<PAGE>
The Concert
Investment Series(R)
[GRAPHIC]
Combined Prospectus
FEBRUARY 28, 2000
CLASS A SHARES, CLASS B SHARES AND CLASS 1 SHARES
Small Cap Fund
International Equity Fund
Mid Cap Fund
Growth Fund
Growth and Income Fund
Government Fund
Municipal Bond Fund
The Securities and Exchange Commission has [SB] Smith Barney
not approved or disapproved these securities or [MF] Mutual Funds
determined whether this prospectus is accurate
or complete. Any statement to the contrary is a
crime.
<PAGE>
Contents
<TABLE>
<S> <C>
Investments, risks and performance
- --------------------------------------------------
Small Cap Fund 2
- --------------------------------------------------
International Equity Fund 4
- --------------------------------------------------
Mid Cap Fund 6
- --------------------------------------------------
Growth Fund 8
- --------------------------------------------------
Growth and Income Fund 10
- --------------------------------------------------
Government Fund 12
- --------------------------------------------------
Municipal Bond Fund 14
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More on the Funds' Investments 16
- --------------------------------------------------
Management 17
- --------------------------------------------------
Choosing a Share Class to Buy 18
- --------------------------------------------------
Sales Charges:
- --------------------------------------------------
Class A Sales Charge 19
- --------------------------------------------------
Class B Sales Charge 20
- --------------------------------------------------
Class 1 Sales Charge 21
- --------------------------------------------------
Buying Shares and Exchanging Shares 22
- --------------------------------------------------
Redeeming Shares 23
- --------------------------------------------------
Other Things to Know about Share Transactions 24
- --------------------------------------------------
Dividends, Distributions and Taxes 25
- --------------------------------------------------
Financial Highlights 26
- --------------------------------------------------
</TABLE>
About the manager
The funds' investment manager is SSB Citi Fund Management LLC, an affiliate of
Salomon Smith Barney Inc. The manager selects the funds' investments and
oversees their operations. The manager and Salomon Smith Barney are subsidiar-
ies of Citigroup Inc. Citigroup businesses provide a broad range of financial
services.
About mutual fund risks
An investment in any of the funds is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
1
The Concert Investment Series Prospectus
<PAGE>
Small Cap Fund
Investment objective
The fund seeks capital appreciation.
Key investments
The fund invests in common stocks of small sized companies considered by the
manager to be "emerging growth" companies. These are primarily domestic compa-
nies, in the early stages of their life cycles, characterized by relatively
high earnings growth. The manager selects investments from among companies that
have market capitalizations in the lowest 20% of all publicly traded U.S.
companies.
How the manager selects the fund's investments
The manager emphasizes individual security selection while spreading invest-
ments among many industries and sectors. The manager uses quantitative analysis
to identify individual companies that it believes offer exceptionally high
prospects for growth. The manager purchases these companies' stocks when it be-
lieves they are reasonably priced. This style of stock selection is commonly
known as "growth at a reasonable price." Quantitative methods are also used to
control portfolio risk related to broad macroeconomic factors, such as interest
rate changes. The manager selects investments for their potential capital ap-
preciation; any ordinary income is incidental. In selecting individual compa-
nies for investment, the manager looks for:
. Above average earnings growth
. A pattern of reported earnings that exceed market expectations
. Rising earnings estimates over the next several quarters
. High relative return on invested capital
. Reasonable price/earnings multiple
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Stock prices decline generally
. Small cap companies fall out of favor with investors
. The manager's judgment about the attractiveness, value or potential apprecia-
tion of a particular stock proves to be incorrect
. A particular product or service developed by a small cap company is unsuc-
cessful, the company does not meet earnings expectations or other events de-
press the value of the company's stock
Compared to large, established companies, small cap companies are more likely
to have limited product lines, limited capital resources and less experienced
management. In addition, securities of small cap companies are more likely to:
. Experience sharper swings in market value
. Be harder to sell at times and prices the manager believes appropriate
. Offer greater potential for gains and losses
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking to participate in the long term growth potential of small cap
companies
. Currently have exposure to fixed income investments and less volatile equity
investments and wish to broaden your investment portfolio
. Are willing to accept the risks of investing in the stock market and the spe-
cial risks of investing in emerging growth companies with limited track rec-
ords
2
The Concert Investment Series Prospectus
<PAGE>
Small Cap Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class A shares for each of the past 4 calendar years.
Class 1 and B shares would have different performance due to their different
expenses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 25.10% in 4th quarter 1998; Lowest: (20.66)% in 3rd
quarter 1998
The performance information in the bar chart does not reflect sales charges,
which would reduce your return.
[BAR CHART]
Percentage Total Returns for Class A shares
1996 15.17%
1997 20.87%
1998 8.43%
1999 41.22%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
This table indicates the risks of investing in the fund by comparing the
average annual total return of each class for the periods shown to that of the
Russell 2000 Stock Index, an unmanaged index of smaller capitalization
stocks.
This table assumes the imposition of the maximum sales charge applicable to
the class, the redemption of shares at the end of the period, and the
reinvestment of distributions and dividends.
Average annual total returns for periods ended December 31, 1999
----------------------------------------------------------------
Class Inception Date 1 Year Since Inception
----------------------------------------------------------------
1 08/08/96 29.61% 18.03%
----------------------------------------------------------------
A 02/21/95 34.18% 23.00%
----------------------------------------------------------------
B 02/21/95 35.17% 23.28%
----------------------------------------------------------------
Russell 2000 Stock Index n/a 21.26% 16.61%*
----------------------------------------------------------------
* The index comparison begins on 2/28/95.
Fee table
- --------------------------------------------------------------------------------
This table sets forth the fees and expenses you will pay if you invest in shares
of the fund.
Shareholder fees (paid directly from
your investment) Class 1 Class A Class B
----------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 8.50% 5.00% None
----------------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value
at purchase or redemption) None None* 5.00%
----------------------------------------------------------------
Annual fund operating expenses (paid by
the fund as % of net assets)
----------------------------------------------------------------
Management fee 0.65% 0.65% 0.65%
----------------------------------------------------------------
Distribution and service (12b-1) fee 0.00% 0.25% 1.00%
----------------------------------------------------------------
Other expenses 0.60% 0.65% 0.66%
----------------------------------------------------------------
Total annual fund operating expenses 1.25% 1.55% 2.31%
----------------------------------------------------------------
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge) but
if you redeem those shares within 12 months of purchase
you will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
This example helps you compare the costs of investing in the fund with those of
other mutual funds. Your actual costs may be higher or lower.
Number of years you own
your shares 1 Year* 3 Years* 5 Years* 10 Years*
-------------------------------------------------------------
Class 1 (with or without
redemption) $967 $1,213 $1,478 $2,233
-------------------------------------------------------------
Class A (with or without
redemption) $650 $ 965 $1,302 $2,253
-------------------------------------------------------------
Class B (assuming
redemption at end of
period) $734 $1,021 $1,335 $2,456
-------------------------------------------------------------
Class B (assuming no
redemption) $234 $ 721 $1,235 $2,456
-------------------------------------------------------------
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
3
<PAGE>
International Equity Fund
Investment objective
The fund seeks total return on its assets from growth of capital and income.
Key investments
The fund invests principally in a diversified portfolio of equity securities of
established non-U.S. issuers.
How the manager selects the fund's investments
By spreading the fund's investments across many international markets, the man-
ager seeks to reduce volatility compared to investing in a single region. Un-
like global mutual funds which may allocate a substantial portion of assets to
the U.S. markets, the fund invests substantially all of its assets in countries
outside of the U.S.
The manager emphasizes individual security selection while diversifying the
fund's investments across regions and countries, which can help to reduce risk.
While the manager selects investments primarily for their capital appreciation
potential, some investments have an income component as well. Companies in
which the fund invests may have large, mid-size or small market capitalizations
and may operate in any market sector. In selecting individual companies for in-
vestment, the manager looks for:
. Above average earnings growth
. High relative return on invested capital
. Experienced and effective management
. Effective research, product development and marketing
. Competitive advantages
. Strong financial condition or stable or improving credit quality
Depending on the manager's assessment of overseas potential for long-term
growth, the fund's emphasis among foreign markets (including emerging markets)
and types of issuers may vary. In allocating assets among countries and re-
gions, the manager evaluates:
. Economic stability and favorable prospects for economic growth
. Low or decelerating inflation, creating a favorable environment for securi-
ties markets
. Stable governments with policies that encourage economic growth, equity in-
vestment and development of securities markets
. Currency stability
. The range of individual investment opportunities
Principal risks of investing in the fund
Many foreign countries in which the fund invests have markets that are less
liquid and more volatile than markets in the U.S.
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Foreign securities prices decline
. Adverse governmental action or political, economic or market instability af-
fects a foreign country or region
. The currency in which a security is priced declines in value relative to the
U.S. dollar
. The manager's judgment about the attractiveness, value or potential apprecia-
tion of a particular security proves to be incorrect
In some foreign countries, there is also less information available about for-
eign issuers and markets because of less rigorous accounting and regulatory
standards than in the U.S. Currency fluctuations could erase investment gains
or add to investment losses. The risk of investing in foreign securities is
greater for emerging markets. In Europe, Economic and Monetary Union (EMU) and
the introduction of a single currency began in 1999. There are significant po-
litical and economic risks associated with EMU, which may increase the volatil-
ity of the fund's European securities and present valuation problems.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking to participate in the long term total return potential of inter-
national markets
. Currently have exposure to U.S. stock markets and wish to diversify your in-
vestment portfolio by adding non-U.S. stocks that may not move in tandem with
U.S. stocks
. Are willing to accept the risks of investing in the stock market and the spe-
cial risks of investing in foreign securities, including emerging market se-
curities
4
The Concert Investment Series Prospectus
<PAGE>
International Equity Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class A shares for each of the past 4 calendar years.
Class 1 and B shares would have different performance due to their different
expenses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly Returns: Highest: 77.26% in 4th quarter 1999; Lowest: (20.43)% in 3rd
quarter 1998
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class A shares
1996 17.59%
1997 5.10%
1998 22.47%
1999 130.79%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
This table indicates the risks of investing in the fund by comparing the
average annual total return of each class for the periods shown to that of the
Morgan Stanley Capital International EAFE Index, an unmanaged index of
international stocks.
This table assumes the imposition of the maximum sales charge applicable to
the class, the redemption of shares at the end of the period, and the
reinvestment of distributions and dividends.
Average annual total returns for periods ended December 31, 1999
-----------------------------------------------------------------
Class Inception Date 1 Year Since Inception
-----------------------------------------------------------------
1 08/08/96 111.94% 36.70%
-----------------------------------------------------------------
A 02/21/95 119.27% 33.45%
-----------------------------------------------------------------
B 02/21/95 124.17% 33.82%
-----------------------------------------------------------------
Morgan Stanley EAFE Index n/a 26.96% 14.27%*
-----------------------------------------------------------------
* The index comparison begins on 02/28/95.
Fee table
- --------------------------------------------------------------------------------
This table sets forth the fees and expenses you will pay if you invest in shares
of the fund.
Shareholder fees (paid directly from
your investment) Class 1 Class A Class B
----------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 8.50% 5.00% None
----------------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value
at purchase or redemption) None None* 5.00%
----------------------------------------------------------------
Annual fund operating expenses (paid by
the fund as % of net assets)
----------------------------------------------------------------
Management fee 1.00% 1.00% 1.00%
----------------------------------------------------------------
Distribution and service (12b-1) fee 0.00% 0.25% 1.00%
----------------------------------------------------------------
Other expenses 0.68% 0.83% 0.79%
----------------------------------------------------------------
Total annual fund operating expenses 1.68% 2.08% 2.79%
----------------------------------------------------------------
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge) but
if you redeem those shares within 12 months of purchase
you will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
This example helps you compare the costs of investing in the fund with those of
other mutual funds. Your actual costs may be higher or low-er.
Number of years you own
your shares 1 Year* 3 Years* 5 Years* 10 Years*
-------------------------------------------------------------
Class 1 (with or without
redemption) $1,006 $1,335 $1,685 $2,668
-------------------------------------------------------------
Class A (with or without
redemption) $ 700 $1,119 $1,563 $2,790
-------------------------------------------------------------
Class B (assuming
redemption at end of
period) $ 782 $1,165 $1,574 $2,949
-------------------------------------------------------------
Class B (assuming no
redemption) $ 282 $ 865 $1,474 $2,949
-------------------------------------------------------------
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
5
<PAGE>
Mid Cap Fund
Investment objective
The fund seeks long-term growth of capital.
Key investments
The fund invests primarily in equity securities of medium sized companies,
which are companies with market capitalizations within the range of capitaliza-
tions of the companies included in the Standard & Poor's MidCap 400 Index at
the time of investment. Equity securities include exchange traded and over-the-
counter common stocks, preferred stocks, debt securities convertible into eq-
uity securities and warrants and rights relating to equity securities. The fund
also may invest up to 35% of its assets in equity securities of companies with
market capitalizations smaller or larger than those of medium sized companies
(i.e., companies considered to be small or large capitalization companies), and
up to 25% of its assets in securities of foreign issuers both directly and
through depositary receipts for those securities.
How the manager selects the fund's investments
The manager focuses on medium capitalization companies that exhibit either at-
tractive growth characteristics or attractive value characteristics. The man-
ager selects individual "growth" stocks for investment in two ways: by identi-
fying those companies which exhibit the most favorable growth prospects and by
identifying those companies which have favorable valuations relative to their
growth characteristics. This strategy is commonly known as "growth at a reason-
able price" and offers investors style diversification within a single mutual
fund. In selecting companies for investment, the manager looks for:
. Growth characteristics, including high historic growth rates and high rela-
tive growth compared with companies in the same industry or sector
. Value characteristics, including low price/earnings ratios and other statis-
tics indicating that a security is undervalued
. Increasing profits and sales
. Competitive advantages that could be more fully exploited by a company
. Skilled management that is committed to long-term growth
. Potential for a long-term investment by the fund
The manager uses fundamental research to find stocks with strong growth poten-
tial and also uses quantitative analysis to determine whether these stocks are
relatively undervalued or overvalued compared to stocks with similar fundamen-
tal characteristics. The manager's quantitative valuations determine whether
and when the fund will purchase and sell stocks that it identifies through fun-
damental research.
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, because of the following:
. U.S. stock markets go down, or perform poorly relative to other types of in-
vestments
. An adverse company specific event, such as an unfavorable earnings report,
negatively affects the stock price of a company in which the fund invests
. Medium capitalization stocks fall out of favor with investors
. The manager's judgment about the attractiveness, growth prospects, value or
potential appreciation of a particular stock proves to be incorrect
Because the fund invests primarily in medium capitalization companies, an in-
vestment in the fund may be more volatile and more susceptible to loss than an
investment in a fund which invests primarily in large capitalization companies.
Medium capitalization companies may have more limited product lines, markets
and financial resources than large capitalization companies. They may have
shorter operating histories and more erratic businesses, although they gener-
ally have more established businesses than small capitalization companies. The
prices of medium capitalization company stocks tend to be more volatile than
the prices of large capitalization company stocks.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking to participate in the long term growth potential of the U.S.
stock market
. Are looking for an investment with potentially greater return but higher risk
than a fund that invests primarily in large cap companies
. Are willing to accept the risks of investing in the stock market
6
The Concert Investment Series Prospectus
<PAGE>
Mid Cap Fund, continued
Performance
- --------------------------------------------------------------------------------
Because this fund commenced operations on March 15, 1999, the Fund does not yet
have a sufficient operating history to generate the performance information
which other funds show in bar and table form in this location of the Prospec-
tus.
Fee table
- --------------------------------------------------------------------------------
This table sets forth the fees and expenses you will pay if you invest in shares
of the fund.
Shareholder fees (paid directly from
your investment) Class 1 Class A Class B
----------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 8.50% 5.00% None
----------------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value
at purchase or redemption) None None* 5.00%
----------------------------------------------------------------
Annual fund operating expenses (paid by
the fund as % of net assets)
----------------------------------------------------------------
Management fee 0.75% 0.75% 0.75%
----------------------------------------------------------------
Distribution and service (12b-1) fee 0.00% 0.25% 1.00%
----------------------------------------------------------------
Other expenses 1.13% 1.12% 1.13%
----------------------------------------------------------------
Total annual fund operating expenses 1.88% 2.12% 2.88%
----------------------------------------------------------------
Management fee waiver/1/ (0.64)% (0.64)% (0.64)%
----------------------------------------------------------------
Net annual operating expenses 1.24% 1.48% 2.24%
----------------------------------------------------------------
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
/1/ Management has agreed to waive a portion of its Manage-
ment fee for all classes. The actual Management fee was
0.11% and is currently in effect. Management may discon-
tinue or modify this Management fee waiver without the ap-
proval of the fund's trustees.
Example
- --------------------------------------------------------------------------------
This example helps you compare the costs of investing in the fund with those of
other mutual funds. Your actual costs may be higher or lower.
Number of years you own
your shares 1 Year* 3 Years* 5 Years* 10 Years*
---------------------------------------------------------------
Class 1 (with or without
redemption) $1,025 $1,391 $1,780 $2,864
---------------------------------------------------------------
Class A (with or without
redemption) $ 704 $1,131 $1,582 $2,763
---------------------------------------------------------------
Class B (assuming
redemption at end of
period) $ 791 $1,192 $1,618 $3,204
---------------------------------------------------------------
Class B (assuming no
redemption) $ 291 $ 892 $1,518 $3,204
---------------------------------------------------------------
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
7
<PAGE>
Growth Fund
Investment objective
The fund seeks capital appreciation.
Key investments
The fund invests principally in U.S. common stocks and other equity securities,
typically of established companies with large market capitalizations.
How the manager selects the fund's investments
The manager uses a "bottom-up" strategy, primarily focusing on individual secu-
rity selection, with less emphasis on industry and sector allocation. The man-
ager selects investments for their capital appreciation; any ordinary income is
incidental. In selecting individual companies for investment, the manager looks
for:
. Growth characteristics, including high historic growth rates and high rela-
tive growth compared with companies in the same industry or sector
. Value characteristics, including low price/earnings ratios and other statis-
tics indicating that a security is undervalued
. Increasing profits and sales
. Competitive advantages that could be more fully exploited by a company
. Skilled management that is committed to long-term growth
. Potential for a long-term investment by the fund
The manager uses fundamental research to find stocks with strong growth poten-
tial, and then uses quantitative analysis to determine whether these stocks are
relatively undervalued or overvalued compared to stocks with similar fun-
damental characteristics. The manager's quantitative valuations determine
whether and when the fund will purchase or sell the stocks that it identifies
through fundamental research. This style of stock selection is commonly known
as "growth at a reasonable price."
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Stock prices decline generally
. Large capitalization companies fall out of favor with investors
. The manager's judgment about the attractiveness, value or potential apprecia-
tion of a particular stock proves to be incorrect
. The company does not meet earnings expectations or other events depress the
value of the company's stock
The fund may engage in active and frequent trading, resulting in high portfolio
turnover. This may lead to the realization and distribution to shareholders of
higher capital gains, increasing their tax liability. Frequent trading also in-
creases transaction costs, which could detract from the fund's performance.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are an aggressive investor seeking to participate in the long term growth po-
tential of the stock market
. Are willing to accept the risks of investing in common stocks
8
The Concert Investment Series Prospectus
<PAGE>
Growth Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class 1 shares for each of the past 10 calendar years.
Class A and B shares would have different performance due to their different
expenses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 23.52% in 4th quarter 1998; Lowest: (15.74)% in 3rd
quarter 1990
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class 1 shares
1990 -3.41%
1991 38.59%
1992 7.13%
1993 9.37%
1994 -2.29%
1995 32.84%
1996 18.89%
1997 27.70%
1998 28.50%
1999 29.05%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
This table indicates the risks of investing in the fund by comparing the
average annual total return of each class for the periods shown to that of the
Standard & Poor's 500 Index, an unmanaged index of common stocks.
This table assumes the imposition of the maximum sales charge applicable to
the class, the redemption of shares at the end of the period, and the
reinvestment of distributions and dividends.
Average annual total returns for
periods ended December 31, 1999
---------------------------------------------------------------------
Class Inception Date 1 Year 5 Years 10 Years Since Inception
---------------------------------------------------------------------
1 04/14/87 18.10% 25.08% 16.71% 14.68%
---------------------------------------------------------------------
A 08/18/96 22.29% n/a n/a 27.15%
---------------------------------------------------------------------
B 08/18/96 22.74% n/a n/a 27.81%
---------------------------------------------------------------------
S&P 500
Index n/a 21.03% 28.54% 18.19% 16.79%*
---------------------------------------------------------------------
* The index comparison begins on 4/30/87.
Fee table
- --------------------------------------------------------------------------------
This table sets forth the fees and expenses you will pay if you invest in shares
of the fund.
Shareholder fees (paid directly from
your investment) Class 1 Class A Class B
----------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 8.50% 5.00% None
----------------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value
at purchase or redemption) None None* 5.00%
----------------------------------------------------------------
Annual fund operating expenses (paid by
the fund as % of net assets)
----------------------------------------------------------------
Management fee 0.65% 0.65% 0.65%
----------------------------------------------------------------
Distribution and service (12b-1) fee 0.00% 0.25% 1.00%
----------------------------------------------------------------
Other expenses 0.11% 0.11% 0.11%
----------------------------------------------------------------
Total annual fund operating expenses 0.76% 1.01% 1.76%
----------------------------------------------------------------
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
This example helps you compare the costs of investing in the fund with those of
other mutual funds. Your actual costs may be higher or lower.
Number of years you own
your shares 1 Year* 3 Years* 5 Years* 10 Years*
-------------------------------------------------------------
Class 1 (with or without
redemption) $921 $1,072 $1,236 $1,712
-------------------------------------------------------------
Class A (with or without
redemption) $598 $ 805 $1,030 $1,674
-------------------------------------------------------------
Class B (assuming
redemption at end of
period) $679 $ 854 $1,054 $1,875
-------------------------------------------------------------
Class B (assuming no
redemption) $179 $ 554 $ 954 $1,875
-------------------------------------------------------------
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
9
<PAGE>
Growth and Income Fund
Investment objective
The fund seeks reasonable growth and income.
Key investments
The fund invests in a portfolio consisting principally of equity securities,
including convertible securities, that provide dividend or interest income.
However, it may also invest in non-income producing investments for potential
appreciation in value. The fund emphasizes U.S. stocks with large market capi-
talizations. The fund's convertible securities may be of any credit quality and
may include below investment grade securities (commonly known as "junk bonds").
How the manager selects the fund's investments
The manager emphasizes individual security selection while spreading the fund's
investments among industries and sectors. The manager uses a two-step selection
process commonly known as "growth at a reasonable price."
First, the manager uses quantitative analysis to find stocks with strong growth
potential, and to determine whether these securities are relatively undervalued
or overvalued. Quantitative factors include:
. Growth characteristics, including high historic growth rates and high rela-
tive growth compared with companies in the same industry or sector
. Value characteristics, including low price/earnings ratios and other statis-
tics indicating that a security is undervalued
Then, the manager uses fundamental qualitative research to verify these equity
securities' growth potential. Qualitative factors include:
. Management with established track records, or favorable changes in current
management
. Improvement in a company's competitive position
. Positive changes in corporate strategy
These quantitative and qualitative factors, as well as the expected dividends
and income, influence the fund's purchases and sales of securities.
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Stock prices decline generally
. Large capitalization companies fall out of favor with investors
. Companies in which the fund invests suffer unexpected losses or lower than
expected earnings
. The manager's judgment about the attractiveness, value or income potential of
a particular security proves to be incorrect
. The issuer of a debt security owned by the fund defaults on its obligation to
pay principal and/or interest or has its credit rating downgraded. This risk
is higher for below investment grade securities. These securities are consid-
ered speculative because they have a higher risk of issuer default, are sub-
ject to greater price volatility and may be illiquid
The fund may engage in active and frequent trading, resulting in high portfolio
turnover. This may lead to the realization and distribution to shareholders of
higher capital gains, increasing their tax liability. Frequent trading also in-
creases transaction costs, which could detract from the fund's performance.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking reasonable long term growth and current income
. Are willing to accept the risks of investing in the stock market
10
The Concert Investment Series Prospectus
<PAGE>
Growth and Income Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class 1 shares for each of the past 10 calendar years.
Class A and B shares would have different performance due to their different
expenses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 19.51% in 4th quarter 1998; Lowest: (14.06)% in 3rd
quarter 1990
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class 1 shares
1990 -3.10%
1991 31.30%
1992 7.33%
1993 9.40%
1994 -3.17%
1995 36.57%
1996 17.93%
1997 24.47%
1998 19.32%
1999 16.77%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
This table indicates the risks of investing in the fund by comparing the
average annual total return of each class for the periods shown to that of the
Standard & Poor's 500 Index, an unmanaged index of common stocks.
This table assumes the imposition of the maximum sales charge applicable to
the class, the redemption of shares at the end of the period, and the
reinvestment of distributions and dividends.
Average annual total returns for
periods ended December 31, 1999
---------------------------------------------------------------
Class Inception Date 1 Year 5 Years 10 Years Since Inception
---------------------------------------------------------------
1 08/08/86 6.87% 20.64% 13.97% 12.54%
---------------------------------------------------------------
A 08/18/96 10.60% n/a n/a 20.32%
---------------------------------------------------------------
B 08/18/96 10.67% n/a n/a 20.85%
---------------------------------------------------------------
S&P 500
Index n/a 21.03% 28.54% 18.19% 17.23%*
---------------------------------------------------------------
* The index comparison begins on 8/31/86.
Fee table
- --------------------------------------------------------------------------------
This table sets forth the fees and expenses you will pay if you invest in shares
of the fund.
Shareholder fees (paid directly from
your investment) Class 1 Class A Class B
----------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 8.50% 5.00% None
----------------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value
at purchase or redemption) None None* 5.00%
----------------------------------------------------------------
Annual fund operating expenses (paid by
the fund as % of net assets)
----------------------------------------------------------------
Management fee 0.65% 0.65% 0.65%
----------------------------------------------------------------
Distribution and service (12b-1) fee 0.00% 0.25% 1.00%
----------------------------------------------------------------
Other expenses 0.19% 0.22% 0.22%
----------------------------------------------------------------
Total annual fund operating expenses 0.84% 1.12% 1.87%
----------------------------------------------------------------
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
This example helps you compare the costs of investing in the fund with those of
other mutual funds. Your actual costs may be higher or lower.
Number of years you own
your shares 1 Year* 3 Years* 5 Years* 10 Years*
-------------------------------------------------------------
Class 1 (with or without
redemption) $928 $1095 $1276 $1799
-------------------------------------------------------------
Class A (with or without
redemption) $608 $ 838 $1086 $1795
-------------------------------------------------------------
Class B (assuming
redemption at end of
period) $690 $ 888 $1111 $1995
-------------------------------------------------------------
Class B (assuming no
redemption) $190 $ 588 $1011 $1995
-------------------------------------------------------------
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
11
<PAGE>
Government Fund
Investment objective
The fund seeks high current return consistent with preservation of capital.
Key investments
The fund invests primarily in government debt issued or guaranteed by the U.S.
government, its agencies or instrumentalities. These securities include U.S.
Treasury securities, mortgage-related and asset-backed securities. Some govern-
ment guaranteed mortgage-related securities are backed by the full faith and
credit of the U.S. Treasury, some are supported by the right of the issuer to
borrow from the U.S. government and some are backed only by the credit of the
issuer itself.
In order to hedge against changes in interest rates, the fund also may purchase
or sell options on U.S. government securities and enter into interest rate
futures contracts and options on these contracts.
How the manager selects the fund's investments
The manager focuses on identifying undervalued sectors and securities. Specifi-
cally, the manager:
. Determines sector and maturity weightings based on intermediate and long-term
assessments of the economic environment and relative value factors based on
interest rate outlook
. Uses research to uncover inefficient sectors of the government and mortgage
markets and adjusts portfolio positions to take advantage of new information
. Measures the potential impact of supply/demand imbalances, yield curve shifts
and changing prepayment patterns to identify individual securities that bal-
ance potential return and risk
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Interest rates increase, causing the prices of fixed income securities to de-
cline and reducing the value of the fund's portfolio
. Prepayment risk (or call risk). As interest rates decline, the issuers of se-
curities held by the fund may prepay principal earlier than scheduled, forc-
ing the fund to reinvest in lower yielding securities
. Extension risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities, locking in
below-market interest rates and reducing the value of these securities
. The manager's judgment about interest rates or the attractiveness, value or
income potential of a particular security proves incorrect
. Changes in interest rates or the value of securities cause the value of op-
tions or futures contracts held by the fund to decline, resulting in dispro-
portionate losses to the fund's portfolio
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking income consistent with preservation of capital
. Are willing to accept the interest rate risks and market risks of investing
in government bonds and mortgage-related securities
12
The Concert Investment Series Prospectus
<PAGE>
Government Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class 1 shares for each of the past 10 calendar years.
Class A and B shares would have different performance due to their different
expenses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 5.92% in 3rd quarter 1991; Lowest: (3.45)% in 1st
quarter 1994.
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class 1 shares
1990 8.09%
1991 15.44%
1992 6.79%
1993 8.18%
1994 -4.54%
1995 16.97%
1996 2.09%
1997 9.68%
1998 6.26%
1999 -4.71%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown to that of the Lehman
Brothers Government Index, an unmanaged index of U.S. government securities.
This table assumes the imposition of the maximum sales charge applicable to
the class, the redemption of shares at the end of the period, and the
reinvestment of distributions and dividends.
Average annual total returns for periods
ended December 31, 1999
--------------------------------------------------------------------
Class Inception Date 1 Year 5 Years 10 Years Since Inception
--------------------------------------------------------------------
1 04/14/87 (11.16)% 4.34% 5.46% 5.94%
--------------------------------------------------------------------
A 08/08/96 (9.42)% n/a n/a 2.52%
--------------------------------------------------------------------
B 08/08/96 (9.77)% n/a n/a 2.69%
--------------------------------------------------------------------
Lehman Brothers
Government
Index n/a (2.23)% 7.44% 6.27% 7.85%*
--------------------------------------------------------------------
* The index comparison begins on 4/30/87.
Fee table
- --------------------------------------------------------------------------------
This table sets forth the fees and expenses you will pay if you invest in shares
of the fund.
Shareholder fees (paid directly from
your investment) Class 1 Class A Class B
----------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 6.75% 4.50% None
----------------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value
at purchase or redemption) None None* 4.50%
----------------------------------------------------------------
Annual fund operating expenses (paid by
the fund as % of net assets)
----------------------------------------------------------------
Management fee 0.60% 0.60% 0.60%
----------------------------------------------------------------
Distribution and service (12b-1) fee 0.00% 0.25% 1.00%
----------------------------------------------------------------
Other expenses 0.29% 0.40% 0.34%
----------------------------------------------------------------
Total annual fund operating expenses 0.89% 1.25% 1.94%
----------------------------------------------------------------
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
This example helps you compare the costs of investing in the fund with those of
other mutual funds. Your actual costs may be higher or lower.
Number of years you own
your shares 1 Year* 3 Years* 5 Years* 10 Years*
-------------------------------------------------------------
Class 1 (with or without
redemption) $760 $940 $1,135 $1,697
-------------------------------------------------------------
Class A (with or without
redemption) $572 $829 $1,105 $1,893
-------------------------------------------------------------
Class B (assuming
redemption at end of
period) $647 $909 $1,147 $2,085
-------------------------------------------------------------
Class B (assuming no
redemption) $197 $609 $1,047 $2,085
-------------------------------------------------------------
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
13
<PAGE>
Municipal Bond Fund
Investment objective
The fund seeks as high a level of current interest income exempt from federal
income tax as is consistent with the preservation of capital.
Key investments
The fund invests in a diversified portfolio consisting principally of tax ex-
empt municipal bonds, which are obligations issued by or on behalf of states,
territories or possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities. Tax exempt
means that the bonds pay interest that is excluded from gross income for fed-
eral income tax purposes.
The fund invests principally in municipal bonds rated at the time of purchase
within the three highest grades by nationally recognized bond rating services,
or, if unrated, of equivalent quality. The fund may also invest up to 25% in
lower rated municipal bonds that have speculative characteristics.
How the manager selects the fund's investments
The manager selects securities primarily by identifying undervalued sectors and
individual securities, while also selecting securities that it believes will
benefit from changes in relative interest rates. In selecting individual secu-
rities, the manager:
. Uses fundamental credit analysis to estimate the relative value and attrac-
tiveness of various securities and sectors and to exploit inefficiencies in
the municipal bond market
. Actively trades among various sectors, such as insured, general obligation,
revenue and housing, based on their apparent relative values
. Identifies individual securities with the most potential for added value,
such as those involving unusual situations, new issuers, the potential for
credit upgrades, unique structural characteristics or innovative features
. Considers a security's maturity in light of the outlook for the issuer and
its sector
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Interest rates rise, causing the value of the fund's portfolio generally to
decline
. Municipal bonds fall out of favor with investors
. Unfavorable legislation affects the tax-exempt status of municipal bonds
. The manager's judgment about the attractiveness, value or income potential of
a particular bond proves to be incorrect
. The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest or has its credit rating downgraded. This risk is
higher for below investment grade bonds, which are considered speculative be-
cause they have a higher risk of issuer default, are subject to greater price
volatility and may be illiquid
It is possible that some of the fund's income and gains may be subject to
federal taxation. The fund may realize taxable gains on the sale of its
securities. In addition, distributions of the fund's income and gains will be
subject to state taxation.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are in a high tax bracket and seeking income that is exempt from federal tax-
ation
. Currently have exposure to equity securities and taxable fixed income securi-
ties and wish to broaden your investment portfolio
. Are willing to accept the risks of investing in municipal bonds, including
interest rate risk and credit risk
14
The Concert Investment Series Prospectus
<PAGE>
Municipal Bond Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class 1 shares for each of the past 10 calendar years.
Class A and B shares would have different performance due to their different
expenses.
Past performance does not necessarily indicate how the fund will perform in the
future.
The performance information in the chart does not reflect sales charges, which
would reduce your return.
Quarterly returns: Highest: 5.95% in 1st quarter 1995; Lowest: (4.04)% in 1st
quarter 1994
[BAR CHART]
Percent Total Return for Class 1 shares
1990 5.77%
1991 11.29%
1992 8.51%
1993 11.17%
1994 -4.27%
1995 16.58%
1996 3.99%
1997 8.97%
1998 5.40%
1999 -4.65%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
This table indicates the risks of investing in the fund by comparing the
average annual total return of each class for the periods shown to that of the
Lehman Brothers Municipal Bond Index, an unmanaged index of municipal bonds.
This table assumes the imposition of the maximum sales charge applicable to
the class, the redemption of shares at the end of the period, and the
reinvestment of distributions and dividends.
