefit the issuer by mitigating its initial need for cash
to meet debt service, but some also provide a higher rate of return to
attract investors who are willing to defer receipt of such cash. The market
prices of zero coupon and deferred interest bonds are more volatile than
instruments that pay interest regularly.
HIGH YIELD/HIGH RISK DEBT OBLIGATIONS. Each Portfolio (other than the Money
Market Portfolio and Government Securities Portfolio) may invest in high
yield/high risk, fixed income securities (commonly called junk bonds) rated
Ba or lower by Moody's, BB or lower by Standard & Poor's, or an equivalent
rating, or unrated securities. No Portfolio will invest in fixed income
securities rated below "B" except that the International Equity Portfolio
may invest in securities rated as low as "C" by Moody's or "D" by Standard &
Poor's. Ratings of "C" or "D" indicate that the obligations are speculative
and may be in default. Ratings are based largely on the historical
financial condition of the issuer. Consequently, the rating assigned to any
particular security is not necessarily a reflection of the issuer's current
financial condition, which may be better or worse than the rating would
indicate.
High yield/high risk obligations are subject to risks not generally
associated with an investment in investment grade bonds. The market for
high yield obligations is relatively new and has not been exposed for a long
period of time to the effects of cyclical and sometimes adverse changes in
the economy. The prices of high yield obligations have been less sensitive
to interest rate changes than higher rated investments, but are more
sensitive to adverse economic changes or individual corporate developments.
During an economic downturn or substantial period of rising interest rates,
issuers may experience financial stress that adversely affects their ability
to meet principal and interest payment obligations. If an issuer of a high
yield obligation defaulted on its obligation to pay principal or interest or
entered into bankruptcy proceedings, a Portfolio may incur additional
expense to seek recovery of its investment. In addition, periods of
uncertainty and change can be expected to result in increased volatility of
market prices of high yield, high risk bonds and a Portfolio's net asset
value. High yield obligations may contain redemption or call provisions
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that, if exercised, may require the Portfolio to replace the security with a
lower yielding security, resulting in a decreased return for investors. The
market for high yield obligations is likely to be less liquid than the
market for higher rated obligations and the Manager or, in the case of the
LifeSpan Portfolios or the International Equity Portfolio, the relevant
Subadviser's judgment may play a greater role in the valuation of high yield
obligations. Market conditions may restrict the availability of high yield
obligations and may affect the choice of securities to be sold when a
Portfolio attempts to meet redemption requests.
Each Portfolio is dependent on its Manager's or its Subadviser's judgment,
analysis and experience in evaluating the quality of high yield obligations.
In evaluating the credit quality of a particular issue, whether rated or
unrated, the Manager or, in the case of the LifeSpan Portfolios or the
International Equity Portfolio, the relevant Subadviser will normally take
into consideration, among other things, the financial resources of the
issuer (or, as appropriate, of the underlying source of funds for debt
service), its sensitivity to economic conditions and trends, any operating
history of and the community support for the facility financed by the
issuer, the ability of the issuer's management and regulatory matters. The
Manager and Subadviser will attempt to reduce the risks of investing in high
yield obligations through active portfolio management, credit analysis and
attention to current developments and trends in the economy and the
financial markets.
The Portfolios may invest in pay-in-kind ("PIK") securities, which pay
interest in either cash or additional securities, at the issuer's option,
for a specified period. PIKs may be more speculative and subject to greater
fluctuations in value than securities which pay interest periodically and in
cash, due to changes in interest rates. The Portfolios may purchase debt
securities (such as zero-coupon or pay-in-kind securities) that contain
original issue discount. Original issue discount that accrues in a taxable
year is treated as earned by a Portfolio and therefore is subject to the
distribution requirements of the Code. Because the original issue discount
earned by the Portfolio in a taxable year may not be represented by cash
income, the Portfolio may have to dispose of other securities and use the
proceeds to make distributions to shareholders. The Portfolios will accrue
income on such investments for tax and accounting purposes, as required,
which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Portfolio's distribution obligations.
PREFERRED STOCK
(All Portfolios except the Money Market Portfolio and Government Securities
Portfolio)
Each of the Portfolios (other than the Money Market Portfolio and Government
Securities Portfolio), subject to its investment objectives, may purchase
preferred stock. Preferred stocks are equity securities, but possess
certain attributes of debt securities and are generally considered fixed
income securities. Holders of preferred stocks normally have the right to
receive dividends at a fixed rate when and as declared by the issuer's board
of directors, but do not participate in other amounts available for
distribution by the issuing corporation. Dividends on the preferred stock
may be cumulative, and all cumulative dividends usually must be paid prior
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to dividend payments to common stockholders. Because of this preference,
preferred stocks generally entail less risk than common stocks. Upon
liquidation, preferred stocks are entitled to a specified liquidation
preference, which is generally the same as the par or stated value, and are
senior in right of payment to common stocks. However, preferred stocks are
equity securities in that they do not represent a liability of the issuer
and therefore do not offer as great a degree of protection of capital or
assurance of continued income as investments in corporate debt securities.
In addition, preferred stocks are subordinated in right of payment to all
debt obligations and creditors of the issuer, and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer.
WARRANTS
(All Portfolios except the Money Market Portfolio and Government Securities
Portfolio)
Each of the Portfolios (other than the Money Market Portfolio and the
Government Securities Portfolio) may purchase warrants, which are privileges
issued by corporations enabling the owners to subscribe to and purchase a
specified number of shares of the corporation at a specified price during a
specified period of time. The purchase of warrants involves a risk that a
Portfolio could lose the purchase value of a warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the
effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market
price such as when there is no movement in the level of the underlying
security. A Portfolio will not invest more than 5% of its net assets, taken
at market value, in warrants, or more than 2% of its net assets, taken at
market value, in warrants not listed on a recognized securities exchange.
Warrants acquired by a Portfolio in units or attached to other securities
shall not be included in determining compliance with these percentage
limitations.
MORTGAGE-BACKED SECURITIES
(All Portfolios)
Each Portfolio may invest in mortgage-backed securities. Mortgage-backed
securities represent direct or indirect participations in or obligations
collateralized by and payable from mortgage loans secured by real property.
Each mortgage pool underlying mortgage-backed securities will consist of
mortgage loans evidenced by promissory notes secured by first mortgages or
first deeds of trust or other similar security instruments creating a first
lien on owner and non-owner occupied one-unit to four-unit residential
properties, multifamily residential properties, agricultural properties,
commercial properties and mixed use properties.
AGENCY MORTGAGE SECURITIES. Each Portfolio may invest in mortgage backed
securities issued or guaranteed by the U.S. Government, foreign governments
or any of their agencies, instrumentalities or sponsored enterprises.
Agencies, instrumentalities or sponsored enterprises of the U.S. Government
include but are not limited to the Government National Mortgage Association,
("Ginnie Mae"), Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac"). Ginnie Mae
securities are backed by the full faith and credit of the U.S. Government,
which means that the U.S. Government guarantees that the interest and
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principal will be paid when due. Fannie Mae securities and Freddie Mac
securities are not backed by the full faith and credit of the U.S.
Government; however, these enterprises have the ability to obtain financing
from the U.S. Treasury. There are several types of agency mortgage
securities currently available, including, but not limited to, guaranteed
mortgage pass-through certificates and multiple class securities.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. Each Portfolio may also invest
in mortgage-backed securities issued by trusts or other entities formed or
sponsored by private originators of and institutional investors in mortgage
loans and other foreign or domestic non-governmental entities (or
representing custodial arrangements administered by such institutions).
These private originators and institutions include domestic and foreign
savings and loan associations, mortgage bankers, commercial banks, insurance
companies, investment banks and special purpose subsidiaries of the
foregoing. Privately issued mortgage-backed securities are generally backed
by pools of conventional (i.e., non-government guaranteed or insured)
mortgage loans. Since such mortgage-backed securities are not guaranteed by
an entity having the credit standing of Ginnie Mae, Fannie Mae or Freddie
Mac, in order to receive a high quality rating, they normally are structured
with one or more types of "credit enhancement." Such credit enhancements
fall generally into two categories; (1) liquidity protection and
(2) protection against losses resulting after default by a borrower and
liquidation of the collateral. Liquidity protection refers to the providing
of cash advances to holders of mortgage-backed securities when a borrower on
an underlying mortgage fails to make its monthly payment on time.
Protection against losses resulting after default and liquidation is
designed to cover losses resulting when, for example, the proceeds of a
foreclosure sale are insufficient to cover the outstanding amount on the
mortgage. Such protection may be provided through guarantees, insurance
policies or letters of credit, though various means of structuring the
transaction or through a combination of such approaches.
MORTGAGE PASS-THROUGH SECURITIES. Each Portfolio may invest in mortgage
pass-through securities, which are fixed or adjustable rate mortgage-backed
securities that provide for monthly payments that are a "pass-through" of
the monthly interest and principal payments (including any prepayments) made
by the individual borrowers on the pooled mortgage loans, net of any fees or
other amounts paid to any guarantor, administrator and/or servicers of the
underlying mortgage loans.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. The Government Securities Portfolio, Income Portfolio, Total
Return Portfolio and each of the LifeSpan Portfolios may invest in
collateralized mortgage obligations ("CMOs"), which are multiple class
mortgage-backed securities. CMOs provide an investor with a specified
interest in the cash flow from a pool of underlying mortgages or of other
mortgage-backed securities. CMOs are issued in multiple classes, each with
a specified fixed or adjustable interest rate and a final distribution date.
In most cases, payments of principal are applied to the CMO classes in the
order of their respective stated maturities, so that no principal payments
will be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. Sometimes, however, CMO classes are
"parallel pay" (i.e., payments of principal are made to two or more classes
concurrently).
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STRIPPED MORTGAGE-BACKED SECURITIES. The Government Securities Portfolio,
Income Portfolio, Total Return Portfolio and each of the LifeSpan Portfolios
may also invest in stripped mortgage-backed securities ("SMBS"), which are
derivative multiple class mortgage-backed securities. SMBS are usually
structured with two classes that receive different proportions of the
interest and principal distributions from a pool of mortgage loans. If the
underlying mortgage loans experience greater than anticipated prepayments of
principal, a Portfolio may fail to fully recoup its initial investment in
these securities.
A common type of SMBS will have one class receiving all of the interest from
a pool of mortgage loans ("IOs"), while the other class will receive all of
the principal ("POs"). The market value of POs generally is unusually
volatile in response to changes in interest rates. The yields on IOs are
generally higher than prevailing market yields on other mortgage-backed
securities because the cash flow patterns of IOs are more volatile and there
is a greater risk that the initial investment will not be fully recouped.
Because an investment in an IO consists entirely of a right to an interest
income stream and prepayments of mortgage loan principal amounts can reduce
or eliminate such income stream, the value of IO's can be severely adversely
affected by significant prepayments of underlying mortgage loans. In
accordance with a requirement imposed by the staff of the SEC, the Manager
and, in the case of the LifeSpan Portfolios, the relevant Subadviser will
consider privately-issued fixed rate IOs and POs to be illiquid securities
for purposes of the Portfolios' limitation on investments in illiquid
securities. Unless the Manager or the relevant Subadviser, acting pursuant
to guidelines and standards established by the Board of Directors,
determines that a particular government-issued fixed rate IO or PO is
liquid, management will also consider these IOs and POs to be illiquid.
CUSTODIAL RECEIPTS
(All Portfolios)
Each of the Portfolios may acquire U.S. Government securities and their
unmatured interest coupons that have been separated (stripped) by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government securities, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRs") and Certificate of Accrual on
Treasury Securities ("CATS"). The stripped coupons are sold separately from
the underlying principal, which is usually sold at a deep discount because
the buyer receives only the right to receive a future fixed payment on the
security and does not receive any rights to periodic interest (cash)
payments. The underlying U.S. Treasury bonds and notes themselves are
generally held in book-entry form at a Federal Reserve Bank. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government securities for federal tax and securities
purposes. In the case of CATS and TIGRS, the Internal Revenue Service (the
"IRS") has reached this conclusion for the purpose of applying the tax
diversification requirements applicable to regulated investment companies
such as the Portfolios. CATS and TIGRS are not considered U.S. Government
securities by the staff of the SEC, however. Further, the IRS conclusion is
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contained only in a general counsel memorandum, which is an internal
document of no precedential value or binding effect, and a private letter
ruling, which also may not be relied upon by the Portfolios. The Company is
not aware of any binding legislative, judicial or administrative authority
on this issue.
COMMERCIAL PAPER
(All Portfolios)
Commercial paper is a short-term, unsecured negotiable promissory note of a
U.S or non-U.S issuer. Each of the Portfolios may purchase commercial paper
for temporary defensive purposes as described in the Prospectus. A
Portfolio may also invest in variable rate master demand notes which
typically are issued by large corporate borrowers providing for variable
amounts of principal indebtedness and periodic adjustments in the interest
rate according to the terms of the instrument. Demand notes are direct
lending arrangements between a Portfolio and an issuer, and are not normally
traded in a secondary market. A Portfolio, however, may demand payment of
principal and accrued interest at any time. In addition, while demand notes
generally are not rated, their issuers must satisfy the same criteria as
those set forth above for issuers of commercial paper. The Manager and, in
the case of the LifeSpan Portfolios and the International Equity Portfolio,
the relevant Subadviser will consider the earning power, cash flow and other
liquidity ratios of issuers of demand notes and continually will monitor
their financial ability to meet payment on demand.
BANK OBLIGATIONS
(All Portfolios)
Certificates of Deposit ("CDs") are short-term negotiable obligations of
commercial banks. Time Deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified periods of time at stated
interest rates. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers usually in connection with international transactions.
U.S. commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members
of the Federal Reserve System and to be insured by the Federal Deposit
Insurance Corporation (the "FDIC"). U.S. banks organized under state law
are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit
to a Portfolio, depending upon the principal amount of CDs of each bank held
by the Portfolio) and are subject to federal examination and to a
substantial body of federal law and regulation. As a result of governmental
regulations, U.S. branches of U.S. banks, among other things, generally are
required to maintain specified levels of reserves, and are subject to other
supervision and regulation designed to promote financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by the
Portfolios, are supervised and subject to examination by the Office of
Thrift Supervision. U.S. savings and loan associations are insured by the
Savings Association Insurance Account which is administered by the FDIC and
backed by the full faith and credit of the U.S. Government.
B-19
<PAGE>
REPURCHASE AGREEMENTS
(All Portfolios)
Each of the Portfolios may enter into repurchase agreements as described in
the Prospectus. For purposes of the Investment Company Act and, generally,
for federal tax purposes, a repurchase agreement is considered to be a loan
from the Portfolio to the seller of the obligation. For other purposes, it
is not clear whether a court would consider such an obligation as being
owned by the Portfolio or as being collateral for a loan by the Portfolio to
the seller. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the obligation before its
repurchase, under the repurchase agreement, the Portfolio may encounter
delay and incur costs before being able to sell the security. Such delays
may result in a loss of interest or decline in price of the obligation. If
the court characterizes the transaction as a loan and the Portfolio has not
perfected a security interest in the obligation, the Portfolio may be
treated as an unsecured creditor of the seller and required to return the
obligation to the seller's estate. As an unsecured creditor, the Portfolio
would be at risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt instrument purchased for the
Portfolios, the Manager and, in the case of the LifeSpan Portfolios and the
International Equity Portfolio, the relevant Subadviser seek to minimize the
risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case, the seller of the obligation. In addition to the
risk of bankruptcy or insolvency proceedings, there is the risk that the
seller may fail to repurchase the security. However, if the market value of
the obligation falls below the repurchase price (including accrued
interest), the seller of the obligation will be required to deliver
additional securities so that the market value of all securities subject to
the repurchase agreement equals or exceeds the repurchase price.
RESTRICTED AND ILLIQUID SECURITIES
(All Portfolios)
Each Portfolio may invest in restricted securities eligible for resale to
certain institutional investors pursuant to Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and foreign securities acquired in
accordance with Regulation S under the 1933 Act. No Portfolio (except each
of the LifeSpan Portfolios) will invest more than 10% of its net assets in
illiquid investments, which include repurchase agreements maturing in more
than seven days, securities that are not readily marketable, restricted
securities, purchased OTC Options, certain assets used to cover written OTC
options, and privately issued stripped mortgage-backed securities. Each of
the LifeSpan Portfolios will not invest more than 15% of its net assets in
such illiquid investments. If the Board of Directors determines, based upon
a continuing review of the trading markets for specific Rule 144A
securities, that such securities are liquid, then these securities may be
purchased without regard to the Portfolios' 10% or 15% limit on illiquid
investments, as the case may be. The Board of Directors may adopt
guidelines and delegate to the Manager or, in the case of the LifeSpan
Portfolios and the International Equity Portfolio, the relevant Subadviser
the daily function of determining and monitoring the liquidity of restricted
securities. The Board of Directors, however, will retain sufficient
oversight and be ultimately responsible for the determinations. The Board
B-20
<PAGE>
of Directors will carefully monitor each Portfolio's investments in these
securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could
have the effect of increasing the level of illiquidity in the Portfolios if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
PORTFOLIO TURNOVER
Each Portfolio's particular portfolio securities may be changed without
regard to the holding period of these securities (subject to certain tax
restrictions), when the Manager or, in the case of the LifeSpan Portfolios
and the International Equity Portfolio, the relevant Subadviser deems that
this action will help achieve the Portfolio's objective given a change in an
issuer's operations or changes in general market conditions. Short-term
trading means the purchase and subsequent sale of a security after it has
been held for a relatively brief period of time. The Portfolios do not
intend to invest for the purpose of seeking short-term profits. Variations
in portfolio turnover rate from year to year reflect the investment
discipline applied to the particular Portfolio and do not generally reflect
trading for short-term profits.
INVESTMENT RESTRICTIONS
A.FUNDAMENTAL INVESTMENT RESTRICTIONS.
Each Portfolio has adopted the following fundamental investment restrictions
which may not be changed without approval of a majority of the applicable
Portfolio's outstanding voting securities. Under the Investment Company
Act, and as used in the Prospectus and SAI, a "majority of the outstanding
voting securities" requires the approval of the lesser of (1) the holders of
67% or more of the shares of a Portfolio represented at a meeting if the
holders of more than 50% of the outstanding shares of the Portfolio are
present in person or by proxy or (2) the holders of more than 50% of the
outstanding shares of the Portfolio.
With respect to each CMFS Portfolio, the Company does not issue senior
securities; in addition, except as noted, each CMFS Portfolio may not:
<TABLE>
<CAPTION
<S> <C>
1. (a) Invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities (other than U.S. Government agency
securities) of any one issuer (including repurchase agreements with any one
bank); and (b) purchase more than either (i) 10% of the principal amount of the
outstanding debt securities of an issuer, or (ii) 10% of the outstanding voting
securities of an issuer, except that such restrictions shall not apply to
securities issued or guaranteed by the U.S. Government or its agencies, bank
money instruments or bank repurchase agreements. (This Restriction is not
applicable to the Government Securities Portfolio).
2. Invest more than 25% of its total assets (taken at market value at the time
of each investment) in the securities of issuers primarily engaged in the same
industry. Utilities will be divided according to their services; for example,
B-21
<PAGE>
gas, gas transmissions, electric and telephone each will be considered a
separate industry for purposes of this restriction; provided that this
limitation shall not apply to the purchase of obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, certificates of
deposit issued by domestic banks and bankers' acceptances. (This Restriction is
not applicable to the International Equity Portfolio or the Government
Securities Portfolio).
3. Alone, or together with any other Portfolio or Portfolios, make investments
for the purpose of exercising control over, or management of, any issuer.
4. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved, and only if immediately thereafter not more than 10%
of such Portfolio's total assets, taken at market value, would be invested in
such securities.
5. Purchase or sell interests in oil, gas or other mineral exploration or
development programs, commodities, commodity contracts or real estate, except
that the Government Securities Portfolio, the Income Portfolio, the Total
Return Portfolio, the International Equity Portfolio and the Growth Portfolio
each may: (1) purchase securities of issuers which invest or deal in any of
the above and (2) invest for hedging purposes in futures contracts on
securities, financial instruments and indices, and foreign currency, as are
approved for trading on a registered exchange. The International Equity
Portfolio may also invest in options on foreign futures contracts on
securities, financial instruments and indices and foreign currency.
6. Purchase any securities on margin (except that the Company may obtain such
short term credits as may be necessary for the clearance of purchases and sales
of portfolio securities) or make short sales of securities or maintain a short
position. The deposit or payment by a Portfolio of initial or maintenance
margin in connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
7. Make loans, except that the Portfolio (1) may lend portfolio securities in
accordance with the Portfolio's investment policies up to 33 1/3% of the
Portfolio's total assets taken at market value, (2) enter into repurchase
agreements, and (3) purchase all or a portion of an issue of publicly
distributed debt securities, bank loan participation interests, bank
certificates of deposit, bankers' acceptances, debentures or other securities,
whether or not the purchase is made upon the original issuance of the
securities.