Average annual total returns for periods
ended December 31, 1999
----------------------------------------------------------------------
Class Inception Date 1 Year 5 Years 10 Years Since Inception
----------------------------------------------------------------------
1 07/13/88 (9.15)% 4.80% 5.57% 6.04%
----------------------------------------------------------------------
A 08/18/96 (9.20)% n/a n/a 1.82%
----------------------------------------------------------------------
B 08/18/96 (9.63)% n/a n/a 1.93%
----------------------------------------------------------------------
Lehman Brothers
Municipal Bond
Index n/a (2.06)% 6.91% 6.89% 7.31%*
----------------------------------------------------------------------
* The index comparison begins on 7/31/88.
Fee table
- --------------------------------------------------------------------------------
This table sets forth the fees and expenses you will pay if you invest in shares
of the fund.
Shareholder fees (paid directly from
your investment) Class 1 Class A Class B
----------------------------------------------------------------
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 4.75% 4.50% None
----------------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value
at purchase or redemption) None None* 4.50%
----------------------------------------------------------------
Annual fund operating expenses (paid by
the fund as % of net assets)
----------------------------------------------------------------
Management fee 0.60% 0.60% 0.60%
----------------------------------------------------------------
Distribution and service (12b-1) fee 0.00% 0.25% 1.00%
----------------------------------------------------------------
Other expenses 0.35% 0.33% 0.33%
----------------------------------------------------------------
Total annual fund operating expenses 0.95% 1.18% 1.93%
----------------------------------------------------------------
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
This example helps you compare the costs of investing in the fund with those of
other mutual funds. Your actual costs may be higher or lower.
Number of years you
own your shares 1 Year* 3 Years* 5 Years* 10 Years*
----------------------------------------------------------
Class 1 $567 $763 $ 976 $1,586
----------------------------------------------------------
Class A $565 $808 $1,070 $1,817
----------------------------------------------------------
Class B (Assuming
redemption at end of
period) $646 $906 $1,142 $2,059
----------------------------------------------------------
Class B (Assuming no
redemption) $196 $606 $1,042 $2,059
----------------------------------------------------------
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
15
<PAGE>
More on the Funds' Investments
Equity securities
Equity securities include exchange traded and over-the-counter common and pre-
ferred stocks, debt securities convertible into equity securities, and warrants
and rights relating to equity securities.
Securities of foreign issuers
all funds except Government Fund and Municipal Bond Fund
International Equity Fund invests at least 65% of its assets in equity securi-
ties of foreign issuers, including those in emerging market countries. Small
Cap Fund, Growth Fund and Growth and Income Fund may invest up to 20% of their
assets, and Mid Cap Fund up to 25% of its assets, in foreign securities, in-
cluding those of issuers in emerging market countries.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve special risks. These include possible political and
economic instability and the possible imposition of exchange controls or other
restrictions on investments. Since each fund may invest in securities denomi-
nated or quoted in currencies other than the U.S. dollar, changes in foreign
currency rates relative to the U.S. dollar will affect the U.S. dollar value of
the fund's assets. Emerging market investments offer the potential for signifi-
cant gains but also involve greater risks than investing in more developed
countries. Political or economic stability, lack of market liquidity and gov-
ernment actions such as currency controls or seizure of private business or
property may be more likely in emerging markets.
Derivative transactions
All Funds
The funds may, but need not, use derivative contracts, such as futures and op-
tions on securities, securities indices or currencies; options on these
futures; forward currency contracts; and interest rate or currency swaps for
any of the following purposes:
. To hedge against the economic impact of adverse changes in the market value
of portfolio securities because of changes in stock market prices, currency
exchange rates or interest rates
. As a substitute for buying or selling securities
. To enhance a fund's return
A derivative contract will obligate or entitle a fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities,
currencies or indices. Even a small investment in derivative contracts can have
a big impact on a fund's stock market, currency and interest rate exposure.
Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when stock prices, currency rates or interest rates are
changing. A fund may not fully benefit from or may lose money on derivatives if
changes in their value do not correspond accurately to changes in the value of
the fund's holdings. The other parties to certain derivative contracts present
the same types of default risk as issuers of fixed income securities. Deriva-
tives can also make a fund less liquid and harder to value, especially in de-
clining markets.
Temporary defensive investments
All Funds
Each of the funds may depart from its principal investment strategies in re-
sponse to adverse market, economic or political conditions by taking temporary
defensive positions in all types of money market and short-term debt securi-
ties. If the fund takes a temporary defensive position, it may be unable to
achieve its investment objective.
Special restrictions
All Funds Except International Equity Fund and Mid Cap Fund
Each fund, except International Equity Fund and Mid Cap Fund, will not purchase
any securities issued by a company primarily engaged in the manufacture of al-
cohol or tobacco.
Goals/Policies
All Funds
Each fund's goal and investment policies generally may be changed by the trust-
ees without shareholder approval.
16
The Concert Investment Series Prospectus
<PAGE>
Management
Smith Barney Mutual Funds, which includes the Concert Investment Series, offers
a distinct family of fund choices tailored to help meet the varying needs of
large and small investors. The manager and Salomon Smith Barney are
subsidiaries of Citigroup Inc. Citigroup businesses provide a broad range of
financial services--asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading--and use
diverse channels to make them available to consumer and corporate customers
around the world.
The portfolio managers
The portfolio managers are primarily responsible for the day-to-day operation
of the funds indicated below. The table also shows the business experience of
each portfolio manager.
<TABLE>
<CAPTION>
Portfolio
Fund Manager(s) Since Past 5 Years' Business Experience
- ---------------------------------------------------------------------------------------
<C> <C> <C> <S>
Small Cap Sandip Bhagat 1997 investment officer of the manager and pres-
ident of
Travelers Investment Management Company, an
affiliate of the manager
- ---------------------------------------------------------------------------------------
International Equity Jeffrey Russell 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
James Conheady 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
- ---------------------------------------------------------------------------------------
Mid Cap Larry Weissman 1997 investment officer of the manager and man-
Growth 1999 aging director of Salomon Smith Barney
since October, 1997; portfolio manager of
Neuberger & Berman, LLC, 1995-97; portfolio
manager of College Retirement Equities Fund
prior thereto
- ---------------------------------------------------------------------------------------
Growth and Income R. Jay Gerken 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
- ---------------------------------------------------------------------------------------
Government James E. Conroy 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
- ---------------------------------------------------------------------------------------
Municipal Bond Joseph P. Deane 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
- ---------------------------------------------------------------------------------------
</TABLE>
Management fees
Management fees paid during the fiscal year ended october 31, 1999
(as % of average daily net assets)
<TABLE>
<CAPTION>
Small
Cap International Mid Cap Growth Growth and Government Municipal
Fund Equity Fund Fund Fund Income Fund Fund Fund
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0.65% 1.00% 0.11% 0.55% 0.63% 0.60% 0.60%
- -------------------------------------------------------------------------
</TABLE>
Distributor
CFBDS, Inc. serves as the funds' distributor. PFS Investments sells shares of
the funds to members of the public.
Distribution plans
The funds each have adopted Rule 12b-1 distribution plans for their Class A and
B shares. Under each plan, the fund pays distribution and service fees. These
fees are an ongoing expense and over time, may cost you more than other types
of sales charges.
Year 2000 issue
As the year 2000 began, there were few problems caused by the inability of cer-
tain computer systems to tell the difference between the year 2000 and the year
1900 (commonly known as the "Year 2000" issue). It is still possible that some
computer systems could malfunction in the future because of the Year 2000 issue
or as a result of actions taken to address the Year 2000 issue. Fund management
does not anticipate that its services or those of the funds' other service
providers will be adversely affected, but fund management will continue to mon-
itor the situation. If malfunctions related to the Year 2000 issue do arise,
the fund and its investments could be negatively affected.
17
The Concert Investment Series Prospectus
<PAGE>
Choosing a Share Class to Buy
Share classes
- --------------------------------------------------------------------------------
You can choose between Class A shares and Class B shares. If you, or your
spouse or minor children, already own Class 1 shares of a fund, you may also be
eligible to purchase additional Class 1 shares. The classes have different
sales charges and expenses, allowing you to choose the class that best meets
your needs. When choosing which class of shares to buy, you should consider:
. How much you plan to invest . The expenses paid by each class
. How long you expect to own . Whether you qualify for any reduction or
the shares waiver of sales charges
Investment minimums
- --------------------------------------------------------------------------------
Minimum initial and additional investment amounts vary depending on the class of
shares you buy and the nature of your investment account.
Initial Investment Additional Investments
Classes A and B All Classes
-------------------------------------------------------------------
General $1,000 $50
-------------------------------------------------------------------
Individual Retirement
Accounts, Self Employed
Retirement Plans,
Uniform Gift to Minor
Accounts $ 250 $50
-------------------------------------------------------------------
Qualified Retirement
Plans $ 25 $25
-------------------------------------------------------------------
Systematic Investment
Plans $ 25 $25
-------------------------------------------------------------------
Qualified Retirement Plans are qualified under Section 403(b)(7) or
Section 401(a) of the Internal Revenue Code, including 401(k) plans
Comparing classes
- --------------------------------------------------------------------------------
Your PFS Investments Registered Representative can help you decide which class
meets your goals. Your PFS Investments Registered Representative may receive
different compensation depending upon which class you choose.
Key Features Class A Class B Class 1
. Initial sales . No initial . Only avail-
charge sales charge able to eli-
gible Class 1
. You may qual- . Deferred shareholders
ify for re- sales charge
duction or declines over . Higher initial
waiver of time sales charge
initial sales
charge over . Convert to . Lowest annual
time Class A expenses
shares after
. Lower annual eight years
expenses than
Class B . Highest an-
shares nual expenses
Initial Sales
Charge Up to 5%, re- None Up to 8.50%,
duced for large reduced for
purchases and large purchases
waived for cer-
tain investors.
No charge for
purchases of
$500,000 or more,
or for certain
investors
Deferred Sales
Charge None, except Up to 5% None
for purchases charged when
of $500,000 or you redeem
more -- 1% if shares. The
you redeem charge is re-
within 1 year duced over time
of purchase and there is no
deferred sales
charge after 6
years
Annual 12b-1
Fees 0.25% of aver- 1% of average None
age daily net daily net as-
assets sets
Exchangeable
Into* Class A shares Class B shares Class 1 shares
of Concert and of Concert and of Concert
certain Smith certain Smith funds that of-
Barney mutual Barney mutual fer Class 1
funds funds shares and
Class A shares
of other Con-
cert and cer-
tain Smith
Barney mutual
funds
*Ask your PFS Investments Registered Representative about funds available for
exchange.
18
The Concert Investment Series Prospectus
<PAGE>
Class A Sales Charge
Class A sales charge
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment in-
creases to certain levels called breakpoints. You do not pay a sales charge on
the fund's distributions or dividends that you reinvest in additional Class A
shares.
To learn more about the accumulation and combination privileges, letters of in-
tent, additional waivers for certain investors and other options to reduce your
sales charge, ask your PFS Investments Registered Representative or consult the
Statement of Additional Information (SAI).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Small Cap Fund,
International Equity Fund, Mid Cap
Fund, Growth Fund and Growth and For Municipal Bond Fund and
Income Fund Government Fund
- ---------------------------------------------------------------------------------------------------------------------------
Sales Charge as Sales Charge as Sales Charge as
Sales Charge as % % of Net Amount % of Offering % of Net Amount
Amount of Investment of Offering Price Invested Price Invested
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50% 4.71%
- ---------------------------------------------------------------------------------------------------------------------------
$25,000 but less than
$50,000 4.00 4.17 4.00 4.17
- ---------------------------------------------------------------------------------------------------------------------------
$50,000 but less than
$100,000 3.50 3.63 3.50 3.63
- ---------------------------------------------------------------------------------------------------------------------------
$100,000 but less than
$250,000 3.00 3.09 2.50 2.56
- ---------------------------------------------------------------------------------------------------------------------------
$250,000 but less than
$500,000 2.00 2.04 1.50 1.52
- ---------------------------------------------------------------------------------------------------------------------------
$500,000 or more* -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*You do not pay an initial sales charge when you buy $500,000 or more of Class
A shares. However, if you redeem these Class A shares within one year of pur-
chase, you will pay a deferred sales charge of 1%.
Qualifying for reduced Class A sales charges
There are several ways you can combine multiple purchases of Class A shares of
Concert funds and certain other Smith Barney funds to take advantage of the
breakpoints in the sales charge schedule.
. Accumulation privilege--lets you add the current value of Class A shares of
Concert funds and certain other Smith Barney funds already owned by you or
members of your immediate family (and for which you paid a sales charge) to
the amount of your next purchase of Class A shares for purposes of calculat-
ing the sales charge. Certain trustees and fiduciaries may be entitled to
combine accounts in determining their sales charge.
. Letter of intent--lets you purchase Class A shares of one or more Concert
funds and certain other Smith Barney funds over a 13-month period and pay the
same sales charge, if any, as if all shares had been purchased at once. You
may include purchases on which you paid a sales charge made within 90 days
before you sign the letter.
Waivers for certain Class A investors
Class A initial sales charges are waived for certain types of investors, in-
cluding:
. Employees of members of the NASD
. 403(b) or 401(k) retirement plans, if certain conditions are met
. Investors who purchased through a PFS Investments Registered Representative
with proceeds from a prior mutual fund redemption, if certain conditions are
met
. Investors who redeemed Class A shares of Concert funds or certain other Smith
Barney funds in the past 60 days, if your PFS Investments Registered Repre-
sentative is notified
. Participants in the PFS Primerica Corporation Savings and Retirement Plan
19
The Concert Investment Series Prospectus
<PAGE>
Class B Sales Charge
Class B deferred sales charge
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge.
The deferred sales charge decreases as the number of years since your purchase
increases.
If you want to learn more about additional deferred sales charges and waivers
of deferred sales charges, contact your PFS Investments Registered Representa-
tive or consult the SAI.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year After Purchase
- ---------------------------------------------------------------------------
Deferred Sales Charge for: 1st 2nd 3rd 4th 5th 6th through 8th
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government Fund and
Municipal Fund 4.50% 4.00% 3.00% 2.00% 1.00% -0-
- ---------------------------------------------------------------------------
All other funds 5.00% 4.00% 3.00% 2.00% 1.00% -0-
- ---------------------------------------------------------------------------
</TABLE>
Calculation of deferred sales charge
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation. In addition, you do not pay a de-
ferred sales charge on shares exchanged for shares of another Concert or eligi-
ble Smith Barney mutual fund, shares representing reinvested distributions and
dividends or shares no longer subject to the deferred sales charge.
Shares are redeemed in this order:
. Shares that represent appreciation
. Shares representing reinvested distributions and dividends
. Shares that are not subject to the deferred sales charge
. Class B shares held longest
Deferred sales charges are not imposed at the time you exchange shares for
shares of another fund.
Each time you place a request to sell shares, the fund will first sell any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
. To make payments through certain systematic withdrawal plans
. To make certain distributions from a retirement plan
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
Class B conversion
After 8 years, Class B shares automatically convert into Class A shares. This
helps you because Class A shares have lower annual expenses. Your Class B
shares will convert to Class A shares as follows:
- --------------------------------------------------------------------------------
Shares Issued at Initial Purchase
- --------------------------------------------------------------------------------
. Eight years after the date of purchase
Shares Issued on Reinvestment of Distribution and Dividends
- --------------------------------------------------------------------------------
. In same proportion that the number of Class B shares converting is to total
Class B shares you own (excluding shares issued as a dividend)
Shares Issued upon Exchange from Another Fund
- --------------------------------------------------------------------------------
. On the date the shares originally acquired would have converted into Class A
shares
- --------------------------------------------------------------------------------
20
The Concert Investment Series Prospectus
<PAGE>
Class 1 Sales Charge
Class 1 sales charge
Class 1 shares are offered to eligible Class 1 shareholders at the next deter-
mined net asset value plus a sales charge. You do not pay a sales charge on a
fund's distributions or dividends that you reinvest in additional Class 1
shares.
You pay a lower sales charge as the size of your investment increases to cer-
tain levels called breakpoints. As described in these tables, the Class 1
breakpoints vary by fund.
Small Cap, International Equity, Mid Cap, Growth and Growth and Income Funds
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
sales charge as sales charge as
Amount of investment % of offering price % of net amount invested
- -------------------------------------------------------------------------------
<S> <C> <C>
Less than $10,000 8.50% 9.29%
- -------------------------------------------------------------------------------
$10,000 but less than
$25,000 7.75% 8.40%
- -------------------------------------------------------------------------------
$25,000 but less than
$50,000 6.00% 6.38%
- -------------------------------------------------------------------------------
$50,000 but less than
$100,000 4.50% 4.71%
- -------------------------------------------------------------------------------
$100,000 but less than
$250,000 3.50% 3.63%
- -------------------------------------------------------------------------------
$250,000 but less than
$400,000 2.50% 2.56%
- -------------------------------------------------------------------------------
$400,000 but less than
$600,000 2.00% 2.04%
- -------------------------------------------------------------------------------
$600,000 but less than $5,000,000 1.00% 1.01%
- -------------------------------------------------------------------------------
$5,000,000 or more 0.25% 0.25%
</TABLE>
- --------------------------------------------------------------------------------
Government Fund
<TABLE>
- ---------------------------------------------------------------------------------
<CAPTION>
sales charge as sales charge as
Amount of investment % of offering price % of net amount invested
- ---------------------------------------------------------------------------------
<S> <C> <C>
Less than $25,000 6.75% 7.24%
- ---------------------------------------------------------------------------------
$25,000 but less than
$50,000 5.75% 6.10%
- ---------------------------------------------------------------------------------
$50,000 but less than
$100,000 4.25% 4.44%
- ---------------------------------------------------------------------------------
$100,000 but less than
$250,000 3.50% 3.63%
- ---------------------------------------------------------------------------------
$250,000 but less than
$500,000 2.50% 2.56%
- ---------------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.00% 2.04%
- ---------------------------------------------------------------------------------
$1,000,000 but less than $2,500,000 1.00% 1.01%
- ---------------------------------------------------------------------------------
$2,500,000 but less than $5,000,000 0.50% 0.50%
- ---------------------------------------------------------------------------------
$5,000,000 or more 0.25% 0.25%
</TABLE>
- --------------------------------------------------------------------------------
Municipal Bond Fund
<TABLE>
- ---------------------------------------------------------------------------------
<CAPTION>
sales charge as sales charge as
Amount of investment % of offering price % of net amount invested
- ---------------------------------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.75% 4.99%
- ---------------------------------------------------------------------------------
$100,000 but less than
$250,000 3.75% 3.90%
- ---------------------------------------------------------------------------------
$250,000 but less than
$500,000 3.00% 3.09%
- ---------------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.00% 2.04%
- ---------------------------------------------------------------------------------
$1,000,000 but less than $2,500,000 1.00% 1.01%
- ---------------------------------------------------------------------------------
$2,500,000 but less than $5,000,000 0.50% 0.50%
- ---------------------------------------------------------------------------------
$5,000,000 or more 0.25% 0.25%
- ---------------------------------------------------------------------------------
</TABLE>
21
The Concert Investment Series Prospectus
<PAGE>
Buying Shares and Exchanging Shares
Buying shares by mail
. Initial purchases of shares of each fund must be made through a PFS Invest-
ments Registered Representative by completing the appropriate application.
The completed application should be forwarded to PFS Shareholder Services.
. Subsequent investments may be sent by mail directly to PFS Shareholder Serv-
ices.
. The address and telephone number of PFS Shareholder Services is: 3100 Breck-
inridge Blvd., Bldg. 200 Duluth, Georgia 30099-0062 (800) 544-5445
. You may also reach PFS Shareholder Services by calling (800) 544-7278 for
Spanish speaking representatives or (800) 824-1721 for the TDD Line for the
Hearing Impaired.
. Checks drawn on foreign banks must be payable in U.S. dollars and have the
routing number of the U.S. bank encoded on the check.
Buying shares by wire
Initial purchases of shares for $10,000 may be made by wire order from your
bank account. Contact PFS Shareholder Services for details. In addition, once
an account is open, you may make additional wire orders through your PFS In-
vestments Representative.
Systematic investment plan
You may authorize PFS Shareholder Services to automatically transfer funds on a
monthly basis from a regular bank account or other financial institution to buy
shares of a fund.
. Amounts transferred must be at least $25 monthly.
. If you do not have sufficient funds in your bank account on a transfer date,
PFS Shareholder Services may charge you a fee.
For more information, contact your PFS Investments Registered Representative or
consult the SAI.
Exchange privilege
You should contact your PFS Investments Registered Representative to exchange
into other eligible Concert and certain Smith Barney mutual funds. Be sure to
read the prospectus of the Concert or Smith Barney fund you are exchanging in-
to. An exchange is a taxable transaction.
. You may exchange shares only for shares of the same class of another eligible
Concert or Smith Barney mutual fund. Some funds may not be offered in your
state of residence. Not all Smith Barney funds offer all classes.
. You must meet the minimum investment amount for each fund.
. If you hold share certificates, the transfer agent must receive the certifi-
cates endorsed for transfer or with signed stock powers before the exchange
is effective.
. Your fund may suspend or terminate your exchange privilege if you engage in
an excessive pattern of exchanges.
. Your shares will not be subject to an initial sales charge at the time of the
exchange. Your deferred sales charge (if any) will continue to be measured
from the date of your original purchase. If the fund that you exchange into
has a higher deferred sales charge, you will be subject to that charge. If
you exchange again to a fund with a lower charge, the sales charge will not
be reduced.
. You may exchange shares by telephone if you elect telephone exchanges on your
account application. Telephone exchanges are subject to the same limitations
as telephone redemptions.
To learn more about the exchange privileges and the Concert and Smith Barney
mutual funds that you may be eligible to exchange into, contact your PFS In-
vestments Registered Representative or consult the SAI.
22
The Concert Investment Series Prospectus
<PAGE>
Redeeming Shares
Redemptions by mail
Generally, a properly completed Redemption Form with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary.
You may redeem some or all of your shares by sending a Redemption Form or other
written request in proper form to PFS Shareholder Services, 3100 Breckinridge
Blvd., Bldg. 200, Duluth, Georgia 30099-0062. You may also reach PFS Share-
holder Services by calling (800) 544-5445 or (800) 544-7278 for Spanish speak-
ing representatives or (800) 824-1721 for the TDD Line for the Hearing Im-
paired. The written request for redemption must be in good order. This means
that you have provided the following information. Your request will not be
processed without this information.
. Name of the fund
. Account number
. Dollar amount or number of shares to redeem
. Signature of each owner exactly as account is registered
. Other documentation required by PFS Shareholder Services
To be in good order, your request must include a signature guarantee if:
. The proceeds of the redemption exceed $50,000
. The proceeds are not paid to the record owner(s) at the record address
. The shareholder(s) has had an address change in the past 45 days
. The shareholder(s) is a corporation, sole proprietor, partnership, trust or
fiduciary
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loans, but not from a notary public.
In all cases, your redemption price is the net asset value next determined af-
ter your request is received in good order. Redemption proceeds normally will
be sent within three days. However, if you recently purchased your shares by
check, your redemption proceeds will not be sent to you until your original
check clears, which may take up to 15 days. Any request that your redemption
proceeds be sent to a destination other than your bank account or address of
record must be in writing and must include signature guarantees.
Redemptions by telephone
You may redeem shares by telephone if you elect the telephone redemption option
on your account application. This is available only for redemptions of $50,000
or less, and the proceeds must be mailed to your address of record. In addi-
tion, you must be able to provide proper identification information. You may
not redeem by telephone if your address has changed within the past 45 days or
if your shares are in certificate form. Telephone redemption requests may be
made by calling PFS Shareholder Services at (800) 544-5445 between 9:00 a.m.
and 6:00 p.m. eastern time on any day the New York Stock Exchange is open. If
telephone redemptions are not available for any reason, you may use the Fund's
regular redemption procedure described above.
Payment of redemption proceeds
Whether you redeem by mail or telephone, your redemption proceeds can be sent
by check to your address of record or by wire transfer to a bank account desig-
nated on your application.
Automatic cash withdrawal plan
You can arrange for the automatic redemption of a portion of your shares on a
monthly or quarterly basis. To qualify you must own shares of the fund with a
value of at least $10,000 ($5,000 for retirement accounts) and each automatic
redemption must be at least $50. If your shares are subject to a deferred sales
charge, the sales charge will be waived if your automatic payments are equal to
or less the 1% per month of the value of your shares subject to a deferred
sales charge. The following conditions apply:
. Shares may not be represented by certificates
. All dividends and distributions must be reinvested
. You can establish a withdrawal plan for a retirement account only if you are
eligible to receive distributions from the account
23
The Concert Investment Series Prospectus
<PAGE>
Other Things to Know about Share Transactions
Small account balances
If your account falls below $500 due to redemption of fund shares, the fund may
ask you to bring your account up to the minimum requirement. If your account is
still below $500 after 60 days, the fund may close your account and send you
the redemption proceeds.
Share certificates
Upon written request, a share certificate will be issued if the request has
been signed by all registered owners.
Share price
You may buy, exchange or redeem fund shares at the net asset value, adjusted
for any applicable sales charge, next determined after receipt of your request
in good order. Each fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
Each fund calculates its net asset value every day the New York Stock Exchange
is open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done at 4:00 p.m., Eastern time, or when regular trading closes
on the Exchange, if earlier.
The funds generally value their securities based on market prices or quota-
tions. The funds' currency conversions are done when the London stock exchange
closes, which is 12 noon Eastern time. When market prices or quotations are not
available, or when the manager believes they are unreliable or that the value
of a security has been materially affected by events occurring after a foreign
exchange closes, the funds may price those securities at fair value. Fair value
is determined in accordance with procedures approved by the funds' board. A
fund that uses fair value to price securities may value those securities higher
or lower than another fund that uses market quotations to price the same secu-
rities.
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by a fund could change on days when you can-
not buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with PFS before the New York Stock Exchange closes. If the New York
Stock Exchange closes early, you must place your order prior to the actual
closing time. Otherwise, you will receive the next business day's price.
Salomon Smith Barney or members of the funds' selling group must transmit all
orders to buy, exchange or redeem shares to the funds' agent before the agent's
close of business.
Important addresses
Manager: SSB Citi Fund Management LLC
388 Greenwich Street, MF2
New York, New York 10013
Shareholder Services:
PFS Shareholder Services
3100 Breckinridge Blvd., Bldg. 200
Duluth, Georgia 30099-0062
(800) 544-5445
24
The Concert Investment Series Prospectus
<PAGE>
Dividends, Distributions and Taxes
Dividends and distributions
Annual distributions of income and capital gain normally take place at the end
of the year in which the income or gain is realized or the beginning of the
next year.
The funds normally pay dividends and distribute capital gains, if any, as fol-
lows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income Capital Distributions
Dividend Gain Mostly
Fund Distributions Distributions From
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Annually Annually Gain
- -----------------------------------------------------------------------------------
International Equity Annually Annually Gain
- -----------------------------------------------------------------------------------
Mid Cap Annually Annually Gain
- -----------------------------------------------------------------------------------
Growth Annually Annually Gain
- -----------------------------------------------------------------------------------
Growth and Income Quarterly Annually Both
- -----------------------------------------------------------------------------------
Government Monthly Annually Income
- -----------------------------------------------------------------------------------
Municipal Bond Monthly Annually Income
- -----------------------------------------------------------------------------------
</TABLE>
The funds may pay additional distributions and dividends at other times if nec-
essary for a fund to avoid a federal tax. Capital gains distributions and divi-
dends are reinvested in additional fund shares of the same class that you hold.
You do not pay a sales charge on reinvested distributions or dividends. Alter-
natively, you can instruct your PFS Investments Registered Representative or
PFS to have your distributions and/or dividends paid in cash. You can change
your choice at any time to be effective as of the next distribution or divi-
dend, except that any change given to the transfer agent less than five days
before the payment date will not be effective until the next distribution or
dividend is made.
Taxes
In general, redeeming shares, exchanging shares and receiving distributions
(whether in cash or additional shares) are all taxable events.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transaction Federal Income Tax Status
- -------------------------------------------------
<S> <C>
Redemption or Usually capital gain or loss;
exchange long-term only if shares
of shares owned more than one year
- -------------------------------------------------
Long-term capital Long-term capital gain
gain
distributions
- -------------------------------------------------
Short-term Ordinary income
capital gain
distributions
- -------------------------------------------------
Dividends Ordinary income (for all funds
except Municipal Bond
Fund)*
- -------------------------------------------------
</TABLE>
* Municipal Bond Fund intends to distribute the interest it earns on tax-exempt
municipal bonds as "exempt-interest" dividends, which are excludable from gross
income for federal income tax purposes but may be subject to state and local
income tax. Its distributions from other sources, if any, would be taxable as
described above.
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when a fund is about to declare a long-term capital gain distri-
bution or a taxable dividend, because it will be taxable to you even though it
may actually be a return of a portion of your investment.
After the end of each year, the funds will provide you with information about
the distributions and dividends that you received and any redemptions of shares
during the previous year. If you do not provide a fund with your correct tax-
payer identification number and any required certifications, you may be subject
to back-up withholding of 31% of your distributions, dividends (other than ex-
empt-interest dividends), and redemption proceeds. Because each shareholder's
circumstances are different and special tax rules may apply, you should consult
with your tax adviser about your investment in a fund and your receipt of divi-
dends, distributions or redemption proceeds.
25
The Concert Investment Series Prospectus
<PAGE>
Financial Highlights
The financial highlights tables are intended to help you understand the
performance of each class for the past five years (or since inception if less
than five years). Certain information reflects financial results for a single
share. Total returns represent the rate that a shareholder would have earned (or
lost) on a fund share assuming reinvestment of all dividends and distributions.
The information in the following tables was audited by Ernst & Young LLP,
independent auditors, whose report, along with the fund's financial statements
is included in the annual report (available upon request).
For a Share of Each Class of Beneficial Interest Outstanding
Throughout Each Year:
Small Cap Fund
- -------------------------------------------------------------
Class 1 Shares
<TABLE>
<CAPTION>
August 8, 1996
(Commencement
Year Ended Year Ended Year Ended of Distribution) to
October 31, 1999(1) October 31, 1998* October 31, 1997 October 31, 1996
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 20.28 $ 22.15 $18.59 $17.89
----------------------------------------------------------------------------------------------------------------
Income (loss) from operations
Net investment loss (0.13) (0.12) (0.08) (0.02)
----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 6.71 (1.54) 3.64 0.72
----------------------------------------------------------------------------------------------------------------
Total income from operations 6.58 (1.66) 3.56 0.70
----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- --
Net realized gain (1.53) (0.21) -- --
----------------------------------------------------------------------------------------------------------------
Total Distributions (1.53) (0.21) -- --
----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 25.33 $20.28 $22.15 $18.59
----------------------------------------------------------------------------------------------------------------
Total Return 33.42% (7.52)% 19.15% 3.91%(2)
----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(millions) $9 $7 $6 $1
----------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets 1.25% 1.26% 1.39% 1.74%+
----------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to
average net assets (0.58)% (0.60)% (0.63)% (1.09)%+
----------------------------------------------------------------------------------------------------------------
Portfolio Turnover 115% 80% 100% 80%
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using
the monthly average shares method.
(2) Total return is not annualized as it may not be repre-
sentative of the total return for the year.
+ Annualized.
* Effective December 31, 1997 SSB Citi Fund Management LLC
(successor to SSBC Fund Management Inc., formerly known
as Mutual Management Corp.), replaced Van Kampen
American Capital Asset Management as the Fund Manager.
<TABLE>
<CAPTION>
Class A Shares February 21, 1995
Year Ended Year Ended Year Ended Year Ended (Commencement of
October 31, October 31, October 31, October 31, Investment Operations)
1999(1) 1998(3) 1997 1996 to October 31, 1995(1)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 20.15 $22.08 $18.57 $15.12 $11.81
---------------------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment loss (0.20) (0.17) (0.15) (0.18) (0.24)
Net realized and
unrealized gain 6.66 (1.55) 3.66 3.63 3.55
---------------------------------------------------------------------------------------------------------
Total income from
operations 6.46 (1.72) 3.51 3.45 3.31
---------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
Net realized gain (1.53) (0.21) -- -- --
---------------------------------------------------------------------------------------------------------
Total Distributions (1.53) (0.21) -- -- --
---------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 25.08 $20.15 $22.08 $18.57 $15.12
---------------------------------------------------------------------------------------------------------
Total Return 33.02% (7.81)% 18.90% 22.82% 28.11%(2)
---------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $ 138 $108 $101 $52 $16
---------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets* 1.55% 1.43% 1.69% 2.21% 2.75%+
---------------------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets* (0.88)% (0.80)% (0.92)% (1.52)% (1.65)%+
---------------------------------------------------------------------------------------------------------
Portfolio Turnover 115% 80% 100% 80% 83%
---------------------------------------------------------------------------------------------------------
* If certain expenses
had not been waived or
reimbursed by the
Fund's former manager,
total return would
have been lower and
the ratios would have
been as follows:
---------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets N/A N/A N/A N/A 3.37%+
---------------------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets N/A N/A N/A N/A (2.27%)+
---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using
the monthly average share method.
(2) Total return is not annualized, as it may not be repre-
sentative of the total return for the year.
(3) Effective December 31, 1997 SSB Citi Fund Management LLC
(successor to SSBC Fund Management Inc.), formerly known
as Mutual Management Corp., replaced Van Kampen American
Capital Asset Management as the Fund Manager.
+ Annualized.
N/A=Not Applicable
26
The Concert Investment Series Prospectus
<PAGE>
Financial Highlights, continued
Small Cap Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares February 21, 1995
(Commencement
Year Ended Year Ended Year Ended Year Ended of Investment
October 31, October 31, October 31, October 31, Operations) to
1999(1) 1998(3) 1997 1996 October 31, 1995(1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $19.60 $21.63 $18.34 $15.04 $11.81
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
Net investment loss (0.37) (0.30) (0.27) (0.27) (0.35)
Net realized and unrealized gain 6.46 (1.52) 3.56 3.57 3.58
- -------------------------------------------------------------------------------------------------------------------
Total income from operations 6.09 (1.82) 3.29 3.30 3.23
- -------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
Net realized gain (1.53) (0.21) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total Distributions (1.53) (0.21) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $24.16 $19.60 $21.63 $18.34 $15.04
- -------------------------------------------------------------------------------------------------------------------
Total Return 32.00% (8.45)% 17.94% 21.94% 27.43%(2)
- -------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $129 $91 $80 $39 $11
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets* 2.31% 2.18% 2.44% 2.96% 3.49%+
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to average net
assets* (1.63)% (1.55)% (1.67)% (2.27)% (2.45)%+
- -------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 115% 80% 100% 80% 83%
- -------------------------------------------------------------------------------------------------------------------
* If certain expenses had not been waived or
reimbursed by the Fund's former manager,
total return would have been lower and the
ratios would have been as follows:
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets N/A N/A N/A N/A 4.11%+
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss to
average net assets N/A N/A N/A N/A (3.07%)+
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
share method.
(2) Total return is not annualized, as it may not be representative of the
total return for the year.
(3) Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
+ Annualized.
N/A=Not Applicable
27
The Concert Investment Series Prospectus
<PAGE>
International Equity Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class 1 Shares Year August 8, 1996
Ended Year Ended Year Ended (Commencement
October 31, October 31, October 31, of Distribution) to
1999(1) 1998(3) 1997 October 31, 1996(1)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $19.06 $18.16 $16.52 $ 16.00
- ---------------------------------------------------------------------------------
Income (loss) from
operations
Net investment loss (0.28) (0.21) (0.17) (0.03)
Net realized and
unrealized gain 13.79 1.11 1.81 0.55
- ---------------------------------------------------------------------------------
Total income from
operations 13.51 0.90 1.64 0.52
- ---------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- --
- ---------------------------------------------------------------------------------
Total Distributions -- -- -- --
- ---------------------------------------------------------------------------------
Net Asset Value, End of
Period $32.57 $19.06 $18.16 $16.52
- ---------------------------------------------------------------------------------
Total Return 70.88% 4.96% 9.99% 3.25%(2)
- ---------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $4 $2 $2 $0.2
- ---------------------------------------------------------------------------------
Ratio of expenses to
average net assets* 1.68% 1.79% 2.26% 2.50%+
- ---------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets* (1.12)% (0.99)% (1.24)% (1.31)%+
- ---------------------------------------------------------------------------------
Portfolio Turnover 50% 63% 57% 78%
- ---------------------------------------------------------------------------------
* If certain expenses
had not been waived or
reimbursed by the
Fund's former manager,
total return would
have been lower and
the ratios would have
been as follows:
- ---------------------------------------------------------------------------------
Ratio of expenses to
average net assets N/A N/A N/A 3.87%+
- ---------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets N/A N/A N/A (2.67)+
- ---------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
share method.
(2) Total return is not annualized, as it may not be representative of the
total return for the year.
(3) Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
N/A=Not Applicable
+ Annualized.
<TABLE>
<CAPTION>
Class A Shares February 21, 1995
Year (Commencement
Ended Year Ended Year Ended Year Ended of Investment
October 31, October 31, October 31, October 31, Operations) to
1999 1998(4) 1997 1996 October 31, 1995(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $18.94 $18.14 $16.54 $13.86 $11.81
- ---------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment loss (0.37) (0.27) (0.26) (0.19) (0.14)
Net realized and
unrealized gain 13.67 1.07 1.86 2.87 2.19
- ---------------------------------------------------------------------------------------------
Total income from
operations 13.30 0.80 1.60 2.68 2.05
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $32.24 $18.94 $18.14 $16.54 $13.86
- ---------------------------------------------------------------------------------------------
Total Return 70.22% 4.41% 9.74% 19.34% 16.28%(3)
- ---------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $38 $20 $17 $10 $7
- ---------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets* 2.08% 2.25% 2.56% 2.75% 3.64%+
- ---------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets* (1.53)% (1.46)% (1.59)% (1.56)% (1.40)%+
- ---------------------------------------------------------------------------------------------
Portfolio Turnover 50% 63% 57% 78% 17%
- ---------------------------------------------------------------------------------------------
* If certain expenses
had not been waived or
reimbursed by the
Fund's former manager,
Total Return would
have been lower and
the ratios would have
been as follows:
- ---------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets N/A N/A N/A 4.12% 5.97%+
- ---------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets N/A N/A N/A (2.92) (3.73)+
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment loss has been calculated using the monthly average share
method.
(2) Total return is not annualized, as it may not be representative of the
total return for the year.
(3) Total return from March 17, 1995 (date the Fund's Investment strategy was
implemented) through October 31, 1995 without annualization.
(4) Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
N/A=Not Applicable
+ Annualized.
The Concert Investment Series Prospectus
28
<PAGE>
Financial Highlights, continued
International Equity Fund, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares February 21, 1995
(Commencement
Year Ended Year Ended Year Ended Year Ended of Investment
October 31, October 31, October 31, October 31, Operations) to
1999(1) 1998(4) 1997 1996 October 31, 1995(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $18.44 $17.81 $16.36 $13.79 $11.81
- ---------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment loss (0.53) (0.39) (0.32) (0.26) (0.21)
Net realized and
unrealized gain 13.25 1.02 1.77 2.83 2.19
- ---------------------------------------------------------------------------------------------
Total income from
operations 12.72 0.63 1.45 2.57 1.98
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $31.16 $18.44 $17.81 $16.36 $13.79
- ---------------------------------------------------------------------------------------------
Total Return 68.98% 3.54% 8.93% 18.64% 15.69(3)
- ---------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $41 $18 $13 $8 $2
- ---------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets* 2.79% 3.11% 3.30% 3.50% 4.33%+
- ---------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets* (2.26)% (2.32)% (2.34)% (2.31)% (2.80)%+
- ---------------------------------------------------------------------------------------------
Portfolio Turnover 50% 63% 57% 78% 17%(2)
- ---------------------------------------------------------------------------------------------
* If certain expenses
had not been waived or
reimbursed by the
fund's former manager,
Total Return would
have been lower and
the ratios would have
been as follows:
- ---------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets N/A N/A N/A 4.87% 6.67%+
- ---------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets N/A N/A N/A (3.67)% (5.13)%+
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment loss has been calculated using the monthly average share
method.
(2) Not annualized.
(3) Total return is not annualized, as it may not be representative of the
total return for the year.
(4) Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the fund Manager.
N/A=Not Applicable
+ Annualized.
29
The Concert Investment Series Prospectus
<PAGE>
<TABLE>
<CAPTION>
Mid Cap Fund Period Ended October 31, 1999
- -------------------------------------------------------------------------------
Class 1(1)(2) Class A(2)(3) Class B(1)(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $11.44 $ 11.40 $11.44
- -------------------------------------------------------------------------------
Income (loss) from operations
Net investment income (loss)(4) 0.02 0.01 (0.05)
Net realized and unrealized gain 0.57 0.60 0.58
- -------------------------------------------------------------------------------
Total income from operations++ 0.59 0.61 0.53
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- --
- -------------------------------------------------------------------------------
Total distributions -- -- --
- -------------------------------------------------------------------------------
Net Asset Value, End of Period $12.03 $ 12.01 $11.97
- -------------------------------------------------------------------------------
Total Return++ 5.16% 5.35% 4.63%
- -------------------------------------------------------------------------------
Net Assets, End of Period (000s) $741 $10,194 $16,955
- -------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses(4) 1.24% 1.48% 2.24%
Net investment income (loss) 0.32% 0.08% (0.68)%
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 47% 47% 47%
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from March 16, 1999 (inception date) to October 31, 1999.
(2) Net investment income (loss) has been calculated using the monthly average
shares method.
(3) For the period from March 15, 1999 (inception date) to October 31, 1999.
(4) The Adviser has waived a portion of its fees for the period ended October
31, 1999. If such fees were not waived, the per share effect on net
investment income (loss) and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income (Loss) Without Fee Waiver
Per Share Decrease and Reimbursement
---------------------------------------------------------
<S> <C> <C>
Class 1 $0.05 1.88%+
---------------------------------------------------------
Class A 0.04 2.12+
---------------------------------------------------------
Class B 0.04 2.88+
---------------------------------------------------------
</TABLE>
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
30
The Concert Investment Series Prospectus
<PAGE>
Growth Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class 1 Shares Year Ended October 31
- ------------------------------------------------------------------------------
1999(1) 1998* 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $19.59 $20.94 $17.98 $17.46 $15.31
- ------------------------------------------------------------------------------
Income from operations
Net investment income 0.08 0.13 0.17 .19 0.16
Net realized and unrealized gain 6.62 2.10 4.33 2.91 3.18
- ------------------------------------------------------------------------------
Total income from operations 6.70 2.23 4.50 3.10 3.34
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.11) (0.17) (0.18) (0.18) (0.16)
Net realized gains (1.82) (3.41) (1.36) (2.40) (1.03)
- ------------------------------------------------------------------------------
Total distributions 1.93 (3.58) (1.54) (2.58) (1.19)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $24.36 $19.59 $20.94 $17.98 $17.46
- ------------------------------------------------------------------------------
Total Return 35.60% 12.54% 26.93% 19.94% 24.01%
- ------------------------------------------------------------------------------
Net Assets, End of Year (millions) $4,475 $3,657 $3,547 $3,005 $2,612
- ------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.76% 0.78% 0.88% 0.93% 1.00%
Ratio of net investment income to average
net assets 0.34 0.63 0.86 1.08 1.04
- ------------------------------------------------------------------------------
Portfolio Turnover 37% 113% 165% 202% 230%
- ------------------------------------------------------------------------------
</TABLE>
(1) Net investment income has been calculated using the monthly average shares
method.
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the fund Manager.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------------------ ------------------------------------------------
Period Period
Year Ended Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999(1) 1998* 1997 1996(2) 1999(1) 1998* 1997 1996(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $19.54 $20.89 $17.96 $16.63 $19.37 $20.75 $17.93 $16.63
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment income
(loss) 0.02 0.05 0.15 0.02 (0.14) (0.11) 0.01 (0.01)
Net realized and
unrealized gain 6.60 2.13 4.30 1.31 6.54 2.14 4.28 1.31
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 6.62 2.18 4.45 1.33 6.40 2.03 4.29 1.30
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.05) (0.12) (0.16) -- -- -- (0.11) --
Net realized gains (1.82) (3.41) (1.36) -- (1.82) (3.41) (1.36) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.87) (3.53) (1.52) -- (1.82) (3.41) (1.47) --
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $24.29 $19.54 $20.89 $17.96 $23.95 $19.37 $20.75 $17.93
- ---------------------------------------------------------------------------------------------------------------------------
Total Return 35.24% 12.27% 26.65% 8.00%(3) 34.31% 11.43% 25.66% 7.82%(3)
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $344 $180 $109 $49 $357 $182 $126 $74
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.01% 1.02% 1.13% 1.17% 1.76% 1.75% 1.88% 1.93%
Ratio of net investment
income (loss) to
average net assets 0.09 0.38 0.57 0.46 (0.65) (0.35) (0.16) (0.29)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 37% 113% 165% 202%(3) 37% 113% 165% 202%(3)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income has been calculated using the monthly average shares
method.
(2) Class A and Class B shares commenced distribution on August 18, 1996.
(3) Not annualized.
* Effective December 31, 1997 SSB Citi Fund Management LLC (succeccor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the fund Manager.
31
The Concert Investment Series Prospectus
<PAGE>
Financial Highlights, continued
Growth And Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class 1 Shares Year Ended October 31
- ------------------------------------------------------------------------------
1999(1) 1998* 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.53 $20.10 $18.11 $16.95 $15.77
- ------------------------------------------------------------------------------
Income (loss) from operations
Net investment income 0.09 0.18 0.24 0.31 0.36
Net realized and unrealized gain/loss 3.60 1.70 4.23 2.94 2.72
- ------------------------------------------------------------------------------
Total income from operations 3.69 1.88 4.47 3.25 3.08
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.08) (0.20) (0.30) (0.34) (0.30)
Net realized gains (0.78) (3.25) (2.18) (1.75) (1.60)
- ------------------------------------------------------------------------------
Total distributions (0.86) (3.45) (2.48) (2.09) (1.90)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $21.36 $18.53 $20.10 $18.11 $16.95
- ------------------------------------------------------------------------------
Total Return(1) 20.27% 10.90% 27.35% 20.58% 22.45%
- ------------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,122 $1,079 $1,097 $943 $828
- ------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.84% 0.83% 0.88% 0.91% 0.96%
- ------------------------------------------------------------------------------
Ratio of net investment income to average
net assets 0.43 0.90% 1.25% 1.78% 2.27%
- ------------------------------------------------------------------------------
Portfolio Turnover 53% 34% 93% 121% 117%
- ------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
shares method.
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
----------------------------------------------- -----------------------------------------------
Period Period
Year Ended Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999(1) 1998* 1997 1996(2) 1999(1) 1998* 1997 1996(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $18.53 $20.10 $18.11 $17.19 $18.48 $20.07 $18.09 $17.19
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment income 0.03 (0.02) 0.20 0.07 (0.12) (0.01) 0.06 0.04
Net realized and
unrealized gain 3.60 1.85 4.22 0.91 3.58 1.71 4.22 0.90
- -------------------------------------------------------------------------------------------------------------------------
Total income from
operations 3.63 1.83 4.42 0.98 3.46 1.70 4.28 0.94
- -------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.03) (0.15) (0.25) (0.06) -- (0.04) (0.12) (0.04)
Net realized gains (0.78) (3.25) (2.18) -0- (0.78) (3.25) (2.18) -0-
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (0.81) (3.40) (2.43) (0.06) (0.78) (3.29) (2.30) (0.04)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $21.35 $18.53 $20.10 $18.11 $21.16 $18.48 $20.07 $18.09
- -------------------------------------------------------------------------------------------------------------------------
Total Return 19.93% 10.63% 27.04% 5.72%(3) 19.03% 9.85% 26.08% 5.49%(3)
- -------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $181 $124 $80 $33 $208 $137 $99 $52
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.12% 1.07% 1.12% 1.16%+ 1.87% 1.81% 1.88% 1.91%+
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets 0.15 0.63% 0.96% 1.78%+ (0.60) (0.09)% 0.22% 1.05%
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 53% 34% 93% 121% 53% 34% 93% 121%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
shares method.
(2) Class A and Class B shares commenced distribution on August 18, 1996.
(3) Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
32
The Concert Investment Series Prospectus
<PAGE>
Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class 1 Shares Year Ended October 31
- ------------------------------------------------------------------------------
1999(1) 1998* 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.66 $10.58 $10.40 $10.67 $9.99
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.54 0.65 0.69 0.70 0.70
Net realized and unrealized gain/loss (0.87) 0.10 0.17 (0.25) 0.68
- ------------------------------------------------------------------------------
Total income from operations (0.33) 0.75 0.86 0.45 1.38
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.54) (0.67) (0.68) (0.72) (0.70)
Capital (0.05) -- -- -- --
- ------------------------------------------------------------------------------
Total distributions (0.59) (0.67) (0.68) (0.72) (0.70)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $9.74 $10.66 $10.58 $10.40 $10.67
- ------------------------------------------------------------------------------
Total Return (3.16)% 7.29% 8.56% 4.58% 14.27%
- ------------------------------------------------------------------------------
Net Assets, at End of Year (millions) $160 $209 $241 $287 $329
- ------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.89% 0.88% 0.90% 0.84% 0.83%
- ------------------------------------------------------------------------------
Ratio of net investment income to average
net assets 5.28 6.11 6.69 6.79 6.84
- ------------------------------------------------------------------------------
Portfolio Turnover 201% 141% 104% 276% 214%
- ------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
shares method.
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------------------ ------------------------------------------------
Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended Year Ended Period Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999(1) 1998* 1997 1996(2) 1999(1) 1998* 1997 1996(2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.66 $10.58 $10.41 $10.32 $10.66 $10.58 $10.41 $10.32
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.50 0.62 0.66 0.15 0.43 0.54 0.59 0.14
Net realized and
unrealized gain (0.87) 0.10 0.17 0.09 (0.87) 0.10 0.17 0.09
- ------------------------------------------------------------------------------------------------------------------------
Total income from
operations 0.37 0.72 0.83 0.24 (0.44) 0.64 0.76 0.23
- ------------------------------------------------------------------------------------------------------------------------
Less distributions
from:
Net investment income (0.51) (0.64) (0.66) (0.15) (0.43) (0.56) (0.59) (0.14)
Capital (0.05) -- -- -- (0.05) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.64) (0.66) (0.15) (0.48) (0.56) (0.59) (0.14)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End
of Period $9.73 $10.66 $10.58 $10.41 $9.74 $10.66 $10.58 $10.41
- ------------------------------------------------------------------------------------------------------------------------
Total Return (3.51)% 7.00% 8.35% 2.36%(3) (4.17)% 6.20% 7.55% 2.18%(3)
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $23 $17 $14 $11 $17 $14 $12 $14
- ------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.25% 1.12% 1.15% 1.09% 1.94% 1.87% 1.90% 1.84%
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net
investment income to
average net assets 4.96% 5.78% 6.44% 6.50%+ 4.27% 5.04% 5.69% 5.74%+
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 201% 141% 104% 276%(3) 201% 141% 104% 276%(3)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
shares method.
(2) Class A and Class B shares commenced distribution on August 8, 1996.
(3) Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
33
The Concert Investment Series Prospectus
<PAGE>
Financial Highlights, continued
Municipal Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class 1 Shares Year Ended October 31
- ------------------------------------------------------------------------------
1999(1) 1998* 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 14.41 $14.21 $13.83 $13.77 $12.89 $14.07
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.66 0.68 0.69 0.70 0.74 0.71
Net realized and unrealized gain
(loss) (1.25) 0.31 0.39 0.11 0.87 (1.18)
- ------------------------------------------------------------------------------
Total income from operations (0.59) 0.99 1.08 0.81 1.61 (0.47)
- ------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.69) (0.66) (0.66) (0.71) (0.73) (0.71)
Net realized gains (0.23) (0.13) (0.04) (0.04) -- --
- ------------------------------------------------------------------------------
Total distributions (0.92) (0.79) (0.70) (0.75) (0.73) (0.71)
- ------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.90 $14.41 $14.21 $13.83 $13.77 $12.89
- ------------------------------------------------------------------------------
Total Return (4.34)% 7.20% 8.04% 6.09% 12.72% (3.38%)
- ------------------------------------------------------------------------------
Net Assets, End of Period
(millions) $75 $94 $104 $119 $119 $112
- ------------------------------------------------------------------------------
Ratio of expenses to average net
assets 0.95% 1.01% 0.98% 1.05% 0.96% 0.99%
- ------------------------------------------------------------------------------
Ratio of net investment income to
average net assets 4.77% 4.77% 4.93% 5.13% 5.58% 5.27%
- ------------------------------------------------------------------------------
Portfolio Turnover 38% 28% 50% 80% 49% 4%
- ------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
shares method.
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------------------ ------------------------------------------------
Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended Year Ended Period Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999(1) 1998* 1997 1996(3) 1999(1) 1998* 1997 1996(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $14.41 $14.21 $13.83 $13.78 $14.39 $14.20 $13.82 $13.78
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.63 0.62 0.65 0.11 0.52 0.51 0.54 0.09
Net realized and
unrealized gain
(loss) (1.26) 0.34 0.40 0.04 (1.25) 0.33 0.40 0.04
- ------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from operations (0.63) 0.96 1.05 0.15 (0.73) 0.84 0.94 0.13
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions
From:
Net investments
income (0.65) (0.63) (0.63) (0.10) (0.55) (0.52) (0.52) (0.09)
Net realized gains (0.23) (0.13) (0.04) -- (0.23) (0.13) (0.04) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (0.88) (0.76) (0.67) (0.10) (0.78) (0.65) (0.56) (0.09)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End
of Period $12.90 $14.41 $14.21 $13.83 $12.88 $14.39 $14.20 $13.82
- ------------------------------------------------------------------------------------------------------------------------
Total Return (4.58)% 6.93% 7.77% 1.12%(2) (5.30)% 6.10% 6.98% 0.93%(2)
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $34 $16 $9 $2 $8 $6 $3 $1
- ------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.18% 1.23% 1.19% 1.30%+ 1.93% 1.95% 1.94% 2.05%+
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net
investment income to
average net assets 4.54% 4.44% 4.79% 4.82%+ 3.79% 3.67% 4.04% 4.06%+
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 38% 28% 50% 80% 38% 28% 50% 80%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
shares method.
(2) Total return is not annualized, as it may not be representative of the
total return for the year.
(3) Class A and Class B shares commenced distribution on August 18, 1996.
+ Annualized.
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
34
The Concert Investment Series Prospectus
<PAGE>
This page is intentionally left blank
<PAGE>
The Concert Investment Series(R)
Small Cap Fund Growth and Income Fund
International Equity Fund Government Fund
Mid Cap Fund Municipal Bond Fund
Growth Fund
- --------------------------------------------------------------------------------
Additional Information about the
Funds
Shareholder Reports.
Annual and semiannual reports to
shareholders provide additional
information about the funds' in-
vestments. These reports discuss
the market conditions and invest-
ment strategies that signifi-
cantly affected each fund's per-
formance during its last fiscal
year.
Statement of Additional Information.
The combined statement of addi-
tional information provides more
detailed information about each
fund. It is incorporated by ref-
erence into this combined pro-
spectus.
How to Obtain Additional
Information.
. You may obtain shareholder re-
ports and the statement of ad-
ditional information without
charge, by contacting PFS
Shareholder Services, by call-
ing 1-800-544-5445 or writing
the funds at 3100 Breckinridge
Blvd., Bldg. 200, Duluth, Geor-
gia 30099-0062
. Information about the Funds
(including the SAI) can be re-
viewed and copied at the Secu-
rities and Exchange Commis-
sion's ("Commission") Public
Reference Room in Washington,
D.C. In addition, information
on the operation of the Public
Reference Room may be obtained
by calling the Commission at 1-
202-942-8090. Reports and other
information about the Fund are
available on the EDGAR Database
on the Commission's Internet
site at http://www.sec.gov.
Copies of this information may
be obtained for a duplicating
fee by electronic request at
the following E-mail address:
[email protected], or by writ-
ing the Commission's Public
Reference Section, Washington,
D.C. 20549-0102.
If someone provides you with information about the funds that is not in this
prospectus, you should not rely upon that information. Neither the funds nor
the distributor is offering to sell shares of the funds to any person to whom
the funds may not lawfully sell their shares.
(Investment Company Act file no. 811-05018)
SB-1G 2/00
<PAGE>
the Concert
- -------------------
Investment Series(R)
Prospectus
February 28, 2000
Class A Shares and Class B Shares
Small Cap Fund
International Equity Fund
Mid Cap Fund
Growth Fund
Growth and Income Fund
Government Fund
Municipal Bond Fund
[GRAPHIC]
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete.
Any statement to the contrary is a crime.
- --------------------------------------------------------------------------
INVESTMENT PRODUCT: NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE
- --------------------------------------------------------------------------
<PAGE>
Contents
<TABLE>
<S> <C>
Investments, risks and performance:
- --------------------------------------------------
Small Cap Fund 2
- --------------------------------------------------
International Equity Fund 4
- --------------------------------------------------
Mid Cap Fund 6
- --------------------------------------------------
Growth Fund 8
- --------------------------------------------------
Growth and Income Fund 10
- --------------------------------------------------
Government Fund 12
- --------------------------------------------------
Municipal Bond Fund 14
- --------------------------------------------------
More on the Funds' Investments 16
- --------------------------------------------------
Management 17
- --------------------------------------------------
Choosing a Share Class to Buy 18
- --------------------------------------------------
Sales Charges:
- --------------------------------------------------
Class A Sales Charge 19
- --------------------------------------------------
Class B Sales Charge 20
- --------------------------------------------------
Buying Shares and Exchanging Shares 21
- --------------------------------------------------
Redeeming Shares 22
- --------------------------------------------------
Other Things to Know about Share Transactions 23
- --------------------------------------------------
Dividends, Distributions and Taxes 24
- --------------------------------------------------
Financial Highlights 25
- --------------------------------------------------
</TABLE>
About the manager
The funds' investment manager is SSB Citi Fund Management LLC, an affiliate of
Salomon Smith Barney Inc. The manager selects the funds' investments and
oversees their operations. The manager and Salomon Smith Barney are subsidiar-
ies of Citigroup Inc. Citigroup businesses provide a broad range of financial
services.
About mutual fund risks
An investment in any of the funds is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency and may lose value.
1
The Concert Investment Series Prospectus
<PAGE>
Small Cap Fund
Investment objective
The fund seeks capital appreciation.
Key investments
The fund invests in common stocks of small sized companies considered by the
manager to be "emerging growth" companies. These are primarily domestic compa-
nies, in the early stages of their life cycles, characterized by relatively
high earnings growth. The manager selects investments from among companies that
have market capitalizations in the lowest 20% of all publicly traded U.S.
companies.
How the manager selects the fund's investments
The manager emphasizes individual security selection while spreading invest-
ments among many industries and sectors. The manager uses quantitative analysis
to identify individual companies that it believes offer exceptionally high
prospects for growth. The manager purchases these companies' stocks when it be-
lieves they are reasonably priced. This style of stock selection is commonly
known as "growth at a reasonable price." Quantitative methods are also used to
control portfolio risk related to broad macroeconomic factors, such as interest
rate changes. The manager selects investments for their potential capital ap-
preciation; any ordinary income is incidental. In selecting individual compa-
nies for investment, the manager looks for:
. Above average earnings growth
. A pattern of reported earnings that exceed market expectations
. Rising earnings estimates over the next several quarters
. High relative return on invested capital
. Reasonable price/earnings multiple
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Stock prices decline generally
. Small cap companies fall out of favor with investors
. The manager's judgment about the attractiveness, value or potential apprecia-
tion of a particular stock proves to be incorrect
. A particular product or service developed by a small cap company is unsuc-
cessful, the company does not meet earnings expectations or other events de-
press the value of the company's stock
Compared to large, established companies, small cap companies are more likely
to have limited product lines, limited capital resources and less experienced
management. In addition, securities of small cap companies are more likely to:
. Experience sharper swings in market value
. Be harder to sell at times and prices the manager believes appropriate
. Offer greater potential for gains and losses
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking to participate in the long term growth potential of small cap
companies
. Currently have exposure to fixed income investments and less volatile equity
investments and wish to broaden your investment portfolio
. Are willing to accept the risks of investing in the stock market and the spe-
cial risks of investing in emerging growth companies with limited track rec-
ords
2
The Concert Investment Series Prospectus
<PAGE>
Small Cap Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class A shares for each of the past 4 calendar years.
Class B shares would have different performance due to their different ex-
penses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 25.10% in 4th quarter 1998; Lowest: (20.66)% in 3rd
quarter 1998
The performance information in the bar chart does not reflect sales charges,
which would reduce your return.
[BAR CHART]
Percentage Total Returns for Class A shares
1996 15.17%
1997 20.87%
1998 8.43%
1999 41.22%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average annual total returns for periods ended December 31,
1999
-----------------------------------------------------------------
<S> <C> <C>
Since Inception
Class 1 Year February 21, 1995
-----------------------------------------------------------------
A 34.18% 23.00%
-----------------------------------------------------------------
B 35.17% 23.28%
-----------------------------------------------------------------
Russell 2000 Stock Index 21.26% 16.61%*
-----------------------------------------------------------------
</TABLE>
This table in-
dicates the
risks of
investing in
the fund by
comparing the
average annual
total return of
each class for
the periods
shown to that
of the Russell
2000 Stock In-
dex, an unman-
aged index of
smaller capi-
talization
stocks.
* The index comparison begins on 2/28/95.
This table as-
sumes the impo-
sition of the
maximum sales
charge applica-
ble to the
class, the re-
demption of
shares at the
end of the pe-
riod, and the
reinvestment of
distributions
and dividends.
Fee table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shareholder fees (paid directly from your
investment) Class A Class B
---------------------------------------------------------
<S> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 5.00% None
---------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at
purchase or redemption) None* 5.00%
---------------------------------------------------------
Annual fund operating expenses (paid by the
fund as % of net assets)
---------------------------------------------------------
Management fee 0.65% 0.65%
---------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00%
---------------------------------------------------------
Other expenses 0.65% 0.66%
---------------------------------------------------------
Total annual fund operating expenses 1.55% 2.31%
---------------------------------------------------------
</TABLE>
This table sets
forth the fees
and expenses
you will pay if
you invest in
shares of the
fund.
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge) but
if you redeem those shares within 12 months of purchase
you will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of years you own your
shares* 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $650 $ 965 $1,302 $2,253
-------------------------------------------------------------
Class B (assuming redemption at
end of period) $734 $1,021 $1,335 $2,456
-------------------------------------------------------------
Class B (assuming no
redemption) $234 $ 721 $1,235 $2,456
-------------------------------------------------------------
</TABLE>
This example
helps you com-
pare the costs
of investing in
the fund with
those of other
mutual funds.
Your actual
costs may be
higher or low-
er.
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
3
<PAGE>
International Equity Fund
Investment objective
The fund seeks total return on its assets from growth of capital and income.
Key investments
The fund invests principally in a diversified portfolio of equity securities of
established non-U.S. issuers.
How the manager selects the fund's investments
By spreading the fund's investments across many international markets, the man-
ager seeks to reduce volatility compared to investing in a single region. Un-
like global mutual funds which may allocate a substantial portion of assets to
the U.S. markets, the fund invests substantially all of its assets in countries
outside of the U.S.
The manager emphasizes individual security selection while diversifying the
fund's investments across regions and countries, which can help to reduce risk.
While the manager selects investments primarily for their capital appreciation
potential, some investments have an income component as well. Companies in
which the fund invests may have large, mid-size or small market capitalizations
and may operate in any market sector. In selecting individual companies for in-
vestment, the manager looks for:
. Above average earnings growth
. High relative return on invested capital
. Experienced and effective management
. Effective research, product development and marketing
. Competitive advantages
. Strong financial condition or stable or improving credit quality
Depending on the manager's assessment of overseas potential for long-term
growth, the fund's emphasis among foreign markets (including emerging markets)
and types of issuers may vary. In allocating assets among countries and re-
gions, the manager evaluates:
. Economic stability and favorable prospects for economic growth
. Low or decelerating inflation, creating a favorable environment for securi-
ties markets
. Stable governments with policies that encourage economic growth, equity in-
vestment and development of securities markets
. Currency stability
. The range of individual investment opportunities
Principal risks of investing in the fund
Many foreign countries in which the fund invests have markets that are less
liquid and more volatile than markets in the U.S.
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Foreign securities prices decline
. Adverse governmental action or political, economic or market instability af-
fects a foreign country or region
. The currency in which a security is priced declines in value relative to the
U.S. dollar
. The manager's judgment about the attractiveness, value or potential apprecia-
tion of a particular security proves to be incorrect
In some foreign countries, there is also less information available about for-
eign issuers and markets because of less rigorous accounting and regulatory
standards than in the U.S. Currency fluctuations could erase investment gains
or add to investment losses. The risk of investing in foreign securities is
greater for emerging markets. In Europe, Economic and Monetary Union (EMU) and
the introduction of a single currency began in 1999. There are significant po-
litical and economic risks associated with EMU, which may increase the volatil-
ity of the fund's European securities and present valuation problems.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking to participate in the long term total return potential of inter-
national markets
. Currently have exposure to U.S. stock markets and wish to diversify your in-
vestment portfolio by adding non-U.S. stocks that may not move in tandem with
U.S. stocks
. Are willing to accept the risks of investing in the stock market and the spe-
cial risks of investing in foreign securities, including emerging market se-
curities
4
The Concert Investment Series Prospectus
<PAGE>
International Equity Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class A shares for each of the past 4 calendar years.
Class B shares would have different performance due to their different ex-
penses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly Returns: Highest: 77.26% in 4th quarter 1999; Lowest: (20.43)% in 3rd
quarter 1998
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class A shares
1996 17.59%
1997 5.10%
1998 22.47%
1999 130.79%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average annual total returns for periods ended December 31,
1999
---------------------------------------------------------------------
<S> <C> <C>
Since Inception
Class 1 Year February 21, 1995
---------------------------------------------------------------------
A 119.27% 33.45%
---------------------------------------------------------------------
B 124.17% 33.82%
---------------------------------------------------------------------
MSCI EAFE Index 29.96% 14.27%*
---------------------------------------------------------------------
</TABLE>
This table in-
dicates the
risks of in-
vesting in the
fund by compar-
ing the average
annual total
return of each
class for the
periods shown
to that of the
Morgan Stanley
Capital Inter-
national EAFE
Index ("MSCI
EAFE" Index),
an unmanaged
index of
international
stocks.
* The index comparison begins on 2/28/95.
This table as-
sumes the impo-
sition of the
maximum sales
charge applica-
ble to the
class, the re-
demption of
shares at the
end of the
period, and the
reinvestment of
distributions
and dividends.
Fee table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shareholder fees (paid directly from your
investment) Class A Class B
---------------------------------------------------------
<S> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 5.00% None
---------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at
purchase or redemption) None* 5.00%
---------------------------------------------------------
Annual fund operating expenses (paid by the
fund as % of net assets)
---------------------------------------------------------
Management fee 1.00% 1.00%
---------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00%
---------------------------------------------------------
Other expenses 0.83% 0.79%
---------------------------------------------------------
Total annual fund operating expenses 2.08% 2.79%
---------------------------------------------------------
</TABLE>
This table sets
forth the fees
and expenses
you will pay if
you invest in
shares of the
fund.
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge) but
if you redeem those shares within 12 months of purchase
you will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of years you own your
shares* 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $700 $1,119 $1,563 $2,790
-------------------------------------------------------------
Class B (assuming redemption at
end of period) $782 $1,165 $1,574 $2,949
-------------------------------------------------------------
Class B (assuming no
redemption) $282 $ 865 $1,474 $2,949
-------------------------------------------------------------
</TABLE>
This example
helps you com-
pare the costs
of investing in
the fund with
those of other
mutual funds.
Your actual
costs may be
higher or low-
er.
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
5
<PAGE>
Mid Cap Fund
Investment objective
The fund seeks long-term growth of capital.
Key investments
The fund invests primarily in equity securities of medium sized companies,
which are companies with market capitalizations within the range of capitaliza-
tions of the companies included in the Standard & Poor's MidCap 400 Index at
the time of investment. Equity securities include exchange traded and over-the-
counter common stocks, preferred stocks, debt securities convertible into eq-
uity securities and warrants and rights relating to equity securities. The fund
also may invest up to 35% of its assets in equity securities of companies with
market capitalizations smaller or larger than those of medium sized companies
(i.e., companies considered to be small or large capitalization companies), and
up to 25% of its assets in securities of foreign issuers both directly and
through depositary receipts for those securities.
How the manager selects the fund's investments
The manager focuses on medium capitalization companies that exhibit either at-
tractive growth characteristics or attractive value characteristics. The man-
ager selects individual "growth" stocks for investment in two ways: by identi-
fying those companies which exhibit the most favorable growth prospects and by
identifying those companies which have favorable valuations relative to their
growth characteristics. This strategy is commonly known as "growth at a reason-
able price" and offers investors style diversification within a single mutual
fund. In selecting companies for investment, the manager looks for:
. Growth characteristics, including high historic growth rates and high rela-
tive growth compared with companies in the same industry or sector
. Value characteristics, including low price/earnings ratios and other statis-
tics indicating that a security is undervalued
. Increasing profits and sales
. Competitive advantages that could be more fully exploited by a company
. Skilled management that is committed to long-term growth
. Potential for a long-term investment by the fund
The manager uses fundamental research to find stocks with strong growth poten-
tial and also uses quantitative analysis to determine whether these stocks are
relatively undervalued or overvalued compared to stocks with similar fundamen-
tal characteristics. The manager's quantitative valuations determine whether
and when the fund will purchase and sell stocks that it identifies through fun-
damental research.