8. Borrow amounts in excess of 10% of its total assets, taken at market value
B-22
<PAGE>
at the time of the borrowing, and then only from banks as a temporary measure
for extraordinary or emergency purposes; or make investments in portfolio
securities while its outstanding borrowings exceed 5% of its total assets.
9.Mortgage, pledge, hypothecate or in any manner transfer, as security for
indebtedness, any securities owned or held by such Portfolio except as may be
necessary in connection with borrowings mentioned in (8) above, and then such
mortgaging, pledging or hypothecating may not exceed 10% of such Portfolio's
total assets, taken at market value at the time thereof. In order to comply
with certain state statutes, such Portfolio will not, as a matter of operating
policy, mortgage, pledge or hypothecate its portfolio securities to the extent
that at any time the percentage of the value of pledged securities plus the
maximum sales charge will exceed 10% of the value of such Portfolio's shares at
the maximum offering price. The deposit of cash as equivalents and liquid debt
securities in a segregated account with the custodian and/or with a broker in
connection with futures contracts or related options transactions and the
purchase of securities on a "when-issued" basis is not deemed to be a pledge.
10. Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the 1933 Act in selling portfolio securities.
11. Write, purchase or sell puts, calls or combinations thereof, except that
the Total Return Portfolio, the Income Portfolio and the Growth Portfolio may
write covered call options and engage in closing purchase transactions. (This
restriction is not applicable to the Government Securities Portfolio or to the
International Equity Portfolio.)
12. Invest in securities of foreign issuers if at the time of acquisition more
than 10% of its total assets, taken at market value at the time of the
investment, would be invested in such securities. However, up to 25% of the
total assets of such Portfolio may be invested in securities (i) issued,
assumed or guaranteed by foreign governments, or political subdivisions or
instrumentalities thereof, (ii) assumed or guaranteed by domestic issuers,
including Eurodollar securities, or (iii) issued, assumed or guaranteed by
foreign issuers having a class of securities listed for trading on the New York
Stock Exchange (the "Exchange"). (This restriction is not applicable to the
International Equity Portfolio.)
</TABLE>
The LifeSpan Portfolios each may not:
<TABLE>
<CAPTION
<S> <C>
1. Issue senior securities, except as permitted by paragraphs 2, 3, 6 and 7
below. For purposes of this restriction, the issuance of shares of common
stock in multiple classes or series, the purchase or sale of options, futures
contracts and options on futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Account's investment policies,
are not deemed to be senior securities.
B-23
<PAGE>
2. Purchase any securities on margin (except that the Company may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of portfolio securities) or make short sales of securities or maintain a short
position. The deposit or payment by the Portfolio of initial or maintenance
margin in connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
3. Borrow money, except for emergency or extraordinary purposes including
(i) from banks for temporary or short-term purposes or for the clearance of
transactions in amounts not to exceed 33 1/3% of the value of the Portfolio's
total assets (including the amount borrowed) taken at market value, (ii) in
connection with the redemption of Portfolio shares or to finance failed
settlements of portfolio trades without immediately liquidating portfolio
securities or other assets; and (iii) in order to fulfill commitments or plans
to purchase additional securities pending the anticipated sale of other
portfolio securities or assets, but only if after each such borrowing there is
asset coverage of at least 300% as defined in the Investment Company Act. For
purposes of this investment restriction, reverse repurchase agreements,
mortgage dollar rolls, short sales, futures contracts, options on futures
contracts, securities or indices and forward commitment transactions shall not
constitute borrowing.
4. Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Portfolio may be deemed to be an
underwriter for purposes of the 1933 Act.
5. Purchase or sell real estate except that the Portfolio may (i) acquire or
lease office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities that are
secured by real estate or interests therein, (iv) purchase and sell mortgage-
related securities and (v) hold and sell real estate acquired by the Portfolio
as a result of the ownership of securities.
6. Invest in commodities, except the Portfolio may purchase and sell options
on securities, securities indices and currency, futures contracts on
securities, securities indices and currency and options on such futures,
forward foreign currency exchange contracts, forward commitments, securities
index put or call warrants and repurchase agreements entered into in accordance
with the Portfolio's investment policies.
7. Make loans, except that the Portfolio (1) may lend portfolio securities in
accordance with the Portfolio's investment policies up to 33 1/3% of the
Portfolio's total assets taken at market value, (2) enter into repurchase
agreements, and (3) purchase all or a portion of an issue of publicly
distributed bonds, debentures or other similar obligations.
B-24
<PAGE>
8. Purchase the securities of issuers conducting their principal activity in
the same industry if, immediately after such purchase, the value of its
investments in such industry would exceed 25% of its total assets taken at
market value at the time of such investment. This limitation does not apply to
investments in obligations of the U.S. Government or any of its agencies,
instrumentalities or authorities.
9. With respect to 75% of total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities), if:
(a) such purchase would cause more than 5% of the Portfolio's total assets
taken at market value to be invested in the securities of such issuer; or
(b) such purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Portfolio.
</TABLE>
B. NON-FUNDAMENTAL INVESTMENT RESTRICTIONS.
The following restrictions are designated as non-fundamental and may be
changed by the Board of Directors without the approval of shareholders.
The LifeSpan Portfolios each may not:
<TABLE>
<CAPTION
<S> <C>
(1) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings and then only if such pledging, mortgaging or hypothecating does not
exceed 33 1/3% of the Portfolio's total assets taken at market value.
Collateral arrangements with respect to margin, option and other risk
management and when-issued and forward commitment transactions are not deemed
to be pledges or other encumbrances for purposes of this restriction.
(2) Participate on a joint or joint-and-several basis in any securities
tradingaccount. The "bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under the management of the Manager or
the relevant Subadvisers to save commissions or to average prices among them is
not deemed to result in a joint securities trading account.
(3) Purchase or retain securities of an issuer if one or more of the Directors
or officers of the Company or directors or officers of the Manager or any
Subadviser or any investment management subsidiary of the Manager or any
Subadviser individually owns beneficially more than 0.5% and together own
beneficially more than 5% of the securities of such issuer.
(4) Purchase a security if, as a result, (i) more than 10% of the Portfolio's
assets would be invested in securities of other investment companies, (ii) such
purchase would result in more than 3% of the total outstanding voting
securities of any one such investment company being held by the Portfolio or
B-25
<PAGE>
(iii) more than 5% of the Portfolio's assets would be invested in any one such
investment company. The Portfolio will not purchase the securities of any
open-end investment company except when such purchase is part of a plan of
merger, consolidation, reorganization or purchase of substantially all of the
assets of any other investment company, or purchase the securities of any
closed-end investment company except in the open market where no commission or
profit to a sponsor or dealer results from the purchase, other than customary
brokerage fees. The Portfolio has no current intention of investing in other
investment companies.
(5) Invest more than 15% of total assets in restricted securities, including
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933.
(6) Invest more than 5% of total assets in securities of any issuer which,
together with its predecessors, has been in operation for less than three years.
(7) Invest in securities which are illiquid if, as a result, more than 15% of
its net assets would consist of such securities, including repurchase
agreements maturing in more than seven days, securities that are not readily
marketable, certain restricted securities, purchased OTC options, certain
assets used to cover written OTC options, and privately issued stripped
mortgage-backed securities.
(8) Purchase securities while outstanding borrowings exceed 5% of the
Portfolio's total assets.
(9) Invest in real estate limited partnership interests.
(10) Purchase warrants of any issuer, if, as a result of such purchase, more
than 2% of the value of the Portfolio's total assets would be invested in
warrants which are not listed on an exchange or more than 5% of the value of
the total assets of the Portfolio would be invested in warrants generally,
whether or not so listed. For these purposes, warrants are to be valued at the
lesser of cost or market, but warrants acquired by the Portfolio in units with
or attached to debt securities shall be deemed to be without value.
(11) Purchase interests in oil, gas, or other mineral exploration programs or
mineral leases; however, this policy will not prohibit the acquisition of
securities of companies engaged in the production or transmission of oil, gas,
or other minerals.
(12) Write covered call or put options with respect to more than 25% of the
value of its total assets, invest more than 25% of its total assets in
protective put options or invest more 5% of its total assets in puts, calls,
spreads or straddles, or any combination thereof, other than protective put
options. The aggregate value of premiums paid on all options, other than
protective put options, held by the Portfolio at any time will not exceed 20%
of the Portfolio's total assets.
B-26
<PAGE>
(13) Invest for the purpose of exercising control over or management of any
company.
</TABLE>
If a percentage restriction on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the values of a Portfolio's assets
will not be considered a violation of the restriction.
In order to permit the sale of shares of the Portfolios in certain states,
the Board of Directors may, in its sole discretion, adopt restrictions on
investment policy more restrictive than those described above. Should the
Board of Directors determine that any such more restrictive policy is no
longer in the best interest of a Portfolio and its shareholders, the
Portfolio may cease offering shares in the state involved and the Board of
Directors may revoke such restrictive policy. Moreover, if the states
involved shall no longer require any such restrictive policy, the Board of
Directors may, in its sole discretion, revoke such policy.
MANAGEMENT
The Company's Board of Directors provides broad supervision over the affairs
of the Company. The officers of the Company are responsible for the day-to-
day operations of the Company. The Directors of the Company and the
officers of the Company are listed below. Except as indicated, each
individual has held the office shown or other offices in the same company
for the last five years. Unless otherwise noted, the business address of
each Director and officer of the Company is 140 Garden Street, Hartford,
Connecticut 06154. Those Directors and officers who are "interested
persons" of the Company, as defined in the Investment Company Act, by virtue
of their affiliation with the Company, are indicated by an asterisk(*).
DIRECTORS AND OFFICERS OF THE COMPANY:
RICHARD H. AYERS, 52, DIRECTOR
Chairman and Chief Executive Officer, The Stanley Works (tool manufacturer).
Address:The Stanley Works, 1000 Stanley Drive, New Britain, Connecticut
06050
DAVID E.A., CARSON, 61, DIRECTOR
President, Chairman and Chief Executive Officer, People's Bank.
Address:People's Bank, 899 Main Street, Bridgeport, Connecticut 06604
RICHARD W. GREENE, 60, DIRECTOR
Executive Vice President and Treasurer, University of Rochester.
Address:University of Rochester, Wilson Boulevard, Rochester, New York 14627
BEVERLY L. HAMILTON, 48, DIRECTOR
President, ARCO Investment Management Company (1991-Present); Deputy
Comptroller, City of New York (1987-1991).
Address:ARCO Investment Management Company, 555 South Flower Street,
Los Angeles, California 90071
B-27
<PAGE>
DONALD H. POND, JR., 52, DIRECTOR AND PRESIDENT*
Executive Vice President, Connecticut Mutual Life Insurance Company (CML)
(1988-present).
DAVID E. SAMS, JR., 52, DIRECTOR*
President and Chief Executive Officer, CML (1993-present); President and
Chief Executive Officer, Agency Group, Capital Holdings Corporation (1987-
1993).
LINDA M. NAPOLI, 38, TREASURER AND CONTROLLER*
Assistant Vice President, CML (1987-present); Associate Director, CML (1988-
1993).
LOUIS A. LACCAVOLE, 46, GENERAL AUDITOR*
Vice President and General Auditor, CML (1990-Present); Assistant Vice
President and General Auditor, CML (1981-1990).
ANN F. LOMELI, 39, SECRETARY*
Secretary of the Company; Corporate Secretary, CML (1988-present).
All Board members of the Company are board members of, Mr. Pond is a board
member and President of, and Ms. Lomeli is Secretary, Ms. Napoli is
Treasurer and Mr. Laccavole is General Auditor of, Connecticut Mutual
Investment Accounts, Inc., for which the Manager acts as investment adviser.
Each of the Directors and principal officers affiliated with the Company who
is also an affiliated person of the Manager or any Subadviser is named
above, together with the capacity in which such person is affiliated with
the Company, the Manager or Subadviser. As of March 31, 1995, the Directors
and officers of the Company owned, in the aggregate, less than 1% of the
outstanding securities of the Company.
COMPENSATION OF OFFICERS AND DIRECTORS.THE PORTFOLIOS PAY NO SALARIES OR
compensation to any of their officers. The chart below sets forth the fees
paid by each Portfolio to the Directors and certain other information:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
<C>
RICHARD M. DONALD E. A. RICHARD W. BEVERLY L. DONALD H. DAVID E.
AYERS CARSON GREENE HAMILTON POND, JR. SAMS, JR.
COMPENSATION
RECEIVED FROM
PORTFOLIO
Money Market
Portfolio $708 $708 $794 $706 $0 $0
Government
Securities
Portfolio* $708 $708 $792 $708 $0 $0
Income
Portfolio* $706 $710 $792 $708 $0 $0
__________________
{1}As of most recently completed fiscal year.
B-28
<PAGE>
Total Return
Portfolio* $710 $708 $792 $710 $0 $0
Growth
Portfolio* $710 $708 $790 $708 $0 $0
International
Equity
Portfolio* $708 $708 $790 $710 $0 $0
Diversified
Income
Portfolio $400 $400 $400 $400 $0 $0
Balanced
Portfolio** $400 $400 $400 $400 $0 $0
Capital
Appreciation
Portfolio** $400 $400 $400 $400 $0 $0
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PENSION OR
RETIREMENT
BENEFITS
ACCRUED
AS ACCOUNT
EXPENSE*
Money Market
Portfolio -0- -0- -0- -0- -0- -0-
Government
Securities
Portfolio -0- -0- -0- -0- -0- -0-
Income
Portfolio -0- -0- -0- -0- -0- -0-
Total Return
Portfolio -0- -0- -0- -0- -0- -0-
Growth
Portfolio -0- -0- -0- -0- -0- -0-
InternationaL
Equity
Portfolio -0- -0- -0- -0- -0- -0-
Diversified
Income
Account -0- -0- -0- -0- -0- -0-
B-29
<PAGE>
Balanced
Account -0- -0- -0- -0- -0- -0-
Capital
Appreciation
Account -0- -0- -0- -0- -0- -0-
TOTAL
COMPENSATION
FROM COMPANY
AND COMPLEX
PAID TO
DIRECTORS{2}* 9,250 9,063 10,250 9,250 -0- -0-
</TABLE>
OTHER INFORMATION ABOUT THE COMPANY. The Company was incorporated in
Maryland on August 17, 1981. The authorized capital stock of the Company
consists of 1 billion shares of common stock, par value $0.001 per share
(Common Stock). The shares of Common Stock are divided into nine series
portfolios: Government Securities Portfolio (150,000,000 shares); Income
Portfolio (150,000,000 shares); Total Return Portfolio (150,000,000 shares);
Growth Portfolio (150,000,000 shares); Money Market Portfolio (250,000,000
shares); International Equity Portfolio (150,000,000 shares); Diversified
Income Portfolio (200,000,000 shares); Balanced Portfolio (200,000,000
shares); and Capital Appreciation Portfolio (200,000,000 shares). The
balance of 900,000,000 shares may be issued as an addition to one or more of
the above portfolios or any new portfolio or portfolios as determined by the
Board of Directors. The Board of Directors may reclassify authorized shares
to add to one or more of the portfolios described above or to add any new
portfolios to the Company. As of the date of this SAI, the Board has not
authorized the issuance of additional series of the Company, although the
Board may do so at any time in the future without additional notice to
shareholders.
As of December 31, 1994, CML and its affiliates (and not on behalf of
any separate account) owned shares of certain accounts as follows:
Government Securities Portfolio (5,921,433 shares) (30% of shares
outstanding) and International Equity Portfolio (5,452,923 shares) (19% of
shares outstanding). CML is incorporated under the laws of the State of
Connecticut. CML and its affiliates are deemed to be controlling persons of
any Portfolio of the Company of which they own more than 25% of the shares
outstanding. As such, the exercise by CML and its affiliates of their
voting rights may diminish the voting power of other shareholders. As of
December 31, 1994, no other shareholder of the Company owns of record or
beneficially 5% or more of the shares outstanding of any Portfolio.
The shares of the Portfolios are entitled to vote separately to
approve investment advisory agreements or changes in investment
restrictions, but shareholders of all series vote together in the election
and selection of Directors and accountants. Shares of a Portfolio vote
together as a class on matters that affect the Portfolio in substantially
the same manner. Shares of the Company do not have cumulative voting
____________
{2}*As of December 31, 1994; for nine series of the Company and
for Connecticut Mutual Investment Accounts, Inc.
B-30
<PAGE>
rights. The Company does not intend to hold annual meetings of shareholders
unless required to do so by the Investment Company Act or the Maryland
statute under which the Company is organized. Although Directors are not
elected annually by the shareholders, shareholders have under certain
circumstances the right to remove one or more Directors. Each Portfolio's
shares are fully paid and nonassessable when issued and have no preference,
preemptive, conversion or similar rights and are freely transferable.
The Investment Company Act provides an exemption from the pass-
through voting requirement described in the Prospectus. An Insurance
Company would be allowed to disregarding voting instructions of Variable
Contract holders if such holders initiate any change in the underlying
investment company's investment policies or any investment adviser. The
Insurance Company would also be allowed to disregard voting instructions of
Variable Contract holders with respect to the investments of an underlying
fund, or any contract between a fund and its investment adviser, when
required to do so by an insurance regulatory authority. The Insurance
Company's disregard of such voting instruments of Variable Contract holders
would be required to be reasonable and based on specific good faith
determinations. See the Prospectus for additional information about voting
procedures with respect to the holders of the Variable Contracts.
The Company's Articles of Incorporation provide that the Directors,
officers and employees of the Company may be indemnified by the Company to
the fullest extent permitted by Maryland law. The Company's Bylaws provide
that the Company shall indemnify each of its Directors, officers and
employees against liabilities and expenses reasonably incurred by them, in
connection with, or resulting from, any claim, action, suit or proceeding,
threatened against or otherwise involving such Director, officer or
employee, directly or indirectly, by reason of being or having been a
Director, officer or employee of the Company. Neither the Articles of
Incorporation nor the Bylaws authorize the Company to indemnify any Director
or officer against any liability to which he or she would otherwise be
subject by reason of or for willful misfeasance, bad faith, gross negligence
or reckless disregard of such person's duties.
INVESTMENT ADVISORY ARRANGEMENTS
The Company, on behalf of each Portfolio, has entered into an
investment advisory agreement with the Manager. The investment advisory
agreement provides that the Manager, subject to the supervision and approval
of the Company's Board of Directors, is responsible for the actual
management of each Portfolio. The Manager is responsible for the selection
of portfolio investments for each Portfolio (other than the International
Equity Portfolio and each LifeSpan Portfolio). In connection therewith, the
Manager provides investment research and supervision of the investments held
by a Portfolio and conducts a continuous program of investment, evaluation
and, if appropriate, sale and reinvestment of the Portfolio's assets, in
accordance with the investment objectives and policies of the Portfolio.
The Manager also furnishes the Company such statistical information, with
respect to the investments which the Portfolios may hold or contemplate
purchasing, as the Company may reasonably request. The Manager will apprise
the Company of important developments materially affecting any of the
Portfolios and furnish the Company from time to time with such information
B-31
<PAGE>
as the Manager may believe appropriate for this purpose. In addition, the
Manager agrees to furnish the Board of Directors such periodic and special
reports that the Board may reasonably request and to provide persons
satisfactory to the Board of Directors to serve as the Company's officers.
The Manager will also, without charge, render such clerical, accounting,
administrative and other services as the Manager may believe appropriate or
as the Company may reasonably request.
With respect to the International Equity Portfolio and the
International Component for LifeSpan Appreciation and Balanced Portfolio,
the Manager has entered into a subadvisory investment agreement with
Scudder. With respect to the small cap Component of each LifeSpan
Portfolio, the Manager has entered into subadvisory investment agreements
with Pilgrim. With respect to the high yield/high risk bond Component for
each LifeSpan Portfolio, the Manager has entered into subadvisory investment
agreements with BEA Associates. Under the respective subadvisory investment
agreement, the corresponding Subadviser, subject to the review of the Board
of Directors and the overall supervision of the Manager, is responsible for
managing the investment operations of the corresponding Portfolio and the
composition of the Portfolio's portfolio and furnishing the Portfolio with
advice and recommendations with respect to investments and the purchase and
sale of securities for the respective Portfolio.
As provided by the investment advisory agreement, the Portfolio pays
the Manager an investment management fee, which is accrued daily and paid
monthly, equal on an annual basis to a stated percentage of the Portfolio's
average daily net asset value. The Manager, not the Portfolio, pays the
subadvisory fees to the Subadvisers, as described in the Prospectus. See
"The Manager and the Subadvisers" and "Breakdown of Expenses" in the
Prospectuses for additional description of the management and subadvisory
fee and certain other information concerning the Portfolio's investment
advisory agreement and the subadvisory investment agreement of the
International Equity Portfolio and the LifeSpan Portfolios.