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, because of the following:
. U.S. stock markets go down, or perform poorly relative to other types of in-
vestments
. An adverse company specific event, such as an unfavorable earnings report,
negatively affects the stock price of a company in which the fund invests
. Medium capitalization stocks fall out of favor with investors
. The manager's judgment about the attractiveness, growth prospects, value or
potential appreciation of a particular stock proves to be incorrect
Because the fund invests primarily in medium capitalization companies, an in-
vestment in the fund may be more volatile and more susceptible to loss than an
investment in a fund which invests primarily in large capitalization companies.
Medium capitalization companies may have more limited product lines, markets
and financial resources than large capitalization companies. They may have
shorter operating histories and more erratic businesses, although they gener-
ally have more established businesses than small capitalization companies. The
prices of medium capitalization company stocks tend to be more volatile than
the prices of large capitalization company stocks.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking to participate in the long term growth potential of the U.S.
stock market
. Are looking for an investment with potentially greater return but higher risk
than a fund that invests primarily in large cap companies
. Are willing to accept the risks of investing in the stock market
6
The Concert Investment Series Prospectus
<PAGE>
Mid Cap Fund, continued
Performance
- --------------------------------------------------------------------------------
Because this fund commenced operations on March 15, 1999, the fund does not yet
have a sufficient operating history to generate the performance information
which other funds show in bar and table form in this location of the prospec-
tus.
Fee table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shareholder fees (paid directly from your
investment) Class A Class B
---------------------------------------------------------
<S> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 5.00 % None
---------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at
purchase or redemption) None* 5.00 %
---------------------------------------------------------
Annual fund operating expenses (paid by the
fund as % of net assets)
---------------------------------------------------------
Management fee 0.75 % 0.75 %
---------------------------------------------------------
Distribution and service (12b-1) fee 0.25 % 1.00 %
---------------------------------------------------------
Other expenses 1.12 % 1.13 %
---------------------------------------------------------
Total annual fund operating expenses 2.12 % 2.88 %
---------------------------------------------------------
Management fee waiver/1/ (0.64)% (0.64)%
---------------------------------------------------------
Net annual operating expenses 1.48 % 2.24 %
---------------------------------------------------------
</TABLE>
This table sets
forth the fees
and expenses
you will pay if
you invest in
shares of the
fund.
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
/1/Management has agreed to waive a portion of its manage-
ment fee for all classes. The actual management fee was
0.11% and is currently in effect. Management may discon-
tinue or modify this management fee waiver without the ap-
proval of the fund's trustees.
Example
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of years you own your
shares* 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $704 $1,131 $1,582 $2,763
-------------------------------------------------------------
Class B (assuming redemption at
end of period) $791 $1,192 $1,618 $3,204
-------------------------------------------------------------
Class B (assuming no
redemption) $291 $ 892 $1,518 $3,204
-------------------------------------------------------------
</TABLE>
This example
helps you com-
pare the costs
of investing in
the fund with
those of other
mutual funds.
Your actual
costs may be
higher or low-
er.
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
7
<PAGE>
Growth Fund
Investment objective
The fund seeks capital appreciation.
Key investments
The fund invests principally in U.S. common stocks and other equity securities,
typically of established companies with large market capitalizations.
How the manager selects the fund's investments
The manager uses a "bottom-up" strategy, primarily focusing on individual secu-
rity selection, with less emphasis on industry and sector allocation. The man-
ager selects investments for their capital appreciation; any ordinary income is
incidental. In selecting individual companies for investment, the manager looks
for:
. Growth characteristics, including high historic growth rates and high rela-
tive growth compared with companies in the same industry or sector
. Value characteristics, including low price/earnings ratios and other statis-
tics indicating that a security is undervalued
. Increasing profits and sales
. Competitive advantages that could be more fully exploited by a company
. Skilled management that is committed to long-term growth
. Potential for a long-term investment by the fund
The manager uses fundamental research to find stocks with strong growth poten-
tial, and then uses quantitative analysis to determine whether these stocks are
relatively undervalued or overvalued compared to stocks with similar fun-
damental characteristics. The manager's quantitative valuations determine
whether and when the fund will purchase or sell the stocks that it identifies
through fundamental research. This style of stock selection is commonly known
as "growth at a reasonable price."
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Stock prices decline generally
. Large capitalization companies fall out of favor with investors
. The manager's judgment about the attractiveness, value or potential apprecia-
tion of a particular stock proves to be incorrect
. The company does not meet earnings expectations or other events depress the
value of the company's stock
The fund may engage in active and frequent trading, resulting in high portfolio
turnover. This may lead to the realization and distribution to shareholders of
higher capital gains, increasing their tax liability. Frequent trading also in-
creases transaction costs, which could detract from the fund's performance.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are an aggressive investor seeking to participate in the long term growth po-
tential of the stock market
. Are willing to accept the risks of investing in common stocks
8
The Concert Investment Series Prospectus
<PAGE>
Growth Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class A shares for each of the past 3 calendar years.
Class B shares would have different performance due to their different ex-
penses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 23.38% in 4th quarter 1998; Lowest: (11.70)% in 3rd
quarter 1998
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class A shares
1997 27.35%
1998 28.15%
1999 27.74%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average annual total returns for periods ended December 31,
1999
-------------------------------------------------------------------------
<S> <C> <C>
Since Inception
Class 1 Year August 18, 1996
-------------------------------------------------------------------------
A 22.29% 27.15%
-------------------------------------------------------------------------
B 22.74% 27.81%
-------------------------------------------------------------------------
S&P 500 Index 21.03% 17.23%*
-------------------------------------------------------------------------
</TABLE>
This table in-
dicates the
risks of
investing in
the fund by
comparing the
average annual
total return of
each class for
the periods
shown to that
of the Standard
& Poor's 500
Index, an un-
managed index
of common
stocks.
*The index comparison begins on 8/31/96.
This table as-
sumes the impo-
sition of the
maximum sales
charge applica-
ble to the
class, the re-
demption of
shares at the
end of the pe-
riod, and the
reinvestment of
distributions
and dividends.
Fee table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shareholder fees (paid directly from your
investment) Class A Class B
---------------------------------------------------------
<S> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 5.00% None
---------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at
purchase or redemption) None* 5.00%
---------------------------------------------------------
Annual fund operating expenses (paid by the
fund as % of net assets)
---------------------------------------------------------
Management fee 0.65% 0.65%
---------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00%
---------------------------------------------------------
Other expenses 0.11% 0.11%
---------------------------------------------------------
Total annual fund operating expenses 1.01% 1.76%
---------------------------------------------------------
</TABLE>
This table sets
forth the fees
and expenses
you will pay if
you invest in
shares of the
fund.
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of years you own your
shares* 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $598 $805 $1,030 $1,674
-------------------------------------------------------------
Class B (assuming redemption at
end of period) $679 $854 $1,054 $1,875
-------------------------------------------------------------
Class B (assuming no
redemption) $179 $554 $ 954 $1,875
-------------------------------------------------------------
</TABLE>
This example
helps you com-
pare the costs
of investing in
the fund with
those of other
mutual funds.
Your actual
costs may be
higher or low-
er.
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
9
<PAGE>
Growth and Income Fund
Investment objective
The fund seeks reasonable growth and income.
Key investments
The fund invests in a portfolio consisting principally of equity securities,
including convertible securities, that provide dividend or interest income.
However, it may also invest in non-income producing investments for potential
appreciation in value. The fund emphasizes U.S. stocks with large market capi-
talizations. The fund's convertible securities may be of any credit quality and
may include below investment grade securities (commonly known as "junk bonds").
How the manager selects the fund's investments
The manager emphasizes individual security selection while spreading the fund's
investments among industries and sectors. The manager uses a two-step selection
process commonly known as "growth at a reasonable price."
First, the manager uses quantitative analysis to find stocks with strong growth
potential, and to determine whether these securities are relatively undervalued
or overvalued. Quantitative factors include:
. Growth characteristics, including high historic growth rates and high rela-
tive growth compared with companies in the same industry or sector
. Value characteristics, including low price/earnings ratios and other statis-
tics indicating that a security is undervalued
Then, the manager uses fundamental qualitative research to verify these equity
securities' growth potential. Qualitative factors include:
. Management with established track records, or favorable changes in current
management
. Improvement in a company's competitive position
. Positive changes in corporate strategy
These quantitative and qualitative factors, as well as the expected dividends
and income, influence the fund's purchases and sales of securities.
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Stock prices decline generally
. Large capitalization companies fall out of favor with investors
. Companies in which the fund invests suffer unexpected losses or lower than
expected earnings
. The manager's judgment about the attractiveness, value or income potential of
a particular security proves to be incorrect
. The issuer of a debt security owned by the fund defaults on its obligation to
pay principal and/or interest or has its credit rating downgraded. This risk
is higher for below investment grade securities. These securities are consid-
ered speculative because they have a higher risk of issuer default, are sub-
ject to greater price volatility and may be illiquid
The fund may engage in active and frequent trading, resulting in high portfolio
turnover. This may lead to the realization and distribution to shareholders of
higher capital gains, increasing their tax liability. Frequent trading also in-
creases transaction costs, which could detract from the fund's performance.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking reasonable long term growth and current income
. Are willing to accept the risks of investing in the stock market
10
The Concert Investment Series Prospectus
<PAGE>
Growth and Income Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class A shares for each of the past 3 calendar years.
Class B shares would have different performance due to their different ex-
penses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 19.44% in 4th quarter 1998; Lowest: (12.38)% in 3rd
quarter 1998
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class A shares
1997 24.18%
1998 19.03%
1999 16.42%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average annual total returns for periods
ended December 31, 1999
----------------------------------------
<S> <C> <C> <C>
Since Inception
Class 1 Year August 18, 1996
----------------------------------------
A 10.60% 20.32%
----------------------------------------
B 10.67% 20.85%
----------------------------------------
S&P 500 Index 21.03% 17.23%*
----------------------------------------
</TABLE>
This table in-
dicates the
risks of
investing in
the fund by
comparing the
average annual
total return of
each class for
the periods
shown to that
of the Standard
& Poor's 500
Index, an un-
managed index
of common
stocks.
*The index comparison begins on 8/31/96.
This table as-
sumes the impo-
sition of the
maximum sales
charge applica-
ble to the
class, the re-
demption of
shares at the
end of the pe-
riod, and the
reinvestment of
distributions
and dividends.
Fee table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shareholder fees (paid directly from your
investment) Class A Class B
---------------------------------------------------------
<S> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 5.00% None
---------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at
purchase or redemption) None* 5.00%
---------------------------------------------------------
Annual fund operating expenses (paid by the
fund as % of net assets)
---------------------------------------------------------
Management fee 0.65% 0.65%
---------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00%
---------------------------------------------------------
Other expenses 0.22% 0.22%
---------------------------------------------------------
Total annual fund operating expenses 1.12% 1.87%
---------------------------------------------------------
</TABLE>
This table sets
forth the fees
and expenses
you will pay if
you invest in
shares of the
fund.
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of years you own your
shares* 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $608 $838 $1,086 $1,795
-------------------------------------------------------------
Class B (assuming redemption at
end of period) $690 $888 $1,111 $1,995
-------------------------------------------------------------
Class B (assuming no
redemption) $190 $588 $1,011 $1,995
-------------------------------------------------------------
</TABLE>
This example
helps you com-
pare the costs
of investing in
the fund with
those of other
mutual funds.
Your actual
costs may be
higher or low-
er.
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
11
<PAGE>
Government Fund
Investment objective
The fund seeks high current return consistent with preservation of capital.
Key investments
The fund invests primarily in government debt issued or guaranteed by the U.S.
government, its agencies or instrumentalities. These securities include U.S.
Treasury securities, mortgage-related and asset-backed securities. Some govern-
ment guaranteed mortgage-related securities are backed by the full faith and
credit of the U.S. Treasury, some are supported by the right of the issuer to
borrow from the U.S. government and some are backed only by the credit of the
issuer itself.
In order to hedge against changes in interest rates, the fund also may purchase
or sell options on U.S. government securities and enter into interest rate
futures contracts and options on these contracts.
How the manager selects the fund's investments
The manager focuses on identifying undervalued sectors and securities. Specifi-
cally, the manager:
. Determines sector and maturity weightings based on intermediate and long-term
assessments of the economic environment and relative value factors based on
interest rate outlook
. Uses research to uncover inefficient sectors of the government and mortgage
markets and adjusts portfolio positions to take advantage of new information
. Measures the potential impact of supply/demand imbalances, yield curve shifts
and changing prepayment patterns to identify individual securities that bal-
ance potential return and risk
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Interest rates increase, causing the prices of fixed income securities to de-
cline and reducing the value of the fund's portfolio
. Prepayment risk (or call risk). As interest rates decline, the issuers of se-
curities held by the fund may prepay principal earlier than scheduled, forc-
ing the fund to reinvest in lower yielding securities
. Extension risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities, locking in
below-market interest rates and reducing the value of these securities
. The manager's judgment about interest rates or the attractiveness, value or
income potential of a particular security proves incorrect
. Changes in interest rates or the value of securities cause the value of op-
tions or futures contracts held by the fund to decline, resulting in dispro-
portionate losses to the fund's portfolio
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are seeking income consistent with preservation of capital
. Are willing to accept the interest rate risks and market risks of investing
in government bonds and mortgage-related securities
12
The Concert Investment Series Prospectus
<PAGE>
Government Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class A shares for each of the past 3 calendar years.
Class B shares would have different performance due to their different ex-
penses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 3.57% in 2nd quarter 1997; Lowest: (2.13)% in 1st
quarter 1999.
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class A shares
1997 9.46%
1998 5.97%
1999 -5.15%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average annual total returns for periods ended December 31,
1999
---------------------------------------------------------------
<S> <C> <C>
Since Inception
Class 1 Year August 8, 1996
---------------------------------------------------------------
A (9.42)% 2.52%
---------------------------------------------------------------
B (9.77)% 2.69%
---------------------------------------------------------------
Lehman Brothers Government Index (2.23)% 6.45%*
---------------------------------------------------------------
</TABLE>
This table in-
dicates the
risks of in-
vesting in the
fund by compar-
ing the average
annual total
return of each
class for the
periods shown
to that of the
Lehman Brothers
Government In-
dex, an unman-
aged index of
U.S. government
securities.
* The index comparison begins on 8/31/96.
This table as-
sumes the impo-
sition of the
maximum sales
charge applica-
ble to the
class, the re-
demption of
shares at the
end of the pe-
riod, and the
reinvestment of
distributions
and dividends.
Fee table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shareholder fees (paid directly from your
investment) Class A Class B
---------------------------------------------------------
<S> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 4.50% None
---------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at
purchase or redemption) None* 4.50%
---------------------------------------------------------
Annual fund operating expenses (paid by the
fund as % of net assets)
---------------------------------------------------------
Management fee 0.60% 0.60%
---------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00%
---------------------------------------------------------
Other expenses 0.40% 0.34%
---------------------------------------------------------
Total annual fund operating expenses 1.25% 1.94%
---------------------------------------------------------
</TABLE>
This table sets
forth the fees
and expenses
you will pay if
you invest in
shares of the
fund.
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of years you own your
shares* 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $572 $829 $1,105 $1,893
-------------------------------------------------------------
Class B (assuming redemption at
end of period) $647 $909 $1,147 $2,085
-------------------------------------------------------------
Class B (assuming no
redemption) $197 $609 $1,047 $2,085
-------------------------------------------------------------
</TABLE>
This example
helps you com-
pare the costs
of investing in
the fund with
those of other
mutual funds.
Your actual
costs may be
higher or low-
er.
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
13
<PAGE>
Municipal Bond Fund
Investment objective
The fund seeks as high a level of current interest income exempt from federal
income tax as is consistent with the preservation of capital.
Key investments
The fund invests in a diversified portfolio consisting principally of tax ex-
empt municipal bonds, which are obligations issued by or on behalf of states,
territories or possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities. Tax exempt
means that the bonds pay interest that is excluded from gross income for fed-
eral income tax purposes.
The fund invests principally in municipal bonds rated at the time of purchase
within the three highest grades by nationally recognized bond rating services,
or, if unrated, of equivalent quality. The fund may also invest up to 25% in
lower rated municipal bonds that have speculative characteristics.
How the manager selects the fund's investments
The manager selects securities primarily by identifying undervalued sectors and
individual securities, while also selecting securities that it believes will
benefit from changes in relative interest rates. In selecting individual secu-
rities, the manager:
. Uses fundamental credit analysis to estimate the relative value and attrac-
tiveness of various securities and sectors and to exploit inefficiencies in
the municipal bond market
. Actively trades among various sectors, such as insured, general obligation,
revenue and housing, based on their apparent relative values
. Identifies individual securities with the most potential for added value,
such as those involving unusual situations, new issuers, the potential for
credit upgrades, unique structural characteristics or innovative features
. Considers a security's maturity in light of the outlook for the issuer and
its sector
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
. Interest rates rise, causing the value of the fund's portfolio generally to
decline
. Municipal bonds fall out of favor with investors
. Unfavorable legislation affects the tax-exempt status of municipal bonds
. The manager's judgment about the attractiveness, value or income potential of
a particular bond proves to be incorrect
. The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest or has its credit rating downgraded. This risk is
higher for below investment grade bonds, which are considered speculative be-
cause they have a higher risk of issuer default, are subject to greater price
volatility and may be illiquid
It is possible that some of the fund's income and gains may be subject to
federal taxation. The fund may realize taxable gains on the sale of its
securities. In addition, distributions of the fund's income and gains will be
subject to state taxation.
Who may want to invest in the fund
The fund may be an appropriate investment if you:
. Are in a high tax bracket and seeking income that is exempt from federal tax-
ation
. Currently have exposure to equity securities and taxable fixed income securi-
ties and wish to broaden your investment portfolio
. Are willing to accept the risks of investing in municipal bonds, including
interest rate risk and credit risk
14
The Concert Investment Series Prospectus
<PAGE>
Municipal Bond Fund, continued
Risk return bar chart
- --------------------------------------------------------------------------------
This bar chart indicates the risks of investing in the fund by showing the per-
formance of the fund's Class A shares for each of the past 3 calendar years.
Class B shares would have different performance due to their different ex-
penses.
Past performance does not necessarily indicate how the fund will perform in the
future.
Quarterly returns: Highest: 3.29% in 2nd quarter 1997; Lowest: (2.33)% in 2nd
quarter 1999
The performance information in the chart does not reflect sales charges, which
would reduce your return.
[BAR CHART]
Percent Total Return for Class A shares
97 8.77%
98 5.14%
99 -4.89%
Calendar years ended December 31
Risk return table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average annual total returns for periods ended December 31,
1999
---------------------------------------------------------------------
<S> <C> <C>
Since Inception
Class 1 Year August 18, 1996
---------------------------------------------------------------------
A (9.20)% 1.82%
---------------------------------------------------------------------
B (9.63)% 1.93%
---------------------------------------------------------------------
Lehman Brothers
Municipal Bond Index (2.06)% 5.21%*
---------------------------------------------------------------------
</TABLE>
This table in-
dicates the
risks of in-
vesting in the
fund by compar-
ing the average
annual total
return of each
class for the
periods shown
to that of the
Lehman Brothers
Municipal Bond
Index, an un-
managed index
of municipal
bonds.
* The index comparison begins on 8/31/96.
This table as-
sumes the impo-
sition of the
maximum sales
charge applica-
ble to the
class, the re-
demption of
shares at the
end of the pe-
riod, and the
reinvestment of
distributions
and dividends.
Fee table
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shareholder fees (paid directly from your
investment) Class A Class B
---------------------------------------------------------
<S> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 4.50% None
---------------------------------------------------------
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at
purchase or redemption) None* 4.50%
---------------------------------------------------------
Annual fund operating expenses (paid by the
fund as % of net assets)
---------------------------------------------------------
Management fee 0.60% 0.60%
---------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00%
---------------------------------------------------------
Other expenses 0.33% 0.33%
---------------------------------------------------------
Total annual fund operating expenses 1.18% 1.93%
---------------------------------------------------------
</TABLE>
This table sets
forth the fees
and expenses
you will pay if
you invest in
shares of the
fund.
* You may buy Class A shares in amounts of $500,000 or more
at net asset value (without an initial sales charge)but if
you redeem those shares within 12 months of purchase you
will pay a deferred sales charge of 1.00%.
Example
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of years you own your
shares* 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $565 $808 $1,070 $1,817
-------------------------------------------------------------
Class B (Assuming redemption at
end of period) $646 $906 $1,142 $2,059
-------------------------------------------------------------
Class B (Assuming no
redemption) $196 $606 $1,042 $2,059
-------------------------------------------------------------
</TABLE>
This example
helps you com-
pare the costs
of investing in
the fund with
those of other
mutual funds.
Your actual
costs may be
higher or low-
er.
* The example assumes:
. You invest $10,000 for the period shown
. You reinvest all distributions and dividends without a
sales charge
. The fund's operating expenses remain the same
. Your investment has a 5% return each year
. Conversion of Class B shares to Class A shares after 8
years
The Concert Investment Series Prospectus
15
<PAGE>
More on the Funds' Investments
Equity securities
Equity securities include exchange traded and over-the-counter common and pre-
ferred stocks, debt securities convertible into equity securities, and warrants
and rights relating to equity securities.
Securities of foreign issuers
all funds except Government Fund and Municipal Bond Fund
International Equity Fund invests at least 65% of its assets in equity securi-
ties of foreign issuers, including those in emerging market countries. Small
Cap Fund, Growth Fund and Growth and Income Fund may invest up to 20% of their
assets, and Mid Cap Fund up to 25% of its assets, in foreign securities, in-
cluding those of issuers in emerging market countries.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve special risks. These include possible political and
economic instability and the possible imposition of exchange controls or other
restrictions on investments. Since each fund may invest in securities denomi-
nated or quoted in currencies other than the U.S. dollar, changes in foreign
currency rates relative to the U.S. dollar will affect the U.S. dollar value of
the fund's assets. Emerging market investments offer the potential for signifi-
cant gains but also involve greater risks than investing in more developed
countries. Political or economic stability, lack of market liquidity and gov-
ernment actions such as currency controls or seizure of private business or
property may be more likely in emerging markets.
Derivative transactions
All Funds
The funds may, but need not, use derivative contracts, such as futures and op-
tions on securities, securities indices or currencies; options on these
futures; forward currency contracts; and interest rate or currency swaps for
any of the following purposes:
. To hedge against the economic impact of adverse changes in the market value
of portfolio securities because of changes in stock market prices, currency
exchange rates or interest rates
. As a substitute for buying or selling securities
. To enhance a fund's return
A derivative contract will obligate or entitle a fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities,
currencies or indices. Even a small investment in derivative contracts can have
a big impact on a fund's stock market, currency and interest rate exposure.
Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when stock prices, currency rates or interest rates are
changing. A fund may not fully benefit from or may lose money on derivatives if
changes in their value do not correspond accurately to changes in the value of
the fund's holdings. The other parties to certain derivative contracts present
the same types of default risk as issuers of fixed income securities. Deriva-
tives can also make a fund less liquid and harder to value, especially in de-
clining markets.
Temporary defensive investments
All Funds
Each of the funds may depart from its principal investment strategies in re-
sponse to adverse market, economic or political conditions by taking temporary
defensive positions in all types of money market and short-term debt securi-
ties. If the fund takes a temporary defensive position, it may be unable to
achieve its investment objective.
Special restrictions
All Funds Except International Equity Fund and Mid Cap Fund
Each fund, except International Equity Fund and Mid Cap Fund, will not purchase
any securities issued by a company primarily engaged in the manufacture of al-
cohol or tobacco.
Goals/Policies
All Funds
Each fund's goal and investment policies generally may be changed by the
trustees without shareholder approval.
16
The Concert Investment Series Prospectus
<PAGE>
Management
The Concert Investment Series offers a family of fund choices to help meet the
varying needs of investors. The manager and Salomon Smith Barney are
subsidiaries of Citigroup Inc. Citigroup businesses provide a broad range of
financial services--asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading--and use
diverse channels to make them available to consumer and corporate customers
around the world.
The portfolio managers
The portfolio managers are primarily responsible for the day-to-day operation
of the funds indicated below. The table also shows the business experience of
each portfolio manager.
<TABLE>
<CAPTION>
Portfolio
Fund Manager(s) Since Past 5 Years' Business Experience
- ---------------------------------------------------------------------------------------
<C> <C> <C> <S>
Small Cap Sandip Bhagat 1997 investment officer of the manager and pres-
ident of
Travelers Investment Management Company, an
affiliate of the manager
- ---------------------------------------------------------------------------------------
International Equity Jeffrey Russell 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
James Conheady 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
- ---------------------------------------------------------------------------------------
Mid Cap Larry Weissman 1997 investment officer of the manager and man-
Growth 1999 aging director of Salomon Smith Barney
since October, 1997; portfolio manager of
Neuberger & Berman, LLC, 1995-97; portfolio
manager of College Retirement Equities Fund
prior thereto
- ---------------------------------------------------------------------------------------
Growth and Income R. Jay Gerken 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
- ---------------------------------------------------------------------------------------
Government James E. Conroy 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
- ---------------------------------------------------------------------------------------
Municipal Bond Joseph P. Deane 1997 investment officer of the manager and man-
aging director of Salomon Smith Barney
- ---------------------------------------------------------------------------------------
</TABLE>
Management fees
Management fees paid during the fiscal year ended october 31, 1999
(as % of average daily net assets)
<TABLE>
<CAPTION>
Small
Cap International Mid Cap Growth Growth and Government Municipal
Fund Equity Fund Fund Fund Income Fund Fund Fund
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0.65% 1.00% 0.11% 0.55% 0.63% 0.60% 0.60%
- -------------------------------------------------------------------------
</TABLE>
Distributor
CFBDS, Inc. serves as the funds' distributor. Broker-dealers and financial
institutions (called Service Agents) that have entered into a dealer agreement
with the distributor sell shares of the funds to the public.
Distribution plans
The funds each have adopted Rule 12b-1 distribution plans for their Class A and
B shares. Under each plan, the fund pays distribution and service fees. These
fees are an ongoing expense and over time, may cost you more than other types
of sales charges.
Year 2000 issue
As the year 2000 began, there were few problems caused by the inability of cer-
tain computer systems to tell the difference between the year 2000 and the year
1900 (commonly known as the "Year 2000" issue). It is still possible that some
computer systems could malfunction in the future because of the Year 2000 issue
or as a result of actions taken to address the Year 2000 issue. Fund management
does not anticipate that its services or those of the funds' other service
providers will be adversely affected, but fund management will continue to mon-
itor the situation. If malfunctions related to the Year 2000 issue do arise,
the fund and its investments could be negatively affected.
17
The Concert Investment Series Prospectus
<PAGE>
Choosing a Share Class to Buy
Share classes
- --------------------------------------------------------------------------------
You can choose between Class A shares and Class B shares. The classes have dif-
ferent sales charges and expenses, allowing you to choose the class that best
meets your needs. When choosing which class of shares to buy, you should con-
sider:
.How much you plan to invest .The expenses paid by each class
.How long you expect to own .Whether you qualify for any reduction or
the shares waiver of sales charges
Investment minimums
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Initial Investment Additional Investments
----------------------------------------------------------------
<S> <C> <C>
General $1,000 $50
----------------------------------------------------------------
Individual Retirement
Accounts, Self Employed
Retirement Plans,
Uniform Gift to Minor
Accounts $ 250 $50
----------------------------------------------------------------
Qualified Retirement
Plans $ 25 $25
----------------------------------------------------------------
Systematic Investment
Plans $ 25 $25
----------------------------------------------------------------
</TABLE>
Minimum initial
and additional
investment
amounts vary
depending on the
nature of your
investment
account.
Qualified Retirement Plans are qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code,
including 401(k) plans
Comparing classes
- --------------------------------------------------------------------------------
Your account representative may receive different compensation depending upon
which class you choose.
Key Features Class A Class B
. No initial sales
.Initial sales charge charge
. Deferred sales charge
. You may qualify for declines over time
reduction or waiver
of initial sales . Convert to Class A
charge over time shares after eight
years
. Higher annual ex-
. Lower annual ex- penses
penses
Initial Sales Charge
Up to 5%, reduced for None
large purchases and
waived for certain
investors. No charge
for purchases of
$500,000 or more, or
for certain investors
Deferred Sales Charge
None, except for pur- Up to 5% charged when
chases of $500,000 or you redeem shares. The
more -- 1% if you re- charge is reduced over
deem within 1 year of time and there is no
purchase deferred sales charge
after 6 years
Annual 12b-1 Fees 0.25% of average 1% of average daily net
daily net assets assets
Exchangeable Into Class A shares of Class B shares of cer-
certain Concert brand tain Concert brand
funds and funds and CitiFunds SM
CitiFunds SM Cash Re- Cash Reserves
serves
18
The Concert Investment Series Prospectus
<PAGE>
Class A Sales Charge
Class A sales charge
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment in-
creases to certain levels called breakpoints. You do not pay a sales charge on
the funds' distributions or dividends that you reinvest in additional Class A
shares.
To learn more about the accumulation privilege, letters of intent, additional
waivers for certain investors and other options to reduce your sales charge,
ask your Service Agent or consult the Statement of Additional Information
(SAI).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Small Cap Fund,
International Equity Fund, Mid Cap
Fund, Growth Fund and Growth and For Municipal Bond Fund and
Income Fund Government Fund
- ---------------------------------------------------------------------------------------------------------------------------
Sales Charge as Sales Charge as Sales Charge as
Sales Charge as % % of Net Amount % of Offering % of Net Amount
Amount of Investment of Offering Price Invested Price Invested
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50% 4.71%
- ---------------------------------------------------------------------------------------------------------------------------
$25,000 but less than
$50,000 4.00 4.17 4.00 4.17
- ---------------------------------------------------------------------------------------------------------------------------
$50,000 but less than
$100,000 3.50 3.63 3.50 3.63
- ---------------------------------------------------------------------------------------------------------------------------
$100,000 but less than
$250,000 3.00 3.09 2.50 2.56
- ---------------------------------------------------------------------------------------------------------------------------
$250,000 but less than
$500,000 2.00 2.04 1.50 1.52
- ---------------------------------------------------------------------------------------------------------------------------
$500,000 or more* -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*You do not pay an initial sales charge when you buy $500,000 or more of Class
A shares. However, if you redeem these Class A shares within one year of pur-
chase, you will pay a deferred sales charge of 1%.
Qualifying for reduced Class A sales charges
There are several ways you can combine multiple purchases of Class A shares of
Concert brand funds to take advantage of the breakpoints in the sales charge
schedule.
. Accumulation privilege--lets you add the current value of Class A shares of
the funds already owned by you or members of your immediate family (and for
which you paid a sales charge) to the amount of your next purchase of Class A
shares for purposes of calculating the sales charge. Certain trustees and fi-
duciaries may be entitled to combine accounts in determining their sales
charge.
. Letter of intent--lets you purchase Class A shares of one or more funds over
a 13-month period and pay the same sales charge, if any, as if all shares had
been purchased at once. You may include purchases on which you paid a sales
charge made within 90 days before you sign the letter.
Waivers for certain Class A investors
Class A initial sales charges are waived for certain types of investors, in-
cluding:
. Employees of members of the NASD
. 403(b) or 401(k) retirement plans, if certain conditions are met
. Investors who redeemed Class A shares of Concert brand funds in the past 60
days, if your Service Agent is notified
. Employees and retired employees of Citigroup and its affiliates (including
immediate families of any of the foregoing)
. Accounts for which a Citigroup affiliate performs investment advisory servic-
es.
. Other waivers may apply. Please consult the SAI for a complete list.
19
The Concert Investment Series Prospectus
<PAGE>
Class B Sales Charge
Class B deferred sales charge
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge.
The deferred sales charge decreases as the number of years since your purchase
increases.
If you want to learn more about additional deferred sales charges and waivers
of deferred sales charges, contact your Service Agent or consult the SAI.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year After Purchase
- ---------------------------------------------------------------------------
Deferred Sales Charge for: 1st 2nd 3rd 4th 5th 6th through 8th
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government Fund and
Municipal Fund 4.50% 4.00% 3.00% 2.00% 1.00% -0-
- ---------------------------------------------------------------------------
All other funds 5.00% 4.00% 3.00% 2.00% 1.00% -0-
- ---------------------------------------------------------------------------
</TABLE>
Calculation of deferred sales charge
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation. In addition, you do not pay a de-
ferred sales charge on shares exchanged for shares of another Concert brand
fund or CitiFunds SM Cash Reserves, shares representing reinvested distribu-
tions and dividends or shares no longer subject to the deferred sales charge.
Shares are redeemed in this order:
. Shares that represent appreciation
. Shares representing reinvested distributions and dividends
. Shares that are not subject to the deferred sales charge
. Class B shares held longest
Each time you place a request to sell shares, the fund will first sell any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
. To make payments through certain systematic withdrawal plans
. To make certain distributions from a retirement plan
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
Other waivers may apply. Please consult the SAI for a complete list.
Class B conversion
After 8 years, Class B shares automatically convert into Class A shares. This
helps you because Class A shares have lower annual expenses. Your Class B
shares will convert to Class A shares as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares
Issued at
Initial
Purchase
- -------------------------
<S> <C> <C> <C>
.Eight years after the
date of purchase
<CAPTION>
Shares
Issued on
Reinvestment
of
Distribution
and
Dividends
- -------------------------
<S> <C> <C> <C>
.In same proportion that
the number of Class B
shares converting is to
total Class B shares
you own (excluding
shares issued as a
dividend)
<CAPTION>
Shares
Issued upon
Exchange
from Another
Fund
- -------------------------
<S> <C> <C> <C>
.On the date the shares
originally acquired
would have converted
into Class A shares
- -------------------------
</TABLE>
20
The Concert Investment Series Prospectus
<PAGE>
Buying Shares and Exchanging Shares
How to buy shares
. Shares of the funds may be purchased from the distributor or your Service
Agent that has entered into a service agreement with the distributor concern-
ing the funds. Please specify whether you are purchasing Class A or Class B
shares. If you fail to specify, Class A shares will be purchased for your ac-
count.
. Your Service Agent will not transmit your purchase order for fund shares un-
til it receives the purchase price in federal or other immediately available
funds. If you pay by check, the Service Agent transmits the order when the
check clears.
. If you are a customer of a Service Agent, your Service Agent will establish
and maintain your account and be the shareholder of record. If you wish to
transfer your account, you may transfer it to another financial institution.
For more information, contact your Service Agent or consult the SAI.
Exchanges
You may exchange fund shares for shares of certain Concert brand funds or of
CitiFunds SM Cash Reserves. Shareholders exchanging into another fund should
read that fund's prospectus describing the shares being acquired for more in-
formation. An exchange is a taxable transaction.
. You may place exchange orders through the transfer agent or, if you are a
customer of a Service Agent, through your Service Agent. You may place ex-
change orders by telephone if your account application permits. The transfer
agent or your Service Agent can provide you with more information, including
a prospectus for another Concert brand fund or for CitiFunds SM Cash Reserves
so that it may be acquired through an exchange.
. You must meet the minimum investment amount for each fund.
. Your fund may suspend or terminate your exchange privilege if you engage in
an excessive pattern of exchanges.
. Your shares will not be subject to an initial sales charge at the time of the
exchange. Your deferred sales charge (if any) will continue to be measured
from the date of your original purchase. If the fund that you exchange into
has a higher deferred sales charge, you will be subject to that charge. If
you exchange again to a fund with a lower charge, the sales charge will not
be reduced.
To learn more about the exchange privileges, contact your Service Agent or con-
sult the SAI.
21
The Concert Investment Series Prospectus
<PAGE>
Redeeming Shares
How to redeem shares
. You may sell (redeem) your shares on any business day. In all cases, your re-
demption price is the net asset value next determined after your request is
received in good order.
. You may make redemption requests in writing through the transfer agent or, if
you are a customer of a Service Agent, through your Service Agent. If your
account application permits, you may also make redemption requests by calling
the transfer agent or, if you are a customer of a Service Agent, your Service
Agent. Your Service Agent is responsible for promptly submitting redemption
requests to the transfer agent. You are responsible for making sure your re-
demption request is in proper form.
. The funds have an automatic redemption plan which allows you to automatically
withdraw a specific dollar amount from your account on a regular basis. You
must have at least $10,000 in your account to participate in this program.
Under the plan, if your shares are subject to a deferred sales charge, you
may only withdraw up to 10% of the value of your account in any year, but you
will not be subject to a deferred sales charge on the shares withdrawn under
the plan. For more information, please contact your Service Agent.
. If you own both Class A and Class B shares, and want to sell shares, you
should specify which class of shares you wish to sell. If you fail to speci-
fy, Class A shares will be redeemed first.
22
The Concert Investment Series Prospectus
<PAGE>
Other Things to Know about Share Transactions
Share price
You may buy, exchange or redeem fund shares at the net asset value, adjusted
for any applicable sales charge, next determined after receipt of your request
in good order. Each fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
Each fund calculates its net asset value every day the New York Stock Exchange
is open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done at 4:00 p.m., Eastern time, or when regular trading closes
on the Exchange, if earlier.
The funds generally value their securities based on market prices or quota-
tions. The funds' currency conversions are done when the London stock exchange
closes, which is 12 noon, Eastern time. When market prices or quotations are
not available, or when the manager believes they are unreliable or that the
value of a security has been materially affected by events occurring after a
foreign exchange closes, the funds may price those securities at fair value.
Fair value is determined in accordance with procedures approved by the funds'
board. A fund that uses fair value to price securities may value those securi-
ties higher or lower than another fund that uses market quotations to price the
same securities.
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by a fund could change on days when you can-
not buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Service Agent before the New York Stock Exchange closes.
If the Exchange closes early, you must place your order prior to the actual
closing time. Otherwise, you will receive the next business day's price.
Your Service Agent and other members of the funds' selling group must transmit
all orders to buy, exchange or redeem shares to the funds' transfer agent be-
fore the transfer agent's close of business.
Important address
Manager: SSB Citi Fund Management LLC
388 Greenwich Street, MF2
New York, New York 10013
23
The Concert Investment Series Prospectus
<PAGE>
Dividends, Distributions and Taxes
Dividends and distributions
Annual distributions of income and capital gain normally take place at the end
of the year in which the income or gain is realized or the beginning of the
next year.
The funds normally pay dividends and distribute capital gains, if any, as fol-
lows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income Capital Distributions
Dividend Gain Mostly
Fund Distributions Distributions From
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Annually Annually Gain
- -----------------------------------------------------------------------------------
International Equity Annually Annually Gain
- -----------------------------------------------------------------------------------
Mid Cap Annually Annually Gain
- -----------------------------------------------------------------------------------
Growth Annually Annually Gain
- -----------------------------------------------------------------------------------
Growth and Income Quarterly Annually Both
- -----------------------------------------------------------------------------------
Government Monthly Annually Income
- -----------------------------------------------------------------------------------
Municipal Bond Monthly Annually Income
- -----------------------------------------------------------------------------------
</TABLE>
The funds may pay additional distributions and dividends at other times if nec-
essary for a fund to avoid a federal tax. Capital gains distributions and divi-
dends are reinvested in additional fund shares of the same class that you hold.
You do not pay a sales charge on reinvested distributions or dividends. Alter-
natively, you can instruct your Service Agent or the transfer agent to have
your distributions and/or dividends paid in cash. You can change your choice at
any time to be effective as of the next distribution or dividend, except that
any change given to the transfer agent less than five days before the payment
date will not be effective until the next distribution or dividend is made.
Taxes
In general, redeeming shares, exchanging shares and receiving distributions
(whether in cash or additional shares) are all taxable events.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transaction Federal Income Tax Status
- -------------------------------------------------
<S> <C>
Redemption or Usually capital gain or loss;
exchange long-term only if shares
of shares owned more than one year
- -------------------------------------------------
Long-term capital Long-term capital gain
gain
distributions
- -------------------------------------------------
Short-term Ordinary income
capital gain
distributions
- -------------------------------------------------
Dividends Ordinary income (for all funds
except Municipal Bond
Fund)*
- -------------------------------------------------
</TABLE>
* Municipal Bond Fund intends to distribute the interest it earns on tax-exempt
municipal bonds as "exempt-interest" dividends, which are excludable from gross
income for federal income tax purposes but may be subject to state and local
income tax. Its distributions from other sources, if any, would be taxable as
described above.
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when a fund is about to declare a long-term capital gain distri-
bution or a taxable dividend, because it will be taxable to you even though it
may actually be a return of a portion of your investment.
After the end of each year, the funds will provide you with information about
the distributions and dividends that you received and any redemptions of shares
during the previous year. If you do not provide a fund with your correct tax-
payer identification number and any required certifications, you may be subject
to back-up withholding of 31% of your distributions, dividends (other than ex-
empt-interest dividends), and redemption proceeds. Because each shareholder's
circumstances are different and special tax rules may apply, you should consult
with your tax adviser about your investment in a fund and your receipt of divi-
dends, distributions or redemption proceeds.
24
The Concert Investment Series Prospectus
<PAGE>
Financial Highlights
The financial
highlights ta-
bles are in-
tended to help
you understand
the performance
of the Class A
and Class B
shares for the
past five years
(or since in-
ception if less
than five
years). Certain
information re-
flects finan-
cial results
for a single
share. Total
returns repre-
sent the rate
that a share-
holder would
have earned (or
lost) on a fund
share assuming
reinvestment of
all dividends
and distribu-
tions. The in-
formation in
the following
tables was au-
dited by Ernst
& Young LLP,
independent au-
ditors, whose
report, along
with the fund's
financial
statements is
included in the
annual report
(available upon
request).
For a Share of Beneficial Interest
Outstanding Throughout Each Year:
Small Cap Fund
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
Class A Shares February 21, 1995
Year Ended Year Ended Year Ended Year Ended (Commencement of
October 31, October 31, October 31, October 31, Investment Operations)
1999(1) 1998* 1997 1996 to October 31, 1995(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $20.15 $22.08 $18.57 $15.12 $11.81
- ------------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment loss (0.20) (0.17) (0.15) (0.18) (0.24)
Net realized and
unrealized gain 6.66 (1.55) 3.66 3.63 3.55
- ------------------------------------------------------------------------------------------------
Total income from
operations 6.46 (1.72) 3.51 3.45 3.31
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
Net realized gain (1.53) (0.21) -- -- --
- ------------------------------------------------------------------------------------------------
Total Distributions (1.53) (0.21) -- -- --
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $25.08 $20.15 $22.08 $18.57 $15.12
- ------------------------------------------------------------------------------------------------
Total Return 33.02% (7.81)% 18.90% 22.82% 28.11%(2)
- ------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $138 $108 $101 $52 $16
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets* 1.55% 1.43% 1.69% 2.21% 2.75%+
- ------------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets* (0.88)% (0.80)% (0.92)% (1.52)% (1.65)+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover 115% 80% 100% 80% 83%(3)
- ------------------------------------------------------------------------------------------------
* If certain expenses
had not been waived or
reimbursed by the
Fund's former manager,
total return would
have been lower and
the ratios would have
been as follows:
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets N/A N/A N/A N/A 3.37%+
- ------------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets N/A N/A N/A N/A (2.27%)+
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment loss has been calculated using the monthly average share
method.
(2) Total return from March 17, 1995 (date the Fund's investment strategy was
implemented) through October 31, 1995 is not annualized, as it may not be
representative of the total return for the year.
(3) Not annualized.
+ Annualized.
N/A=Not Applicable
* Effective December 31, 1997, SSB Citi Fund Management LLC (successor to
SSBC Fund Management Inc.), formerly known as Mutual Management Corp., re-
placed Van Kampen American Capital Asset Management as the Fund Manager.
25
The Concert Investment Series Prospectus
<PAGE>
Financial Highlights, continued
Small Cap Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares February 21, 1995
(Commencement
of Investment
Year Ended Year Ended Year Ended Year Ended Operations) to
October 31, 1999(1) October 31, 1998(4) October 31, 1997 October 31, 1996 October 31, 1995(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $19.60 $21.63 $18.34 $15.04 $11.81
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment loss (0.37) (0.30) (0.27) (0.27) (0.35)
Net realized and
unrealized gain 6.46 (1.52) 3.56 3.57 3.58
- -----------------------------------------------------------------------------------------------------------------------
Total income from
operations 6.09 (1.82) 3.29 3.30 3.23
- -----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
Net realized gain (1.53) (0.21) -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions (1.53) (0.21) -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $24.16 $19.60 $21.63 $18.34 $15.04
- -----------------------------------------------------------------------------------------------------------------------
Total Return 32.00% (8.45)% 17.94% 21.94% 27.43%(2)
- -----------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $129 $91 $80 $39 $11
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets* 2.31% 2.18% 2.44% 2.96% 3.49%+
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets* (1.63)% (1.55)% (1.67)% (2.27)% (2.45)%+
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 115% 80% 100% 80% 83%(3)
- -----------------------------------------------------------------------------------------------------------------------
* If certain expenses
had not been waived or
reimbursed by the
Fund's former manager,
total return would
have been lower and
the ratios would have
been as follows:
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets N/A N/A N/A N/A 4.11%+
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets N/A N/A N/A N/A (3.07%)+
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment loss has been calculated using the monthly average share
method.
(2) Total return from March 17, 1995 (date the Fund's Investment strategy was
implemented) through October 31, 1995 is not annualized as it may not be
representative of the total return for the year.
(3) Not annualized.
(4) Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
+ Annualized.
N/A=Not Applicable
26
The Concert Investment Series Prospectus
<PAGE>
International Equity Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares February 21, 1995
(Commencement
Year Ended Year Ended Year Ended Year Ended of Investment
October 31, October 31, October 31, October 31, Operations) to
1999(1) 1998(4) 1997 1996 October 31, 1995(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $18.94 $18.14 $16.54 $13.86 $11.81
- ---------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment loss (0.37) (0.27) (0.26) (0.19) (0.14)
Net realized and
unrealized gain 13.67 1.07 1.86 2.87 2.19
- ---------------------------------------------------------------------------------------------
Total income from
operations 13.30 0.80 1.60 2.68 2.05
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $32.24 $18.94 $18.14 $16.54 $13.86
- ---------------------------------------------------------------------------------------------
Total Return 70.22% 4.41% 9.74% 19.34% 16.28%(3)
- ---------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $38 $20 $17 $10 $7
- ---------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets* 2.08% 2.25% 2.56% 2.75% 3.64%+
- ---------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets* (1.53)% (1.46)% (1.59)% (1.56)% (1.40)%+
- ---------------------------------------------------------------------------------------------
Portfolio Turnover 50% 63% 57% 78% 17%(2)
- ---------------------------------------------------------------------------------------------
* If certain expenses
had not been waived or
reimbursed by the
Fund's former manager,
Total Return would
have been lower and
the ratios would have
been as follows:
- ---------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets N/A N/A N/A 4.12% 5.97%+
- ---------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets N/A N/A N/A (2.92) (3.73)+
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares February 21, 1995
(Commencement
Year Ended Year Ended Year Ended Year Ended of Investment
October 31, October 31, October 31, October 31, Operations) to
1999(1) 1998(4) 1997 1996 October 31, 1995(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $18.44 $17.81 $16.36 $13.79 $11.81
- ---------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment loss (0.53) (0.39) (0.32) (0.26) (0.21)
Net realized and
unrealized gain 13.25 1.02 1.77 2.83 2.19
- ---------------------------------------------------------------------------------------------
Total income from
operations 12.72 0.63 1.45 2.57 1.98
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $31.16 $18.44 $17.81 $16.36 $13.79
- ---------------------------------------------------------------------------------------------
Total Return 68.98% 3.54% 8.93% 18.64% 15.69(3)
- ---------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $41 $18 $13 $8 $2
- ---------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets* 2.79% 3.11% 3.30% 3.50% 4.33%+
- ---------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets* (2.26)% (2.32)% (2.34)% (2.31)% (2.80)%+
- ---------------------------------------------------------------------------------------------
Portfolio Turnover 50% 63% 57% 78% 17%(2)
- ---------------------------------------------------------------------------------------------
* If certain expenses
had not been waived or
reimbursed by the
fund's former manager,
Total Return would
have been lower and
the ratios would have
been as follows:
- ---------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets N/A N/A N/A 4.87% 6.67%+
- ---------------------------------------------------------------------------------------------
Ratio of net investment
loss to average net
assets N/A N/A N/A (3.67)% (5.13)%+
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment loss has been calculated using the monthly average share
method.
(2) Not annualized.
(3) Total return from March 17, 1995 (date the fund's investment strategy was
implemented) through October 31, 1995 is not annualized, as it may not be
representative of the total return for the year.
(4) Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the fund Manager.
N/A=Not Applicable
+ Annualized.
The Concert Investment Series Prospectus
27
<PAGE>
Financial Highlights, continued
Mid Cap Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended October 31, 1999
-----------------------------------------
Class A Shares(2)(3) Class B Shares(1)(2)
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $11.40 $11.44
- -------------------------------------------------------------------------------
Income (loss) from operations
Net investment income (loss)(4) 0.01 (0.05)
Net realized and unrealized gain 0.60 0.58
- -------------------------------------------------------------------------------
Total income from operations 0.61 0.53
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income -- --
- -------------------------------------------------------------------------------
Total distributions -- --
- -------------------------------------------------------------------------------
Net Asset Value, End of Period $12.01 $11.97
- -------------------------------------------------------------------------------
Total Return* 5.35% 4.63%
- -------------------------------------------------------------------------------
Net Assets, End of Period (millions) $10 $17
- -------------------------------------------------------------------------------
Ratio to average net assets+:
Expenses(4) 1.48% 2.24%
Net investment income (loss) 0.08% (0.68)%
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 47% 47%
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from March 16, 1999 (inception date) to October 31, 1999.
(2) Net investment income (loss) has been calculated using the monthly average
shares method.
(3) For the period from March 15, 1999 (inception date) to October 31, 1999.
(4) The Advisor has waived a portion of its fees for the period ended October
31, 1999. If such fees were not waived, the per share effect on net
investment income (loss) and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income (Loss) Without Fee Waiver
Per Share Decrease and Reimbursement
---------------------------- ------------------
<S> <C> <C>
Class A 0.04+ 2.12+
Class B 0.04+ 2.88+
</TABLE>
* Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
Growth Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Class B Shares
----------------------------------------------- -----------------------------------------------
Period Period
Year Ended Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999(1) 1998* 1997 1996(2) 1999(1) 1998* 1997 1996(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $19.54 $20.89 $17.96 $16.63 $19.37 $20.75 $17.93 $16.63
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment income
(loss) 0.02 0.05 0.15 0.02 (0.14) (0.11) 0.01 (0.01)
Net realized and
unrealized gain 6.60 2.13 4.30 1.31 6.54 2.14 4.28 1.31
- -------------------------------------------------------------------------------------------------------------------------
Total income from
operations 6.62 2.18 4.45 1.33 6.40 2.03 4.29 1.30
- -------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.05) (0.12) (0.16) -- -- -- (0.11) --
Net realized gains (1.82) (3.41) (1.36) -- (1.82) (3.41) (1.36) --
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (1.87) (3.53) (1.52) -- (1.82) (3.41) (1.47) --
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $24.29 $19.54 $20.89 $17.96 $ 23.95 $ 19.37 $20.75 $17.93
- -------------------------------------------------------------------------------------------------------------------------
Total Return 35.24% 12.27% 26.65% 8.00%(3) 34.31% 11.43% 25.66% 7.82%(3)
- -------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $344 $180 $109 $49 $357 $182 $126 $74
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.01% 1.02% 1.13% 1.17%+ 1.76% 1.75% 1.88% 1.93%+
Ratio of net investment
income (loss) to
average net assets 0.09% 0.38% 0.57% 0.46%+ (0.65)% (0.35)% (0.16)% (0.29)%+
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 37% 113% 165% 202%(3) 37% 113% 165% 202%(3)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
shares method.
(2) Class A and Class B shares commenced distribution on August 18, 1996.
(3) Not annualized.
+ Annualized
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
28
The Concert Investment Series Prospectus
<PAGE>
Growth And Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Class B Shares
----------------------------------------------- -----------------------------------------------
Period Period
Year Ended Year Ended Year Ended Ended Year Ended Year Ended Year Ended Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999(1) 1998* 1997 1996(2) 1999(1) 1998* 1997 1996(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $18.53 $20.10 $18.11 $17.19 $18.48 $20.07 $18.09 $17.19
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations
Net investment income
(loss) 0.03 (0.02) 0.20 0.07 (0.12) (0.01) 0.06 0.04
Net realized and
unrealized gain 3.60 1.85 4.22 0.91 3.58 1.71 4.22 0.90
- -------------------------------------------------------------------------------------------------------------------------
Total income from
operations 3.63 1.83 4.42 0.98 3.46 1.70 4.28 0.94
- -------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.03) (0.15) (0.25) (0.06) -- (0.04) (0.12) (0.04)
Net realized gains (0.78) (3.25) (2.18) -- (0.78) (3.25) (2.18) --
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (0.81) (3.40) (2.43) (0.06) (0.78) (3.29) (2.30) (0.04)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $21.35 $18.53 $20.10 $18.11 $21.16 $18.48 $20.07 $18.09
- -------------------------------------------------------------------------------------------------------------------------
Total Return 19.93% 10.63% 27.04% 5.72%(3) 19.03% 9.85% 26.08% 5.49%(3)
- -------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $181 $124 $80 $33 $208 $137 $99 $52
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.12% 1.07% 1.12% 1.16%+ 1.87% 1.81% 1.88% 1.91%+
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets 0.15% 0.63% 0.96% 1.78%+ (0.60)% (0.09)% 0.22% 1.05%+
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 53% 34% 93% 121% 53% 34% 93% 121%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------------------ ------------------------------------------------
Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended Year Ended Period Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999(1) 1998* 1997 1996(2) 1999(1) 1998* 1997 1996(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.66 $10.58 $10.41 $10.32 $10.66 $10.58 $10.41 $10.32
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.50 0.62 0.66 0.15 0.43 0.54 0.59 0.14
Net realized and
unrealized
gain (loss) (0.87) 0.10 0.17 0.09 (0.87) 0.10 0.17 0.09
- ------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from operations (0.37) 0.72 0.83 0.24 (0.44) 0.64 0.76 0.23
- ------------------------------------------------------------------------------------------------------------------------
Less distributions
from:
Net investment income (0.51) (0.64) (0.66) (0.15) (0.43) (0.56) (0.59) (0.14)
Capital (0.05) -- -- -- (0.05) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.64) (0.66) (0.15) (0.48) (0.56) (0.59) (0.14)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End
of Period $9.73 $10.66 $10.58 $10.41 $9.74 $10.66 $10.58 $10.41
- ------------------------------------------------------------------------------------------------------------------------
Total Return (3.51)% 7.00% 8.35% 2.36%(3) (4.17)% 6.20% 7.55% 2.18%(3)
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $23 $17 $14 $11 $17 $14 $12 $14
- ------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.25% 1.12% 1.15% 1.09%+ 1.94% 1.87% 1.90% 1.84%+
- ------------------------------------------------------------------------------------------------------------------------
Ratio of interest
expense to average
net assets 0.01% -- -- -- 0.01% -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net
investment income to
average net assets 4.96% 5.78% 6.44% 6.50%+ 4.27% 5.04% 5.69% 5.74%+
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 201% 141% 104% 276%(3) 201% 141% 104% 276%(3)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income (loss) has been calculated using the monthly average
shares method.
(2) Class A and Class B shares commenced distribution on August 18, 1996.
(3) Not annualized.
+ Annualized
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
29
The Concert Investment Series Prospectus
<PAGE>
Financial Highlights, continued
Municipal Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Class B Shares
------------------------------------------------ ------------------------------------------------
Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended Year Ended Period Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999(1) 1998* 1997 1996(3) 1999(1) 1998* 1997 1996(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $14.41 $14.21 $13.83 $13.78 $14.39 $14.20 $13.82 $13.78
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.63 0.62 0.65 0.11 0.52 0.51 0.54 0.09
Net realized and
unrealized gain
(loss) (1.26) 0.34 0.40 0.04 (1.25) 0.33 0.40 0.04
- ------------------------------------------------------------------------------------------------------------------------
Total income (loss)
from operations (0.63) 0.96 1.05 0.15 (0.73) 0.84 0.94 0.13
- ------------------------------------------------------------------------------------------------------------------------
Less distributions
from:
Net investment income (0.65) (0.63) (0.63) (0.10) (0.55) (0.52) (0.52) (0.09)
Net realized gains (0.23) (0.13) (0.04) -- (0.23) (0.13) (0.04) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (0.88) (0.76) (0.67) (0.10) (0.78) (0.65) (0.56) (0.09)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End
of Period $12.90 $14.41 $14.21 $13.83 $12.88 $14.39 $14.20 $13.82
- ------------------------------------------------------------------------------------------------------------------------
Total Return (4.58)% 6.93% 7.77% 1.12%(2) (5.30)% 6.10% 6.98% 0.93%(2)
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $34 $16 $9 $2 $8 $6 $3 $1
- ------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.18% 1.23% 1.19% 1.30%+ 1.93% 1.95% 1.94% 2.05%+
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net
investment income to
average net assets 4.54% 4.44% 4.79% 4.82%+ 3.79% 3.67% 4.04% 4.06%+
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 38% 28% 50% 80% 38% 28% 50% 80%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net investment income has been calculated using the months average shares
method.
(2) Not annualized. Total return is not annualized, as it may not be
representative of the total return for the year.
(3) Class A and Class B shares commenced distribution on August 18, 1996.
+ Annualized.
* Effective December 31, 1997 SSB Citi Fund Management LLC (successor to SSBC
Fund Management Inc., formerly known as Mutual Management Corp.), replaced
Van Kampen American Capital Asset Management as the Fund Manager.
30
The Concert Investment Series Prospectus
<PAGE>
This page is intentionally left blank
<PAGE>
The Concert Investment Series(R)
Small Cap Fund Growth and Income Fund
International Equity Fund Government Fund
Mid Cap Fund Municipal Bond Fund
Growth Fund
- --------------------------------------------------------------------------------
Additional Information about the
Funds
Shareholder Reports.
Annual and semiannual reports to
shareholders provide additional
information about the funds' in-
vestments. These reports discuss
the market conditions and invest-
ment strategies that signifi-
cantly affected each fund's per-
formance during its last fiscal
year.
Statement of Additional Information.
The combined statement of addi-
tional information provides more
detailed information about each
fund. It is incorporated by ref-
erence into this combined pro-
spectus.
How to Obtain Additional
Information.
. You may obtain shareholder re-
ports and the statement of ad-
ditional information without
charge by calling your Service
Agent or 1-800-625-4554.
. Information about the Funds
(including the SAI) can be re-
viewed and copied at the Secu-
rities and Exchange Commis-
sion's ("Commission") Public
Reference Room in Washington,
D.C. In addition, information
on the operation of the Public
Reference Room may be obtained
by calling the Commission at 1-
202-942-8090. Reports and other
information about the Fund are
available on the EDGAR Database
on the Commission's Internet
site at http://www.sec.gov.
Copies of this information may
be obtained for a duplicating
fee by electronic request at
the following E-mail address:
[email protected], or by writ-
ing the Commission's Public
Reference Section, Washington,
D.C. 20549-0102.
If someone provides you with information about the funds that is not in this
prospectus, you should not rely upon that information. Neither the funds nor
the distributor is offering to sell shares of the funds to any person to whom
the funds may not lawfully sell their shares.
(Investment Company Act file no. 811-05018)
CIS-P 2/00
STATEMENT OF ADDITIONAL INFORMATION
CONCERT INVESTMENT SERIES(r)
388 Greenwich Street
New York, NY 10013
February 28, 2000
Concert Investment Series(r) (the "Trust") is a diversified, open-end
management
investment company with twelve separate funds, seven of which are discussed
herein: the Small Cap Fund (formerly Emerging Growth Fund), the International
Equity Fund, the Mid Cap Fund, the Growth Fund, the Growth and Income Fund,
the Government Fund and the Municipal Bond Fund (collectively, the "Funds").
Each Fund is in effect a separate fund issuing its own shares.
This Statement of Additional Information (this "SAI") is not a Prospectus but
contains information in addition to and more detailed than that set forth in
the current Prospectuses of the Trust dated February 28, 2000, and should be
read in conjunction with a Prospectus.
For purchases through PFS Investments Inc.:
A Prospectus dated February 28, 2000 may be obtained without charge by writing
PFS Shareholder Services at 3100 Breckinridge Boulevard, Bldg. 200, Duluth,
Georgia 30099-0001. PFS customers may call Customer Service at (800) 544-5445
for information about the Funds.
For purchases through Citibank Investment Services or other Service Agents:
A Prospectus dated February 28, 2000, may be obtained without charge from
your financial professional or by calling (877) 236-3983.
TABLE OF CONTENTS
Page
General Information 2
Goals and Investment Policies 2
Investment Practices 8
Risk Factors 20
Investment Restrictions 24
Trustees and Officers 28
Investment Advisory Agreements 30
Distributor 33
Portfolio Turnover 34
Distribution Plans 34
Portfolio Transactions and Brokerage 37
Determination of Net Asset Value 40
Purchase and Redemption of Shares 41
Exchange Privilege 51
Distributions and Federal Taxes 54
Other Information 59
Appendix A - Ratings of Municipal Bonds, Notes and Commercial Paper 65
GENERAL INFORMATION
SSB Citi Fund Management LLC, a limited liability company ("SSB Citi" or the
"manager") formed on September 21, 1999, successor to SSBC Fund Management
Inc. (which was incorporated on March 12, 1968), 388 Greenwich Street, New
York, NY 10013, renders investment management advice to investment companies
with aggregate assets under management in excess of $127 billion as of January
31, 2000. The manager is an affiliate of Salomon Smith Barney Inc. ("Salomon
Smith Barney"). The manager and Salomon Smith Barney are subsidiaries of
Citigroup Inc. ("Citigroup"), a financial services company that uses diverse
channels to offer a broad range of financial services to consumer and
corporate customers around the world. Among these businesses are Citibank,
Commercial Credit, Primerica Financial Services, Salomon Smith Barney, SSB
Citi Asset Management, Travelers Life & Annuity, and Travelers Property
Casualty.
CFBDS, Inc. (the "Distributor") is the distributor of the Funds' shares.
Shares of the funds (each, a "Fund" and collectively, the "Funds") of Concert
Investment Series(r) (the "Trust") are offered for sale by PFS Investments Inc.
("PFS Investments") and other broker-dealers or financial institutions that
have entered into a dealer agreement with the Distributor (collectively,
"Other Service Agents"). Shares of the funds sold through PFS Investments are
held in accounts of PFS Shareholder Services, and are referred to as "PFS
Accounts" in this SAI. Shares sold through Other Service Agents are held in
accounts of PFPC Global Fund Services ("PFPC"), a sub-transfer agent of the
Trust (a "Sub-Transfer Agent"), and are referred to as "Other Accounts" in
this SAI.
PFS Investments is an indirect wholly-owned subsidiary of Citigroup. PFS
Shareholder Services, Inc., another sub-transfer agent of the Trust (a "Sub-
Transfer Agent") performs services for PFS Accounts as sub-transfer agent, and
is a subsidiary of PFS Services, Inc., an affiliate of Primerica Financial
Services, Inc. ("Primerica Financial").
For PFS Accounts, a Prospectus dated February 28, 2000 relating to the Class
1, Class A and Class B shares of the Trust (as amended from time to time, the
"PFS Prospectus") sets forth important information relevant to shareholders
purchasing through PFS Investments and/or holding their shares through PFS
Accounts and is the relevant Prospectus.
For Other Accounts, a Prospectus dated February 28, 2000, relating to the
Class A and Class B shares of the Trust (as amended from time to time, the
"Additional Prospectus") sets forth important information relevant to
shareholders purchasing through Other Service Agents and/or holding their
shares through Other Accounts.
The PFS Prospectus and the Additional Prospectus are sometimes referred to
generically in this SAI as the "Prospectus." Such references to the
Prospectus in this SAI should be understood as references to the relevant
Prospectus for a particular shareholder.
Two classes of shares are offered to PFS Accounts and Other Accounts
(collectively, "All Accounts"): Class A shares and Class B shares. In
addition, Class 1 shares are offered only to "Eligible Class 1 Purchasers"
through PFS Accounts. ("Eligible Class 1 Purchasers" consist of previously
established Class 1 shareholders or members of a family unit comprised of a
husband, wife and minor children, and Class 1 shareholders of a fund
exchanging their Class 1 shares for those of another fund.) Each class of
shares represents an interest in the same portfolio of securities of the
relevant Fund.
GOALS AND INVESTMENT POLICIES
The following disclosures supplement disclosures set forth in the Prospectus
and do not, standing alone, present a complete and accurate explanation of the
matters disclosed.
The differences in goals and investment policies among the Funds can be
expected to affect the return of each Fund and the degree of market and
financial risk to which each Fund is subject. The goal and investment
policies, the percentage limitations, and the kinds of securities in which
each Fund may invest are generally not fundamental policies and therefore may
be changed by the Trustees without shareholder approval. Although each Fund
has a different goal which it pursues through separate investment policies,
each Fund, except the International Equity Fund and the Mid Cap Fund, will not
purchase any securities issued by any company primarily engaged in the
manufacture of alcohol or tobacco.
Each of the Funds may depart from its principal investment strategies in
response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If a Fund takes a temporary defensive position, it may be unable
to achieve its investment objective.
Small Cap Fund
Small Cap Fund seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks of small sized companies
considered by the manager to be emerging growth companies. Any ordinary income
received from portfolio securities is entirely incidental. There can be no
assurance that the objective of capital appreciation will be realized;
therefore, full consideration should be given to the risks inherent in the
investment techniques that the manager may use to achieve such objective.
Under normal conditions, the Fund invests at least 65% of its total assets in
common stocks of small sized companies, both domestic and foreign, in the
early stages of their life cycle that the manager believes have the potential
to become major enterprises. Investments in such companies may offer greater
opportunities for growth of capital than larger, more established companies,
but also may involve certain special risks. Small Cap companies often have
limited product lines, markets, or financial resources, and they may be
dependent upon one or a few key people for management. The securities of such
companies may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. While the Fund will invest primarily in common stocks, to a limited
extent, it may invest in other securities such as preferred stocks,
convertible securities and warrants.
The Fund may also invest in special situations involving new management,
special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.
The Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. Short-term investments may include repurchase agreements with
banks or broker-dealers. The Fund may invest up to 20% of its total assets in
securities of foreign issuers.
International Equity Fund
International Equity Fund seeks total return on its assets from growth of
capital and income. The Fund seeks to achieve its goal by investing at least
65% of its assets in a diversified portfolio of equity securities of
established non-United States issuers.
In seeking to achieve its goal, the Fund presently expects to invest at least
65% and substantially all of its assets in common stocks of established non-
United States companies which in the opinion of the manager have potential for
growth of capital. However, there is no requirement that the Fund invest
exclusively in common stocks or other equity securities and, if deemed
advisable, the Fund may invest up to 35% of its assets in bonds, notes and
other debt securities (including securities issued in the Eurocurrency markets
or obligations of the United States or foreign governments and their political
subdivisions). When the manager believes that the return on debt securities
will equal or exceed the return on common stocks, the Fund may, in seeking its
goal of total return, substantially increase its holdings (up to a maximum of
35% of its assets) in such debt securities. In determining whether the Fund
will be invested for capital appreciation or for income or any combination of
both, the manager regularly analyzes a broad range of international equity and
fixed income markets in order to assess the degree of risk and level of return
that could be expected from each market.
The Fund generally invests its assets broadly among countries and normally has
represented in the portfolio business activities in not less than three
foreign countries. The Fund normally invests at least 65% of its assets in
companies organized or governments located in any area of the world other than
the United States, such as the Far East (e.g., Japan, Hong Kong, Singapore,
Malaysia), Western Europe (e.g., United Kingdom, Germany, The Netherlands,
France, Italy, Switzerland), Eastern Europe (e.g., Hungary, Poland, The Czech
Republic and certain countries of the former Soviet Union), Central and South
America (e.g., Mexico, Chile and Venezuela), Australia, Canada and such other
areas and countries as the manager may determine from time to time. Allocation
of the Fund's investments will depend upon the relative attractiveness of the
international markets and particular issuers. Concentration of the Fund's
assets in one or a few countries or currencies will subject the Fund to
greater risks than if the Fund's assets were not geographically concentrated.
It is expected that portfolio securities will ordinarily be traded on a stock
exchange or other market in the country in which the issuer is principally
based, but may also be traded on markets in other countries including, in many
cases, the United States securities exchanges and over-the-counter markets.
To the extent that the Fund's assets are not otherwise invested as described
above, the assets may be held in cash, in any currency, or invested in United
States as well as foreign high quality money market instruments and
equivalents.