No person other than the Manager and the corresponding Subadviser and
their directors and employees regularly furnishes advice to the Portfolios
with respect to the desirability of the Portfolios investing in, purchasing
or selling securities. The Manager and Subadvisers may from time to time
receive statistical or other similar factual information, and information
regarding general economic factors and trends, from CML and its affiliates.
Under the terms of the investment advisory agreement with the Company
on behalf of each Portfolio, the Manager provides each Portfolio with office
space, supplies and other facilities required for the business of the
Portfolio. The Manager pays the compensation of all officers and employees
of the Company and Directors of the Company affiliated with the Manager, the
office expenses of the Portfolios and other expenses incurred by the Manager
in connection with the performance of its duties. All other expenses which
are not specifically paid by the Manager and which are incurred in the
operation of the Portfolios, including fees of directors who are not
"interested persons," as such term is defined in the Investment Company Act,
of the Company or CML are borne by the Portfolios.
B-32
<PAGE>
Securities held by any Portfolio may also be held by other portfolios
for which the Manager, the Subadvisers or their respective affiliates
provides investment advice. Because of different investment objectives or
other factors, a particular security may be bought by the Manager or a
Subadviser for one or more clients when one or more clients are selling the
same security. If purchases or sales of securities arise for consideration
at or about the same time for any Account or other funds for which the
Manager or a Subadviser acts as an investment adviser or for their advisory
clients, transactions in such securities will be made, insofar as feasible,
for the respective funds and clients in a manner deemed equitable to all.
To the extent that transactions on behalf of more than one client of the
Manager, the Subadvisers or respective affiliates during the same period may
increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
The advisory fees paid by the following Portfolios for the last three
fiscal years were:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1992 1993 1994
Money Market Portfolio $ 335,061 $ 274,197 $ 298,013
Government Securities $ 23,708 $ 71,274 $ 110,313
Portfolio
Income Portfolio $ 437,355 $ 585,385 $ 644,104
Total Return Portfolio $ 2,104,708 $2,817,177 $3,672,463
Growth Portfolio $ 531,508 $ 821,666 $1,249,284
International Equity $ 63,287 $ 129,881 $ 269,195
Portfolio
Total All Portfolios $ 3,495,627 $4,699,580 $6,243,372
</TABLE>
The LifeSpan Portfolios commenced operations in fiscal 1995 and
therefore paid no advisory fees during the periods listed above.
The investment advisory agreement provides that the Manager will
limit the aggregate ordinary operating expenses (including the advisory fee,
but excluding interest, taxes, brokerage fees, commissions and extraordinary
charges such as litigation costs) of the Money Market Portfolio to no more
than 1.0% of the Portfolio's average net assets. The investment advisory
contract provides that the Manager will limit the aggregate ordinary
operating expenses (including the advisory fee, but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges such as
litigation costs) of each of the Government Securities Portfolio, Income
Portfolio, Growth Portfolio, Total Return Portfolio and International Equity
Portfolio to no more than 1.5% of the average daily net assets of the
respective Portfolio.
B-33
<PAGE>
The Manager has voluntarily and temporarily agreed to limit the
expenses of each of the Capital Appreciation Portfolio and the Balanced
Portfolio to 1.55% and of the Diversified Income Portfolio to 1.50% of such
Portfolio's average daily net assets.
Pursuant to the investment advisory agreement and, where applicable,
each subadvisory investment agreement, neither the Manager nor any
Subadviser is liable to the Portfolios or their shareholders for any error
of judgment or mistake of law or for any loss suffered by the Portfolios in
connection with the matters to which their respective agreements relate,
except a loss resulting from willful misfeasance, bad faith or negligence on
the part of the Manager or Subadviser in the performance of their duties or
from their reckless disregard of the obligations and duties under the
applicable agreement. Each Subadviser has agreed to indemnify the Manager
to the fullest extent permitted by law against any and all loss, damage,
judgment, fines, amounts paid in settlement and attorneys' fees incurred by
the Manager to the extent resulting in whole or in part from any of the
respective Subadviser's acts or omissions related to the performance of its
duties as set forth specifically in the respective subadvisory investment
agreement or otherwise from the respective Subadviser's willful misfeasance,
bad faith or gross negligence.
The Manager, whose principal business address is at 10 State House
Square, Hartford, Connecticut and whose mailing address is 140 Garden
Street, Hartford, Connecticut 06154, was organized in 1976 and has over
$2.3 billion in assets under management in its capacity as investment
adviser to the Portfolios and the other mutual funds in the Connecticut
Mutual group of funds. The Manager is a wholly-owned subsidiary of DHC,
Inc., which is in turn a wholly-owned subsidiary of CML.
Scudder, 345 Park Avenue, New York, NY 10154, is a Delaware
corporation and has been providing investment counseling services for over
70 years, since its founding in 1919. Scudder supervises assets for
institutional clients, mutual funds and individuals and had over $90 billion
in assets under management as of December 31, 1994. All of the outstanding
voting and nonvoting securities of Scudder are held of record by the
Managing Directors, Daniel Pierce, Edmond D. Villani, Stephen R. Beckwith,
and Juris Padegs, in their capacity as the Representatives of the beneficial
owners of such securities pursuant to a Security Holders Agreement, under
which such Representatives have the right to reallocate shares among the
beneficial owners from time to time, at net book value in cash transactions.
BEA Associates, Citicorp Center, 153 E. 53rd Street, 57th Floor, New York,
NY 10022, is a partnership between Credit Suisse Capital Corporation and BEA
Associate's employee shareholders. BEA Associates has been providing
domestic and global fixed income and equity investment management services
for institutional clients and mutual funds since 1984 and, together with its
global affiliate, had $16 billion in assets under management as of December
31, 1994. Pilgrim, 1255 Drummers Lane, Wayne, Pennsylvania 19087, was
established in 1982 to provide specialized equity management for
institutional investors. Pilgrim is a Delaware corporation and a wholly
owned subsidiary of United Asset Management Corporation. As of December 31,
1994, Pilgrim had over $3.4 billion in assets under management.
The investment advisory agreement and subadvisory investment
agreements continue in effect from year to year if approved annually by a
vote of a majority of the Directors of the Company who are not interested
persons of one of the parties to the contract, cast in person at a meeting
B-34
<PAGE>
called for the purpose of voting on such approval, and by either the
Directors or the holders of a majority of the applicable Portfolio's
outstanding voting securities. Each contract automatically terminates upon
assignment. The investment advisory agreement may be terminated without
penalty on 60 days' notice at the option of either party to the agreement or
by vote of the holders of a majority of the outstanding voting securities of
the applicable Portfolio. Each subadvisory investment agreement may be
terminated at any time without the payment of any penalty by the Board of
Directors or by vote of a majority of the outstanding voting securities of
the Portfolio upon 60 days' notice to the Manager and the Subadviser, by the
Manager upon 60 days' written notice to the Portfolio and the Subadviser and
by the Subadviser upon 90 days' written notice to the Portfolio and the
Manager. Each subadvisory investment agreement terminates automatically
upon the termination of the corresponding investment advisory agreement.
PORTFOLIO EXPENSES
EXPENSES OF THE PORTFOLIOS. Each Portfolio pays its own expenses including,
without limitation: (i) expenses of maintaining the Portfolio and
continuing its existence, (ii) registration of the Company under the
Investment Company Act, (iii) auditing, accounting and legal expenses,
(iv) taxes and interest, (v) governmental fees, (vi) expenses of issue,
sale, repurchase and redemption of Portfolio shares, (vii) expenses of
registering and qualifying the Portfolio and its shares under federal and
state securities laws and of preparing and printing prospectuses for such
purposes and for distributing the same to shareholders and investors, and
fees and expenses of registering and maintaining registrations of the
Portfolio and of the Portfolio's principal underwriter, if any, as
broker-dealer or agent under state securities laws, (viii) expenses of
reports and notices to shareholders and of meetings of shareholders and
proxy solicitations therefor, (ix) expenses of reports to governmental
officers and commissions, (x) insurance expenses, (xi) association
membership dues, (xii) fees, expenses and disbursements of custodians for
all services to the Portfolio, (xiii) fees, expenses and disbursements of
transfer agents, dividend disbursing agents, shareholder servicing agents
and registrars for all services to the Portfolio, (xiv) expenses for
servicing shareholder accounts, (xv) any direct charges to shareholders
approved by the Directors of the Company, (xvi) compensation and expenses of
Directors of the Company who are not "interested persons" of the Portfolio,
and (xvii) such non-recurring items as may arise, including expenses
incurred in connection with litigation, proceedings and claims and the
obligation of the Company to indemnify its Directors and officers with
respect thereto.
DISTRIBUTION ARRANGEMENTS
Connecticut Mutual Financial Services, L.L.C. ("CMFS") serves as the
principal underwriter for each Portfolio pursuant to an Underwriting
Agreement initially approved by the Board of Directors of the Company. CMFS
is a registered broker/dealer and member of the National Association of
Securities Dealers, Inc. (NASD). Shares of each Portfolio will be
continuously offered and will be sold by registered representatives of CMFS.
CMFS or an affiliate of CMFS bears all the expenses of providing services
pursuant to the Underwriting Agreement including the printing and
B-35
<PAGE>
distribution of prospectuses to non-shareholders as well as of any
advertising or sales literature. The Company bears the expenses of
registering its shares with the SEC and qualifying them, as required, with
state regulatory authorities. CMFS receives no compensation for services
rendered under the Underwriting Agreement. The Underwriting Agreement
continues in effect for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a majority of the
Directors who are not interested persons, as such term is defined in the
Investment Company Act, of the Company (non-interested Directors) or parties
to the Agreement and (ii) either (a) by the vote of a majority of the
outstanding voting securities of each Portfolio or (b) by the vote of a
majority of the Board of Directors.
CMFS's principal business address is at Ten State House Square,
Hartford, Connecticut 06143. CMFS was organized as a limited liability
company in Connecticut on November 10, 1994, and is a direct subsidiary of
CML.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Company has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject
to any policy established by the Board of Directors, the Manager and the
Subadvisers (if applicable) are primarily responsible for the investment
decisions of each Portfolio and the placing of its portfolio transactions.
In placing orders, it is the policy of each Portfolio to obtain the most
favorable net results, taking into account various factors, including price,
dealer spread or commission, if any, size of the transaction and difficulty
of execution. While the Manager and the Subadvisers generally seek
reasonably competitive spreads or commissions, the Portfolios will not
necessarily be paying the lowest spread or commission available. The
Manager and the Subadvisers may direct brokerage transactions to
broker/dealers who also sell shares of the Company and the sale of shares of
the Company may be taken into account by the Manager and the Subadvisers
when allocating brokerage transactions.
The Manager and the Subadvisers will generally deal directly with the
dealers who make a market in the securities involved (unless better prices
and execution are available elsewhere) if the securities are traded
primarily in the over-the-counter market. Such dealers usually act as
principals for their own account. On occasion, securities may be purchased
directly from the issuer. Bonds and money market securities are generally
traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. Portfolio securities in the Money Market
Portfolio normally are purchased directly from, or sold directly to, the
issuer, an underwriter or market maker for the securities. There usually
will be no brokerage commissions paid by the Money Market Portfolio for such
purchases or sales and, in 1992, 1993 and 1994, no such commissions were
paid. Similarly, no brokerage commissions were paid by the Government
Securities Portfolio or the Income Portfolio during those three years. Each
of the LifeSpan Portfolios commenced operations in fiscal 1995, and
accordingly paid no brokerage commissions during the last three years.
B-36
<PAGE>
Brokerage commissions for the most recent three year period for the
Growth Portfolio, the Total Return Portfolio and the International Equity
Portfolio were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1992 1993 1994
Brokerage Brokerage Brokerage
Portfolio Commissions Commissions Commissions
Growth Portfolio $ 385,105 $ 466,977 $ 727,310
Total Return Portfolio $ 985,105 $1,058,612 $1,311,239
International Equity $ 35,823 $ 23,792 $ 56,589
Portfolio
</TABLE>
While the Manager and the Subadvisers seek to obtain the most
favorable net results in effecting transactions in a Portfolio's portfolio
securities, dealers who provide supplemental investment research to the
Manager or a Subadviser may receive orders for transactions from the Manager
or the relevant Subadviser. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a
company, industry, or economic sector. If, in the judgment of the Manager
or the corresponding Subadviser, a Portfolio will be benefited by such
supplemental research services, the Manager and the corresponding Subadviser
are authorized to pay spreads or commissions to brokers or dealers
furnishing such services which are in excess of spreads or commissions which
another broker or dealer may charge for the same transaction. Information
so received will be in addition to and not in lieu of the services required
to be performed by the Manager and the corresponding Subadviser under the
investment advisory agreement or the sub-investment advisory agreement. The
expenses of the Manager and the Subadvisers will not necessarily be reduced
as a result of the receipt of such supplemental information. The Manager
and the Subadvisers may use such supplemental research in providing
investment advice to portfolios other than those for which the transactions
are made. Similarly, the Portfolios may benefit from such research obtained
by the Manager and the Subadvisers for portfolio transactions for other
clients.
Investment decisions for the Portfolios will be made independently
from those of any other clients that may be or become managed by the
Manager, any Subadviser or their affiliates. If, however, accounts managed
by the Manager or any Subadviser are simultaneously engaged in the purchase
of the same security, then, pursuant to the authorization of the Company's
Board of Directors, available securities may be allocated to each account
and may be averaged as to price in whatever manner, the Manager or the
corresponding Subadviser deems to be fair. In some cases, this system might
adversely affect the price paid by a Portfolio (for example, during periods
of rapidly rising or falling interest rates) or limit the size of the
position obtainable for a Portfolio (for example, in the case of a small
issue).
Scudder, or its affiliate, Scudder Investor Services Inc. ("SIS"),
shall arrange for the placing of all orders for the purchase and sale of
securities for the International Equity Portfolio and the international
Component of Capital Appreciation and Balanced Portfolio with brokers or
dealers selected by SIS, provided that neither Scudder nor SIS shall be
responsible for payment of brokerage commissions. In the selection of such
brokers or dealers and the placing of such orders, SIS is directed at all
B-37
<PAGE>
times to seek for the International Equity Portfolio and the international
Component of Capital Appreciation Portfolio and Balanced Portfolio the best
execution available. Neither Scudder nor any affiliate of Scudder will act
as principal or receive directly or indirectly any compensation in
connection with the purchase or sale of investment securities by the
International Equity Portfolio and the international Components of Capital
Appreciation Portfolio and Balanced Portfolio, other than compensation
provided for in the Subadvisory Investment Agreements with Scudder, and such
brokerage commissions as are permitted by the Investment Company Act. If
and to the extent authorized to act as broker in the relevant jurisdiction,
Scudder or any of its affiliates may act as broker for the International
Equity Portfolio and the international Components of Capital Appreciation
Portfolio and Balanced Portfolio, in the purchase and sale of securities.
Scudder agrees that all transactions effected through Scudder or brokers
affiliated with Scudder will be effected in compliance with Section 17(e) of
the Investment Company Act and written procedures established from time to
time by the Board of Directors of the Company pursuant to Rule 17e-1 under
the Investment Company Act. (SIS does not receive any compensation for
performing this service).
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined as of
the close of regular trading (currently 4:00 p.m., Eastern Time) on each day
on which the Exchange is open for trading. As of the date of this SAI, the
Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value per share of each Portfolio is also determined on any other day
in which the level of trading in its portfolio securities is sufficiently
high so that the current net asset value per share might be materially
affected by changes in the value of its portfolio securities. No Portfolio
is required to determine its net asset value per share on any day in which
no purchase orders for the shares of the Portfolio become effective and no
shares of the Portfolio are tendered for redemption.
The net asset value per share of each Portfolio is computed by taking
the value of all of the Portfolio's assets less the Portfolio's liabilities,
and dividing it by the number of outstanding shares of the Portfolio. For
purposes of determining net asset value, expenses of each Portfolio are
accrued daily.
MONEY MARKET PORTFOLIO
Except as set forth in the following paragraph, Money Market
Portfolio's investments are valued on each business day on the basis of
amortized cost, if the Board of Directors determines in good faith that the
method approximates fair value. This technique involves valuing an
instrument at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method
provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price
such Portfolio would receive if it sold the investment. During periods of
declining interest rates, the yield on shares of Money Market Portfolio
computed as described below may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation
B-38
<PAGE>
based upon market prices and estimates of market prices for all of its
portfolio investments. Thus, if the use of amortized cost by Money Market
Portfolio resulted in a lower aggregate portfolio value on a particular day,
a prospective investor in the Portfolio would be able to obtain a somewhat
higher yield than would result from investment in a fund utilizing solely
market values. The converse would apply in a period of rising interest
rates.
In determining Money Market Portfolio's net asset value, "when-
issued" securities will be valued at the value of the security at the time
the commitment to purchase is entered into.
The valuation of Money Market Portfolio's investments based upon
their amortized cost and the concomitant maintenance of the Portfolio's per
share net asset value of $1.00 is permitted in accordance with Rule 2a-7
under the 1940 Act, pursuant to which the Portfolio must adhere to certain
conditions which are described in detail in the Prospectus. Money Market
Portfolio must maintain a dollar-weighted average portfolio maturity of 90
days or less. The maturities of variable rate demand instruments held by
the Portfolio will be deemed to be the longer of the demand period or the
period remaining until the next interest rate adjustment, although stated
maturities may be in excess of one year. The Directors have established
procedures designed to stabilize, to the extent reasonably possible, the
price per share of Money Market Portfolio for the purpose of maintaining
sales and redemptions at a single value. Such procedures will include
review of the Portfolio's holdings by the Directors, at such intervals as
they may deem appropriate, to determine whether the Portfolio's net asset
value calculated by using available market quotations deviates from $1.00
per share and, if so, whether such deviation may result in material dilution
or is otherwise unfair to existing shareholders. In the event the Directors
determine that such a deviation exists, they have agreed to take such
corrective action as they regard as necessary and appropriate, including:
(i) the sale of portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; (ii) withholding
dividends; (iii) redeeming shares in kind; or (iv) establishing a net asset
value per share by using available market quotations. It is the intention
of the Company to maintain Money Market Portfolio's per-share net asset
value at $1.00 but there can be no assurance of this.
ALL OTHER PORTFOLIOS
Securities which have not traded on the date of valuation or
securities for which sales prices are not generally reported are valued at
the mean between the last bid and asked prices. Securities for which no
market quotations are readily available (including those the trading of
which has been suspended) will be valued at fair value as determined in good
faith using a method adopted by the Company's Board of Directors, although
the actual computations may be made by persons acting pursuant to the
direction of the Board.
INVESTMENT PERFORMANCE
Each Portfolio's average annual total return quotations and yield
B-39
<PAGE>
quotations as they may appear in the Prospectus, this SAI or in advertising
are calculated by standard methods prescribed by the SEC.
MONEY MARKET PORTFOLIO
In accordance with regulations prescribed by the SEC, the Company is
required to compute the Money Market Portfolio's current annualized yield
for a seven-day period in a manner which does not take into consideration
any realized or unrealized gains or losses on its portfolio securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and
unrealized appreciation and depreciation) in the value of a hypothetical
account having a balance of one share of the Money Market Portfolio at the
beginning of such seven-day period, dividing such net change in account
value by the value of the account at the beginning of the period to
determine the base period return and annualizing this quotient on a 365-day
basis.
The SEC also permits the Company to disclose the effective yield of
the Money Market Portfolio for the same seven-day period, determined on a
compounded basis. The effective yield is calculated by compounding the
unannualized base period return by adding one to the base period return,
raising the sum to a power equal to 365 divided by 7, and subtracting one
from the result.
For the seven day period ending December 31, 1994, the Money Market
Portfolio's annualized yield was 5.30%. For the same period, the effective
yield was 5.44%.
The yield on amounts held in the Money Market Portfolio normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates
of return. The Money Market Portfolio's actual yield is affected by changes
in interest rates on money market securities, average portfolio maturity of
the Money Market Portfolio, the types and quality of portfolio securities
held by the Money Market Portfolio, and its operating expenses.
OTHER ACCOUNTS
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS. Average annual
total return quotations for shares are computed by finding the average
annual compounded rates of return that would cause a hypothetical investment
made on the first day of a designated period to equal the ending redeemable
value of such hypothetical investment on the last day of the designated
period in accordance with the following formula:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
P(1+T) n = ERV
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000, less the
maximum sales load applicable to a Portfolio
T = average annual total return
B-40
<PAGE>
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 initial
payment made at the beginning of the designated period (or
fractional portion thereof)
</TABLE>
The computation above assumes that all dividends and distributions made by a
Portfolio are reinvested at net asset value during the designated period.
The average annual total return quotation is determined to the nearest 1/100
of 1%.
One of the primary methods used to measure performance is "total
return." "Total return" will normally represent the percentage change in
value of a Portfolio, or of a hypothetical investment in a class of a
Portfolio, over any period up to the lifetime of the Portfolio. Unless
otherwise indicated, total return calculations usually assume the reinvest-
ment of all dividends and capital gains distributions and will be expressed
as a percentage increase or decrease from an initial value, for the entire
period or for one or more specified periods within the entire period. All
non-standardized performance will be advertised only if the standard
performance data for the same period, as well as for the required periods,
is also presented.
Total return percentages for periods longer than one year will
usually be accompanied by total return percentages for each year within the
period and/or by the average annual compounded total return for the period.
The income and capital components of a given return may be separated and
portrayed in a variety of ways in order to illustrate their relative
significance. Performance may also be portrayed in terms of cash or
investment values, without percentages. Past performance cannot guarantee
any particular future result. In determining the average annual total
return (calculated as provided above), recurring fees, if any, that are
charged to all shareholder accounts are taken into consideration. For any
account fees that vary with the size of the account, the account fee used
for purposes of the above computation is assumed to be the fee that would be
charged to the mean account size of a class of the Portfolio.
The charts below set forth certain performance information for the
Portfolios as of December 31, 1994. Past performance is no guarantee and is
not necessarily indicative of future performance. The actual annual returns
for a Portfolio may vary significantly from the past and future performance
of the Portfolio. Investment returns and the value of the shares of the
Portfolios will fluctuate in response to market and economic conditions as
well as other factors and shares, when redeemed, may be worth more or less
than their original cost. Total returns are based on capital changes plus
reinvestment of all distributions for the time periods noted in the charts
below.
Value of a $1,000 Investment in the Government Securities Portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Investment Total Return
Period Date Annualized
Life of Portfolio
12/31/94 5/13/92* 4.58%
B-41
<PAGE>
1 Year Ended
12/31/93 12/31/94 -4.89%
</TABLE>
*Date of Inception
Value of a $1,000 Investment in the Income Portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Investment Total Return
Period Date Annualized
10 Years Ended
12/31/94 12/31/84 9.67%
5 Years Ended
12/31/94 12/31/89 7.66%
1 Year Ended
12/31/94 12/31/93 -4.08%
</TABLE>
Value of a $1,000 Investment in the Total Return Portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Investment Total Return
Period Date Annualized
10 Years Ended
12/31/94 12/31/84 12.64%
5 Years Ended
12/31/94 12/31/89 10.21%
1 Year Ended
12/31/94 12/31/93 -1.97%
</TABLE>
Value of a $1,000 Investment in the Growth Portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Investment Total Return
Period Date Annualized
10 Years Ended
12/31/94 12/31/84 14.28%
5 Years Ended
12/31/94 12/31/89 11.41%
1 Year Ended
12/31/94 12/31/93 -0.51%
</TABLE>
Value of a $1,000 Investment in the International Equity Portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
B-42
<PAGE>
Investment Investment Total Return
Period Date Annualized
Life of Portfolio to
12/31/94 5/13/92* 6.56%
1 Year Ended
12/31/94 12/31/93 1.44%
*Date of Inception
</TABLE>
No shares of any of the LifeSpan Portfolios were outstanding during
these periods.
Each Portfolio may also publish its distribution rate and/or its
effective distribution rate. A Portfolio's distribution rate is computed by
dividing the most recent monthly distribution per share annualized, by the
current net asset value per share. A Portfolio's effective distribution
rate is computed by dividing the distribution rate by the ratio used to
annualize the most recent monthly distribution and reinvesting the resulting
amount for a full year on the basis of such ratio. The effective
distribution rate will be higher than the distribution rate because of the
compounding effect of the assumed reinvestment. A Portfolio's yield is
calculated using a standardized formula, the income component of which is
computed from the yields to maturity of all debt obligations held by the
Portfolio based on prescribed methods (with all purchases and sales of
securities during such period included in the income calculation on a
settlement date basis), whereas the distribution rate is based on a
Portfolio's last monthly distribution. A Portfolio's monthly distribution
tends to be relatively stable and may be more or less than the amount of net
investment income and short-term capital gain actually earned by the
Portfolio during the month (see "Distribution and Taxes" in the Portfolios'
Prospectus).
Other data that may be advertised or published about each Portfolio
include the average portfolio quality, the average portfolio maturity and
the average portfolio duration.
STANDARDIZED YIELD QUOTATIONS. The Portfolios may advertize their
yield from time to time. Yield is computed by dividing the net investment
income per share during a base period of 30 days, or one month, by the
maximum offering price per share on the last day of such base period in
accordance with the following formula:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YIELD = 2[ (a-b +1)6 -1]
---
cd
Where: a = net investment income earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
B-43
<PAGE>
d = the maximum offering price per share on the last
day of the period
</TABLE>
Net investment income will be determined in accordance with rules
established by the SEC.
The actual yield of the Portfolios may vary significantly from the
past and future yields of the Portfolios. Past yields of the Portfolios is
no guarantee and is not necessarily indicative of the future yields of the
Portfolios.
GENERAL INFORMATION. The following publications and other newspapers
and business and financial publications may be cited in each Portfolio's
advertising and in shareholder materials which contain articles describing
investment results or other data relative to one or more of the Portfolios.
<TABLE>
<CAPTION>
<S> <C>
Broker World Value Line
Across the Board Financial World
American Banker Advertising Age
Best's Review Barron's
Business Month Business Insurance
Changing Times Business Week
Economist Consumer Reports
Forbes Financial Planning
Inc. Fortune
Insurance Forum Institutional Investor
Insurance Week Insurance Sales
Journal of the American Society Journal of Accountancy
of CLU & ChFC Journal of Commerce
Life Insurance Selling Life Association News
Lipper Analytical Services, Inc. Manager's Magazine
MarketFacts Money
National Underwriter Nation's Business
New Choices (formerly 50 Plus) New York Times
Pension World Pensions & Investments
Rough Notes Round the Table
U.S. Banker Wall Street Journal
Working Woman Morningstar, Inc.
Financial Services Week Wiesenberger Investment
Kiplinger's Personal Finance Service
Registered Representative Medical Economics
U.S. News & World Report Investment Advisor
CDA Tillinghast
Financial Times American Agent and Broker
Insurance Product News Insurance Times
LIMRA's Marketfacts Professional Insurance Agents
Investment Dealers Digest Insurance Review Investor's
Business Daily Insurance Advocate Independent
Agent Professional Agent
California Broker Life Times
Hartford Courant New England Business
Entrepreneur Entrepreneurial Woman
B-44
<PAGE>
USA Today Business Marketing
Adweek Independent Business
Newsweek Time
Success The Standard
The Boston Globe Crain's
The Washington Post United Press International
Associated Press Bloomberg
Reuter's Business News Features
Business Wire Knight-Ridder
Dow Jones News Service Consumer Digest
</TABLE>
From time to time the Company may publish the sales of shares of one
or more of the Portfolios on a gross or net basis and for various periods of
time, and compare such sales with sales similarly reported by other
investment companies.
TAXES
It is each Portfolio's policy to meet the requirements of Subchapter
M of the Code for qualification as a regulated investment company. If a
Portfolio meets all such requirements and distributes to its shareholders at
least annually all investment company taxable income and net capital gain,
if any, which it receives, the Portfolio will be relieved of the necessity
of paying federal income tax.
In order to qualify as a regulated investment company under
Subchapter M, a Portfolio must, among other things, derive at least 90% of
its annual gross income from dividends, interest, gains from the sale or
other disposition of stock, securities or foreign currencies, or other
income (including gains from options, futures and forward contracts) derived
with respect to its business of investing in such stock, securities or
currencies (the "90% income test"), limit its gains from the sale of stock,
securities and certain other investments held for less than three months to
less than 30% of its annual gross income (the "30% test") and satisfy
certain annual distribution and quarterly diversification requirements. For
purposes of the 90% income test, income that a Portfolio earns from equity
interests in certain entities that are not treated as corporations (e.g.,
are treated as partnerships or trusts) for U.S. tax purposes will generally
have the same character for the Portfolio as in the hands of such entities;
consequently, the Portfolio may be required to limit its equity investments
in such entities that earn fee income, rental income, or other nonqualifying
income.
As noted in the Prospectus, each Portfolio must, and intends to,
comply with the diversification requirements imposed by Section 817(h) of
the Code and the regulations thereunder. These requirements, which are in
addition to the diversification requirements imposed on a Portfolio by the
Investment Company Act and Subchapter M of the Code, place certain
limitations on the assets of each separate account and, because Section
817(h) and those regulations treat the assets of the Portfolio as assets of
the related separate account, the assets of a Portfolio, that may be
invested in securities of a single issuer. Specifically, the regulations
provide that, except as permitted by the "safe harbor" described below, as
of the end of each calendar quarter or within 30 days thereafter no more
than 55% of the total assets of a Portfolio may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
B-45
<PAGE>
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single
investment, and each U.S. Government agency and instrumentality is
considered a separate issuer. Section 817(h) provides, as a safe harbor,
that a separate account will be treated as being adequately diversified if
the diversification requirements under Subchapter M are satisfied and no
more than 55% of the value of the account's total assets are cash and cash
items (including receivables), U.S. Government securities and securities of
other regulated investment companies. Failure by a Portfolio to both
qualify as a regulated investment company and satisfy the Section 817(h)
requirements would generally result in treatment of the variable contract
holders other than as described in the applicable variable contract
prospectus, including inclusion in ordinary income of income accrued under
the contracts for the current and all prior taxable years. Any such failure
may also result in adverse tax consequences for the insurance company
issuing the contracts.
Dividends from net investment income, net short-term capital gains,
and certain net foreign exchange gains are taxable as ordinary income,
whether received in cash or in additional shares. Dividends from net long-
term capital gains, if any, whether received in cash or additional shares,
are taxable to a Portfolio's shareholders as long-term capital gains for
federal income tax purposes without regard to the length of time shares of
the Portfolio have been held. The federal income tax status of all
distributions will be reported to shareholders annually.
Any dividend declared by a Portfolio in October, November or December
as of a record date in such a month and paid during the following January
will be treated for federal income tax purposes as received by shareholders
on December 31 of the calendar year in which it is declared.
Foreign exchange gains and losses realized by a Portfolio in
connection with certain transactions involving foreign currency- denominated
debt securities, certain options and futures contracts relating to foreign
currency, forward foreign currency contracts, foreign currencies, or
payables or receivables denominated in a foreign currency are subject to
Section 988 of the Code, which generally causes such gains and losses to be
treated as ordinary income and losses and may affect the amount, timing and
character of distributions to shareholders. Any such transactions that are
not directly related to a Portfolio's investment in stock or securities may
increase the amount of gain it is deemed to recognize from the sale of
certain investments held for less than three months for purposes of the 30%
test and may under future Treasury regulations produce income not among the
types of "qualifying income" for purposes of the 90% income test. If the
net foreign exchange loss for a year were to exceed the Portfolio's
investment company taxable income (computed without regard to such loss) the
resulting overall ordinary loss for such year would not be deductible by the
Portfolio or its shareholders in future years.
If a Portfolio acquires the stock of certain non-U.S. corporations
that receive at least 75% of their annual gross income from passive sources
(such as sources that produce interest, dividend, rental, royalty or capital
gain income) or hold at least 50% of their assets in such passive sources
("passive foreign investment companies"), the Portfolio could be subject to
federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of stock in such
B-46
<PAGE>
companies, even if all income or gain actually received by the Portfolio is
timely distributed to its shareholders. The Portfolio would not be able to
pass through to its shareholders any credit or deduction for such a tax. In
certain cases, an election may be available that would ameliorate these
adverse tax consequences. Each Portfolio may limit its investments in
passive foreign investment companies and will undertake appropriate actions,
including consideration of any available elections, to limit its tax
liability, if any, or take other defensive actions with respect to such
investments.
Some of the Portfolios may invest in debt obligations that are in the
lower rating categories or are unrated, including debt obligations of
issuers not currently paying interest as well as issuers who are in default.
Investments in debt obligations that are at risk of or in default present
special tax issues for a Portfolio. Tax rules are not entirely clear about
issues such as when a Portfolio may cease to accrue interest, original issue
discount, or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable.
These and other issues will be addressed by a Portfolio, in the event it
invests in such securities, in order to ensure that it distributes
sufficient income to preserve its status as a regulated investment company
and to avoid becoming subject to federal income or excise tax.
Since, at the time of an investor's purchase of shares of a
Portfolio, a portion of the per share net asset value by which the purchase
price is determined may be represented by realized or unrealized
appreciation in the Portfolio or undistributed taxable income of the
Portfolio, subsequent distributions (or portions thereof) on such shares may
be taxable to such investor even if the net asset value of his shares is, as
a result of the distributions, reduced below his cost for such shares and
the distributions (or portions thereof) in reality represent a return of a
portion of his investment.
Any loss realized by a shareholder upon the redemption of shares with
a tax holding period at the time of redemption of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares.
For federal income tax purposes, each Portfolio is permitted to carry
forward a net realized capital loss in any year to offset realized capital
gains, if any, during the eight years following the year of the loss. To
the extent subsequent net realized capital gains are offset by such losses,
they would not result in federal income tax liability to the Portfolio and
are not expected to be distributed as such to shareholders.
Each Portfolio that may invest in foreign countries, may be subject
to withholding and other taxes imposed by foreign countries with respect to
its investments in those countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Options written or purchased and futures contracts entered into by a
Portfolio on certain securities, securities indices and foreign currencies,
as well as certain foreign currency forward contracts, may cause the
B-47
<PAGE>
Portfolio to recognize gains or losses from marking-to-market at the end of
its taxable year even though such options may not have lapsed, been closed
out, or exercised or such futures or forward contracts may not have been
closed out or disposed of and may affect the characterization as long-term
or short-term of some capital gains and losses realized by the Portfolio.
Certain options, futures and forward contracts on foreign currency may be
subject to Section 988, described above, and accordingly produce ordinary
income or loss. Losses on certain options, futures or forward contracts
and/or offsetting positions (portfolio securities or other positions with
respect to which the Portfolio's risk of loss is substantially diminished by
one or more options, futures or forward contracts) may also be deferred
under the tax straddle rules of the Code, which may also affect the
characterization of capital gains or losses from straddle positions and
certain successor positions as long-term or short-term. The tax rules
applicable to options, futures, forward contracts and straddles may affect
the amount, timing and character of the Portfolio's income and loss and
hence of distributions to shareholders. Certain tax elections may be
available that would enable the Portfolio to ameliorate some adverse effects
of the tax rules described in this paragraph.
The description above relates only to certain U.S. federal income tax
consequences and does not address special tax rules applicable to insurance
companies. Shareholders should consult their own tax advisers on these
matters.
CUSTODIAN
Portfolio securities of each Portfolio are held pursuant to a
Custodian Agreement between the Manager and State Street, 225 Franklin
Street, Boston, Massachusetts 02110. Under the Custodian Agreement, State
Street performs custody, portfolio and fund accounting services for the
Portfolios.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Arthur Andersen LLP, has been selected as the independent certified
public accountants of the Company to provide audit services.
OTHER INFORMATION
CML has granted the Company the right to use the name, "Connecticut
Mutual," and has reserved the right to withdraw its consent to the use of
such name by the Company at any time, or to grant the use of such name to
any other company. CML was founded in 1846 and is one of the nation's
largest mutual life insurance companies with nearly 150 years of experience
and assets of $11.5 billion and $105 billion of life insurance in force.
CML has over 1.2 million policyholders and offers a broad range of
insurance, retirement and investment products in all 50 states, Puerto Rico
and the District of Columbia through a network of general agents and more
than 3,000 career agents and brokers.
B-48
<PAGE>
FINANCIAL STATEMENTS
Each Portfolio's audited financial statements as of December 31,
1994, together with the notes thereto and the report of Arthur Andersen LLP
are attached to this SAI.
B-49
<PAGE>
SCHEDULE OF INVESTMENTS CONNECTICUT MUTUAL FINANCIAL SERVICES
SERIES FUND I, INC.
December 31, 1994
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
COMMERCIAL PAPER
(94.5% OF NET ASSETS)
American Broadcasting Co.
$ 1,200,000 5.45%, due 1/24/95 $ 1,195,822
1,000,000 6.08%, due 2/16/95 992,231
American Express Credit Corp.
650,000 5.83%, due 1/6/95 650,000
358,000 5.85%, due 1/6/95 358,000
Banc One Corp.
1,960,000 5.97%, due 1/18/95 1,954,474
1,000,000 5.75%, due 2/13/95 993,132
Bell Atlantic Financial Services, Inc.
910,000 5.57%, due 1/10/95 908,733
1,235,000 5.98%, due 1/25/95 1,230,076
Cargill, Inc.
500,000 5.45%, due 1/26/95 498,108
1,100,000 5.87%, due 3/1/95 1,089,418
950,000 5.93%, due 3/1/95 940,767
Central & South West Corp.
500,000 5.80%, due 1/24/95 498,147
1,000,000 6.17%, due 2/7/95 993,659
800,000 6.10%, due 2/14/95 794,035
500,000 6.15%, due 2/24/95 495,388
Cincinnati Bell, Inc.
1,100,000 6.10%, due 1/3/95 1,099,627
Corporate Asset Funding Co., Inc.
1,000,000 5.40%, due 1/23/95 996,700
2,000,000 5.45%, due 1/26/95 1,992,431
Corporate Receivables Corp.
1,055,000 5.47%, due 1/9/95 1,053,718
510,000 6.00%, due 1/17/95 508,640
Dover Corp.
1,000,000 6.08%, due 1/9/95 998,649
1,000,000 5.85%, due 1/31/95 995,125
Ford Motor Credit Co.
1,184,000 5.35%, due 1/4/95 1,184,000
1,500,000 5.81%, due 2/21/95 1,500,000
General Electric Capital Corp.
1,000,000 4.90%, due 1/31/95 1,000,000
500,000 4.97%, due 2/1/95 500,000
1,238,000 6.03%, due 3/2/95 1,238,000
Golden Peanut Co.
1,300,000 5.62%, due 2/3/95 1,293,303
1,000,000 5.63%, due 2/7/95 994,214
700,000 6.22%, due 3/17/95 690,929
Goldman Sachs Group
850,000 5.87%, due 2/1/95 845,703
GTE Florida, Inc.
2,000,000 5.90%, due 1/5/95 1,998,689
International Lease Finance Corp.
500,000 5.00%, due 1/10/95 499,375
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
$ 1,000,000 5.02%, due 1/10/95 $ 998,745
1,000,000 5.95%, due 3/3/95 989,918
750,000 5.87%, due 3/21/95 740,339
McGraw-Hill Inc.
795,000 5.63%, due 2/2/95 791,021
1,100,000 6.12%, due 2/8/95 1,092,894
1,425,000 5.80%, due 2/17/95 1,414,210
Merrill Lynch & Co., Inc.
1,000,000 5.40%, due 1/3/95 999,700
1,455,000 5.47%, due 1/30/95 1,448,589
795,000 5.83%, due 2/22/95 788,305
Michigan Consolidated Gas Co.
1,500,000 5.45%, due 1/13/95 1,497,275
Morgan (J.P.) & Co., Inc.
1,500,000 6.20%, due 3/1/95 1,484,758
National Rural Utilities Cooperative
Finance Corp.
2,600,000 5.95%, due 1/11/95 2,595,703
Norwest Corp.
1,000,000 5.63%, due 1/17/95 997,498
750,000 5.78%, due 2/15/95 744,581
PACCAR Financial Corp.
2,100,000 5.79%, due 2/23/95 2,082,099
PHH Corporation
2,190,000 6.00%, due 1/5/95 2,188,540
1,100,000 5.99%, due 1/20/95 1,096,522
Philip Morris Companies Inc.
1,400,000 6.05%, due 1/19/95 1,395,765
U.S. Bancorp
1,000,000 5.37%, due 1/17/95 997,613
1,240,000 6.07%, due 1/20/95 1,236,028
915,000 5.50%, due 1/27/95 911,365
U S West Communications, Inc.
1,000,000 5.35%, due 1/11/95 998,514
1,000,000 5.85%, due 2/2/95 994,800
1,000,000 5.85%, due 2/3/95 994,638
-------------
TOTAL COMMERCIAL PAPER
(COST $62,460,513) 62,460,513
-------------
U.S. AGENCY SHORT-TERM OBLIGATIONS
(5.3% OF NET ASSETS)
Federal Farm Credit Banks
1,000,000 5.55%, due 2/6/95 994,450
Federal National Mortgage Assn.
500,000 5.73%, due 2/28/95 495,384
Student Loan Marketing Assn.
2,000,000 5.90%, due 5/14/96 2,000,000
-------------
TOTAL U.S. AGENCY SHORT-TERM OBLIGATIONS
(COST $3,489,834) 3,489,834
-------------
TOTAL INVESTMENTS
(COST $65,950,347) $ 65,950,347
-------------
-------------
</TABLE>
1
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
MORTGAGE-BACKED SECURITIES
(2.6% OF NET ASSETS)
American Southwest Financial Corp.