Mid Cap Fund
Mid Cap Fund seeks long-term growth of capital. The Fund attempts to achieve
its investment objective by investing, under normal market conditions,
substantially all of its assets in equity securities and at least 65% of its
total assets in equity securities of medium-sized companies. Medium sized
companies are those whose market capitalization is within the market
capitalization range of companies in the S&P MidCap Index at the time of the
Fund's investment. The size of the companies in the Index changes with market
conditions and the composition of the Index. As of February 18, 2000, the
largest market capitalization of a company in the Index was $44.8 billion and
the smallest market capitalization was $0.15 billion. Companies whose
capitalization falls outside this range after purchase continue to be
considered medium-sized companies for purposes of the 65% policy. Investing
in medium-capitalization stocks may involve greater risk than investing in
large capitalization stocks since they can be subject to more abrupt or
erratic movements. However, they tend to involve less risk than stocks of
small capitalization companies. The Fund may invest up to 35% of its assets
in equity securities of companies with market capitalizations that do not
qualify them as medium sized at the time of the Fund's investment.
The Fund will normally invest in all types of equity securities, including
common stocks, preferred stocks, securities that are convertible into common
or preferred stocks, such as warrants and convertible bonds, and depository
receipts for those securities. The Fund may maintain a portion of its assets,
which will usually not exceed 10%, in U.S. Government securities, money market
obligations, and in cash to provide for payment of the Fund's expenses and to
meet redemption requests. It is the policy of the Fund to be as fully invested
in equity securities as practicable at all times.
Consistent with its investment objective and policies described above, the
Fund may invest up to 25% of its total assets in foreign securities, including
both direct investments and investments made through depository receipts. The
Fund may also invest in real estate investment trusts; purchase or sell
securities on a when-issued or delayed-delivery basis; enter into forward
commitments to purchase securities; lend portfolio securities; purchase and
sell put and call options; and enter into interest rate futures contracts,
stock index futures contracts and related options.
Growth Fund
Growth Fund seeks capital appreciation through investments in common stocks
and options on common stocks. Any income realized on its investments will be
purely incidental to its goal of capital appreciation.
The Fund also may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets the Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. A
description of the ratings of commercial paper and bonds is contained in the
Appendix. Short-term investments may include repurchase agreements with banks
or broker-dealers.
Certain policies of the Fund, such as purchasing and selling options on
stocks, purchasing options on stock indices and purchasing stock index futures
contracts and options thereon involve inherently greater investment risk and
could result in more volatile price fluctuations. The Fund may also invest up
to 20% of its total assets in securities of foreign issuers and in investment
companies. Since the Fund may take substantial risks in seeking its goal of
capital appreciation, it is not suitable for investors unable or unwilling to
assume such risks.
Growth and Income Fund
Growth and Income Fund seeks reasonable growth and income through investments
in equity securities that provide dividend or interest income, including
common and preferred stocks and securities convertible into common and
preferred stocks.
Convertible securities rank senior to common stocks in a corporation's capital
structure. They are consequently of higher quality and entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security. The Fund may
purchase convertible securities rated Ba or lower by Moody's Investors
Service, Inc. ("Moody's") or BB or lower by Standard & Poor's Ratings Group
("S&P") and may also purchase non-rated securities considered by the manager
to be of comparable quality. Although the Fund selects these securities
primarily on the basis of their equity characteristics, investors should be
aware that debt securities rated in these categories are considered high risk
securities; the rating agencies consider them speculative, and payment of
interest and principal is not considered well assured. To the extent that such
convertible securities are acquired by the Fund, there is a greater risk as to
the timely payment of the principal of, and timely payment of interest or
dividends on, such securities than in the case of higher rated convertible
securities.
Although the portfolio turnover rate will not be considered a limiting factor,
the Fund does not intend to engage in trading directed at realizing short-term
profits. Nevertheless, changes in the portfolio will be made promptly when
determined to be advisable by reason of developments not foreseen at the time
of the investment decision, and usually without reference to the length of
time the security has been held.
The Fund may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets the Fund may hold for liquidity purposes is
based on market conditions and the need to meet redemption requests. Short-
term investments may include repurchase agreements with banks or broker-
dealers. The Fund may also invest up to 20% of its total assets in securities
of foreign issuers and in investment companies. The Fund may engage in
portfolio management strategies and techniques involving options, futures
contracts and options on futures.
Government Fund
Government Fund seeks high current return consistent with preservation of
capital. The Fund intends to invest at least 80% of its assets in debt
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities include: (1) U.S. Treasury obligations,
which differ in their interest rates, maturities and times of issuance: U.S.
Treasury bills (maturity of one year or less), U.S. Treasury notes (maturity
of one to ten years), and U.S. Treasury bonds (generally maturities of greater
than ten years), including the principal components or the interest components
issued by the U.S. Government under the Separate Trading of Registered
Interest and Principal of Securities program (i.e. ''STRIPS''), 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, including government guaranteed mortgage-related
securities, some of which are backed by the full faith and credit of the U.S.
Treasury, some of which are supported by the right of the issuer to borrow
from the U.S. Government and some of which are backed only by the credit of
the issuer itself.
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers deemed creditworthy by the manager solely for purposes of
investing the Fund's cash reserves or when the Fund is in a temporary
defensive posture. The Fund may write covered or fully collateralized call
options on U.S. Government securities and enter into closing or offsetting
purchase transactions with respect to certain of such options. The Fund may
also write secured put options and enter into closing or offsetting purchase
transactions with respect to such options. The Fund may write both listed and
over-the-counter options.
The Fund seeks to obtain a high current return from the following sources:
? interest paid on the Fund's portfolio securities;
? premiums earned upon the expiration of options written;
? net profits from closing transactions; and
? net gains from the sale of portfolio securities on the exercise of
options or otherwise.
The Fund is not designed for investors seeking long-term capital appreciation.
Moreover, varying economic and market conditions may affect the value of and
yields on U.S. Government securities. Accordingly, there is no assurance that
the Fund's investment objective will be achieved.
The Fund may engage in transactions involving obligations issued or guaranteed
by U.S. Government agencies and instrumentalities which are supported by any
of the following: (a) the full faith and credit of the U.S. Government (such
as Government National Mortgage Association ("GNMA") Certificates), (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government, (c) discretionary authority of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality. Agencies
and instrumentalities include, but are not limited to: Federal Land Banks,
Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks and Federal National
Mortgage Association ("FNMA").
While the Fund has no policy limiting the maturities of the debt securities in
which it may invest, the manager seeks to moderate market risk by generally
maintaining a portfolio duration within a range of approximately four to six
years. Duration is a measure of the expected life of a debt security that was
developed as a more precise alternative to the concept of "term to maturity."
Duration incorporates a debt security's yield, coupon interest payments, final
maturity and call features into one measure. Traditionally, a debt security's
"term to maturity" has been used as a proxy for the sensitivity of the
security's price to changes in interest rates (which is the "interest rate
risk" or "price volatility" of the security). However, "term to maturity"
measures only the time until a debt security provides its final payment taking
no account of the pattern of the security's payments of interest or principal
prior to maturity. Duration measures the length of the time interval between
the present and the time when the interest and principal payments are
scheduled to be received (or in the case of a callable bond, expected to be
received), weighing them by the present value of the cash to be received at
each future point in time. In general, the lower the coupon rate of interest
or the longer the maturity, or the lower the yield-to-maturity of a debt
security, the longer its duration; conversely, the higher the coupon rate of
interest, the shorter the maturity or the higher the yield-to-maturity of a
debt security, the shorter its duration.
With respect to some securities, there may be some situations where even the
standard duration calculation does not properly reflect the interest rate
exposure of a security. In these and other similar situations, the manager
will use more sophisticated analytical techniques that incorporate the
economic life of a security into the determination of its interest rate
exposure. The duration is likely to vary from time to time as the manager
pursues its strategy of striving to maintain an active balance between seeking
to maximize income and endeavoring to maintain the value of the Fund's
capital. Thus, the objective of providing high current return consistent with
preservation of capital to shareholders is tempered by seeking to avoid undue
market risk and thus provide reasonable total return as well as high
distributed return. There is, of course, no assurance that the manager will be
successful in achieving such results for the Fund.
The Fund generally purchases debt securities at a premium over the principal
or face value in order to obtain higher current income. The amount of any
premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Fund's net asset value. Any such decline is realized for accounting
purposes as a capital loss at maturity or upon resale. Prior to maturity or
resale, such decline in value could be offset, in whole or part, or increased
by changes in the value of the security due to changes in interest rate
levels.
The principal reason for selling call or put options is to obtain, through the
receipt of premiums, a greater return than would be realized on the underlying
securities alone. By selling options, the Fund reduces its potential for
capital appreciation on debt securities if interest rates decline. Thus, if
market prices of debt securities increase, the Fund would receive a lower
total return from its optioned positions than it would have received if the
options had not been sold. The purpose of selling options is intended to
improve the Fund's total return and not to "enhance" monthly distributions.
During periods when the Fund has capital loss carryforwards, any capital gains
generated from such transactions will be retained in the Fund. The purchase
and sale of options may result in a high portfolio turnover rate.
Municipal Bond Fund
Municipal Bond Fund seeks as high a level of current interest income exempt
from federal income tax as is consistent with the preservation of capital.
The Fund seeks to achieve its objective by investing in a diversified
portfolio of obligations issued by or on behalf of states, territories or
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from
which, in the opinion of bond counsel for the issuer, is exempt from federal
income tax ("Municipal Bonds"). It is a fundamental policy of the Fund under
normal conditions to invest at least 80% of its assets in Municipal Bonds
which are considered tax-exempt. The Fund does not independently evaluate the
tax-exempt status of the Municipal Bonds in which it invests. The Fund invests
principally in Municipal Bonds rated at the time of purchase within the three
highest grades assigned by Moody's, S&P or another nationally recognized
statistical rating organization ("NRSRO"). Ratings at the time of purchase
determine which securities may be acquired, and a subsequent reduction in
rating does not require the Fund to dispose of a security. At least 75% of the
Fund's total assets will be invested in Municipal Bonds rated within the
highest three categories by an NRSRO, i.e., rated ''A'' or higher. The Fund
may invest up to 25% of its total assets in Municipal Bonds rated in the
fourth highest category by an NRSRO (e.g. those rated ''Baa'' by Moody's or
''BBB'' by S&P) or any non-rated Municipal Bonds having characteristics
similar to Municipal Bonds so rated. Municipal Bonds rated in the fourth
highest category are still considered "investment grade," but may have
speculative characteristics so that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade Municipal Bonds. The
market prices of Municipal Bonds generally fluctuate with changes in interest
rates so that the value of investments in such securities can be expected to
decrease as interest rates rise and increase as interest rates fall. Because
investment in lower rated securities involves greater investment risks,
achievement of the Fund's goal may be more dependent on the manager's credit
analysis than would be the case if the Fund invested only in higher rated
securities. Non-rated Municipal Bonds are not necessarily of lower quality
than rated Municipal Bonds, but the market for rated Municipal Bonds is often
broader. The Fund may seek to hedge against changes in interest rates through
transactions in listed futures contracts related to U.S. Government
securities, Municipal Bonds or to an index of Municipal Bonds, and options on
such contracts.
"Municipal Bonds" include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development obligations are issued by or on behalf
of public authorities to finance various privately-operated facilities. Such
obligations are included within the term Municipal Bonds if the interest paid
thereon is exempt from federal income tax. Municipal Bonds also include
short-term tax-exempt municipal obligations such as tax anticipation notes,
bond anticipation notes, revenue anticipation notes, and variable rate demand
notes.
The two principal classifications of Municipal Bonds are "general obligations"
and "revenue" or "special obligations." General obligations are secured by the
issuer's pledge of full faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligations are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or from other specific
revenue sources such as the user of the facility being financed. Industrial
development bonds, including pollution control bonds, are revenue bonds and do
not constitute the pledge of the credit or taxing power of the issuer of such
bonds. The payment of the principal and interest on such industrial revenue
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such payment. The Fund's
portfolio may also include "moral obligation" bonds which are normally issued
by special purpose public authorities. If an issuer of moral obligation bonds
is unable to meet its obligations, the repayment of such bonds becomes a moral
commitment but not a legal obligation of the state or municipality which is
the issuer of the bonds.
On a temporary basis, due to market conditions, the Fund may invest in
Municipal Notes. These securities include demand notes and short-term
municipal obligations (such as tax anticipation notes, revenue anticipation
notes, construction loan notes and short-term discount notes) and tax-exempt
commercial paper, provided that such obligations have the requisite ratings,
as described above. Demand notes are obligations which normally have a stated
maturity in excess of one year, but permit any holder to demand payment of
principal plus accrued interest upon a specified number of days' notice.
Frequently, such obligations are secured by letters of credit or other credit
support arrangement provided by banks. The issuer of such notes normally has
a corresponding right, after a given period, to prepay at its discretion the
outstanding principal of the note plus accrued interest upon a specified
number of days' notice to the noteholders. The interest rate on a demand note
may be based on a known lending rate, such as a bank's prime rate, and may be
adjusted when such rate changes, or the interest rate on a demand note may be
a market rate that is adjusted at specified intervals. Participation
interests in variable rate demand notes will be purchased only if, in the
opinion of counsel, interest income on such interest will be tax-exempt when
distributed as dividends to shareholders.
Yields on Municipal Bonds are dependent on a variety of factors, including the
general condition of the municipal bond market, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. The
ability of the Fund to achieve its investment objective is dependent on the
continuing ability of the issuers of the Municipal Bonds in which the Fund
invests to meet their obligations for the payment of interest and principal
when due. Furthermore, the rights of holders of Municipal Bonds and the
obligations of the issuers of such Municipal Bonds may be subject to
applicable bankruptcy, insolvency and similar laws and court decisions
affecting the rights of creditors generally, and such laws, if any, which may
be enacted by Congress or state legislatures imposing a moratorium on the
payment of principal and interest or imposing other constraints or conditions
on the payments of interest and principal on Municipal Bonds.
The Fund may invest up to 10% of its net assets in illiquid securities. These
securities may include Municipal Bonds issued in limited offerings under which
the Fund represents that it is purchasing for investment purposes only
("restricted securities"), repurchase agreements maturing in more than seven
days, and other securities subject to legal or contractual restrictions on
resale. Municipal Bonds that are restricted securities generally may be resold
only in a privately negotiated transaction or to one or more other
institutional investors. Restricted securities generally must be sold at a
discount from the market price of unrestricted securities of the same issuer.
Investments in restricted securities are not readily marketable without some
time delay. Such limitations could result in the Fund's inability to realize a
favorable price upon disposition, and in some cases might make disposition of
such securities at the time desired by the Fund impossible. The 10% limitation
applies at the time the purchase commitment is made.
Variations in the quality and maturity of the Fund's portfolio investments can
be expected to affect the Fund's yield and the degree of market and financial
risk to which the Fund is subject. Generally, Municipal Bonds with longer
maturities tend to produce higher yields and are subject to greater market
fluctuations as a result of changes in interest rates than Municipal Bonds
with shorter maturities and lower yields. The market value of Municipal Bonds
generally rises when interest rates decline and falls when interest rates
rise. It is also generally the case that lower rated Municipal Bonds provide a
higher yield than higher rated Municipal Bonds of similar maturity, but are
subject to greater risk. The Fund is not limited as to the maturities of the
Municipal Bonds in which it invests. Such securities may have remaining
maturities of up to 30 years or more.
The Fund considers investments in Municipal Bonds not to be subject to any
concentration policy and may invest a relatively high percentage of its assets
in Municipal Bonds issued by entities having similar characteristics. The
issuers may be located in the same geographic area or may pay their interest
obligations from revenue of similar projects such as hospitals, utility
systems and housing finance agencies. This may make the Fund's investments
more susceptible to similar economic, political or regulatory occurrences. As
the similarity in issuers increases, the potential for fluctuation in the
Fund's per share net asset value also increases. The Fund may invest more than
25% of its total assets in industrial development revenue bonds, but it does
not intend to invest more than 25% of its assets in industrial development
revenue bonds issued for companies in the same industry or state. Sizeable
investments in such obligations could involve an increased risk to the Fund
should any of such issuers of any such related projects or facilities
experience financial difficulties.
Interest on certain "private-activity bonds" issued after August 7, 1986, is
an item of tax preference subject to the alternative minimum tax on
individuals and corporations. The Fund will not purchase any private activity
bonds subject to the alternative minimum tax.
The taxable securities in which the Municipal Bond Fund may invest as
temporary investments include U.S. Government securities, domestic bank
certificates of deposit and repurchase agreements. The Fund may not invest in
a certificate of deposit issued by a commercial bank unless the bank is
organized and operating in the United States and has total assets of at least
$500 million and is a member of the Federal Deposit Insurance Corporation.
INVESTMENT PRACTICES
This section contains a discussion of certain investment practices. The Funds
indicated may engage in these and any other practices not prohibited by their
investment restrictions. For further information about risks associated with
these practices, see "Risk Factors" below.
EQUITY SECURITIES
Common Stocks (All Funds except Government Fund and Municipal Bond Fund).
Each Fund may purchase common stocks. Common stocks are shares of a
corporation or other entity that entitle the holder to a pro rata share of the
profits of the corporation, if any, without preference over any other
shareholder or class of shareholders, including holders of the entity's
preferred stock and other senior equity. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so.
Preferred Stocks and Convertible Securities (All Funds except Government Fund
and Municipal Bond Fund). Each Fund may invest in convertible debt and
preferred stocks. Convertible debt securities and preferred stock entitle the
holder to acquire the issuer's stock by exchange or purchase for a
predetermined rate. Convertible securities are subject both to the credit and
interest rate risks associated with fixed income securities and to the stock
market risk associated with equity securities.
Warrants (All Funds except Government Fund and Municipal Bond Fund). Each
Fund may purchase warrants. Warrants acquired by a Fund entitle it to buy
common stock from the issuer at a specified price and time. Warrants are
subject to the same market risks as stocks, but may be more volatile in price.
A Fund's investment in warrants will not entitle it to receive dividends or
exercise voting rights and will become worthless if the warrants cannot be
profitably exercised before the expiration dates.
REITs (All Funds except Government Fund and Municipal Bond Fund). Each Fund
may invest in shares of real estate investment trusts (REITs), which are
pooled investment vehicles that invest in real estate or real estate loans or
interests. Investing in REITs involves risks similar to those associated with
investing in equity securities of small capitalization companies. REITs are
dependent upon management skills, are not diversified, and are subject to
risks of project financing, default by borrowers, self-liquidation, and the
possibility of failing to qualify for the exemption from taxation on
distributed amounts under the Internal Revenue Code of 1986, as amended (the
"Code").
Illiquid and Restricted Securities (All Funds except Government Fund and
Municipal Bond Fund). The Small Cap Fund and the International Equity Fund
may each invest up to 15% of their net assets , the Mid Cap Fund may invest up
to 10% of its net assets, and the Growth Fund, the Growth and Income Fund, the
Government Fund and the Municipal Bond Fund may each invest up to 5% of their
net assets in restricted securities and other illiquid assets. As used herein,
restricted securities are those that have been sold in the United States
without registration under the Securities Act of 1933 and are thus subject to
restrictions on resale. Excluded from the limitation, however, are any
restricted securities which are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 and which have been determined to be liquid
by the Trustees or by the manager pursuant to board-approved guidelines. The
determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. This investment practice
could have the effect of increasing the level of illiquidity in each Fund to
the extent that qualified institutional buyers become for a time uninterested
in purchasing these restricted securities. These difficulties and delays could
result in a Fund's inability to realize a favorable price upon disposition of
restricted securities, and in some cases might make disposition of such
securities at the time desired by the Fund impossible. Since market quotations
are not readily available for restricted securities, such securities will be
valued by a method that the Trustees believe accurately reflects fair value.
Notwithstanding the foregoing, the Small Cap Fund and the International Equity
Fund will not invest more than 10% of each Fund's net assets in restricted
securities; restricted securities eligible for resale pursuant to Rule 144A
are not included within this limitation.
Securities of Foreign Issuers (All Funds except Government Fund and Municipal
Fund). The International Equity Fund invests at least 65% of its total assets
in the equity securities of foreign issuers and the Small Cap Fund, the Growth
Fund and the Growth and Income Fund may invest up to 20% of the value of their
total assets and the Mid Cap Fund may invest up to 25% of the value of its
total assets in securities of foreign governments and companies of developed
and emerging markets countries.
Each Fund may also purchase foreign securities in the form of American
Depositary Receipts (''ADRs'') and European Depositary Receipts (''EDRs'') or
other securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through ''sponsored'' or ''unsponsored'' arrangements. In a sponsored
ADR arrangement, the foreign issuer assumes the obligation to pay some or all
of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligation and the depositary's
transaction fees are paid by the ADR holders. In addition, less information is
available in the United States about an unsponsored ADR than about a sponsored
ADR, and the financial information about a company may not be as reliable for
an unsponsored ADR as it is for a sponsored ADR. Each Fund may invest in ADRs
through both sponsored and unsponsored arrangements.
The Small Cap Fund, the International Equity Fund, the Mid Cap Fund, the
Growth Fund and the Growth and Income Fund may invest in the securities of
developing countries, commonly known as "emerging markets" countries. See
"Risk Factors Securities of Developing /Emerging Market Countries".
FIXED INCOME SECURITIES
Corporate Debt Obligations (All Funds). Each Fund may invest in corporate
debt obligations and zero coupon securities issued by financial institutions
and corporations. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity. Zero coupon securities are securities sold at a
discount to par value and on which interest payments are not made during the
life of the security.
U.S. Government Securities (All Funds). The U.S. Government securities in
which the Funds may invest include: bills, certificates of indebtedness, and
notes and bonds issued by the U.S. Treasury or by agencies or
instrumentalities of the U.S. Government. Some U.S. Government securities,
such as U.S. Treasury bills and bonds, are supported by the full faith and
credit of the U.S. Treasury; others are supported by the right of the issuer
to borrow from the U.S. Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others are supported only by the credit of the instrumentality.
Mortgage Related Securities (Government Fund). The Government Fund may invest
in mortgage-related securities, including those representing an undivided
ownership interest in a pool of mortgage loans, e.g., GNMA, FNMA, FHLMC
Certificates. Mortgage loans made by banks, savings and loan institutions,
and other lenders are often assembled into pools, which are issued or
guaranteed by an agency or instrumentality of the U.S. Government, though not
necessarily by the U.S. Government itself. Interests in such pools are
collectively referred to as ''mortgage-related securities.''
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them
off sooner. Thus, the securityholders frequently receive prepayments of
principal, in addition to the principal which is part of the regular monthly
payment. A borrower is more likely to prepay a mortgage which bears a
relatively high rate of interest. This means that in times of declining
interest rates, some of the Fund's higher yielding securities might be
converted to cash, and the Fund will be forced to accept lower interest rates
when that cash is used to purchase additional securities. The increased
likelihood of prepayment when interest rates decline also limits market price
appreciation of mortgage-related securities. If the Fund buys mortgage-related
securities at a premium, mortgage foreclosures or mortgage prepayments may
result in a loss to the Fund of up to the amount of the premium paid since
only timely payment of principal and interest is guaranteed.
The Government National Mortgage Association ("GNMA") is a wholly owned
corporate instrumentality of the United States within the U.S. Department of
Housing and Urban Development. GNMA's principal programs involve its
guarantees of privately issued securities backed by pools of mortgages.
Certificates of the Government National Mortgage Association ("GNMA
Certificates") are mortgage-backed securities, which evidence an undivided
interest in a pool of mortgage loans. GNMA Certificates differ from bonds in
that principal is paid back monthly by the borrower over the term of the loan
rather than returned in a lump sum at maturity. GNMA Certificates that the
Fund purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid and owned on the mortgage pool net of fees paid to the
"issuer" and GNMA, regardless of whether or not the mortgagor actually makes
the payment. The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or the Farmers' Home
Administration ("FMHA"), or guaranteed by the Veterans Administration ("VA").
Once a pool of such mortgages is assembled and approved by GNMA, the GNMA
guarantee is backed by the full faith and credit of the U.S. Government. GNMA
is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before
maturity of the mortgages in the pool. The Fund normally will not distribute
principal payments (whether regular or prepaid) to its shareholders. Rather,
it will invest such payments in additional mortgage-related securities of the
types described above or other U.S. Government securities. Interest received
by the Fund will, however, be distributed to shareholders. Foreclosures
impose no risk to principal investment because of the GNMA guarantee.
As prepayment rates of the individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the
average life of single-family dwelling mortgages with 25-to 30-year
maturities, the type of mortgages backing the vast majority of GNMA
Certificates, is approximately 12 years. Therefore, it is customary to treat
GNMA Certificates as 30-year mortgage-backed securities which prepay fully in
the twelfth year.
The coupon rate of interest of GNMA Certificates is lower than the interest
rate paid on the VA-guaranteed or FHA-insured mortgages underlying the GNMA
Certificates, but only by the amount of the fees paid to GNMA and the GNMA
Certificate issuer. For the most common type of mortgage pool, containing
single-family dwelling mortgages, GNMA receives an annual fee of 0.06 of one
percent of the outstanding principal for providing its guarantee, and the GNMA
Certificate issuer is paid an annual servicing fee of 0.44 of one percent for
assembling the mortgage pool and for passing through monthly payments of
interest and principal to Certificate holders. The coupon rate by itself,
however, does not indicate the yield which will be earned on the GNMA
Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the prepayment
experience of the mortgage pool underlying the Certificate. If mortgagors
prepay their mortgages, the principal returned to Certificate holders may be
reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to assume
that the Certificates will have a 12 year life. Compared on this basis, GNMA
Certificates have historically yielded roughly 1/4 of 1.00% more than high
grade corporate bonds and 1/2 of 1.00% more than U.S. Government and
U.S. Government agency bonds.
Since the inception of the GNMA mortgage-backed securities program in 1970,
the amount of GNMA Certificates outstanding has grown rapidly. The size of the
market and the active participation in the secondary market by securities
dealers and many types of investors make GNMA Certificates highly liquid
instruments. Quotes for GNMA Certificates are readily available from
securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the pool
of mortgages backing each Certificate.
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional
residential mortgages. FHLMC issues two types of mortgage pass-through
securities, mortgage participation certificates ("PCs") and guaranteed
mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each
PC represents a pro rata share of all interest and principal payments made and
owed on the underlying pool. Like GNMA Certificates, PCs are assumed to be
prepaid fully in their twelfth year. FHLMC guarantees timely monthly payment
of interest of PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semiannually and return principal once a year
in guaranteed minimum payments. The expected average life of these securities
is approximately 10 years.
The Federal National Mortgage Association ("FNMA") creates a secondary market
in mortgages insured by the FHA. FNMA issues guarantee mortgage pass-through
certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA
Certificates in that each Certificate represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. FNMA
guarantees timely payment of interest on FNMA Certificates and the full return
of principal. Like GNMA Certificates, FNMA Certificates are assumed to be
prepaid fully in their twelfth year.
Risk of foreclosure of the underlying mortgages is greater with FHLMC and FNMA
securities because, unlike GNMA securities, FHLMC and FNMA securities are not
guaranteed by the full faith and credit of the U.S. Government.
Forward Commitments (Government Fund and Mid Cap Fund). The Fund may
purchase or sell U.S. Government securities on a ''when-issued'' or ''delayed
delivery'' basis (''Forward Commitments''). These transactions occur when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future, frequently a month or more after such transactions. The
price is fixed on the date of the commitment, and the seller continues to
accrue interest on the securities covered by the Forward Commitment until
delivery and payment take place. At the time of settlement, the market value
of the securities may be more or less than the purchase or sale price.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A
Forward Commitment sale is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in value of a security
which the Fund owns or has the right to acquire. In either circumstance, the
Fund maintains in a segregated account (which is marked to market daily)
either the security covered by the Forward Commitment or appropriate
securities as required by the Investment Company Act of 1940, as amended (the
"1940 Act") (which may have maturities which are longer than the term of the
Forward Commitment) with the Fund's custodian in an aggregate amount equal to
the amount of its commitment as long as the obligation to sell continues. By
entering into a Forward Commitment sale transaction, the Fund forgoes or
reduces the potential for both gain and loss in the security which is being
hedged by the Forward Commitment sale.
The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or
before the settlement date in which event the Fund may reinvest the proceeds
in another Forward Commitment. The Fund's use of Forward Commitments may
increase its overall investment exposure and thus its potential for gain or
loss. When engaging in Forward Commitments, the Fund relies on the other party
to complete the transaction; should the other party fail to do so, the Fund
might lose a purchase or sale opportunity that could be more advantageous than
alternative opportunities at the time of the failure.
The Fund maintains a segregated account (which is marked to market daily) of
appropriate securities as required by the 1940 Act covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the
amount of its commitment as long as the obligation to purchase or sell
continues.
Variable Rate Demand Notes (MunicipalBond Fund). The Fund may invest in
variable rate demand notes (''VRDNs'') which are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and which are
subject to an unconditional right of demand to receive payment of the
principal balance plus accrued interest either at any time or at specified
intervals not exceeding one year and in either case upon no more than seven
days' notice. The interest rates are adjustable at intervals ranging from
daily (''floating rate'') to up to one year to some prevailing market rate for
similar investments, such adjustment formula being calculated to maintain the
market value of the VRDN at approximately the par value of the VRDN upon the
adjustment date. The adjustments are typically based upon the prime rate of a
bank or some other appropriate interest rate adjustment index.
The Fund may also invest in VRDNs in the form of participation interests
(''Participating VRDNs'') in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank (''institution'').
Participating VRDNs provide the Fund with a specified undivided interest (up
to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the Participating VRDNs from
the institution upon a specified number of days' notice, not to exceed seven
days. The Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except
that the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.
Stand-by Commitments (Municipal Bond Fund). The Fund may acquire stand-by
commitments with respect to Municipal Bonds held by it. Under a stand-by
commitment, a bank or dealer from which Municipal Bonds are acquired agrees to
purchase from the Fund, at the Fund's option, the Municipal Bonds at a
specified price. Such commitments are sometimes called ''liquidity puts.''
The amount payable to the Fund upon its exercise of a stand-by commitment is
normally (i) the Fund's acquisition cost of the Municipal Bonds (excluding any
accrued interest which the Fund paid on their acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on
the securities since the last interest payment date during that period. Stand-
by commitments generally can be acquired when the remaining maturity of the
underlying Municipal Bond is greater than one year, and are exercisable by the
Fund at any time before the maturity of such obligations.
The Fund's right to exercise stand-by commitments is unconditional and
unqualified. A stand-by commitment generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Bonds to a third party at
any time.
The Fund expects that stand-by commitments will generally be available without
the payment of any direct or indirect consideration. However, if necessary or
advisable, the Fund may pay for a stand-by commitment either separately in
cash or by paying a higher price for portfolio securities which are acquired
subject to the commitment (thus reducing the yield to maturity otherwise
available for the same securities). The total amount paid in either manner for
outstanding stand-by commitments held in the Fund will not exceed one-half of
one percent of the value of the Fund's total asses calculated immediately
after each stand-by commitment is acquired. The Fund intends to enter into
stand-by commitments only with banks and dealers which, in the manager's
opinion, present minimal credit risks.
The Fund expects to acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect
the valuation of the underlying Municipal Bonds which would continue to be
valued in accordance with the method of valuation employed by the Fund. Stand-
by commitments acquired by the Fund would be valued at zero in determining net
asset value. Where the Fund paid any consideration directly or indirectly for
a stand-by commitment, the cost would be reflected as unrealized depreciation
for the period during which the commitment was held by the Fund.
Delayed Delivery and When-Issued Securities (MunicipalBond Fund). Municipal
Bonds may at times be purchased or sold on a ''delayed delivery'' or a ''when
issued'' basis. These transactions arise when securities are purchased or sold
by the Fund with payment and delivery taking place in the future, often a
month or more after the purchase. The payment obligation and the interest rate
are each fixed at the time the Fund enters into the commitment. The Fund will
only make commitments to purchase such securities with the intention of
actually acquiring the securities, but the Fund may sell these securities
prior to settlement date if it is deemed advisable. Purchasing Municipal Bonds
on a when-issued basis involves the risk that the yields available in the
market when the delivery takes place may actually be higher than those
obtained in the transaction itself; if yields so increase, the value of the
when-issued obligation will generally decrease. The Fund maintains a separate
account at its custodian bank consisting of appropriate securities as required
by the 1940 Act (valued on a daily basis) equal to all times to the amount of
any when-issued commitment.
Short-Term Investments (All Funds). In certain circumstances the Funds may
invest without limitation in all types of short-term money market instruments,
including U.S. Government securities; certificates of deposit, time deposits
and bankers' acceptances issued by domestic banks (including their branches
located outside the United States and subsidiaries located in Canada),
domestic branches of foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase agreements. To the
extent a Fund is investing in short-term investments as a temporary defensive
posture, the applicable Fund's investment objective may not be achieved.
Commercial Paper (All Funds). Commercial paper consists of short-term
(usually 1 to 270 days) unsecured promissory notes issued by corporations in
order to finance their current operations. A variable amount master demand
note (which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender, such as one of the Funds pursuant to which the lender may determine to
invest varying amounts. Transfer of such notes is usually restricted by the
issuer, and there is no secondary trading market for such notes. Each Fund
therefore, may not invest in a master demand note, if as a result more than 5%
(15% in the case of the Small Cap Fund and the International Equity Fund) (10%
in the case of the Mid Cap Fund) of the value of the Fund's total assets would
be invested in such notes and other illiquid securities.
Commercial Bank Obligations (International Equity Fund). For the purposes of
the International Equity Fund's investment policies with respect to bank
obligations, obligations of foreign branches of U.S. banks and of foreign
banks may be general obligations of the parent bank in addition to the issuing
bank, or may be limited by the terms of a specific obligation and by
government regulation. As with investment in foreign securities in general,
investments in the obligations of foreign branches of U.S. banks and of
foreign banks may subject the International Equity Fund to investment risks
that are different in some respects from those of investments in obligations
of domestic issuers. Although the Fund will typically acquire obligations
issued and supported by the credit of U.S. or foreign banks having total
assets at the time of purchase in excess of U.S. $1 billion (or the equivalent
thereof), this U.S. $1 billion figure is not a fundamental investment policy
or restriction of the International Equity Fund. For calculation purposes
with respect to the U.S. $1 billion figure, the assets of a bank will be
deemed to include the assets of its U.S. and non-U.S. branches.
DERIVATIVE INSTRUMENTS
Options, Futures Contracts and Related Options (All Funds)
Selling Call and Put Options (Small Cap Fund, International Equity Fund, Mid
Cap Fund, Growth Fund, Growth and Income Fund and Government Fund). The
principal reason for selling options is to obtain, through receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. A Fund's current return can be expected to fluctuate
because premiums earned from writing options and dividend or interest income
yields on portfolio securities vary as economic and market conditions change.