$ 513,739 8.25%, 2016 (COST $551,205) $ 492,065
-------------
U.S. GOVERNMENT & AGENCY LONG-TERM
OBLIGATIONS
(89.2% OF NET ASSETS)
Federal Farm Credit Banks
1,000,000 4.55%, 1995 977,190
Federal Home Loan Mortgage Corp.
374,161 10.50%, 2020 394,273
977,018 6.50%, 2023 861,906
Federal National Mortgage Assn.
235,067 6.50%, 2009 215,086
833,538 7.50%, 2022 778,316
951,999 6.50%, 2023 837,454
Government National Mortgage Assn.
444,199 6.50%, 2023 384,925
1,181,097 7.00%, 2023 1,060,034
49,415 7.50%, 2023 45,847
975,938 7.00%, 2024 875,905
Private Export Funding Corp.
1,000,000 7.30%, 2002 956,290
500,000 6.90%, 2003 465,670
U.S. Treasury Bonds
1,700,000 7.50%, 2016 1,613,402
1,200,000 9.25%, 2016 1,350,192
U.S. Treasury Notes
450,000 7.375%, 1996 449,226
2,350,000 5.50%, 1997 2,224,792
1,125,000 6.75%, 1997 1,102,849
650,000 5.125%, 1998 591,299
1,000,000 8.25%, 1998 1,012,340
650,000 5.75%, 2003 564,889
-------------
TOTAL U.S. GOVERNMENT & AGENCY LONG-TERM
OBLIGATIONS
(COST $18,092,656) 16,761,885
-------------
U.S. AGENCY SHORT-TERM OBLIGATIONS
(2.6% OF NET ASSETS)
Federal Farm Credit Banks
500,000 5.98%, due 2/21/95 (COST $495,764) 495,764
-------------
REPURCHASE AGREEMENTS*
(4.1% OF NET ASSETS)
State Street Bank & Trust Co.
761,000 5.15%, due 1/3/95 (COST $761,000) 761,000
-------------
TOTAL INVESTMENTS
(COST $19,900,625) $ 18,510,714
-------------
-------------
<CAPTION>
INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
CORPORATE BONDS
(57.7% OF NET ASSETS)
AEROSPACE (1.5%)
British Aerospace Finance Inc.
$ 1,000,000 8.00%, 1997 $ 990,625
Coltec Industries, Inc.
500,000 9.75%, 2000 492,500
-------------
1,483,125
-------------
AUTO & AUTO RELATED (1.0%)
Burmah Castrol Capital, Ltd.
500,000 7.00%, 1997 484,650
Chrysler Corp.
500,000 13.00%, 1997 504,720
-------------
989,370
-------------
BANKING (7.1%)
Banco Ganadero S.A.
700,000 9.75%, 1999 679,000
Banco Nacional de Comercio Exterior,
S.N.C.
700,000 7.25%, 2004 497,000
BankAmerica Corp.
750,000 7.75%, 2002 712,463
Chemical Banking Corp.
750,000 10.125%, 2000 802,852
First Fidelity Bancorporation
750,000 8.50%, 1998 750,885
First USA Bank of Delaware
1,000,000 5.05%, 1995 975,838
Fleet Financial Group, Inc.
500,000 9.90%, 2001 530,495
Home Savings of America
500,000 10.50%, 1997 513,550
Integra Financial Corp.
500,000 6.50%, 2000 456,035
Mellon Financial Co.
500,000 6.50%, 1997 478,050
Shawmut National Corp.
750,000 8.875%, 1996 754,995
-------------
7,151,163
-------------
BUILDING MATERIALS & CONSTRUCTION (.4%)
Cemex
450,000 8.875%, 1998 431,737
-------------
CHEMICALS (3.2%)
Grace (W.R.) & Co.
1,000,000 7.40%, 2000 947,300
Lyondell Petrochemical Co.
1,000,000 8.25%, 1997 989,470
Morton International, Inc.
500,000 9.25%, 2020 536,250
</TABLE>
*Repurchase agreements are fully collateralized by U.S. Government obligations.
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
INCOME PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
PPG Industries, Inc.
$ 750,000 9.00%, 2021 $ 775,455
-------------
3,248,475
-------------
CONGLOMERATES (.8%)
Tenneco, Inc.
750,000 10.00%, 1998 783,240
-------------
DRUGS & COSMETICS (1.5%)
Procter & Gamble Co.
500,000 9.36%, 2021 539,400
Roche Holdings Inc.
1,250,000 2.75%, 2000 961,719
-------------
1,501,119
-------------
ELECTRIC UTILITIES (1.8%)
Consumers Power Co.
1,000,000 8.75%, 1998 1,000,160
Hydro-Quebec
750,000 9.375%, 2030 774,060
-------------
1,774,220
-------------
ELECTRICAL & ELECTRONIC EQUIPMENT (1.0%)
Electrolux
1,000,000 7.75%, 1997 982,500
-------------
FINANCIAL SERVICES (11.3%)
Allied Lyons
500,000 6.50%, 1997 478,750
American General Finance Corp.
750,000 5.875%, 2000 667,838
Aristar, Inc.
750,000 6.25%, 1996 729,112
Associates Corp. of North America
500,000 8.625%, 1997 502,845
Avco Financial Services, Inc.
500,000 5.875%, 1997 470,745
Countrywide Funding Corp.
750,000 6.57%, 1997 719,940
250,000 6.085%, 1999 227,650
Fleet Mortgage Corp.
500,000 6.50%, 1999 460,300
Ford Motor Credit Co.
750,000 6.25%, 1998 706,523
General Motors Acceptance Corp.
2,000,000 5.65%, 1997 1,850,160
500,000 7.875%, 1997 494,260
Green Tree Financial Corp.
1,000,000 7.70%, 2019 972,500
Household Finance Corp.
500,000 8.95%, 1999 510,550
Household International Netherlands
B.V.
500,000 6.00%, 1999 458,030
Santa Barbara Funding Inc.
2,130,849 9.00%, 2016 2,125,522
-------------
11,374,725
-------------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
FOOD & BEVERAGES (1.7%)
Bass America Inc.
$ 750,000 6.75%, 1999 $ 700,080
Seagram Company Ltd.
1,000,000 9.75%, 2000 1,013,890
-------------
1,713,970
-------------
INSURANCE (.7%)
SunAmerica Inc.
750,000 9.00%, 1999 757,140
-------------
LEASING (2.1%)
Penske Truck Leasing Co.
1,000,000 7.75%, 1999 967,260
PHH Corp.
500,000 6.50%, 2000 459,720
U.S. Leasing International Inc.
750,000 7.00%, 1997 723,548
-------------
2,150,528
-------------
MACHINERY & EQUIPMENT (.5%)
Caterpillar Financial Services Corp.
500,000 6.85%, 1997 481,610
-------------
MANUFACTURING (.7%)
Black & Decker Corp.
750,000 6.625%, 2000 667,560
-------------
MORTGAGE-BACKED SECURITIES (2.2%)
Fleet Mortgage Securities, Inc.
327,524 8.25%, 2023 326,807
GE Capital Mortgage Services, Inc.
230,834 6.50%, 2024 221,095
Housing Securities, Inc.
500,000 7.25%, 2012 488,281
Merrill Lynch Trust
500,000 6.50%, 2015 426,090
Ryland Mortgage Securities Corp.
444,482 8.339%, 2030 423,369
Salomon Brothers, Inc.
296,291 0.00%, 2017 199,810
200,220 12.50%, 2017 79,774
Sears Mortgage Securities Corp.
19,912 7.645%, 2019 19,812
-------------
2,185,038
-------------
OIL & GAS (8.9%)
Arkla, Inc.
1,000,000 9.875%, 1997 1,010,000
Bridas Corp.
300,000 12.50%, 1999 289,500
Coastal Corp.
1,000,000 11.125%, 1998 1,015,000
500,000 8.75%, 1999 494,410
Colorado Interstate Gas Co.
500,000 10.00%, 2005 540,380
Empresa Columbia de Petroleos
750,000 7.25%, 1998 690,000
HNG InterNorth
500,000 9.625%, 2008 531,630
</TABLE>
3
<PAGE>
INCOME PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
Norsk Hydro
$ 1,000,000 8.75%, 2001 $ 997,500
Petroleos Mexicanos
350,000 8.25%, 1998 326,375
Petroliam Nasional Berhad
1,000,000 6.875%, 2003 896,270
Texaco Capital Inc.
500,000 8.875%, 2021 514,285
TransCandada Pipelines Ltd.
750,000 9.875%, 2021 830,288
Transco Energy Co.
750,000 11.25%, 1999 797,812
-------------
8,933,450
-------------
PAPER & FOREST PRODUCTS (2.8%)
Celulosa Arauco y Constitucion S.A.
750,000 7.25%, 1998 711,563
Georgia-Pacific Corp.
1,000,000 9.85%, 1997 1,027,760
Kimberly-Clark Corp.
600,000 7.875%, 2023 551,280
Potlatch Corp.
500,000 9.46%, 2002 518,565
-------------
2,809,168
-------------
PRINTING & PUBLISHING (1.8%)
Reed Elsevier Inc.
600,000 6.625%, 2023 468,516
Reed Publishing USA Inc.
500,000 7.20%, 1997 492,740
Time Warner Inc.
900,000 7.45%, 1998 857,817
-------------
1,819,073
-------------
RETAIL TRADE (1.5%)
Kmart Corp.
500,000 8.61%, 1997 503,795
Sears, Roebuck & Co.
1,000,000 8.39%, 1999 993,410
-------------
1,497,205
-------------
SAVINGS & LOAN (.8%)
Golden West Financial Corp.
500,000 10.25%, 1997 518,390
250,000 8.625%, 1998 251,325
-------------
769,715
-------------
TELECOMMUNICATIONS (.9%)
Tele-Communications, Inc.
950,000 5.28%, 1996 908,001
-------------
TELEPHONE UTILITIES (1.5%)
GTE Corp.
750,000 8.85%, 1998 757,185
MCI Communications Corp.
750,000 7.125%, 2000 714,098
-------------
1,471,283
-------------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
TOBACCO (1.1%)
B.A.T Capital Corp.
$ 700,000 6.875%, 2003 $ 622,846
Philip Morris Companies Inc.
500,000 9.25%, 2000 508,320
-------------
1,131,166
-------------
TRANSPORTATION (.9%)
Federal Express Corp.
400,000 6.25%, 1998 374,324
Southern Pacific Transaportation Co.
500,000 10.50%, 1999 507,500
-------------
881,824
-------------
TOTAL CORPORATE BONDS
(COST $61,523,596) 57,896,405
-------------
U.S. GOVERNMENT & AGENCY
LONG-TERM OBLIGATIONS
(33.0% OF NET ASSETS)
Federal Home Loan Mortgage Corp.
1,000,000 6.00%, 2007 798,750
675,403 7.50%, 2023 544,544
Federal National Mortgage Assn.
1,218,666 7.00%, 2002 856,869
975,411 7.00%, 2004 934,434
806,479 7.50%, 2008 771,946
970,103 8.00%, 2017 931,784
855,981 8.50%, 2021 811,310
Government National Mortgage Assn.
1,206,086 6.50%, 2004 1,045,146
586,804 9.00%, 2016 594,039
240,063 8.50%, 2019 237,170
616,092 9.00%, 2019 622,241
618,436 8.50%, 2020 610,470
315,297 9.00%, 2020 318,333
570,905 8.50%, 2021 560,914
115,080 8.50%, 2022 113,066
2,592,778 6.50%, 2023 2,246,797
3,892,375 7.00%, 2023 3,493,406
1,965,701 7.00%, 2024 1,764,216
U.S. Treasury Bonds
500,000 10.375%, 2012 595,000
5,000,000 0.00%, 2014 1,057,150
1,500,000 0.00%, 2015 298,320
9,325,000 7.50%, 2016 8,849,984
1,000,000 9.25%, 2016 1,125,160
1,000,000 8.875%, 2017 1,089,370
750,000 7.25%, 2022 692,340
U.S. Treasury Notes
500,000 7.375%, 1996 499,140
500,000 9.00%, 1998 516,795
750,000 7.50%, 2001 736,290
500,000 5.75%, 2003 434,530
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements. 4
<PAGE>
INCOME PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<C> <S> <C>
SECURITY
TOTAL U.S. GOVERNMENT & AGENCY
LONG-TERM OBLIGATIONS
(COST $35,729,725) $ 33,149,514
-------------
FOREIGN GOVERNMENT BONDS
(3.0% OF NET ASSETS)
Fomento Economico Mexicano
$ 500,000 9.50%, 1997 494,375
Province of Ontario
750,000 8.00%, 2001 739,335
United Mexican States
500,000 6.97%, 2000 422,616
1,700,000 8.50%, 2002 1,368,500
-------------
TOTAL FOREIGN GOVERNMENT BONDS
(COST $3,511,178) 3,024,826
-------------
COMMERCIAL PAPER
(4.5% OF NET ASSETS)
Johnson Controls, Inc.
4,550,000 5.80%, 1/3/95 (COST $4,548,534) 4,548,534
-------------
TOTAL INVESTMENTS
(COST $105,313,033) $ 98,619,279
-------------
-------------
</TABLE>
TOTAL RETURN PORTFOLIO
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<CAPTION>
<C> <S> <C>
COMMON STOCKS
(41.2% OF NET ASSETS)
AEROSPACE (3.3%)
129,000 General Dynamics Corp. $ 5,611,500
118,100 General Motors Corp. Class H 4,118,737
76,400 Lockheed Corp. 5,548,550
152,800 Loral Corp. 5,787,300
24,300 McDonnell Douglas Corp. 3,450,600
-------------
24,516,687
-------------
APPAREL & TEXTILES (.7%)
126,600 Reebok International Ltd. 5,000,700
-------------
AUTO & AUTO RELATED (.4%)
54,100 Johnson Controls, Inc. 2,650,900
-------------
BANKING (2.2%)
189,900 Bank of New York Co., Inc. 5,507,100
147,700 Citicorp 6,111,088
30,300 Wells Fargo & Co. 4,393,500
-------------
16,011,688
-------------
CHEMICALS (1.6%)
69,000 FMC Corp. 3,984,750
82,000 Georgia Gulf Corp. 3,187,750
124,500 Grace (W.R.) & Co. 4,808,813
-------------
11,981,313
-------------
CONGLOMERATES (1.1%)
102,500 AlliedSignal Inc. 3,485,000
90,900 Textron, Inc. 4,579,088
-------------
8,064,088
-------------
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
DRUGS & COSMETICS (.6%)
76,200 American Home Products Corp. $ 4,781,550
-------------
ELECTRIC UTILITIES (2.1%)
172,300 American Electric Power Co., Inc. 5,664,363
163,900 FPL Group, Inc. 5,756,987
201,900 Illinova Corp. 4,391,325
-------------
15,812,675
-------------
ELECTRICAL & ELECTRONIC
EQUIPMENT (.7%)
38,900 LSI Logic Corp. 1,570,587
78,600 Micron Technology Inc. 3,468,225
-------------
5,038,812
-------------
ENERGY SERVICES (.5%)
75,400 Offshore Pipelines, Inc. 1,705,925
56,800 Tosco Corp. 1,654,300
-------------
3,360,225
-------------
FOOD & BEVERAGES (2.2%)
325,552 Archer Daniels Midland Co. 6,714,520
42,100 IBP, Inc. 1,273,525
132,500 Ralcorp Holdings, Inc. 2,948,125
188,900 Seagram Company Ltd. 5,572,550
-------------
16,508,720
-------------
HEALTH SERVICES & HOSPITAL SUPPLIES
(2.3%)
222,500 Baxter International, Inc. 6,285,625
145,500 Charter Medical Corp. 3,128,250
123,800 Columbia Healthcare Corp. 4,518,700
101,100 Foundation Health Corp. 3,134,100
-------------
17,066,675
-------------
INSURANCE (1.9%)
123,300 American General Corp. 3,483,225
67,700 St. Paul Companies Inc. 3,029,575
156,700 TIG Holdings, Inc. 2,938,125
138,100 Travelers, Inc. 4,488,250
-------------
13,939,175
-------------
LEASING (.3%)
114,400 Ryder System, Inc. 2,516,800
-------------
LEISURE RELATED (.9%)
273,350 Mattel, Inc. 6,867,919
-------------
MACHINERY & EQUIPMENT (1.8%)
111,300 Caterpillar Inc. 6,135,412
144,300 Mark IV Industries, Inc. 2,849,925
105,700 Parker-Hannifin Corp. 4,809,350
-------------
13,794,687
-------------
MISCELLANEOUS (1.3%)
249,100 Dial Corp. 5,293,375
92,500 Premark International, Inc. 4,139,375
-------------
9,432,750
-------------
OFFICE EQUIPMENT (.9%)
66,000 Xerox Corp. 6,534,000
-------------
</TABLE>
5
<PAGE>
TOTAL RETURN PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
OIL & GAS (3.5%)
91,100 Amoco Corp. $ 5,386,287
101,300 El Paso Natural Gas Co. 3,089,650
72,500 Mobil Corp. 6,108,125
288,000 Panhandle Eastern Corp. 5,688,000
45,700 Royal Dutch Petroleum Co. 4,912,750
40,400 Ultramar Corp. 1,030,200
-------------
26,215,012
-------------
PAPER & FOREST PRODUCTS (1.7%)
28,500 Georgia-Pacific Corp. 2,037,750
85,700 Scott Paper Co. 5,924,013
94,900 Willamette Industries, Inc. 4,507,750
-------------
12,469,513
-------------
RETAIL TRADE (5.0%)
239,500 American Stores Co. 6,436,563
47,000 Dayton Hudson Corp. 3,325,250
122,500 Dillard Department Stores Inc. 3,276,875
114,400 Eckerd Corp. 3,417,700
170,600 Kroger Co. 4,115,725
242,200 Safeway Inc. 7,720,125
126,000 Sears, Roebuck & Co. 5,796,000
203,300 Waban, Inc. 3,608,575
-------------
37,696,813
-------------
TECHNOLOGY (3.3%)
177,500 Compaq Computer Corp. 7,011,250
129,400 Computer Associates International, Inc. 6,275,900
83,800 International Business Machines Corp. 6,159,300
43,200 Stratus Computer, Inc. 1,641,600
86,500 Sun Microsystems, Inc. 3,070,750
-------------
24,158,800
-------------
TELEPHONE UTILITIES (.9%)
175,300 Ameritech Corp. 7,077,737
-------------
TOBACCO (1.6%)
180,900 American Brands, Inc. 6,783,750
88,300 Philip Morris Companies Inc. 5,077,250
-------------
11,861,000
-------------
TRANSPORTATION (.4%)
111,200 Yellow Corp. 2,654,900
-------------
TOTAL COMMON STOCKS
(COST $287,567,106) 306,013,139
-------------
<CAPTION>
PRINCIPAL CORPORATE BONDS
AMOUNT (20.6% OF NET ASSETS)
AEROSPACE (.3%)
British Aerospace Finance Inc.
$ 1,500,000 8.00%, 1997 1,485,938
Coltec Industries, Inc.
1,000,000 9.75%, 2000 985,000
-------------
2,470,938
-------------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
AUTO & AUTO RELATED (.5%)
Burmah Castrol Capital, Ltd.
$ 2,000,000 7.00%, 1997 $ 1,938,600
Chrysler Corp.
1,500,000 13.00%, 1997 1,514,160
-------------
3,452,760
-------------
BANKING (1.9%)
Banco Nacional de Comercio Exterior,
S.N.C.
1,300,000 7.25%, 2004 923,000
BankAmerica Corp.
1,250,000 7.75%, 2002 1,187,438
Chemical Banking Corp.
1,000,000 10.125%, 2000 1,070,470
First Fidelity Bancorporation
1,500,000 8.50%, 1998 1,501,770
First USA Bank of Delaware
2,000,000 5.05%, 1995 1,948,960
1,250,000 5.35%, 1996 1,172,422
Fleet Financial Group, Inc.
750,000 9.90%, 2001 795,742
Marshall & Ilsley Corp.
1,500,000 6.95%, 1997 1,464,300
Mellon Financial Co.
1,350,000 6.50%, 1997 1,290,735
Shawmut National Corp.
2,250,000 8.875%, 1996 2,264,985
500,000 8.125%, 1997 498,670
-------------
14,118,492
-------------
BUILDING MATERIALS & CONSTRUCTION (.1%)
Cemex
1,000,000 8.875%, 1998 959,416
-------------
CHEMICALS (1.1%)
Grace (W.R.) & Co.
2,750,000 7.40%, 2000 2,605,075
Lyondell Petrochemical Co.
3,500,000 8.25%, 1997 3,463,145
Morton International, Inc.
1,500,000 9.25%, 2020 1,608,750
PPG Industries, Inc.
750,000 9.00%, 2021 775,455
-------------
8,452,425
-------------
CONGLOMERATES (.4%)
Tenneco Credit Corp.
2,000,000 9.25%, 1996 2,029,360
Tenneco, Inc.
1,250,000 10.00%, 1998 1,305,400
-------------
3,334,760
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements. 6
<PAGE>
TOTAL RETURN PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
DRUGS & COSMETICS (.5%)
Procter & Gamble Co.
$ 750,000 9.36%, 2021 $ 809,100
Roche Holdings Inc.
3,000,000 2.75%, 2000 2,308,125
-------------
3,117,225
-------------
ELECTRIC UTILITIES (.7%)
Consumers Power Co.
2,000,000 8.75%, 1998 2,000,320
Hydro-Quebec
2,000,000 9.375%, 2030 2,064,160
Ohio Edison Co.
1,000,000 8.50%, 1996 1,001,940
-------------
5,066,420
-------------
ELECTRICAL & ELECTRONIC
EQUIPMENT (.6%)
Electrolux
2,500,000 7.75%, 1997 2,456,250
Westinghouse Electric Corp.
2,000,000 7.75%, 1996 1,981,960
-------------
4,438,210
-------------
FINANCIAL SERVICES (5.1%)
American General Finance Corp.
2,000,000 7.70%, 1997 1,965,340
1,500,000 5.875%, 2000 1,335,675
Aristar, Inc.
1,750,000 6.25%, 1996 1,701,262
1,250,000 8.125%, 1997 1,241,538
Associates Corp. of North America
1,500,000 6.75%, 1999 1,399,140
Avco Financial Services, Inc.
1,500,000 5.875%, 1997 1,412,235
Chrysler Financial Corp.
4,500,000 5.08%, 1997 4,232,520
Citicorp
1,000,000 8.45%, 1996 1,007,280
Countrywide Funding Corp.
1,000,000 6.57%, 1997 959,920
1,750,000 6.085%, 1999 1,593,550
Discover Credit Corp.
2,750,000 8.73%, 1996 2,771,532
Fleet Mortgage Corp.
3,000,000 6.125%, 1997 2,845,710
750,000 6.50%, 1999 690,450
Ford Motor Credit Co.
1,000,000 8.00%, 1997 993,860
1,500,000 6.25%, 1998 1,413,045
General Motors Acceptance Corp.
2,000,000 5.65%, 1997 1,850,160
2,500,000 7.75%, 1997 2,467,900
Green Tree Financial Corp.
1,500,000 8.00%, 2020 1,476,090
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
Household Finance Corp.
$ 1,200,000 8.95%, 1999 $ 1,225,320
Household International Netherlands
B.V.
1,500,000 6.00%, 1999 1,374,090
ITT Financial Corp.
750,000 8.75%, 2006 750,750
Norwest Financial, Inc.
1,500,000 6.50%, 1997 1,436,100
Transamerica Finance Corp.
2,000,000 6.80%, 1999 1,883,320
-------------
38,026,787
-------------
FOOD & BEVERAGES (.7%)
Bass America Inc.
1,250,000 6.75%, 1999 1,166,800
ConAgra, Inc.
1,500,000 9.75%, 1997 1,544,595
Seagram Company Ltd.
2,275,000 9.75%, 2000 2,306,600
-------------
5,017,995
-------------
INSURANCE (.5%)
Skandia Group Insurance Co. Ltd.
1,700,000 6.00%, 1998 1,547,000
SunAmerica Inc.
1,700,000 9.00%, 1999 1,716,184
-------------
3,263,184
-------------
LEASING (.7%)
Penske Truck Leasing Co.
2,750,000 7.75%, 1999 2,659,965
PHH Corp.
1,250,000 6.50%, 2000 1,149,300
U.S. Leasing International Inc.
1,500,000 7.00%, 1997 1,447,095
-------------
5,256,360
-------------
LODGING & RESTAURANTS (.1%)
Host Marriott Hospitality Inc.
808,000 9.125%, 2000 796,890
-------------
MANUFACTURING (.2%)
Black & Decker Corp.
1,750,000 6.625%, 2000 1,557,640
-------------
MORTGAGE-BACKED SECURITIES (.6%)
Fleet Mortgage Securities, Inc.
982,571 8.25%, 2023 980,421
Housing Securities, Inc.
1,700,000 7.25%, 2012 1,660,156
Sears Mortgage Securities Corp.
29,868 7.645%, 2019 29,719
Transamerica Finance Corp.
2,000,000 6.75%, 1997 1,929,440
-------------
4,599,736
-------------
</TABLE>
7
<PAGE>
TOTAL RETURN PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
OIL & GAS (3.3%)
Arkla, Inc.
$ 3,000,000 9.875%, 1997 $ 3,030,000
BP America Inc.
1,500,000 8.875%, 1997 1,522,290
Bridas Corp.
850,000 12.50%, 1999 820,250
Coastal Corp.
2,000,000 11.125%, 1998 2,030,000
1,500,000 8.125%, 2002 1,418,550
Colorado Interstate Gas Co.
455,000 10.00%, 2005 491,746
El Paso Natural Gas Co.
750,000 6.90%, 1997 729,997
HNG InterNorth
700,000 9.625%, 2006 744,282
Norsk Hydro
1,500,000 8.75%, 2001 1,496,250
Petroleos Mexicanos
500,000 8.25%, 1998 466,250
Petroliam Nasional Berhad
2,500,000 6.875%, 2003 2,240,675
Phillips Petroleum Co.
3,500,000 7.53%, 1998 3,434,565
Texaco Capital Inc.
500,000 8.875%, 2021 514,285
TransCanada Pipelines Ltd.
2,250,000 9.875%, 2021 2,490,862
Transco Energy Co.
2,150,000 11.25%, 1999 2,287,063
Transcontinental Gas Pipe Line Corp.
1,000,000 9.00%, 1996 1,007,500
-------------
24,724,565
-------------
PAPER & FOREST PRODUCTS (.6%)
Celulosa Arauco y Constitucion S.A.
2,000,000 7.25%, 1998 1,897,500
Georgia-Pacific Corp.
2,750,000 9.85%, 1997 2,826,340
-------------
4,723,840
-------------
PRINTING & PUBLISHING (.5%)
Reed Elsevier, Inc.
1,600,000 6.625%, 2023 1,249,376
Time Warner Inc.
2,500,000 7.45%, 1998 2,382,825
-------------
3,632,201
-------------
RETAIL TRADE (.2%)
Sears, Roebuck & Co.
1,400,000 8.39%, 1999 1,390,774
-------------
SAVINGS & LOAN (.2%)
Golden West Financial Corp.
1,250,000 10.25%, 1997 1,295,975
500,000 8.625%, 1998 502,650
-------------
1,798,625
-------------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
TELECOMMUNICATIONS (.2%)
Tele-Communications, Inc.
$ 1,600,000 7.15%, 1998 $ 1,529,920
-------------
TELEPHONE UTILITIES (.6%)
GTE Corp.
2,350,000 8.85%, 1998 2,372,513
MCI Communications Corp.
1,750,000 7.125%, 2000 1,666,228
-------------
4,038,741
-------------
TOBACCO (.7%)
B.A.T Capital Corp.
2,500,000 6.875%, 2003 2,224,450
500,000 6.66%, 2000 445,585
Philip Morris Companies Inc.
1,000,000 8.75%, 1996 1,010,080
1,500,000 9.25%, 2000 1,524,960
-------------
5,205,075
-------------
TRANSPORTATION (.3%)
Federal Express Corp.
1,000,000 6.25%, 1998 935,810
Southern Pacific Transportation Co.
1,250,000 10.50%, 1999 1,268,750
-------------
2,204,560
-------------
TOTAL CORPORATE BONDS
(COST $161,264,369) 153,177,539
-------------
U.S. GOVERNMENT & AGENCY
LONG-TERM OBLIGATIONS
(28.9% OF NET ASSETS)
Federal Home Loan Mortgage Corp.
2,000,000 6.00%, 2007 1,597,500
Federal National Mortgage Assn.
1,827,999 7.00%, 2002 1,285,303
2,700,000 6.00%, 2019 2,414,799
2,147,703 7.50%, 2008 2,055,738
390,544 8.00%, 2017 375,169
Government National Mortgage Assn.
3,920,369 7.00%, 1999 3,518,531
917,963 7.50%, 1999 851,695
993,142 6.50%, 2008 860,617
23,343 9.00%, 2016 23,631
1,528,235 8.00%, 2017 1,481,715
120,020 9.00%, 2017 121,489
1,776,217 9.00%, 2018 1,796,007
319,011 8.50%, 2019 315,168
841,906 9.00%, 2019 850,014
242,282 9.00%, 2020 244,401
166,752 8.50%, 2021 163,833
1,607,613 9.00%, 2021 1,621,679
72,474 8.50%, 2022 71,206
430,570 9.00%, 2022 434,337
8,169,646 6.50%, 2023 7,079,488
1,917,669 7.00%, 2023 1,721,109
7,467,503 7.50%, 2023 6,928,424
548,473 8.50%, 2023 538,875
</TABLE>
The accompanying notes are an integral part of these financial statements. 8
<PAGE>
TOTAL RETURN PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
$13,558,919 6.50%, 2024 $ 11,749,617
19,590,420 7.00%, 2024 17,582,402
U.S. Treasury Bonds
9,200,000 0.00%, 2012 2,280,956
3,000,000 10.375%, 2012 3,570,000
2,250,000 0.00%, 2015 447,480
57,950,000 7.50%, 2016 54,998,027
3,000,000 8.75%, 2017 3,229,230
1,875,000 8.875%, 2017 2,042,569
U.S. Treasury Notes
13,000,000 3.875%, 1995 12,902,500
13,800,000 7.375%, 1996 13,776,264
5,500,000 5.125%, 1996 5,346,165
6,000,000 0.00%, 1997 5,007,480
11,050,000 5.125%, 1998 10,052,075
1,000,000 5.625%, 1998 939,370
8,000,000 7.00%, 1999 7,752,480
15,500,000 7.50%, 2001 15,216,660
5,000,000 8.00%, 2001 5,039,050
5,500,000 0.00%, 2003 2,817,595
3,150,000 5.75%, 2003 2,737,539
-------------
TOTAL U.S. GOVERNMENT & AGENCY
LONG-TERM OBLIGATIONS
(COST $224,440,484) 213,838,187
-------------
FOREIGN GOVERNMENT BONDS
(1.3% OF NET ASSETS)
Fomento Economico Mexicano
2,500,000 9.50%, 1997 2,471,875
Republic of Columbia
600,000 7.125%, 1998 573,000
1,600,000 8.75%, 1999 1,526,000
United Mexican States
1,750,000 6.97%, 2000 1,479,158
4,350,000 8.50%, 2002 3,501,750
-------------
TOTAL FOREIGN GOVERNMENT BONDS
(COST $10,698,799) 9,551,783
-------------
COMMERCIAL PAPER
(5.9% OF NET ASSETS)
Cargill Financial Services Corp.
5,000,000 5.55%, due 1/3/95 4,998,458
6,000,000 5.90%, due 1/6/95 5,995,083
Central & Southwest Corp.
4,100,000 5.80%, due 1/3/95 4,098,679
Cincinnati Bell, Inc.
800,000 6.10%, due 1/3/95 799,729
Ford Motor Credit Co.
9,204,000 5.90%, due 1/5/95 9,204,000
GTE Florida, Inc.
6,000,000 5.90%, due 1/5/95 5,996,067
PHH Corp.
1,000,000 5.94%, due 1/9/95 998,680
Philip Morris Companies Inc.
1,800,000 5.80%, due 1/4/95 1,799,130
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
$10,100,000 5.90%, due 1/4/95 $ 10,095,034
-------------
TOTAL COMMERCIAL PAPER
(COST $43,984,860) 43,984,860
-------------
TOTAL INVESTMENTS
(COST $727,955,618) $ 726,565,508
-------------
-------------
</TABLE>
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
COMMON STOCKS
(89.1% OF NET ASSETS)
AEROSPACE (7.4%)
105,100 General Dynamics Corp. $ 4,571,850
82,300 General Motors Corp. Class H 2,870,212
46,300 Lockheed Corp. 3,362,538
98,500 Loral Corp. 3,730,688
17,900 McDonnell Douglas Corp. 2,541,800
-------------
17,077,088
-------------
APPAREL & TEXTILES (1.6%)
92,000 Reebok International Ltd. 3,634,000
-------------
AUTO & AUTO RELATED (.7%)
33,100 Johnson Controls, Inc. 1,621,900
-------------
BANKING (4.9%)
139,700 Bank of New York Co., Inc. 4,051,300
92,600 Citicorp 3,831,325
23,100 Wells Fargo & Co. 3,349,500
-------------
11,232,125
-------------
CHEMICALS (3.3%)
40,300 FMC Corp. 2,327,325
55,100 Georgia Gulf Corp. 2,142,012
82,100 Grace (W.R.) & Co. 3,171,113
-------------
7,640,450
-------------
CONGLOMERATES (2.1%)
61,600 AlliedSignal Inc. 2,094,400
53,900 Textron, Inc. 2,715,213
-------------
4,809,613
-------------
DRUGS & COSMETICS (1.7%)
62,000 American Home Products Corp. 3,890,500
-------------
ELECTRIC UTILITIES (4.6%)
127,400 American Electric Power Co., Inc. 4,188,275
99,700 FPL Group, Inc. 3,501,963
135,800 Illinova Corp. 2,953,650
-------------
10,643,888
-------------
ELECTRICAL & ELECTRONIC
EQUIPMENT (1.5%)
21,400 LSI Logic Corp. 864,025
58,750 Micron Technology Inc. 2,592,344
-------------
3,456,369
-------------
</TABLE>
9
<PAGE>
GROWTH PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
ENERGY SERVICES (1.0%)
60,800 Offshore Pipelines, Inc. $ 1,375,600
32,900 Tosco Corp. 958,212
-------------
2,333,812
-------------
FOOD & BEVERAGES (4.7%)
183,015 Archer Daniels Midland Co. 3,774,684
27,200 IBP, Inc. 822,800
108,100 Ralcorp Holdings, Inc. 2,405,225
130,100 Seagram Company Ltd. 3,837,950
-------------
10,840,659
-------------
HEALTH SERVICES & HOSPITAL
SUPPLIES (5.0%)
149,100 Baxter International Inc. 4,212,075
111,000 Charter Medical Corp. 2,386,500
83,000 Columbia Healthcare Corp. 3,029,500
59,100 Foundation Health Corp. 1,832,100
-------------
11,460,175
-------------
INSURANCE (4.4%)
89,100 American General Corp. 2,517,075
51,600 St. Paul Companies Inc. 2,309,100
111,300 TIG Holdings, Inc. 2,086,875
95,900 Travelers, Inc. 3,116,750
-------------
10,029,800
-------------
LEASING (.8%)
80,200 Ryder System, Inc. 1,764,400
-------------
LEISURE RELATED (1.4%)
127,875 Mattel, Inc. 3,212,859
-------------
MACHINERY & EQUIPMENT (4.2%)
73,700 Caterpillar Inc. 4,062,712
107,500 Mark IV Industries, Inc. 2,123,125
77,900 Parker-Hannifin Corp. 3,544,450
-------------
9,730,287
-------------
MISCELLANEOUS (2.8%)
139,500 Dial Corp. 2,964,375
76,800 Premark International, Inc. 3,436,800
-------------
6,401,175
-------------
OFFICE EQUIPMENT (1.9%)
45,300 Xerox Corp. 4,484,700
-------------
OIL & GAS (7.3%)
59,200 Amoco Corp. 3,500,200
62,700 El Paso Natural Gas Co. 1,912,350
47,600 Mobil Corp. 4,010,300
187,800 Panhandle Eastern Corp. 3,709,050
29,700 Royal Dutch Petroleum Co. 3,192,750
19,800 Ultramar Corp. 504,900
-------------
16,829,550
-------------
PAPER & FOREST PRODUCTS (3.9%)
21,600 Georgia-Pacific Corp. 1,544,400
65,300 Scott Paper Co. 4,513,862
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
60,400 Willamette Industries, Inc. $ 2,869,000
-------------
8,927,262
-------------
RETAIL TRADE (10.4%)
114,200 American Stores Co. 3,069,125
33,700 Dayton Hudson Corp. 2,384,275
73,700 Dillard Department Stores, Inc. 1,971,475
84,200 Eckerd Corp. 2,515,475
118,800 Kroger Co. 2,866,050
116,100 Safeway Inc. 3,700,688
102,200 Sears, Roebuck & Co. 4,701,200
148,200 Waban, Inc. 2,630,550
-------------
23,838,838
-------------
TECHNOLOGY (7.6%)
127,000 Compaq Computer Corp. 5,016,500
88,400 Computer Associates International, Inc. 4,287,400
64,900 International Business Machines Corp. 4,770,150
31,900 Stratus Computer, Inc. 1,212,200
63,300 Sun Microsystems, Inc. 2,247,150
-------------
17,533,400
-------------
TELEPHONE UTILITIES (1.6%)
92,300 Ameritech Corp. 3,726,612
-------------
TOBACCO (3.6%)
123,800 American Brands, Inc. 4,642,500
62,900 Philip Morris Companies Inc. 3,616,750
-------------
8,259,250
-------------
TRANSPORTATION (.7%)
72,200 Yellow Corp. 1,723,775
-------------
TOTAL COMMON STOCKS
(COST $193,505,804) 205,102,487
-------------
PRINCIPAL COMMERCIAL PAPER
AMOUNT (10.3% OF NET ASSETS)
American Express Credit Corp.
$ 3,071,000 5.85%, due 1/3/95 3,071,000
544,000 5.83%, due 1/4/95 544,000
Duke Power Company
2,380,000 5.85%, due 1/5/95 2,378,453
Ford Motor Credit Co.
3,715,000 5.90%, due 1/4/95 3,715,000
760,000 5.80%, due 1/9/95 760,000
General Electric Capital Corp.
1,280,000 5.82%, due 1/6/95 1,280,000
GTE Florida, Inc.
2,500,000 5.90%, due 1/12/95 2,495,493
Massachusetts Electric Co.
2,000,000 5.90%, due 1/12/95 1,996,394
PHH Corp.
2,000,000 5.85%, due 1/5/95 1,998,700
Philip Morris Companies Inc.
2,694,000 5.90%, due 1/5/95 2,692,234
</TABLE>
The accompanying notes are an integral part of these financial statements. 10
<PAGE>
GROWTH PORTFOLIO (cont'd)
PRINCIPAL MARKET
AMOUNT SECURITY VALUE
U S West Communications, Inc.
$ 2,700,000 5.94%, due 1/19/95 $ 2,691,981
-------------
TOTAL COMMERCIAL PAPER
(COST $23,623,255) 23,623,255
-------------
TOTAL INVESTMENTS
(COST $217,129,059) $ 228,725,742
-------------
-------------
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
<C> <S> <C>
NUMBER OF MARKET
SHARES SECURITY VALUE
<CAPTION>
<C> <S> <C>
COMMON STOCKS
(87.0% OF NET ASSETS)
AEROSPACE (.3%)
33,000 Rolls Royce PLC (United Kingdom) $ 92,943
-------------
APPAREL & TEXTILES (.3%)
36,000 Coats Viyella PLC (United Kingdom) 106,181
-------------
AUTO & AUTO RELATED (3.5%)
Bayerische Motoren Werke
165 (Germany) 81,558
12,000 Honda Motor Co. Ltd. (Japan) 213,253
37,707 Lucas Industries (United Kingdom) 121,540
1,300 Michelin (France) 54,568
23,000 NGK Insulators Ltd. (Japan) 235,542
895 Peugeot (France) 122,662
11,000 Shinmaywa Industries Ltd. (Japan) 112,651
7,000 Toyota Motor Corp. (Japan) 147,591
-------------
1,089,365
-------------
BANKING (12.3%)
4,662 ABN-Amro Holding (Netherlands) 161,944
40,278 ANZ Group Holdings (Australia) 132,740
1,900 Banco Bilbao Vizcaya (Spain) 47,130
1,200 Banco Intercon Espanol (Spain) 99,283
750 Banco Popular Espanol (Spain) 89,174
Banco Santander S.A.
2,300 de Credito (Spain) 88,068
13,300 Bank of Montreal (Canada) 246,507
11,000 Bank of Tokyo Ltd. (Japan) 170,080
200 Bayerische Vereinsbank (Germany) 57,689
1,226 Compagnie de Suez (France) 56,239
1,200 Credit Local de France (France) 85,827
640 CS Holding (Switzerland) 273,797
11,000 Daiwa Bank (Japan) 111,546
520 Deutsche Bank (Germany) 241,595
11,000 Hang Seng Bank (Hong Kong) 78,901
8,600 HSBC Holdings (United Kingdom) 95,070
540 Kredietbank (Belgium) 113,229
37,300 Lloyds Bank (United Kingdom) 322,458
8,000 Mitsubishi Bank (Japan) 196,787
National Australia Bank Ltd.
23,377 (Australia) 187,436
National Westminster Bank PLC
26,700 (United Kingdom) 214,318
10,800 Royal Bank of Canada (Canada) 215,569
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
1,520 Societe Generale (France) $ 159,655
15,000 Sumitomo Bank Ltd. (Japan) 286,144
Westpac Banking Corp. Ltd.