Writing options on portfolio securities also results in a higher portfolio
turnover. The purchaser of a call option pays a premium to the writer (i.e.,
the seller) for the right to buy the underlying security from the writer at a
specified price during a certain period. Small Cap Fund, International
Equity Fund, Growth Fund and Growth and Income Fund sell call options only on
a covered basis. Government Fund sells call options either on a covered
basis, or for cross-hedging purposes. A call option is covered if the Fund
owns or has the right to acquire the underlying securities subject to the call
option at all times during the option period. Thus, Government Fund may sell
options on U.S. Government securities or forward commitments of such
securities. An option is for cross-hedging purposes (relative to Government
Fund only) to hedge against a security which the Fund owns or has the right to
acquire. In such circumstances, Government Fund maintains in a segregated
account with the Fund's Custodian, cash or U.S. Government securities in an
amount not less than the market value of the underlying security, marked to
market daily, while the option is outstanding. The purchaser of a put option
pays a premium to the seller (i.e., the writer) for the right to sell the
underlying security to the writer at a specified price during a certain
period. A Fund sells put options only on a secured basis, which means that,
at all times during the option period, the Fund would maintain in a segregated
account with its Custodian cash, cash equivalents or liquid securities in an
amount of not less than the exercise price of the option, or will hold a put
on the same underlying security at an equal or greater exercise price. A Fund
generally sells put options when the manager wishes to purchase the underlying
security for the Fund's portfolio at a price lower than the current market
price of the security.
In order to terminate its position as writer of a call or put option, a Fund
may enter into a "closing purchase transaction," which is the purchase of a
call (put) on the same underlying security and having the same exercise price
and expiration date as the call (put) previously sold by the Fund. The Fund
will realize a gain (loss) if the premium plus commission paid in the closing
purchase transaction is less (greater) than the premium it received on the
sale of the option. A Fund would also realize a gain if an option it has sold
lapses unexercised. A Fund may sell options that are listed on an exchange as
well as options that are traded over-the-counter. A Fund may close out its
position as writer of an option only if a liquid secondary market exists for
options of that series, but there is no assurance that such a market will
exist, particularly in the case of over-the-counter options, since they can be
closed out only with the other party to the transaction. Alternatively, a
Fund may purchase an offsetting option, which does not close out its position
as a writer, but provides an asset of equal value to its obligation under the
option sold. If a Fund is not able to enter into a closing purchase
transaction or to purchase an offsetting option with respect to an option it
has sold, it will be required to maintain the securities subject to the call
or the collateral securing the put until a closing purchase transaction can be
entered into (or the option is exercised or expires), even though it might not
be advantageous to do so.
By selling a call option, a Fund loses the potential for gain on the
underlying security above the exercise price while the option is outstanding;
by writing a put option a Fund might become obligated to purchase the
underlying security at an exercise price that exceeds the then current market
price.
Each of the United States exchanges has established limitations governing the
maximum number of call or put options on the same underlying security (whether
or not covered) that may be written by a single investor, whether acting alone
or in concert with others, regardless of whether such options are written on
one or more accounts or through one or more brokers. An exchange may order
the liquidation of positions found to be in violation of those limits, and it
may impose other sanctions or restrictions. These position limits may
restrict the number of options the Fund may be able to write.
Purchasing Call and Put Options (Small Cap Fund, International Equity Fund,
Mid Cap Fund, Growth Fund, Growth and Income Fund and Government Fund). A
Fund may purchase call options to protect (e.g., hedge) against anticipated
increases in the prices of securities it wishes to acquire. Alternatively,
call options may be purchased for their leverage potential. Since the premium
paid for a call option is typically a small fraction of the price of the
underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, a Fund can benefit from any significant
increase in the price of the underlying security to a greater extent than had
it invested the same amount in the security directly. However, because of the
very high volatility of option premiums, a Fund could bear a significant risk
of losing the entire premium if the price of the underlying security did not
rise sufficiently, or if it did not do so before the option expired.
Conversely, put options may be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific portfolio
securities or of a Fund's assets generally. Alternatively, put options may be
purchased for capital appreciation in anticipation of a price decline in the
underlying security and a corresponding increase in the value of the put
option. The purchase of put options for capital appreciation involves the
same significant risk of loss as described above for call options. In any
case, the purchase of options for capital appreciation would increase the
Fund's volatility by increasing the impact of changes in the market price of
the underlying securities on the Fund's net asset value. The Funds may
purchase either listed or over-the-counter options.
Options on Stock Indexes (Small Cap Fund, International Equity Fund, Mid Cap
Fund, Growth Fund and Growth and Income Fund). Options on stock indices are
similar to options on stock, but the delivery requirements are different.
Instead of giving the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this cash amount will
depend upon the closing level of the stock index upon which the option is
based being greater than (in the case of a call) or less than (in the case of
a put) the exercise price of the option. The amount of cash received will be
the difference between the closing price of the index and the exercise price
of the option, multiplied by a specified dollar multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Some stock index options are based on a broad market index such
as the Standard & Poor's 500 or the New York Stock Exchange Composite Index,
or a narrower index such as the Standard & Poor's 100. Indexes are also based
on an industry or market segment such as the AMEX Oil and Gas Index or the
Computer and Business Equipment Index. Options are currently traded on The
Chicago Board Options Exchange, the New York Stock Exchange, the American
Stock Exchange and other exchanges. Gain or loss to a Fund on transactions in
stock index options will depend on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
price movements of individual securities. As with stock options, the Fund may
offset its position in stock index options prior to expiration by entering
into a closing transaction on an Exchange, or it may let the option expire
unexercised.
Foreign Currency Options ( International Equity Fund and Mid Cap Fund). The
Fund may purchase put and call options on foreign currencies to reduce the
risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than 5% of the Fund's net assets at any
given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are traded on United States and foreign
exchanges. Exchange-traded options are expected to be purchased by the Fund
from time to time and over-the-counter options may also be purchased, but only
when the manager believes that a liquid secondary market exists for such
options, although there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign
exchange rates and investment generally.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the
price of the option position may vary with changes in the value of either or
both currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those
that may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are
closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying markets
that cannot be reflected in the options markets.
Futures Contracts (All Funds). Each Fund may engage in transactions
involving futures contracts and related options in accordance with rules and
interpretations of the Commodity Futures Trading Commission ("CFTC") under
which Funds are exempt from registration as a "commodity pool".
An interest rate futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of a specific type of debt security
at a specified future time and at a specified price. Although interest rate
futures contracts call for delivery of specified securities, in most cases the
contracts are closed out (by an offsetting purchase or sale) prior to actual
delivery, with the difference between the contract price and the offsetting
price paid in cash.
A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index value at the close of the last trading day of the contract and the
price at which the futures contract is originally struck.
A stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of cash equal to a specified dollar
amount times the difference between the stock index value at a specified time
and the price at which the futures contract is originally struck. A stock
index fluctuates with changes in the market values of the stocks included. No
physical delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to the
Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange ("CME"),
the New York Stock Exchange Composite Index on the New York Futures Exchange
and the Value Line Stock Index on the Kansas City Board of Trade. Differences
in the stocks included in the indexes may result in differences in correlation
of the futures contracts with movements in the value of the securities being
hedged.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded
on the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of
307 stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on
the Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the
New Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto Stock
Exchange. Futures and futures options on the Nikkei Index are traded on the
CME and United States commodity exchanges may develop futures and futures
options on other indices of foreign securities. Futures and options on United
States devised index of foreign stocks are also being developed. Investments
in securities of foreign entities and securities denominated in foreign
currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or
other foreign or United States governmental laws or restrictions applicable to
such investments.
International Equity Fund may enter into futures contracts for non-hedging
purposes, subject to applicable law.
In contrast to the purchase or sale of a security, no price is paid or
received upon the purchase or sale of a futures contract. Initially, a Fund
is required to deposit with its Custodian in an account in the broker's name
an amount of appropriate securities as required by the 1940 Act equal to a
percentage (which will normally range between 2% and 10%) of the contract
amount. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in securities
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract,
which is returned to the Fund upon termination of the futures contract and
satisfaction of its contractual obligations. Subsequent payments to and from
the broker, called variation margin, are made on a daily basis as the price of
the underlying securities or index fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
marking to market.
For example, when a Fund purchases a futures contract and the price of the
underlying security or index rises, that position increases in value, and the
Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract
and the value of the underlying security or index declines, the position is
less valuable, and the Fund is required to make a variation margin payment to
the broker.
At any time prior to expiration of the futures contract, the Fund may elect to
terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
When a Fund anticipates a significant market or market sector advance, the
purchase of a futures contract affords a hedge against not participating in
the advance at a time when the Fund is otherwise fully invested ("anticipatory
hedge"). Such purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities, which may be purchased in an
orderly fashion once the market has stabilized. As individual securities are
purchased, an equivalent amount of futures contracts could be terminated by
offsetting sales. A Fund may sell futures contracts in anticipation of or in
a general market or market sector decline that may adversely affect the market
value of the Fund's securities ("defensive hedge"). To the extent that the
Fund's portfolio of securities changes in value in correlation with the
underlying security or index, the sale of futures contracts substantially
reduces the risk to the Fund of a market decline and, by so doing, provides an
alternative to the liquidation of securities positions in the Fund with
attendant transaction costs.
For example, if Government Fund holds long-term U.S. Government securities,
and a rise in long-term interest rates is anticipated, it could, in lieu of
selling its portfolio securities, sell futures contracts for similar long-term
securities. If interest rates increased and the value of the Fund's
securities declined during the period the contracts were outstanding, the
value of the Fund's futures contracts should increase, thereby protecting the
Fund by preventing net asset value from declining as much as it otherwise
would have.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased incur
a loss of all or part of its margin deposits with the broker. Similarly, in
the event of the bankruptcy of the writer of an over-the-counter option
purchased by Government Fund, the Fund could experience a loss of all or part
of the value of the option. Transactions are entered into by a Fund only with
brokers or financial institutions deemed creditworthy by the manager.
Each Fund's futures transactions will be entered into for traditional hedging
purposes; that is, futures contracts will be sold to protect against a decline
in the price of securities or currencies that the Fund owns, or futures
contracts will be purchased to protect a Fund against an increase in the price
of securities of currencies it has committed to purchase or expects to
purchase. International Equity Fund may also enter into futures transactions
for non-hedging purposes, subject to applicable law.
A Fund pays commissions on futures contracts and options transactions.
Options on Futures Contracts (All Funds). A Fund may also purchase and sell
options on futures contracts which are traded on an Exchange. An option on a
futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a seller of an option
on a futures contract, a Fund is subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition,
net option premiums received by a Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery
of the futures position is accompanied by cash representing the difference
between the current market price of the futures contract and the exercise
price of the option. A Fund may purchase put options on futures contracts in
lieu of, and for the same purposes as, the sale of a futures contract. The
purchase of call options on futures contracts in intended to serve the same
purpose as the actual purchase of the futures contract.
Forward Currency Contracts and Options on Currency (International Equity Fund
and Mid Cap Fund). A forward currency contract is an obligation to purchase
or sell a currency against another currency at a future date and price as
agreed upon by the parties. The Fund may either accept or make delivery of
the currency at the maturity of the forward contract or, prior to maturity,
enter into a closing transaction involving the purchase or sale or an
offsetting contract. The Fund engages in forward currency transactions in
anticipation of, or to protect itself against fluctuations in exchange rates.
The Fund might sell a particular foreign currency forward, for example, when
it holds bonds denominated in that currency but anticipates, and seeks to be
protected against, decline in the currency against the U.S. dollar.
Similarly, the Fund might sell the U.S. dollar forward when it holds bonds
denominated in U.S. dollars but anticipates, and seeks to be protected
against, a decline in the U.S. dollar relative to other currencies. Further,
the Fund might purchase a currency forward to "lock in" the price of
securities denominated in that currency which it anticipates purchasing.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset,
that is the subject of the hedge, generally will not be precise. In addition,
the Fund may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Fund's ability to use
such contract to hedge or cross-hedge its assets. Also, with regard to the
Fund's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to
the U.S. dollar will continue. Thus, at any time poor correlation may exist
between movements in the exchange rates of the foreign currencies underlying
the Fund's cross-hedges and the movements in the exchange rates of foreign
currencies in which the Fund's assets that are the subject of such
cross-hedges are denominated.
Forward contracts are traded in an interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement and is consummated
without payment of any commission. The Fund, however, may enter into forward
contracts with deposit requirements or commissions.
A put option on currency gives the Fund, as purchaser, the right (but not the
obligation) to sell a specified amount of currency at the exercise price until
the expiration of the option. A call option gives the Fund, as purchaser, the
right (but not the obligation) to purchase a specified amount of currency at
the exercise price until its expiration. The Fund might purchase a currency
put option, for example, to protect itself during the contract period against
a decline in the value of a currency in which it holds or anticipates holding
securities. If the currency's value should decline, the loss in currency
value should be offset, in whole or in part, by an increase in the value of
the put. If the value of the currency instead should rise, any gain to the
Fund would be reduced by the premium it had paid for the put option. A
currency call option might be purchased, for example, in anticipation of, or
to protect against, a rise in the value of a currency in which the Fund
anticipates purchasing securities.
The Fund's ability to establish and close out positions in foreign currency
options is subject to the existence of a liquid market. There can be no
assurance that a liquid market will exist for a particular option at any
specific time. In addition, options on foreign currencies are affected by all
of those factors that influence foreign exchange rates and investment
generally.
A position in an exchange-listed option may be closed out only on an exchange
that provides a secondary market for identical options. Exchange markets for
options on foreign currencies exist but are relatively new, and the ability to
establish and close out positions on the exchanges is subject to maintenance
of a liquid secondary market. Closing transactions may be effected with
respect to options traded in the over-the-counter ("OTC") markets (currently
the primary markets for options on foreign currencies) only by negotiating
directly with the other party to the option contract or in a secondary market
for the option if such market exists. Although the Fund intends to purchase
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. In such event, it may not be possible
to effect closing transactions with respect to certain options, with the
result that the Fund would have to exercise those options which it has
purchased in order to realize any profit. The staff of the Securities and
Exchange Commission ("SEC") has taken the position that, in general, purchased
OTC options and the underlying securities used to cover written OTC options
are illiquid securities. However, the Fund may treat as liquid the underlying
securities used to cover written OTC options, provided it has arrangements
with certain qualified dealers who agree that the Fund may repurchase any
option it writes for a maximum price to be calculated by a predetermined
formula. In these cases, the OTC option itself would only be considered
illiquid to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option.
Interest Rate Transactions (International Equity Fund). Among the hedging
transactions into which the Fund may enter are interest rate swaps and the
purchase or sale of interest rate caps and floors. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as a hedge and not as a
speculative investment. The Fund will not sell interest rate caps or floors
that it does not own. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to
the extent that a specified index falls below a predetermined interest rate,
to receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
The Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on
a net basis, i.e., the two payment streams are netted but, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these hedging transactions are entered into for good
faith hedging purposes, the manager and the Fund believe such obligations do
not constitute senior securities and, accordingly will not treat them as being
subject to its borrowing restrictions. The net amount of the excess, if any,
of the Fund's obligations over its entitlements with respect to each interest
rate swap will be accrued on a daily basis and an amount of cash or liquid
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that
satisfies the requirements of the 1940 Act. The Fund will not enter into any
interest rate swap, cap or floor transaction unless the unsecured senior debt
or the claims-paying ability of the other party thereto is rated in the
highest rating category of at least one nationally recognized rating
organization at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing swap documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been developed and, accordingly, they
are less liquid than swaps.
New options and futures contracts and various combinations thereof continue to
be developed and the Fund may invest in any such options and contracts as may
be developed to the extent consistent with its investment objective and
regulatory requirements applicable to investment companies.
Use of Segregated and Other Special Accounts (All Funds). Use of many
hedging and other strategic transactions including currency and market index
transactions by the Fund will require, among other things, that the Fund
segregate cash, liquid securities or other assets with its Custodian, or a
designated sub-custodian, to the extent the Fund's obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation
by the Fund to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, appropriate securities as required by
the 1940 Act at least equal to the current amount of the obligation must be
segregated with the custodian or sub-custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. A call option on securities
written by the Fund, for example, will require the Fund to hold the securities
subject to the call (or securities convertible into the needed securities
without additional consideration) or to segregate liquid securities sufficient
to purchase and deliver the securities if the call is exercised. A call
option sold by the Fund on an index will require the Fund to own portfolio
securities that correlate with the index or to segregate liquid securities
equal to the excess of the index value over the exercise price on a current
basis. A put option on securities written by the Fund will require the Fund
to segregate liquid securities equal to the exercise price. Except when the
Fund enters into a forward contract in connection with the purchase or sale of
a security denominated in a foreign currency or for other non-speculative
purposes, which requires no segregation, a currency contract that obligates
the Fund to buy or sell a foreign currency will generally require the Fund to
hold an amount of that currency, liquid securities denominated in that
currency equal to the Fund's obligations or to segregate liquid securities
equal to the amount of the Fund's obligations.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when the Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option on a futures contract, the Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid securities or other acceptable assets. The
Fund will accrue the net amount of the excess, if any, of its obligations
relating to swaps over its entitlements with respect to each swap on a daily
basis and will segregate with its custodian, or designated sub-custodian, an
amount of cash or liquid securities having an aggregate value equal to at
least the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Hedging and other strategic transactions may be covered by means other than
those described above when consistent with applicable regulatory policies.
The Fund may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding
obligation in related options and hedging and other strategic transactions.
The Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contract
or forward contract, the Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other hedging and other strategic transactions
may also be offset in combinations. If the offsetting transaction terminates
at the time of or after the primary transaction, no segregation is required,
but if it terminates prior to that time, assets equal to any remaining
obligation would need to be segregated.
OTHER PRACTICES
Repurchase Agreements (All Funds). Each Fund may enter into repurchase
agreements with broker-dealers or domestic banks. A repurchase agreement is a
short-term investment in which the purchaser (i.e., the Fund) acquires
ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, usually not more than seven days
from the date of purchase, thereby determining the yield during the
purchaser's holding period. Repurchase agreements are collateralized by the
underlying debt securities and may be considered to be loans under the 1940
Act. The Fund will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of a custodian or
bank acting as agent. The seller under a repurchase agreement is required to
maintain the value of the underlying securities marked to market daily at not
less than the repurchase price. The underlying securities (normally
securities of the U.S. Government, or its agencies and instrumentalities), may
have maturity dates exceeding one year. The Fund does not bear the risk of a
decline in value of the underlying security unless the seller defaults under
its repurchase obligation. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and loss including: (a) possible decline
in the value of the underlying security during the period while the Fund seeks
to enforce its rights thereto, (b) possible lack of access to income on the
underlying security during this period, and (c) expenses of enforcing its
rights.
For the purpose of investing in repurchase agreements, the manager may
aggregate the cash that certain funds advised or subadvised by the manager or
its affiliates would otherwise invest separately into a joint account. The
cash in the joint account is then invested in repurchase agreements and the
funds that contributed to the joint account share pro rata in the net revenue
generated. The manager believes that the joint account produces efficiencies
and economies of scale that may contribute to reduced transaction costs,
higher returns, higher quality investments and greater diversity of
investments for a Fund than would be available to a Fund investing separately.
The manner in which the joint account is managed is subject to conditions set
forth in an SEC exemptive order authorizing this practice, which conditions
are designed to ensure the fair administration of the joint account and to
protect the amounts in that account.
Reverse Repurchase Agreements (International Equity Fund, Mid Cap Fund and
Government Fund). International Equity Fund and Mid Cap Fund may invest in
reverse repurchase agreements. International Equity Fund does not currently
intend to commit more than 5% of its net assets to reverse repurchase
agreements. The Funds may enter into reverse repurchase agreements with
broker/dealers and other financial institutions. Such agreements involve the
sale of portfolio securities with an agreement to repurchase the securities at
an agreed-upon price, date and interest payment and are considered to be
borrowings by the Fund and are subject to the borrowing limitations set forth
under "Investment Restrictions." Since the proceeds of reverse repurchase
agreements are invested, this would introduce the speculative factor known as
"leverage." The securities purchased with the funds obtained from the
agreement and securities collateralizing the agreement will have maturity
dates no later than the repayment date. Generally, the effect of such a
transaction is that the Fund can recover all or most of the cash invested in
the portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only
advantageous if the Fund has an opportunity to earn a greater rate of interest
on the cash derived from the transaction than the interest cost of obtaining
that cash. Opportunities to realize earnings from the use of the proceeds
equal to or greater than the interest required to be paid may not always be
available, and the Fund intends to use the reverse repurchase technique only
when the manager believes it will be advantageous to the Fund. The use of
reverse repurchase agreements may exaggerate any interim increase or decrease
in the value of the Fund's assets. The Fund's custodian bank will maintain a
separate account for the Fund with securities having a value equal to or
greater than such commitments.
Short Sales against the Box (Small Cap Fund, International Equity Fund, Mid
Cap Fund, Growth Fund and Growth and Income Fund). Each Fund may from time
to time make short sales of securities it owns or has the right to acquire
through conversion or exchange of other securities it owns. A short sale is
''against the box'' to the extent that the Fund contemporaneously owns or has
the right to obtain at no added cost securities identical to those sold short.
In a short sale, the Fund does not immediately deliver the securities sold and
does not receive the proceeds from the sale. The Fund is said to have a short
position in the securities sold until it delivers the securities sold, at
which time it receives the proceeds of the sale. The Fund may not make short
sales or maintain a short position if to do so would cause more than 25% of
its total assets, taken at market value, to be held as collateral for such
sales.
To secure its obligation to deliver the securities sold short, the Fund will
deposit in escrow in a separate account with its custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short. However, the
Fund will not purchase and deliver new securities to satisfy its short order
if such purchase and sale would cause the Fund to derive more than 30% of its
gross income from the sale of securities held for less than three months.
Leverage (International Equity Fund). The Fund may borrow from banks, on a
secured or unsecured basis, up to 25% of the value of its assets. If the Fund
borrows and uses the proceeds to make additional investments, income and
appreciation from such investments will improve its performance if they exceed
the associated borrowing costs but impair its performance if they are less
than such borrowing costs. This speculative factor is known as ''leverage.''
Leverage creates an opportunity for increased returns to shareholders of the
Fund but, at the same time, creates special risk considerations. For example,
leverage may exaggerate changes in the net asset value of the Fund's shares
and in the Fund's yield. Although the principal or stated value of such
borrowings will be fixed, the Fund's assets may change in value during the
time the borrowing is outstanding. Leverage will create interest or dividend
expenses for the Fund which can exceed the income from the assets retained. To
the extent the income or other gain derived from securities purchased with
borrowed funds exceed the interest or dividends the Fund will have to pay in
respect thereof, the Fund's net income or other gain will be greater than if
leverage had not been used. Conversely, if the income or other gain from the
incremental assets is not sufficient to cover the cost of leverage, the net
income or other gain of the Fund will be less than if leverage had not been
used. If the amount of income from the incremental securities is insufficient
to cover the cost of borrowing, securities might have to be liquidated to
obtain required funds. Depending on market or other conditions, such
liquidations could be disadvantageous to the Fund.
Loans of Portfolio Securities (All Funds). Each of the Funds may lend
portfolio securities to unaffiliated brokers, dealers and financial
institutions provided that cash equal to 100% of the market value of the
securities loaned is deposited by the borrower with the particular Fund and is
marked to market daily. While such securities are on loan, the borrower is
required to pay the Fund any income accruing thereon. Furthermore, the Fund
may invest the cash collateral in portfolio securities thereby increasing the
return to the Fund as well as increasing the market risk to the Fund. A Fund
will not lend its portfolio securities if such loans are not permitted by the
laws or regulations of any state in which its shares are qualified for sale.
However, should the Fund believe that lending securities is in the best
interests of the Fund's shareholders, it would consider withdrawing its shares
from sale in any such state.
Loans would be made for short-term purposes and subject to termination by the
Fund in the normal settlement time, currently five business days after notice,
or by the borrower on one day's notice. Borrowed securities must be returned
when the loan is terminated. Any gain or loss in the market price of the
borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. Each Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
RISK FACTORS
General. Investors should realize that risk of loss is inherent in the
ownership of any securities and that each Fund's net asset value will
fluctuate, reflecting fluctuations in the market value of its portfolio
positions.
Fixed Income Securities. Investments in fixed income securities may subject
the Funds to risks, including the following:
Interest Rate Risk. When interest rates decline, the market value of
fixed income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed income securities tends to decline. The
volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer of the security could default on its
obligations, causing a Fund to sustain losses on such investments. A default
could impact both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to
both call risk and extension risk. Call risk exists when the issuer may
exercise its right to pay principal on an obligation earlier than scheduled,
which would cause cash flows to be returned earlier than expected. This
typically results when interest rates have declined and a Fund will suffer
from having to reinvest in lower yielding securities. Extension risk exists
when the issuer may exercise its right to pay principal on an obligation later
than scheduled, which would cause cash flows to be returned later than
expected. This typically results when interest rates have increased, and a
Fund will suffer from the inability to invest in higher yield securities.
Below Investment Grade Fixed-Income Securities. Securities rated in the
fourth highest ratings category by an NRSRO, such as those rated BBB by S&P or
Baa by Moody's, are generally regarded as having adequate capacity to pay
interest and repay principal, but may have some speculative characteristics.
Securities rated below the fourth highest ratings category by an NRSRO,
including those rated below Baa by Moody's or BBB by S&P, are not "investment
grade," and may have more speculative characteristics, including the
possibility of default or bankruptcy of the issuers of such securities, market
price volatility based upon interest rate sensitivity, questionable
creditworthiness and relative liquidity of the secondary trading market.
Because high yield bonds have been found to be more sensitive to adverse
economic changes or individual corporate developments and less sensitive to
interest rate changes than higher-rated investments, an economic downturn
could disrupt the market for high yield bonds and adversely affect the value
of outstanding bonds and the ability of issuers to repay principal and
interest. In addition, in a declining interest rate market, issuers of high
yield bonds may exercise redemption or call provisions, which may force a
Fund, to the extent it owns such securities, to replace those securities with
lower yielding securities. This could result in a decreased return.
Small Capitalization Companies. Small companies (those companies that have
market capitalizations in the lowest 20% of all publicly traded U.S.
companies) may (i) be subject to more volatile market movements than
securities of larger, more established companies; (ii) have limited product
lines, markets or financial resources; and (iii) depend upon a limited or less
experienced management group. The securities of small companies may be traded
only on the over-the-counter market or on a regional securities exchange and
may not be traded daily or in the volume typical of trading on a national
securities exchange. Disposition by the Fund of small company securities in
order to meet redemptions may require the Fund to sell these securities at a
discount from market prices, over a longer period of time or during periods
when disposition is not desirable.
Foreign Securities. Investments in securities of foreign issuers involve
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include fluctuations in foreign exchange rates,
future political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions. Since
each Fund will invest heavily in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will, to the extent the Fund does not adequately hedge against such
fluctuations, affect the value of securities in its portfolio and the
unrealized appreciation or depreciation of investments so far as U.S.
investors are concerned. In addition, with respect to certain countries,
there is the possibility of expropriation of assets, confiscatory taxation,
political or social instability or diplomatic developments which could
adversely affect investments in those countries.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could affect investment in those
countries. There may be less publicly available information about a foreign
security than about a security issued by a U.S. company, and foreign entities
may not be subject to accounting, auditing and financial reporting standards
and requirements comparable to those of United States entities. In addition,
certain foreign investments made by the Fund may be subject to foreign
withholding taxes, which would reduce the Fund's total return on such
investments and the amounts available for distributions by the Fund to its
shareholders. See ''Dividends, Distributions and Taxes.'' Foreign financial
markets, while growing in volume, have, for the most part, substantially less
volume than United States markets, and securities of many foreign companies
are less liquid and their prices more volatile than securities of comparable
domestic companies. The foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are not
invested and no return is earned thereon. The inability of each Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Fund due to subsequent declines in value of the portfolio security or, if the
Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage
commissions, are generally higher than with transactions in United States
securities. In addition, each Fund will incur cost in connection with
conversions between various currencies. There is generally less government
supervision and regulation of exchanges, financial institutions and issuers in
foreign countries than there are in the United States. These risks may be
intensified in the case of investments in developing or emerging markets. In
many developing markets, there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies than in the United States. The foreign securities markets of many of
the countries in which the Fund may invest may also be smaller, less liquid,
and subject to greater price volatility than those in the United States.
Finally, in the event of a default on any such foreign debt obligations, it
may be more difficult for the Fund to obtain or to enforce a judgment against
the issuers of such securities.
Currency Risks. The U.S. dollar value of securities denominated in a foreign
currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of the currency in which a Fund's
investments are denominated relative to the U.S. dollar will affect the Fund's
net asset value. Exchange rates are generally affected by the forces of
supply and demand in the international currency markets, the relative merits
of investing in different countries and the intervention or failure to
intervene of U.S. or foreign governments and central banks. However, currency
exchange rates may fluctuate based on factors intrinsic to a country's
economy. Some emerging market countries also may have managed currencies,
which are not free floating against the U.S. dollar. In addition, emerging
markets are subject to the risk of restrictions upon the free conversion of
their currencies into other currencies. Any devaluations relative to the U.S.
dollar in the currencies in which a Fund's securities are quoted would reduce
the Fund's net asset value per share.
Special Risks of Countries in the Asia Pacific Region. Certain of the risks
associated with international investments are heightened for investments in
these countries. For example, some of the currencies of these countries have
experienced devaluations relative to the U.S. dollar, and adjustments have
been made periodically in certain of such currencies. Certain countries, such
as Indonesia, face serious exchange constraints. Jurisdictional disputes also
exist. In addition, Hong Kong reverted to Chinese administration on July 1,
1997. The long-term effects of this reversion are not known at this time.
Securities of Developing/Emerging Markets Countries. A developing or
emerging markets country generally is considered to be a country that is in
the initial stages of its industrialization cycle. Investing in the equity
markets of developing countries involves exposure to economic structures that
are generally less diverse and mature, and to political systems that can be
expected to have less stability, than those of developed countries. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of the more mature economies of developed countries;
however, such markets often have provided higher rates of return to investors.
One or more of the risks discussed above could affect adversely the economy of
a developing market or a Fund's investments in such a market. In Eastern
Europe, for example, upon the accession to power of Communist regimes in the
past, the governments of a number of Eastern European countries expropriated a
large amount of property. The claims of many property owners against those of
governments may remain unsettled. There can be no assurance that any
investments that a Fund might make in such emerging markets would not be
expropriated, nationalized or otherwise confiscated at some time in the
future. In such an event, the Fund could lose its entire investment in the
market involved. Moreover, changes in the leadership or policies of such
markets could halt the expansion or reverse the liberalization of foreign
investment policies now occurring in certain of these markets and adversely
affect existing investment opportunities.
Many of a Fund's investments in the securities of emerging markets may be
unrated or rated below investment grade. Securities rated below investment
grade (and comparable unrated securities) are the equivalent of high yield,
high risk bonds, commonly known as "junk bonds." Such securities are regarded
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse business, financial, economic, or
political conditions.
Derivative Instruments. In accordance with its investment policies, each Fund
may invest in certain 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. Essentially, a
derivative instrument is a financial arrangement or a contract between two
parties (and not a true security like a stock or a bond). Transactions in
derivative instruments can be, but are not necessarily, riskier than
investments in conventional stocks, bonds and money market instruments. A
derivative instrument is more accurately viewed as a way of reallocating risk
among different parties or substituting one type of risk for another. Every
investment by a Fund, including an investment in conventional securities,
reflects an implicit prediction about future changes in the value of that
investment. Every Fund investment also involves a risk that the portfolio
manager's expectations will be wrong. Transactions in derivative instruments
often enable a Fund to take investment positions that more precisely reflect
the portfolio manager's expectations concerning the future performance of the
various investments available to the Fund. Derivative instruments can be a
legitimate and often cost-effective method of accomplishing the same
investment goals as could be achieved through other investment in conventional
securities.
Derivative contracts include options, futures contracts, forward contracts,
forward commitment and when-issued securities transactions, forward foreign
currency exchange contracts and interest rate, mortgage and currency swaps.
The following are the principal risks associated with derivative instruments:
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 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.
Credit risk: The issuer of the instrument may default on its obligation
to pay interest and principal.
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 Funds are not readily marketable and
are subject to a Fund'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.
Each derivative instrument purchased for a Fund's portfolio is reviewed and
analyzed by the Fund's portfolio manager to assess the risk and reward of each
such instrument in relation the Fund's portfolio investment strategy. The
decision to invest in derivative instruments or conventional securities is
made by measuring the respective instrument's ability to provide value to the
Fund and its shareholders.
Special Risks of Using Futures Contracts. The prices of Futures Contracts are
volatile and are influenced by, among other things, actual and anticipated
changes in interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
At best, the correlation between changes in prices of Futures Contracts and of
the securities or currencies being hedged can be only approximate. The degree
of imperfection of correlation depends upon circumstances such as: variations
in speculative market demand for Futures and for debt securities or
currencies, including technical influences in Futures trading; and differences
between the financial instruments being hedged and the instruments underlying
the standard Futures Contracts available for trading, with respect to interest
rate levels, maturities, and creditworthiness of issuers. A decision of
whether, when, and how to hedge involves skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or interest rate trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the Futures Contract is deposited as margin, a subsequent
10% decrease in the value of the Futures Contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Futures Contract were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess
of the amount invested in the Futures Contract. A Fund, however, would
presumably have sustained comparable losses if, instead of the Futures
Contract, it had invested in the underlying financial instrument and sold it
after the decline. Where a Fund enters into Futures transactions for non-
hedging purposes, it will be subject to greater risks and could sustain losses
which are not offset by gains on other Fund assets.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that each Fund has sufficient assets to satisfy its obligations under
a Futures Contract, the Fund segregates and commits to back the Futures
Contract an amount of cash and liquid securities equal in value to the current
value of the underlying instrument less the margin deposit.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type
of Futures Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures Contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
Futures positions and subjecting some Futures traders to substantial losses.
Economic and Monetary Union (EMU). (International Equity Fund Fund) EMU began
on January 1, 1999 when 11 European countries adopted a single currency -- the
Euro. EMU may create new economic opportunities for investors, such as lower
interest rates, easier cross-border mergers, acquisitions and similar
restructurings, more efficient distribution and product packaging and greater
competition. Budgetary decisions remain in the hands of each participating
country, but are subject to each country's commitment to avoid "excessive
deficits" and other more specific budgetary criteria. A European Central Bank
is responsible for setting the official interest rate within the Euro zone.