44,616 (Australia) 150,150
-------------
3,881,336
-------------
BUILDING MATERIALS & CONSTRUCTION (2.4%)
360 Colas (France) 59,382
8,000 Daiwa House Industry (Japan) 113,253
13,000 INAX Corp. (Japan) 135,743
Maeda Road Construction Co.
4,000 Ltd. (Japan) 66,265
30,000 Sekisui House Ltd. (Japan) 334,337
4,000 Yokogawa Bridge Works Ltd. (Japan) 50,602
-------------
759,582
-------------
CHEMICALS (3.9%)
Asahi Chemical Industry Co.
17,000 Ltd. (Japan) 130,402
300 BASF AG (Germany) 61,851
325 Bayer AG (Germany) 76,128
105 Ciba-Geigy AG (Switzerland) 62,647
Daicel Chemical Industries
11,000 Ltd. (Japan) 62,069
1,050 DSM (Netherlands) 83,412
380 Hoechst (Germany) 82,635
4,000 Kuraray Co. (Japan) 47,390
52,400 Montedison (Italy) 39,528
Nova Corporation of
20,600 Alberta (Canada) 190,904
175 Solvay et Cie (Belgium) 83,071
45,000 Toray Industries Inc. (Japan) 327,561
-------------
1,247,598
-------------
COMPUTER BUSINESS EQUIPMENT & SERVICES
(1.6%)
Dai Nippon Printing Co.
16,000 Ltd. (Japan) 273,092
24,000 Fujitsu Ltd. (Japan) 243,373
-------------
516,465
-------------
CONGLOMERATES (3.4%)
29,000 BET PLC (United Kingdom) 46,057
56,251 BTR Nylex Ltd. (Australia) 104,685
13,200 Canadian Pacific Ltd. (Canada) 196,429
580 Groupe Bruxelles Lambert (Belgium) 68,739
33,000 Hanson PLC (United Kingdom) 119,278
44,000 Hutchison Whampoa (Hong Kong) 177,991
Jardine Matheson Holdings Ltd.
15,800 (Hong Kong) 112,821
450 Preussag (Germany) 130,670
21,000 Swire Pacific (Hong Kong) 130,818
-------------
1,087,488
-------------
</TABLE>
11
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
DRUGS & COSMETICS (3.4%)
16,100 Glaxo Holdings (United Kingdom) $ 167,273
44 Roche Holdings (Switzerland) 212,941
10,000 Sankyo Co. Ltd. (Japan) 248,996
65 Schering Group (Germany) 42,657
SmithKline Beecham Corp. PLC
28,906 (United Kingdom) 191,772
Takeda Chemical Industries Ltd.
17,000 (Japan) 206,526
-------------
1,070,165
-------------
ELECTRIC UTILITIES (3.5%)
China Light & Power
36,800 (Hong Kong) 156,950
1,190 Electrabel (Belgium) 213,983
18,300 Iberdrola (Spain) 112,893
London Electricity
7,000 (United Kingdom) 81,599
6,000 National Power (United Kingdom) 46,002
Tokyo Electric Power Co., Inc.
9,700 (Japan) 270,743
Tractebel Invest International
300 (Belgium) 90,632
410 Veba (Germany) 142,866
-------------
1,115,668
-------------
ELECTRICAL & ELECTRONIC EQUIPMENT (9.9%)
Alcatel Alsthom C.G. Electrical
1,186 (France) 101,257
Asea Brown Boveri Ltd.
55 (Switzerland) 47,353
4,600 Fanuc Ltd. (Japan) 216,607
19,100 FKI (United Kingdom) 44,829
General Electric PLC
69,400 (United Kingdom) 299,709
45,000 Hitachi Ltd. (Japan) 446,837
Matsushita Electric Industrial
25,000 Co. Ltd. (Japan) 411,647
12,000 Nippondenso Co. Ltd. (Japan) 253,012
2,400 Philips Electronics (Netherlands) 71,064
Pioneer Electronic Corp.
4,000 (Japan) 96,386
3,000 Secom Co. Ltd. (Japan) 186,747
100 Siemens Corp. (Germany) 41,880
3,400 Sony Corp. (Japan) 192,871
Sumitomo Electric Industries
12,000 Ltd. (Japan) 171,084
4,000 TDK Corp. (Japan) 193,976
49,000 Toshiba Corp. (Japan) 355,693
-------------
3,130,952
-------------
FINANCIAL SERVICES (1.5%)
Banque Nationale de Paris
2,800 (France) 128,702
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
Brierley Investment Ltd.
123,000 (New Zealand) $ 88,976
650 Compagnie Bancaire (France) 62,676
Istituto Mobiliare Italiano
15,000 (Italy) 92,244
4,000 Mediobanca (Italy) 32,543
2,000 ORIX Corp. (Japan) 73,896
-------------
479,037
-------------
FOOD & BEVERAGES (6.5%)
22,300 Bass (United Kingdom) 179,523
10,100 Booker (United Kingdom) 62,424
Burns, Philp & Company
20,000 Ltd. (Australia) 47,301
Grand Metropolitan
29,800 (United Kingdom) 190,243
36,100 Guinness (United Kingdom) 254,186
Hillsdown Holdings
47,700 (United Kingdom) 132,106
890 LVMH (France) 140,474
308 Nestle (Switzerland) 293,412
Nippon Meat Packers Inc.
7,000 (Japan) 92,068
6,700 Seagram Co. Ltd. (Canada) 200,002
2,970 Unilever (Netherlands) 348,858
3,400 Unilever (United Kingdom) 61,579
3,100 Viscofan (Spain) 47,104
-------------
2,049,280
-------------
INSURANCE (3.5%)
73 Allianz AG Holdings (Germany) 117,294
Assicurazioni Generali
6,500 (Italy) 152,953
2,000 Compagnie UAP (France) 51,601
International Nederlanden
3,780 (Netherlands) 178,558
Legal & General Group
11,700 (United Kingdom) 79,270
Lloyds Abbey Life
16,500 (United Kingdom) 85,972
Munchener Ruckversicherung
3 Warrants (Germany) 395
Munchener Ruckversicherung
53 (Germany) 99,180
S.A.I. Societa Assicuratrice
9,000 Industriale (Italy) 47,186
11,900 Sedgwick Group (United Kingdom) 28,303
Tokio Marine & Fire Insurance
16,000 Co. Ltd. (Japan) 195,984
Zurich Insurance Group
65 (Switzerland) 61,822
-------------
1,098,518
-------------
LEISURE RELATED (.2%)
1,400 Nintendo Co. Ltd. (Japan) 75,763
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements. 12
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
MACHINERY & EQUIPMENT (1.3%)
18,000 Amada Co. Ltd. (Japan) $ 225,904
13,000 Daikin Industries Ltd. (Japan) 115,381
250 Mannesmann AG (Germany) 68,078
-------------
409,363
-------------
MANUFACTURING (.4%)
48,900 Pacific Dunlop Ltd. (Australia) 130,061
-------------
METALS & MINING (3.6%)
5,300 Alcan Aluminum Ltd. (Canada) 134,597
American Barrick Resources Corp.
4,700 (Canada) 105,120
Charter Consolidated Group
10,375 (United Kingdom) 127,597
10,800 CRA Ltd. (Australia) 149,069
21,000 Nippon Steel Corp. (Japan) 79,066
5,200 Noranda Inc. (Canada) 98,232
3,554 RTZ Corp. (United Kingdom) 46,044
Tokyo Steel Manufacturing
13,000 Co. Ltd. (Japan) 281,928
630 Union Miniere (Belgium) 48,918
13,900 Western Mining Corp. (Australia) 80,623
-------------
1,151,194
-------------
MISCELLANEOUS (1.9%)
19,000 Asahi Glass Co. Ltd. (Japan) 234,639
11,000 Citizen Watch Co. (Japan) 84,930
Reckitt & Coleman
12,750 (United Kingdom) 114,360
Royal PTT Nederland
2,600 (Netherlands) 87,620
SGS Societe Generale de Surveillance
60 Holdings (Switzerland) 82,964
-------------
604,513
-------------
OIL & GAS (9.8%)
54,300 British Gas Corp. (United Kingdom) 265,935
British Petroleum Co. Ltd.
36,430 (United Kingdom) 242,543
Broken Hill Proprietary
31,600 Co. Ltd. (Australia) 479,783
5,500 Imperial Oil Ltd. (Canada) 181,334
19,000 Italgas (Italy) 52,327
47,213 Lasmo PLC (United Kingdom) 109,334
Norcen Energy Resident
3,300 Ltd. (Canada) 38,815
58,000 Osaka Gas Co. Ltd. (Japan) 232,932
445 Petrofina SA (Belgium) 131,639
17 Petrofina Warrants (Belgium) 332
3,400 Repsol ADR (Spain) 92,650
Royal Dutch Petroleum
2,500 Co. (Netherlands) 272,193
Royal Dutch Petroleum Co. N.Y.
3,600 Reg. (Netherlands) 387,000
23,600 Santos Ltd. (Australia) 63,685
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
Societe Nationale Elf Aquitaine
1,863 (France) $ 131,118
Tonen Energy International Corp.
11,000 (Japan) 172,289
Total Compagnie Francaise des
2,785 Petroles (France) 161,750
6,600 TransCanada Pipelines Ltd. (Canada) 80,571
-------------
3,096,230
-------------
PAPER & FOREST PRODUCTS (1.4%)
11,000 Amcor Ltd. (Australia) 79,498
52,896 Carter Holt Harvey (New Zealand) 108,359
48,700 Fletcher Challenge (New Zealand) 114,416
17,000 Mitsubishi Paper Mills (Japan) 126,647
-------------
428,920
-------------
PACKAGING & CONTAINERS (.7%)
1,900 CarnaudMetalbox (France) 64,210
Saint-Gobain (Compagnie de)
1,325 (France) 152,322
-------------
216,532
-------------
PHOTOGRAPHIC EQUIPMENT (.7%)
13,000 Canon Inc. (Japan) 220,582
-------------
PRINTING & PUBLISHING (1.1%)
17,000 Mirror Group (United Kingdom) 34,580
13,700 News Corp. Ltd. (Australia) 53,648
12,000 Reed Elsevier (Netherlands) 125,122
11,000 Thomson Corp. (Canada) 134,285
-------------
347,635
-------------
RAILROADS (.9%)
9,000 Keio Teito Electric Railway (Japan) 52,500
Kinki Nippon Railway Co. Ltd.
14,000 (Japan) 115,823
Seino Transportation Co. Ltd.
6,000 (Japan) 109,639
-------------
277,962
-------------
REAL ESTATE (1.0%)
Hong Kong Land Holdings Ltd.
48,000 (Hong Kong) 93,674
4,606 Lend Lease Corp. Ltd. (Australia) 57,003
7,000 Mitsui Fudosan Co. Ltd. (Japan) 74,498
24,000 Wharf Holdings (Hong Kong) 80,956
-------------
306,131
-------------
RETAIL TRADE (3.5%)
20,900 Coles Myer Ltd. (Australia) 70,985
35,000 House of Fraser (United Kingdom) 95,290
7,000 Ito Yokado Ltd. (Japan) 374,598
160 Kaufhof (Germany) 49,455
12,000 Nichii Co. Ltd. (Japan) 155,422
5,000 Rinascente (Italy) 28,126
Rinascente (la) Di Risp
10,000 (Italy) 28,250
</TABLE>
13
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES SECURITY VALUE
<C> <S> <C>
51,700 Sears (United Kingdom) $ 88,742
52,000 Tesco (United Kingdom) 202,597
-------------
1,093,465
-------------
TELECOMMUNICATIONS (.9%)
28,000 Hong Kong Telecom (Hong Kong) 53,376
3,000 Northern Telecom Ltd. (Canada) 99,979
67,000 Telecom Italia Di Risp (Italy) 133,690
-------------
287,045
-------------
TELEPHONE UTILITIES (2.2%)
British Telecommunications
72,400 (United Kingdom) 427,648
Telecom Corporation of New Zealand
2,000 (New Zealand) 102,750
13,800 Telefonica de Espana (Spain) 163,031
-------------
693,429
-------------
TOBACCO (.5%)
21,280 B.A.T Industries (United Kingdom) 143,509
-------------
WATER UTILITIES (.9%)
1,771 Generale des Eaux Cie (France) 172,093
16,400 Thames Water (United Kingdom) 124,456
-------------
296,549
-------------
TOTAL COMMON STOCKS
(COST $26,605,492) 27,503,461
-------------
PREFERRED STOCKS (.4% OF NET ASSETS)
AUTO & AUTO RELATED (.3%)
45,000 Fiat (Italy) 103,531
-------------
PRINTING & PUBLISHING (.1%)
8,350 News Corp. Ltd. (Australia) 28,813
-------------
TOTAL PREFERRED STOCKS
(COST $88,606) 132,344
-------------
<CAPTION>
FACE MARKET
AMOUNT SECURITY VALUE
<C> <S> <C>
FOREIGN CURRENCY (3.5% OF NET ASSETS)
$ 2,732 Australia Dollar $ 2,118
194 Belgian Franc 6
7,664 Canadian Dollar 5,463
478 Deutsche Mark 309
84,347 French Franc 15,793
8,437 Pound Sterling 13,201
31,741 Hong Kong Dollar 4,102
700,076 Italian Lira 432
2,244,849 Japanese Yen 22,539
4,368 Netherlands Guilder 2,516
12,541 New Zealand Dollar 8,028
238 Spanish Peseta 2
7,558,772 Swedish Krona 1,017,249
-------------
TOTAL FOREIGN CURRENCY
(COST $1,090,397) 1,091,758
-------------
<CAPTION>
PRINCIPAL
AMOUNT TIME DEPOSITS (9.2% OF NET ASSETS)
<C> <S> <C>
State Street Bank & Trust Co.
4.375%, due 1/3/95
2,899,000 (COST $2,899,000) 2,899,000
-------------
TOTAL INVESTMENTS
(COST $30,683,495) $ 31,626,563
-------------
-------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS December 31, 1994
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
P O R T F O L I O S
1. Aggregate gross unrealized
appreciation (depreciation)
as of December 31, 1994,
based on cost for Federal
income tax purposes, was as MONEY GOVERNMENT TOTAL INTERNATIONAL
follows: MARKET SECURITIES INCOME RETURN GROWTH EQUITY
Aggregate gross unrealized
appreciation $ -- $ -- $ 374,483 $ 25,803,559 $ 16,155,520 $1,906,912
Aggregate gross unrealized
depreciation -- (1,389,911) (7,068,237) (27,193,669) (4,558,837) (963,844)
-------------- -------------- -------------- -------------- -------------- --------------
Net unrealized appreciation
(depreciation) $ -- $(1,389,911) $ (6,693,754) $ (1,390,110) $ 11,596,683 $ 943,068
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
2. The aggregate cost of
investments for Federal
income tax purposes was: $65,950,347 $19,900,625 $105,313,033 $727,955,618 $217,129,059 $30,683,495
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements. 14
<PAGE>
STATEMENT OF NET ASSETS CONNECTICUT MUTUAL FINANCIAL SERVICES
SERIES FUND I, INC.
December 31, 1994
<TABLE>
<CAPTION>
P O R T F O L I O S
MONEY GOVERNMENT TOTAL INTERNATIONAL
MARKET SECURITIES INCOME RETURN GROWTH EQUITY
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Bonds, at market value
(Cost $18,643,861, $100,764,499,
$396,403,652) $ -- $17,253,950 $ 94,070,745 $376,567,509 $ -- $ --
Common stocks, at market value
(Cost $287,567,106,
$193,505,804, $26,605,492) -- -- -- 306,013,139 205,102,487 27,503,461
Preferred stocks, at market value
(Cost $88,606) -- -- -- -- -- 132,344
Foreign currency, at market value
(Cost $1,090,397) -- -- -- -- -- 1,091,758
Short-term securities 65,950,347 1,256,764 4,548,534 43,984,860 23,623,255 2,899,000
------------ ------------ ------------- ------------- ------------- ------------
65,950,347 18,510,714 98,619,279 726,565,508 228,725,742 31,626,563
Cash 10,063 358 21,640 35,226 12,642 860
Investment income receivable 78,194 302,777 1,752,756 6,254,905 422,145 71,728
Receivable from securities sold -- -- -- 14,211,026 4,130,983 25,252,340
Receivable from Fund shares sold 555,821 940 243,749 775,633 473,546 73,657
Foreign tax receivable -- -- -- -- -- 11,728
------------ ------------ ------------- ------------- ------------- ------------
Total Assets 66,594,425 18,814,789 100,637,424 747,842,298 233,765,058 57,036,876
------------ ------------ ------------- ------------- ------------- ------------
LIABILITIES
Accrued expenses payable 87,404 19,796 94,011 499,469 185,832 47,799
Payable for securities purchased -- -- -- 4,453,904 3,376,463 25,252,340
Foreign currency market payable -- -- -- -- -- 102,576
Payable for Fund shares redeemed 390,751 10,653 144,783 754,266 7,493 31,126
------------ ------------ ------------- ------------- ------------- ------------
Total Liabilities 478,155 30,449 238,794 5,707,639 3,569,788 25,433,841
------------ ------------ ------------- ------------- ------------- ------------
NET ASSETS $66,116,270 $18,784,340 $100,398,630 $742,134,659 $230,195,270 $31,603,035
------------ ------------ ------------- ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------- ------------
OUTSTANDING SHARES 66,116,270 19,706,497 90,571,852 489,923,625 116,659,150 29,049,599
------------ ------------ ------------- ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------- ------------
NET ASSET VALUE PER SHARE $1.00 $0.95 $1.11 $1.51 $1.97 $1.09
------------ ------------ ------------- ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------- ------------
</TABLE>
15 The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS CONNECTICUT MUTUAL FINANCIAL SERVICES
SERIES FUND I, INC.
For the year ended December 31, 1994
<TABLE>
<CAPTION>
P O R T F O L I O S
MONEY GOVERNMENT TOTAL INTERNATIONAL
MARKET SECURITIES INCOME RETURN GROWTH EQUITY
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Interest $2,601,975 $ 1,215,055 $ 7,985,012 $ 25,650,765 $ 899,811 $ 199,496
Dividends -- -- -- 7,196,976 4,172,578 (359,533)
----------- ------------ ------------- ------------- ------------- ----------
Total Income 2,601,975 1,215,055 7,985,012 32,847,741 5,072,389 (160,037)
----------- ------------ ------------- ------------- ------------- ----------
Expenses:
Investment advisory fees 298,013 110,313 644,104 3,672,463 1,249,284 269,195
Custodian fees 28,500 22,500 28,500 70,000 40,700 88,500
Professional services 6,049 6,136 6,137 6,137 6,137 6,048
Directors' fees 3,094 3,094 3,094 3,102 3,096 3,094
Shareholder reports 2,800 2,100 3,000 5,500 3,400 2,100
Other 6,510 5,362 16,256 88,723 29,871 3,959
----------- ------------ ------------- ------------- ------------- ----------
Total Expenses 344,966 149,505 701,091 3,845,925 1,332,488 372,896
----------- ------------ ------------- ------------- ------------- ----------
NET INVESTMENT INCOME (LOSS) 2,257,009 1,065,550 7,283,921 29,001,816 3,739,901 (532,933)
----------- ------------ ------------- ------------- ------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on
investments (809) (349,220) (965,115) 16,402,066 6,561,912 759,731
Net realized gain on foreign
currency -- -- -- -- -- 316,879
Net unrealized depreciation on
investments -- (1,459,298) (10,615,056) (54,922,403) (11,081,781) (506,451)
Net unrealized depreciation on
foreign currency -- -- -- -- -- (273,273)
----------- ------------ ------------- ------------- ------------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (809) (1,808,518) (11,580,171) (38,520,337) (4,519,869) 296,886
----------- ------------ ------------- ------------- ------------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $2,256,200 $ (742,968) $ (4,296,250) $ (9,518,521) $ (779,968) $(236,047)
----------- ------------ ------------- ------------- ------------- ----------
----------- ------------ ------------- ------------- ------------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements. 16
<PAGE>
STATEMENT OF CHANGES IN NET CONNECTICUT MUTUAL FINANCIAL SERVICES
ASSETS SERIES FUND I, INC.
For the years ended December 31, 1994
and 1993
<TABLE>
<CAPTION>
P O R T F O L I O S
MONEY MARKET GOVERNMENT SECURITIES
<S> <C> <C> <C> <C>
1994 1993 1994 1993
INCREASE
(DECREASE) IN NET
ASSETS
FROM OPERATIONS:
Net investment
income (loss) $ 2,257,009 $ 1,454,745 $ 1,065,550 $ 585,157
Net realized
gain (loss)
on
investments (809) 27 (349,220) 305,706
Net realized
gain (loss)
on foreign
currency -- -- -- --
Net unrealized
appreciation
(depreciation) -- -- (1,459,298) 75,930
------------- ------------- ------------ ------------
Net increase
(decrease) in
net assets
resulting
from
operations 2,256,200 1,454,772 (742,968) 966,793
------------- ------------- ------------ ------------
DIVIDENDS TO
SHAREHOLDERS FROM:
Net investment
income (2,256,200) (1,454,745) (1,060,214) (582,599)
Net realized
gain from
investment
transactions -- (27) (22,424) (268,201)
------------- ------------- ------------ ------------
(2,256,200) (1,454,772) (1,082,638) (850,800)
------------- ------------- ------------ ------------
FROM CAPITAL
SHARE
TRANSACTIONS:
Net proceeds
from sale of
shares 54,942,760 24,606,843 7,417,091 7,921,269
Net asset
value of
shares issued
to
shareholders
from
reinvestment
of dividends 2,256,200 1,454,772 1,082,638 850,800
Cost of shares
reacquired (43,609,978) (33,981,487) (3,576,427) (835,398)
------------- ------------- ------------ ------------
Increase
(decrease) in
net assets
derived from
capital
share
transactions 13,588,982 (7,919,872) 4,923,302 7,936,671
------------- ------------- ------------ ------------
NET INCREASE
(DECREASE) IN NET
ASSETS 13,588,982 (7,919,872) 3,097,696 8,052,664
NET ASSETS --
BEGINNING OF
PERIOD 52,527,288 60,447,160 15,686,644 7,633,980
------------- ------------- ------------ ------------
NET ASSETS --
END OF PERIOD $ 66,116,270 $ 52,527,288 $18,784,340 $15,686,644
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Undistributed
(distribution
in excess of)
net investment
income
included in
net assets at
end of period -- -- $8,085 $2,749
---------- --------
---------- --------
Undistributed
net realized
gain (loss) on
investments
included in
net assets at
end of period -- -- $(349,220) $22,424
---------- --------
---------- --------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
P O R T F O L I O S
INCOME TOTAL RETURN GROWTH INTERNATIONAL EQUITY
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 1993 1994 1993 1994 1993 1994 1993
FROM OPERATIONS:
Net investment
income (loss) $ 7,283,921 $ 6,123,307 $ 29,001,816 $ 19,446,766 $ 3,739,901 $ 3,022,709 $ (532,933) $ (41,021)
Net realized
gain (loss)
on
investments (965,115) 2,832,151 16,402,066 36,472,632 6,561,912 13,748,895 759,731 272,598
Net realized
gain (loss)
on foreign
currency -- -- -- -- -- -- 316,879 (98,509)
Net unrealized
appreciation
(depreciation) (10,615,056) 1,018,937 (54,922,403) 16,449,843 (11,081,781) 7,765,259 (779,724) 2,336,217
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
Net increase
(decrease) in
net assets
resulting
from
operations (4,296,250) 9,974,395 (9,518,521) 72,369,241 (779,968) 24,536,863 (236,047) 2,469,285
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
DIVIDENDS TO
SHAREHOLDERS FROM:
Net investment
income (7,261,367) (6,105,736) (28,847,348) (19,423,155) (3,737,583) (3,022,442) -- (292,109)
Net realized
gain from
investment
transactions (204,124) (2,530,958) (20,713,226) (35,474,314) (7,240,920) (13,642,018) (450,584) (154,096)
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
(7,465,491) (8,636,694) (49,560,574) (54,897,469) (10,978,503) (16,664,460) (450,584) (446,205)
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
FROM CAPITAL
SHARE
TRANSACTIONS:
Net proceeds
from sale of
shares 26,377,281 37,384,512 215,526,416 181,279,869 87,997,184 55,866,421 22,771,129 5,791,802
Net asset
value of
shares issued
to
shareholders
from
reinvestment
of dividends 7,465,491 8,636,694 49,560,574 54,897,469 10,978,503 16,664,460 450,584 446,205
Cost of shares
reacquired (29,015,143) (20,129,731) (74,289,211) (45,058,694) (22,796,527) (15,843,899) (9,246,752) (439,354)
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
Increase
(decrease) in
net assets
derived from
capital
share
transactions 4,827,629 25,891,475 190,797,779 191,118,644 76,179,160 56,686,982 13,974,961 5,798,653
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
NET INCREASE
(DECREASE) IN NET
ASSETS (6,934,112) 27,229,176 131,718,684 208,590,416 64,420,689 64,559,385 13,288,330 7,821,733
NET ASSETS --
BEGINNING OF
PERIOD 107,332,742 80,103,566 610,415,975 401,825,559 165,774,581 101,215,196 18,314,705 10,492,972
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
NET ASSETS --
END OF PERIOD $100,398,630 $107,332,742 $742,134,659 $610,415,975 $230,195,270 $165,774,581 $31,603,035 $18,314,705
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
Undistributed
(distribution
in excess of)
net investment
income
included in
net assets at
end of period $43,618 $21,064 $193,426 $38,958 $2,674 $356 $(1,023,381) $(490,448)
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
Undistributed
net realized
gain (loss) on
investments
included in
net assets at
end of period $(1,298,470) $(129,231) $(155,529) $4,155,631 $1,106,480 $1,785,488 $195,926 $(113,221)
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements. 18
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONNECTICUT MUTUAL FINANCIAL SERVICES
SERIES FUND I, INC.
December 31, 1994
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Connecticut Mutual Financial Services Series Fund I, Inc. (the Fund), a
Maryland corporation, is registered under the Investment Company Act of 1940,
as amended, as a diversified, open-end management investment company. The Fund
is currently comprised of six separate Portfolios: Money Market, Government
Securities, Income, Total Return, Growth and International Equity. An interest
in the Fund is limited to the assets of the Portfolio or Portfolios in which
shares are held by shareholders, and such shareholders are entitled to a pro
rata share of all dividends and distributions arising from the net investment
income and net realized capital gains on the investments of such Portfolios.
As of December 31, 1994, the shareholders of the Fund are Connecticut Mutual
Life Insurance Company, through its General Account, Panorama Separate
Account, Connecticut Mutual Variable Life Separate Account I, Variable Annuity
Accounts A and B and Accumulation Annuity Account E and C.M. Life Insurance
Company, through its Panorama Plus Separate Account.
The following is a summary of significant accounting policies followed by the
Fund:
(a)VALUATION OF INVESTMENT SECURITIES - Except with respect to securities held
by the Money Market Portfolio, equity and debt securities which are traded
on securities exchanges are valued at the last sales price as of the close
of business on the day the securities are being valued. Lacking any sales,
equity securities are valued at the last bid price and debt securities are
valued at the mean between closing bid and asked prices. Securities traded
in the over-the-counter market and included in the NASDAQ National Market
System are valued using the last sales price when available. Otherwise,
over-the-counter securities are valued at the mean between bid and asked
prices or yield equivalent as obtained from one or more dealers who make a
market in the securities. Short-term securities are valued on an amortized
cost basis, which approximates market value. Securities for which market
quotations are not readily available are valued at fair value as determined
in accordance with procedures established by the Board of Directors of the
Fund, including the use of valuations furnished by a private service
retained by the custodian.
Securities held by the Money Market Portfolio are valued on an amortized
cost basis. This basis involves valuing a security at cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value
of the instrument. The amortized cost method, in the opinion of the Board
of Directors, represents the fair value of the particular security. The
Board monitors the deviation between the Portfolio's net asset value per
share as determined by using available market quotations and its amortized
cost price per share. If the deviation exceeds one half of one percent, the
Board will consider what action, if any, should be initiated to provide
fair valuation. Throughout 1994, the deviation was less than one half of
one percent.
(b)FOREIGN CURRENCY TRANSACTIONS - The books and records of the International
Equity Portfolio are maintained in U.S. dollars. Foreign currency
transactions are translated to U.S. dollars at the prevailing exchange rate
on the trade date. Since investment transactions are recorded on a trade
date basis, the prevailing exchange rate may differ on actual settlement
date. Similarly, the prevailing exchange rate on ex-dividend or interest
receivable date may vary from the date when dividends or interest are
received. These differences give rise to currency gains and losses which
are included as a component of investment income. For the year ended
December 31, 1994, the Portfolio had a net currency loss of $912,501.
(c)GAINS AND LOSSES - Realized gains and losses from sales of investments are
determined on the identified cost basis.
(d)FEDERAL INCOME TAXES - The Fund intends to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue
Code. Under such provisions, by distributing substantially all of its
taxable income to its shareholders or otherwise complying with the
requirements for regulated investment companies, the Fund will not be
subject to Federal income taxes. Accordingly, no provision for Federal
income taxes is required. For Federal income tax reporting purposes, each
Portfolio is treated as a separate taxable entity.
(e)OTHER - Investment transactions are accounted for on the trade date which
is the date the order to buy or sell is executed. Dividend income is
recorded on the ex-dividend date and interest income is accrued on a daily
basis. All expenses are accrued on a daily basis.
2. INVESTMENT ADVISORY FEES
The Fund has an Investment Advisory Agreement with G.R. Phelps & Co., Inc.
(the Investment Adviser), a wholly-owned subsidiary of Connecticut Mutual Life
Insurance Company. Subject to review by the Board of Directors of the Fund,
the Investment Adviser is responsible for the investment management (the
buying, holding and selling of securities) for all Portfolios and has entered
into a Sub-Advisory Agreement with Brinson Partners, Inc. (the Sub-Adviser)
whereby the Sub-Adviser is responsible for the investment management of the
portfolio holdings of the International Equity Portfolio. The Fund's Board of
Directors has approved the Sub-Advisory Agreement. The Investment Adviser
performs certain administrative services for all the Portfolios.
19
<PAGE>
As compensation for its services to the Money Market Portfolio, the Investment
Adviser receives monthly compensation at the annual rate of 0.50% of the first
$200 million of average daily net assets, 0.45% of the next $100 million of
average daily net assets and 0.40% of average daily net assets in excess of
$300 million. As compensation for its services to the Government Securities,
Income, Total Return and Growth Portfolios, the Investment Adviser receives
monthly compensation at the annual rate of 0.625% of the first $300 million of
average daily net assets, 0.50% of the next $100 million of average daily net
assets and 0.45% of average daily net assets in excess of $400 million. As
compensation for its services to the International Equity Portfolio, the
Investment Adviser receives monthly compensation at the annual rate of 1.00%
of the first $10 million of average daily net assets, 0.90% of the next $20
million of average daily net assets, 0.80% of the next $30 million of average
daily net assets, 0.70% of the next $40 million of average daily net assets
and 0.55% of average daily net assets in excess of $100 million.
The investment advisory fee, which also covers certain administrative and
management services, amounted to $6,243,372 for all Portfolios for the year
ended December 31, 1994. The Sub-Adviser received $182,237 from the Investment
Adviser as compensation for its services to the International Equity Portfolio
for the year ended December 31, 1994.
Expenses incurred in the operation of the Fund are borne by the Fund. However,
the Investment Adviser has agreed that in any year the aggregate expenses
(including the investment advisory fee, but excluding interest, taxes,
brokerage fees, commissions and uncommon charges such as litigation costs)
exceed 1% of the value of the average daily net assets of the Money Market
Portfolio or 1.5% of the value of the average daily net assets in each of the
other five Portfolios, it will reimburse the Portfolio for such excess.
3. DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income of the Government Securities, Income,
Total Return, Growth and International Equity Portfolios are paid annually in
additional shares of the respective Portfolios. Dividends from net investment
income of the Money Market Portfolio, which include any net short-term capital
gains, are declared and accrued daily and paid monthly in additional shares of
the Portfolio.
4. CAPITAL STOCK
The authorized capital stock of the Fund consists of 3,000,000,000 shares of
common stock, par value $0.10 per share. The shares of stock are divided into
six classes as indicated below for a total of 1.5 billion shares. The balance
of 1.5 billion shares may be allocated as an addition to one or more of the
six existing classes or to any new classes as determined by the Board of
Directors.
All shares of common stock have equal voting rights, except that only shares
of a particular Portfolio are entitled to vote on matters pertaining to that
Portfolio.
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
MONEY GOVERNMENT TOTAL INTERNATIONAL
MARKET SECURITIES INCOME RETURN GROWTH EQUITY
<S> <C> <C> <C> <C> <C> <C>
Shares authorized (in
millions) 250 150 150 650 150 150
------------ ----------- ------------ ------------ ------------ -----------
------------ ----------- ------------ ------------ ------------ -----------
Shares sold 54,942,760 7,269,737 21,760,905 132,577,297 42,449,530 20,305,864
Shares issued to
shareholders from
reinvestment of dividends 2,256,200 1,133,988 6,718,045 32,522,163 5,515,352 414,264
------------ ----------- ------------ ------------ ------------
Total issued 57,198,960 8,403,725 28,478,950 165,099,460 47,964,882 20,720,128
Shares reacquired (43,609,978) (3,528,866) (23,973,460) (45,844,169) (11,020,467) (8,439,726)
------------ ----------- ------------ ------------ ------------ -----------
Net increase 13,588,982 4,874,859 4,505,490 119,255,291 36,944,415 12,280,402
------------ ----------- ------------ ------------ ------------ -----------
------------ ----------- ------------ ------------ ------------ -----------
</TABLE>
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONT'D)
5. FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
NET REALIZED DISTRIBUTIONS RATIO OF RATIO OF NET
DIVIDENDS & UNREALIZED FROM NET NET ASSET NET ASSET OPERATING INVESTMENT
YEARS NET FROM NET GAIN (LOSS) REALIZED VALUE AT VALUE AT EXPENSES TO INCOME TO
ENDED INVESTMENT INVESTMENT ON GAIN ON BEGINNING END AVERAGE AVERAGE
DECEMBER 31 INCOME INCOME INVESTMENTS INVESTMENTS OF PERIOD OF PERIOD NET ASSETS NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
1985 $ .0762 $ (.0762) $ -- $ -- $1.00 $1.00 .71% 7.62%
1986 .0621 (.0621) -- -- 1.00 1.00 .70 6.21
1987 .0620 (.0620) -- -- 1.00 1.00 .71 6.20
1988 .0704 (.0704) -- -- 1.00 1.00 .70 7.04
1989 .0859 (.0859) -- -- 1.00 1.00 .70 8.59
1990 .0769 (.0769) -- -- 1.00 1.00 .68 7.69
1991 .0560 (.0560) -- -- 1.00 1.00 .63 5.60
1992 .0332 (.0332) -- -- 1.00 1.00 .61 3.32
1993 .0265 (.0265) -- -- 1.00 1.00 .60 2.65
1994 .0379 (.0379) -- -- 1.00 1.00 .58 3.79
GOVERNMENT SECURITIES PORTFOLIO
1992 (a) .02 (.02) .04 (.03) 1.00 1.01 1.20(b) 4.64(b)
1993 .04 (.04) .07 (.02) 1.01 1.06 .93 5.13
1994 .06 (.06) (.11) (.00) 1.06 0.95 .85 6.04
INCOME PORTFOLIO
1985 .11 (.11) .12 -- 1.11 1.23 .79 10.21
1986 .11 (.11) .06 (.05) 1.23 1.24 .86 8.59
1987 .09 (.09) (.06) (.06) 1.24 1.12 .85 6.93
1988 .10 (.11) (.01) -- 1.12 1.10 .85 8.77
1989 .10 (.10) .05 -- 1.10 1.15 .87 8.74
1990 .10 (.10) (.03) -- 1.15 1.12 .85 8.42
1991 .10 (.10) .11 -- 1.12 1.23 .80 7.94
1992 .09 (.09) -- (.02) 1.23 1.21 .77 7.31
1993 .08 (.08) .07 (.03) 1.21 1.25 .70 6.54
1994 .09 (.09) (.14) (.00) 1.25 1.11 .68 7.07
TOTAL RETURN PORTFOLIO
1985 .05 (.05) .23 -- 1.13 1.36 .75 4.29
1986 .05 (.05) .12 (.06) 1.36 1.42 .82 3.32
1987 .06 (.06) .02 (.24) 1.42 1.20 .78 3.53
1988 .06 (.07) .08 -- 1.20 1.27 .79 4.93
1989 .09 (.09) .20 (.06) 1.27 1.41 .80 6.20
1990 .08 (.08) (.07) (.01) 1.41 1.33 .78 5.65
1991 .07 (.07) .32 (.08) 1.33 1.57 .72 4.44
1992 .07 (.07) .10 (.11) 1.57 1.56 .68 4.27
1993 .06 (.06) .20 (.11) 1.56 1.65 .60 3.90
1994 .06 (.06) (.09) (.05) 1.65 1.51 .56 4.21
GROWTH PORTFOLIO
1985 .05 (.05) .29 -- 1.27 1.56 .86 3.62
1986 .05 (.05) .14 (.10) 1.56 1.60 .90 2.61
1987 .04 (.04) -- (.38) 1.60 1.22 .86 1.97
1988 .03 (.04) .15 -- 1.22 1.36 .88 2.24
1989 .07 (.07) .42 (.13) 1.36 1.65 .87 4.16
1990 .05 (.05) (.18) (.01) 1.65 1.46 .84 3.04
1991 .04 (.04) .51 (.10) 1.46 1.87 .80 2.16
1992 .04 (.04) .19 (.15) 1.87 1.91 .76 2.19
1993 .04 (.04) .36 (.19) 1.91 2.08 .69 2.30
1994 .03 (.03) (.04) (.07) 2.08 1.97 .67 1.87
INTERNATIONAL EQUITY PORTFOLIO
1992 (a) .01 (.02) (.06) (.01) 1.00 .92 1.50(b) 1.63(b)
1993 .00 (.02) .20 (.01) .92 1.09 1.50 (0.31)
1994 (.01) -- .03 (.02) 1.09 1.09 1.28 (1.85)
<CAPTION>
NET ASSETS
YEARS AT END ANNUAL
ENDED PORTFOLIO OF PERIOD TOTAL
DECEMBER 31 TURNOVER (IN THOUSANDS) RETURN(C)
<S> <C> <C> <C>
-----------
MONEY MARKET PORTFOLIO
1985 n/a $27,670 7.90%
1986 n/a 28,330 6.40
1987 n/a 39,514 6.33
1988 n/a 50,763 7.22
1989 n/a 65,417 8.96
1990 n/a 84,124 7.97
1991 n/a 76,559 5.73
1992 n/a 60,447 3.35
1993 n/a 52,527 2.69
1994 n/a 66,116 3.79
GOVERNMENT SECURITIES PORTFOLIO
1992 (a) 458.62%(b) 7,634 6.61
1993 178.18 15,687 10.98
1994 102.31 18,784 (4.89)
INCOME PORTFOLIO
1985 291.69 24,828 22.26
1986 160.71 32,288 13.79
1987 161.24 32,222 1.76
1988 104.30 35,156 7.88
1989 172.89 44,171 13.91
1990 36.77 48,959 5.91
1991 51.15 62,018 18.31
1992 115.71 80,104 7.13
1993 124.33 107,333 12.34
1994 74.29 100,399 (4.08)
TOTAL RETURN PORTFOLIO
1985 204.97 92,799 25.43
1986 184.30 137,774 12.58
1987 198.88 167,861 4.26
1988 244.72 184,117 11.64
1989 150.98 220,941 22.98
1990 109.23 229,343 0.50
1991 128.78 304,365 28.79
1992 182.10 401,826 10.21
1993 161.55 610,416 16.28
1994 88.25 742,135 (1.97)
GROWTH PORTFOLIO
1985 200.68 33,289 27.31
1986 175.49 38,605 11.58
1987 218.02 40,995 0.25
1988 246.36 41,434 14.46
1989 174.08 53,955 35.81
1990 146.78 50,998 (7.90)
1991 142.85 75,058 37.53
1992 136.11 101,215 12.36
1993 97.64 165,775 21.22
1994 97.25 230,195 (0.51)
INTERNATIONAL EQUITY PORTFOLIO
1992 (a) 206.69(b) 10,493 (4.32)
1993 57.42 18,315 21.80
1994 76.54 31,603 1.44
</TABLE>
(a) For the period from May 13, 1992 (Inception) to December 31, 1992
(b) Annualized
(c) Annual total returns relate to the Fund only and do not include the
effect of Panorama or Panorama Plus contract level charges
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Connecticut Mutual Financial Services Series
Fund I, Inc.:
We have audited the accompanying statement of net assets, including the
schedule of investments, of Connecticut Mutual Financial Services Series
Fund I, Inc. (a Maryland corporation comprised of the Money Market,
Government Securities, Income, Total Return, Growth and International
Equity Portfolios) as of December 31, 1994, and the related statement of
operations for the year then ended, the statements of changes in net
assets for each of the two years in the period then ended, and the
financial highlights for each of the periods indicated in Note 5 of Notes
to Financial Statements. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994, by
correspondence with the custodian bank. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of each of the respective Portfolios comprising Connecticut Mutual
Financial Services Series Fund I, Inc. as of December 31, 1994, the
results of their operations for the year then ended, the changes in their
net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods indicated in Note 5 of Notes
to Financial Statements, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 15, 1995
22