EMU and the introduction of the Euro, however, present unique risks and
uncertainties for investors in EMU-participating countries, including: (i)
monetary and economic union on this scale has never before been attempted;
(ii) there is uncertainty whether participating countries will remain
committed to EMU in the face of changing economic conditions; (iii)
instability within EMU may increase the volatility of European markets and may
adversely affect the prices of securities of European issuers in the fund's
portfolio; (iv) there is uncertainty concerning the fluctuation of the Euro
relative to non-Euro currencies during the transition period from January 1,
1999 to December 31, 2000, and beyond; and (v) there is no assurance that
interest rate, tax and labor regimes of EMU-participating countries will
converge over time. These and other factors may cause market disruption and
could adversely affect European securities and currencies held by the fund.
Year 2000. As the year 2000 began, there were few problems caused by the
inability of certain computer systems to tell the difference between the year
2000 and the year 1900 (commonly known as the "Year 2000" issue). It is still
possible that some computer systems could malfunction in the future because of
the Year 2000 issue or as a result of actions taken to address the Year 2000
issue. The manager does not anticipate that its services or those of the
funds' other service providers will be adversely affected, but the manager
will continue to monitor the situation. If malfunctions related to the Year
2000 issue do arise, the Funds and their investments could be negatively
affected.
Portfolio Turnover. Each Fund may purchase or sell securities without regard
to the length of time the security has been held and thus may experience a
high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Under certain market conditions, the Growth Fund and the Government Fund
may experience a high rate of portfolio turnover. This may occur, for example,
if the Fund writes a substantial number of covered call options and the market
prices of the underlying securities appreciate. The rate of portfolio turnover
is not a limiting factor when the manager deems it desirable to purchase or
sell securities or to engage in options transactions. The annual turnover
rates of the Growth Fund, the Government Fund and the Municipal Bond Fund are
not expected to exceed 400%; and the annual turnover rates of the Small Cap
Fund, the International Equity Fund and the Growth and Income Fund are not
expected to exceed 100%. High portfolio turnover involves correspondingly
greater transaction costs, including any brokerage commissions, which are
borne directly by the respective Fund and may increase the recognition of
short-term, rather than long-term, capital gains if securities are held for
one year or less and may be subject to applicable income taxes. See
''Dividends, Distributions and Taxes.''
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions which may not be changed with
respect to any Fund without approval by the vote of a majority of such Fund's
outstanding voting shares, which is defined by the 1940 Act as the lesser of
(i) 67% or more of the voting securities present at a meeting, if the holders
of more than 50% of the outstanding voting securities of the Fund are present
or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations need only be met at the time
the investment is made or after relevant action is taken.
The following restrictions apply to all Funds except Mid Cap Fund:
A Fund shall not:
1. Lend money except by the purchase of bonds or other debt obligations of
types commonly offered publicly or privately and purchased by financial
institutions, including investments in repurchase agreements. A Fund will not
invest in repurchase agreements maturing in more than seven days (unless
subject to a demand feature) if any such investment, together with any
illiquid securities (including securities which are subject to legal or
contractual restrictions on resale) held by the Fund, exceeds 10% of the
market or other fair value of its total net assets (15% in the case of Small
Cap Fund and International Equity Fund); provided, however, that with respect
to Small Cap Fund, International Equity Fund, Growth Fund, Growth and Income
Fund and Municipal Bond Fund, illiquid securities shall exclude shares of
other open-end investment companies owned by the Fund but include the Fund's
pro rata portion of the securities and other assets owned by any such company.
See "Repurchase Agreements";
2. Underwrite securities of other companies, except insofar as a Fund might
be deemed to be an underwriter for purposes of the Securities Act of 1933 (the
"1933 Act") in the resale of any securities owned by the Fund;
3. Lend its portfolio securities in excess of 10% (15% in the case of Small
Cap Fund and International Equity Fund) of its total assets, both taken at
market value, provided that any loans shall be in accordance with the
guidelines established for such loans by the Trustees as described under
"Loans of Portfolio Securities," including the maintenance of collateral from
the borrower equal at all times to the current market value of the securities
loaned;
4. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except obligations of the U.S. Government,
its agencies or instrumentalities and repurchase agreements secured thereby)
or purchase more than 10% of the outstanding voting securities of any one
issuer. Neither limitation shall apply to the acquisition of shares of other
open-end investment companies by Small Cap Fund, International Equity Fund,
Growth Fund, Growth and Income Fund and Municipal Bond Fund, to the extent
permitted by rule or order of the SEC exempting them from the limitations
imposed by Section 12(d)(1) of the 1940 Act;
5. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry; provided, however, that with respect to
Small Cap Fund, International Equity Fund, Growth Fund, Growth and Income Fund
and Municipal Bond Fund, this limitation shall exclude shares of other
open-end investment companies owned by the Fund but include the Fund's pro
rata portion of the securities and other assets owned by any such company.
(This does not restrict any of the Funds from investing in obligations of the
U.S. Government and repurchase agreements secured thereby); and
6. With respect to all Funds other than Small Cap Fund and International
Equity Fund, borrow in excess of 10% of the market or other fair value of its
total assets, or pledge its assets to an extent greater than 5% of the market
or other fair value of its total assets, provided that so long as any
borrowing exceeds 5% of the value of the Fund's total assets, the Fund shall
not purchase portfolio securities. Any such borrowings shall be from banks
and shall be undertaken only as a temporary measure for extraordinary or
emergency purposes. With respect to Small Cap Fund, borrow money except
temporarily from banks to facilitate payment of redemption requests and then
only in amounts not exceeding 33 1/3% of its net assets, or pledge more than
10% of its net assets in connection with permissible borrowings or purchase
additional securities when money borrowed exceeds 5% of its net assets. With
respect to International Equity Fund, borrow money from banks on a secured or
unsecured basis, in excess of 25% of the value of its total assets. Deposits
in escrow in connection with the writing of covered call or secured put
options, or in connection with the purchase or sale of forward contracts,
futures contracts, foreign currency futures and related options, are not
deemed to be a pledge or other encumbrance. This restriction shall not
prevent International Equity Fund from entering into reverse repurchase
agreements, provided that reverse repurchase agreements and any transactions
constituting borrowing by the Fund may not exceed 33 1/3% of the Fund's net
assets. International Equity Fund may not mortgage or pledge its assets except
to secure borrowings permitted under this restriction.
The following restrictions apply to Growth Fund, Growth and Income Fund,
Government Fund and Municipal Bond Fund:
Each of these Funds shall not:
1. Make any investment in real estate, commodities or commodities contracts,
or warrants except that Growth Fund, Growth and Income Fund, Government Fund
and Municipal Bond Fund may engage in transactions in futures and related
options, Government Fund may purchase or sell securities which are secured by
real estate, and Growth Fund may acquire warrants or other rights to subscribe
to securities of companies issuing such warrants or rights, or of parents or
subsidiaries of such companies, although Growth Fund may not invest more than
5% of its net assets in such securities valued at the lower of cost or market,
nor more than 2% of its net assets in such securities (valued on such basis)
which are not listed on the New York or American Stock Exchanges (warrants and
rights represent options, usually for a specified period of time, to purchase
a particular security at a specified price from the issuer). Warrants or
rights acquired in units or attached to other securities are not subject to
the foregoing limitations;
2. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by a Fund of an initial or
variation margin in connection with futures contracts or related option
transactions is not considered the purchase of a security on margin;
3. Invest in securities of any company if any officer or trustee of the Trust
or of the manager owns more than 1/2 of 1% of the outstanding securities of
such company, and such officers and trustees own more than 5% of the
outstanding securities of such issuer;
4. Invest in oil or other mineral leases, rights or royalty contracts or
exploration or development programs, except that Growth Fund and Growth and
Income Fund, may invest in the securities of companies which invest in or
sponsor such programs;
5. Invest in companies for the purpose of acquiring control or management
thereof;
6. Invest in the securities of other open-end investment companies, or invest
in the securities of closed-end investment companies except through purchase
in the open market in a transaction involving no commission or profit to a
sponsor or dealer (other than the customary brokers commission) or as part of
a merger, consolidation or other acquisition, except that Growth Fund, Growth
and Income Fund and Municipal Bond Fund may acquire shares of other open-end
investment companies to the extent permitted by rule or order of the SEC
exempting them from the limitations imposed by Section 12(d)(1) of the
1940 Act;
7. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 5% of the
Fund's assets would be invested in such securities; provided, however, that
with respect to Growth Fund, Growth and Income Fund and Municipal Bond Fund,
this limitation shall exclude shares of other open-end investment companies
owned by the Fund but include the Fund's pro rata portion of the securities
and other assets owned by any such company. Illiquid securities include
securities subject to legal or contractual restrictions on resale, which
include repurchase agreements which have a maturity of longer than seven days.
This policy does not apply to restricted securities eligible for resale
pursuant to Rule 144A under the 1933 Act which the Trustees or the manager
under Board approved guidelines may determine are liquid nor does it apply to
other securities for which, notwithstanding legal or contractual restrictions
on resale, a liquid market exists;
8. Invest more than 5% of its assets in companies having a record together
with predecessors, of less than three years' continuous operation, except that
Growth Fund, Growth and Income Fund and Municipal Bond Fund, may acquire
shares of other open-end investment companies to the extent permitted by rule
or order of the SEC exempting them from the limitations imposed by
Section 12(d)(1) of the 1940 Act;
9. Engage in option writing for speculative purposes or purchase call or put
options on securities if, as a result, more than 5% of its net assets of the
Fund would be invested in premiums on such options; and
10. Purchase any security issued by any company deriving more than 25% of its
gross revenues from the manufacture of alcohol or tobacco.
The Trust has adopted additional investment restrictions, with respect to the
above referenced Funds, which may be changed by the Trustees without a vote of
shareholders, as follows:
The Trust shall not make short sales of securities unless at the time of sale
a Fund owns or has the right to acquire at no additional cost securities
identical to those sold short; provided that this prohibition does not apply
to the writing of options or the sale of forward contracts, futures, foreign
currency futures or related options.
Foreign Investments. Growth Fund and Growth and Income Fund may not invest
in the securities of a foreign issuer if, at the time of acquisition, more
than 20% of the value of the Fund's total assets would be invested in such
securities.
Futures Contracts and Options. In addition, Growth Fund and Growth and
Income Fund may not write, purchase or sell puts, calls or combinations
thereof, except that each Fund may (a) write covered call options with respect
to any part or all of its portfolio securities, write secured put options, or
enter into closing purchase transactions with respect to such options,
(b) purchase and sell put options to the extent that the premiums paid for all
such options do not exceed 10% of its total assets and only if the Fund owns
the securities covered by the put option at the time of purchase, and
(c) engage in futures contracts and related options transactions as described
herein. Growth Fund and Growth and Income Fund may purchase put and call
options which are purchased on an exchange in other markets, or currencies
and, as developed from time to time, various futures contracts on market
indices and other instruments. Purchasing options may increase investment
flexibility and improve total return, but also risks loss of the option
premium if an asset the Fund has the option to buy declines in value.
Government Fund may not write, purchase or sell puts, calls or combinations
thereof, except that the Fund may (a) write covered or fully collateralized
call options, write secured put options, and enter into closing or offsetting
purchase transactions with respect to such options, (b) purchase and sell
options to the extent that the premiums paid for all such options owned at any
time do not exceed 10% of its total assets, and (c) engage in futures
contracts and related options transactions as described herein.
Municipal Bond Fund may engage in futures contracts and related options as
described herein.
The following restrictions apply to Small Cap Fund and International Equity
Fund:
A Fund shall not:
1. Make any investment in real estate, commodities or commodities contracts,
except that each Fund may engage in transactions in forward commitments,
futures contracts, foreign currency futures and related options and may
purchase or sell securities which are secured by real estate or interests
therein; or issued by companies; including real estate investment trusts,
which invest in real estate or interests therein; and International Equity
Fund may engage in currency transactions; and
2. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a Fund from (i) making and
collateralizing any permitted borrowings, (ii) making any permitted loans of
its portfolio securities, or (iii) entering into repurchase agreements,
utilizing options, futures contracts and foreign currency futures and options
thereon, forward contracts, forward commitments and other investment
strategies and instruments that would be considered "senior securities" but
for the maintenance by the Fund of a segregated account with its custodian or
some other form of "cover."
The Trust has adopted additional investment restrictions with respect to Small
Cap Fund and International Equity Fund, which may be changed by the Trustees
without a vote of shareholders. These restrictions provide that a Fund shall
not:
1. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities. The deposit or payment by a Fund of an initial or
variation margin in connection with forward contracts, futures contracts,
foreign currency futures or related option transactions is not considered the
purchase of a security on margin;
2. Invest in securities of any company if any officer or trustee of the Trust
or of the manager owns more than 1/2 of 1% of the outstanding securities of
such company, and such officers and trustees own more than 5% of the
outstanding securities of such issuer;
3. Invest in oil or other mineral leases, rights or royalty contracts or
exploration or development programs, except that Small Cap Fund and
International Equity Fund may invest in the securities of companies which
invest in or sponsor such programs;
4. Invest in companies for the purpose of acquiring control or management
thereof;
5. Invest in the securities of other open-end investment companies, or invest
in the securities of closed-end investment companies except through purchase
in the open market in a transaction involving no commission or profit to a
sponsor or dealer (other than the customary brokers commission) or as part of
a merger, consolidation or other acquisition, except that Small Cap Fund and
International Equity Fund, may acquire shares of other open-end investment
companies to the extent permitted by rule or order of the SEC exempting them
from the limitations imposed by Section 12(d)(1) of the 1940 Act;
6. Purchase an illiquid security if, as a result of such purchase, more than
15% of the Fund's net assets would be invested in such securities; provided,
however, that with respect to Small Cap Fund and International Equity Fund,
this limitation shall exclude shares of other open-end investment companies
owned by the Fund but include the Fund's pro rata portion of the securities
and other assets owned by any such company. Illiquid securities include
securities subject to legal or contractual restrictions on resale, which
include repurchase agreements which have a maturity of longer than seven days.
This policy does not apply to restricted securities eligible for resale
pursuant to Rule 144A under the 1933 Act which the Trustees or the manager or
Subadviser under Board-approved guidelines, may determine are liquid nor does
it apply to other securities for which, notwithstanding legal or contractual
restrictions on resale, a liquid market exists;
7. Except for International Equity Fund, purchase any security issued by any
company deriving more than 25% of its gross revenues from the manufacture of
alcohol or tobacco;
8. Make short sales of securities, unless at the time of sale a Fund owns or
has the right to acquire at no additional cost securities identical to those
sold short; provided that this prohibition does not apply to the writing of
options or the sale of forward contracts, futures, foreign currency futures or
related options; and
9. Invest more than 5% of its net assets in warrants or rights valued at the
lower of cost or market, nor more than 2% of its net assets in warrants or
rights (valued on such basis) which are not listed on the New York or American
Stock Exchanges. Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitations.
Foreign Investments for Funds Other than the International Equity Fund.
Small Cap Fund may not invest in the securities of a foreign issuer if, at the
time of acquisition, more than 20% of the value of the Fund's total assets
would be invested in such securities.
Futures Contracts and Options. In addition, Small Cap Fund and International
Equity Fund may purchase put and call options which are purchased on an
exchange in other markets, or currencies and, as developed from time to time,
various futures contracts on market indices and other instruments. Purchasing
options may increase investment flexibility and improve total return, but also
risks loss of the option premium if an asset the Fund has the option to buy
declines in value.
The following restrictions apply only to the Mid Cap Fund:
The Fund has adopted the following investment restrictions for the protection
of shareholders. Restrictions 1 through 7 below cannot be changed without
approval by the holders of a majority of the outstanding shares of the Fund,
defined as the lesser of (a) 67% or more of the Fund's shares present at a
meeting, if the holders of more than 50% of the outstanding shares are present
in person or by proxy or (b) more than 50% of the Fund's outstanding shares.
The remaining restrictions may be changed by the Fund's Board of Trustees at
any time. In accordance with these restrictions, the Fund will not:
1. Invest in a manner that would cause it to fail to be a "diversified
company" under the 1940 Act and the rules, regulations and orders thereunder.
2. Issue "senior securities" as defined in the 1940 Act, and the rules,
regulations and orders thereunder, except as permitted under the 1940 Act and
the rules, regulations and orders thereunder.
3. Invest more than 25% of its total assets in securities, the issuers of
which conduct their principal business activities in the same industry. For
purposes of this limitation, securities of the U.S. government (including its
agencies and instumentalities) and securities of state or municipal
governments and their political subdivisions are not considered to be issued
by members of any industry.
4. Borrow money, except that (a) the Fund may borrow from banks for temporary
or emergency (not leveraging) purposes, including the meeting of redemption
requests which might otherwise require the untimely disposition of securities,
and (b) the Fund may, to the extent consistent with its investment policies,
enter into reverse repurchase agreements, forward roll transactions and
similar investment strategies and techniques. To the extent that it engages
in transactions described in (a) and (b), the Fund will be limited so that no
more than 33 1/3% of the value of its total assets (including the amount
borrowed), valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing is made, is
derived from such transactions.
5. Make loans. This restriction does not apply to: (a) the purchase of debt
obligations in which the Fund may invest consistent with its investment
objective and policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted under the 1940 Act.
6. Engage in the business of underwriting securities issued by other persons,
except to the extent that the Fund may technically be deemed to be an
underwriter under the Securities Act of 1933, as amended, in disposing of
portfolio securities.
7. Purchase or sell real estate, real estate mortgages, commodities or
commodity contracts, but this restriction shall not prevent the Fund from: (a)
investing in securities of issuers engaged in the real estate business or the
business of investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate business or the
business of investing in real estate) and securities which are secured by real
estate or interests therein; (b) holding or selling real estate received in
connection with securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies to the
extent consistent with the Funds' investment objective and policies); or (d)
investing in real estate investment trust securities.
8. Purchase any securities on margin (except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio
securities) or sell any securities short (except "against the box"). For
purposes of this restriction, the deposit or payment by the Fund of underlying
securities and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures contracts and
related options and options on securities, indexes or similar items is not
considered to be the purchase of a security on margin.
9. Invest in oil, gas or other mineral exploration or development programs.
10. Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid.
11. Invest for the purpose of exercising control of management.
If any percentage restriction described above is complied with at the time of
an investment, a later increase or decrease in percentage resulting from a
change in values or assets will not constitute a violation of such
restriction.
TRUSTEES AND OFFICERS
The Trustees and executive officers and their principal occupations for the
past five years are listed below.
TRUSTEES
DONALD M. CARLTON, Trustee. Radian International L.L.C., 8501 N. Mopac Blvd.,
Building No. 6, Austin, Texas 78759. President and Chief Executive of Radian
International L.L.C. (chemical engineering). Director of National
Instruments Corp. and Central and Southwest Corporation. Formerly Director of
The Hartford Steam Boiler Inspection and Insurance Company
(insurance/engineering services); 62.
A. BENTON COCANOUGHER, Trustee. Texas A & M University, 601 Blocker Bldg.,
College Station, Texas 77843-4113. Dean of College of Business Administration
and Graduate School of Business of Texas A & M University; Director of
Randall's Food Markets, Inc.; Director of First American Bank; and Director of
First American Savings Bank; 61.
STEPHEN RANDOLPH GROSS, Trustee. 2625 Cumberland Parkway, Suite 400, Atlanta,
Georgia 30339. Managing Partner of Gross, Collins & Cress, P.C. (accounting
firm); Director of Charter Bank & Trust; 52.
HEATH B. McLENDON,* Trustee. Managing Director of Salomon Smith Barney;
President and Chairman of 71 investment companies associated with Citigroup,
President and Director of the manager and Travelers Investment Adviser, Inc.
("TIA"); 66.
ALAN G. MERTEN, Trustee. George Mason University, 4400 University Drive,
Fairfax, Virginia 22030-4444. President of George Mason University. Director
of Comshare, Inc. (information technology), and Tompkins County Trust
Company, Ithaca, New York; formerly The Anne and Elmer Lindseth Dean of
Johnson Graduate School of Management of Cornell University; 58.
R. RICHARDSON PETTIT, Trustee. Department of Finance, College of Business,
University of Houston, 4800 Calhoun, Houston, Texas 77204-6283. Duncan
Professor of Finance of the University of Houston; formerly Hanson
Distinguished Professor of Business of the University of Washington; 57.
*Denotes a Trustee that is an "interested person" of the Trust within the
meaning of the 1940 Act.
OFFICERS
Heath B. McLendon, President and Chief Executive Officer (See description
under "Trustees"). His address is 7 World Trade Center, New York, New York
10048.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 42). Managing
Director of Salomon Smith Barney; Director and Senior Vice President of the
manager and TIA. Mr. Daidone serves as Senior Vice President and Treasurer or
Executive Vice President and Treasurer of 61 investment companies associated
with Citigroup. His address is 388 Greenwich Street, New York, New York
10013.
Sandip A. Bhagat, Vice President and Investment Officer (Age 39). Managing
Director of Salomon Smith Barney. President of TIMCO; prior to 1995, Senior
Portfolio Manager for TIMCO. His address is One Tower Square, Hartford,
Connecticut 06183-2030.
James E. Conroy, Vice President and Investment Officer (Age 48). Managing
Director of Salomon Smith Barney; Mr. Conroy serves as Investment Officer of
four Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer (Age 52). Managing
Director of Salomon Smith Barney; Mr. Deane serves as Investment Officer of 8
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New York,
New York 10013.
R. Jay Gerken, Vice President and Investment Officer (Age 48). Managing
Director of Salomon Smith Barney; Mr. Gerken is Vice President and Investment
Officer of two other Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New York, New York 10013.
Jeffrey Russell, Vice President and Investment Officer (Age 42). Managing
Director of Salomon Smith Barney; Mr. Russell is Vice President and Investment
Officer of six other Smith Barney Mutual Funds. His address is 7 World Trade
Center, New York, New York 10048.
Larry Weissman, Vice President and Investment Officer; (Age 38 ). Managing
Director of Salomon Smith Barney; Prior to October 1997, Portfolio Manager of
Newberger & Berman LLC; Prior to 1995, Portfolio Manager of College Retirement
Equities Fund. His address is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 49). Managing Director of Salomon Smith
Barney; Secretary of 61 investment companies associated with Citigroup;
General Counsel and Secretary of the manager and TIA. Her address is 388
Greenwich Street, New York, New York 10013.
Paul A. Brook, Controller (Age 46). Managing Director of Salomon Smith Barney;
Controller or Assistant Treasurer of 43 investment companies affiliated with
Citigroup since 1998; Prior to 1998 Managing Director of AMT Capital Services
Inc.; Prior to 1997, Partner with Ernst & Young LLP.
As of February 14, 2000, the Trustees and officers of the Trust as a group own
less than one percent of the outstanding shares of each Fund of the Trust. As
of February 14, 2000, to the knowledge of the Trust and its Trustees, no
shareholder or "group" (as the term is used in Section 13(d) of the Securities
Act of 1933) beneficially owned more than 5% of the outstanding shares of each
Fund of the Trust.
TRUSTEE COMPENSATION
The Funds pay each of the Trustees who is not a director, officer or employee
of the manager or any of its affiliates an annual fee of $48,000 plus $2000
for each Board of Trustees meeting attended, $1000 for each Committee meeting
attended (each Committee chairman is paid an additional $300 for each
Committee meeting attended), $1000 for each telephonic Board meeting in which
participated (unless such meeting is for information purposes only in which
case $100 is paid). In addition, the Funds will reimburse these trustees for
travel and out-of-pocket expenses incurred in connection with Board of
Trustees meetings. For the fiscal year ended October 31, 1999, such expenses
totaled $14, 367.50.
Information regarding compensation paid by the Funds to the Trustees is set
forth below. The compensation shown for the Funds is for the fiscal year
ended October 31, 1999. Mr. McLendon is not compensated for his service as
Trustee, because of his affiliation with the manager. With the exception of
Mr. McLendon, no Trustee serves on the Board of any other investment company
in the Smith Barney Fund Complex. Legend:
SM = Small Cap Fund
MC = Mid Cap Fund
INT = International Equity Fund
G = Growth Fund
G/I = Growth and Income Fund
GVT = Government Fund
MB = Municipal Bond Fund
Name
SM MC(2) INT
G G/I GVT
MB
Retirem
ent
Benefit
s
Accrued
as Part
of Fund
Expense
s
(1)
Total
Compen-
sation
Paid From
Trust
and Fund
Complex
Dr. Donald M.
Carlton
$2,59
9
$79
$551
$37,85
6
$12,03
0
$1,81
3
$1,02
8
- -
$56,000
Dr. A. Benton
Cocanougher
$2,64
3
$85
$560
$38,53
2
$11,69
3
$2,39
5
$1,04
7
- -
$57,000
Stephen Randolph
Gross
$2,71
1
$85
$574
$39,92
0
$12,12
2
$2,46
2
$1,08
1
- -
$59,000
Heath B. McLendon*
- -
- -
- -
- -
- -
- -
- -
- -
- -
Dr. Alan G. Merten
$2,64
3
$85
$560
$38,53
2
$11,69
3
$2,39
5
$1,04
7
- -
$56,000
Dr. R. Richardson
Pettit
$2,71
1
$85
$574
$39,92
0
$11,69
3
$2,46
2
$1,08
1
- -
$59,000
*Designates an "Interested Person" of the Trust, as defined under the 1940
Act.
(1) The Trustees instituted a retirement plan effective April 1, 1996. For
the current Trustees who are not "interested persons" of the Trust, the
retirement benefits payable thereunder are payable for a ten year period
following retirement, with the annual payment to be based upon the highest
total annual compensation received in any of the three calendar years
preceding retirement. Trustees with more than five but less than ten years of
service at retirement will receive a prorated benefit. Total retirement
benefits accrued under the plan for the 1999 fiscal year were $15,901, $0, $0,
$1,124,006, $304,766, $88,194, and $37,951, for the Small Cap Fund, Mid Cap
Fund, International Equity Fund, Growth Fund, Growth and Income Fund,
Government Fund and Municipal Bond Fund, respectively. The amount of benefits
to be paid upon retirement is therefore not currently determinable for any
current Trustee.
(2) Amounts reflect compensation received from March 15, 1999, the date of
inception for the Mid Cap Fund.
INVESTMENT ADVISORY AGREEMENTS
Investment Manager. The manager provides investment advisory and management
services to the Trust, and to other investment companies affiliated with
Salomon Smith Barney.
The Trust and the manager are parties to a separate Investment Advisory
Agreement for each Fund (each, an "Advisory Agreement" and together, the
"Advisory Agreements"). An investment advisory agreement with the manager and
the Trust, on behalf of each Fund had been approved by the Board of Trustees
of the Trust at a meeting held on June 14, 1999. Under the Advisory
Agreements, the Trust retains the manager to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. The manager is responsible for obtaining and evaluating economic,
statistical, and financial data and for formulating and implementing
investment programs in furtherance of each Fund's investment objectives. The
manager also furnishes at no cost to the Trust (except as noted herein) the
services of sufficient executive and clerical personnel for the Trust as are
necessary to prepare registration statements, prospectuses, shareholder
reports, and notices and proxy solicitation materials. In addition, the
manager furnishes at no cost to the Trust the services of a President of the
Trust, one or more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Fund. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer
or other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among all
investment companies advised or subadvised by the manager. The Trust also
pays transfer agency fees, custodian fees, legal fees, the costs of reports to
shareholders and all other ordinary expenses not specifically assumed by the
manager.
The Trust retains the manager to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under the
relevant Advisory Agreement, the Trust pays the manager investment management
fees at the following rates, based on the following amounts of their average
daily net assets:
? For Small Cap Fund, Growth Fund and Growth and Income Fund (calculated
separately for each Fund), 0.65% of the first $1 billion; 0.60% of the
next $1 billion; 0.55% of the next $1 billion; 0.50% of the next
$1 billion; and 0.45% of the average daily net assets in excess of
$4 billion.
? For Mid Cap Fund, 0.75% of the Fund's average daily net assets.
? For International Equity Fund, 1.00% of the Fund's average daily net
assets.
? For the Government Fund, 0.60% of the first $1 billion; 0.55% of the next
$1 billion; 0.50% of the next $1 billion; 0.45% of the next $1 billion;
0.40% of the next $1 billion; and 0.35% of the Fund's average daily net
assets in excess of $5 billion.
? For the Municipal Bond Fund, 0.60% of the first $1 billion; 0.55% of the
next $1 billion; 0.50% of the next $1 billion; and 0.45% of the Fund's
average daily net assets in excess of $3 billion.
The manager may, from time to time, agree to waive its investment advisory
fees or any portion thereof or elect to reimburse a Fund for ordinary business
expenses in excess of an agreed upon amount.
The average daily net assets of each Fund are determined by taking the average
of all of the determinations of net asset value of such Fund for each business
day during a given calendar month. Such fee is payable for each calendar
month as soon as practicable after the end of that month.
The following table shows expenses paid under the relevant investment advisory
agreement during the fiscal year periods ended October 31, 1999, 1998 and
1997.
Small
Cap
Internatio
nal Equity
Growth
Growth &
Income
Governmen
t
Municipa
l Bond
Mid Cap
October 31, 1999
Accounting
Services
- -
- -
- -
- -
- -
- -
- -
Gross Advisory
Fees
$1,632,814
$545,582
$26,462,
719
$9,381,4
62
$1,320,70
2
$719,565
$73,778*
October 31, 1998
Accounting
Services
- -
- -
- -
- -
- -
- -
- -
Gross Advisory
Fees
$1,354,479
$376,585
$23,343,
634
$8,627,1
08
$1,523,61
3
$687,628
- -
October 31, 1997
Accounting
Services
$37,198
$21,601
$420,043
$161,748
$55,786
$39,999
- -
Gross Advisory
Fees
904,959
267,897
20,533,5
44
7,574,20
9
1,702,968
704,693
- -
________________
*Had the manager not waived the management fee and reimbursed certain expenses
in order to cap total annual fund expenses, the Gross Advisory Fees for the
Mid Cap Fund would have been $137,240.
For the fiscal year ended October 31, 1997 and for the period from November 1,
1997 to December 31, 1997, amounts paid by the Funds under the relevant
investment advisory agreements were paid to Van Kampen American Capital Asset
Management Inc. ("VKAC"). VKAC served as the Trust's investment adviser until
December 31, 1997, when the SSB Citi replaced VKAC as the manager of each
Fund. Prior to December 31, 1997, SSB Citi acted as the Sub-Adviser to
International Equity Fund.
Each Fund's Advisory Agreement provides that the manager shall not be liable
to the Trust for any actions or omissions if it acted in good faith without
negligence or misconduct. The Advisory Agreements provide that the manager
shall not be liable to the Trust for any actions or omissions if it acted in
good faith without negligence or misconduct.
Each Advisory Agreement has an initial term of two years and thereafter with
respect to each Fund may be continued from year to year if specifically
approved at least annually (a)(i) by the Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities, and (b) by the
affirmative vote of a majority of the Trustees who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreements provide that they
shall terminate automatically if assigned and that they may be terminated
without penalty by either party on 60 days written notice.
Management's discussion and analysis and additional performance information
regarding the Funds during the fiscal year ended October 31, 1999 is included
in the Annual Report dated October 31, 1999. For PFS Accounts, a copy of the
Annual Report may be obtained upon request and without charge from a PFS
Investments Registered Representative or by writing or calling the Trust at
the address or phone number listed on page one. For Other Accounts, you may
request a copy from you financial professional or call (800) 236-3983.
Code of Ethics. Pursuant to Rule 17j-1 of the 1940 Act, the Funds, their
investment advisers and principal underwriter have adopted codes of ethics
that permit personnel to invest in securities for their own accounts,
including securities that may be purchased or held by the funds. All
personnel must place the interests of clients first and avoid activities,
interests and relationships that might interfere with the duty to make
decisions in the best interests of the clients. All personal securities
transactions by employees must adhere to the requirements of the codes and
must be conducted in such a manner as to avoid any actual or potential
conflict of interest, the appearance of such a conflict, or the abuse of an
employee's position of trust and responsibility.
DISTRIBUTOR
CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408 (the
"Distributor"), distributes shares of the Funds as their principal
underwriter, and as such conducts a continuous offering pursuant to a "best
efforts" arrangement requiring the Distributor to take and pay for only those
securities sold to the public. Prior to October 8, 1998, PFS Distributors,
Inc. acted as Distributor.
The Distributor may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, the Distributor, or PFS
Distributors, Inc. or any Other Service Agent (collectively, "Service
Agents"), or any of their affiliates, may also pay for certain non-cash sales
incentives provided to PFS Investments registered representatives or, as
applicable, other financial professionals (collectively, "Financial
Professionals"). Such incentives do not have any effect on the net amount
invested. In addition to the reallowances from the applicable public offering
price described above, Service Agents may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or
other compensation to Financial Professionals that sell shares of each Fund.
The Distributor may make payments for distribution and/or shareholder
servicing activities out of its past profits and other available sources. The
Distributor may also make payments for marketing, promotional or related
expenses to dealers. The amount of these payments is determined by the
distributor and may vary. Citigroup and its affiliates may make similar
payments under similar arrangements.
The Distributor acts as the principal underwriter of the shares of the Trust
pursuant to a written agreement for the Funds ("Underwriting Agreement"). The
Distributor has entered into a selling agreement with PFS Distributors, Inc.
on behalf of PFS Investments (collectively, "PFS") and with one or more Other
Service Agents giving the Service Agents the right to sell shares of each Fund
of the Trust on behalf of the Distributor. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required
to take and pay only for such shares of each Fund as may be sold to the
public. The Distributor is not obligated to sell any stated number of shares.
The Underwriting Agreement is renewable from year to year if approved (a) by
the Trustees or by a vote of a majority of the Trust's outstanding voting
securities, and (b) by the affirmative vote of a majority of Trustees who are
not parties to the Agreement or interested persons of any party by votes cast
in person at a meeting called for such purpose. The Underwriting Agreement
provides that it will terminate if assigned, and that it may be terminated
without penalty by either party on 60 days' written notice.
Initial Sales Charges - Class A and Class 1.
The following table shows commissions paid as initial sales charges on Class A
and Class 1 shares, amounts retained by the Distributor and amounts received
by PFS Investments during the periods ended October 31, 1999, 1998, and 1997.
Prior to October 8, 1998, PFS Distributors, Inc. acted as Distributor, and
prior to the date of this SAI, PFS was the sole Service Agent.
Small
Cap
Mid Cap
Interna
- -tional
Equity
Growth
Growth
&
Income
Govern-
ment
Munici-
pal
October 31, 1999
Total Underwriting
Commissions*
$1,205,
157
$20,066
$221,11
3
$13,988,
680
$4,069,
851
$541,65
9
$671,77
8
Amount Retained By
Distributor
120,632
3,328
16,578
2,082,11
5
509,045
57,170
38,485
Amount Received By PFS
Investments
1,034,5
25
16,738
204,535
11,906,5
65
3,560,8
05
414,489
633,293
October 31, 1998
Total Underwriting
Commissions**
$1,758,
358
- -
$228,94
5
$11,625,
886
$4,604,
451
$572,71
0
$684,28
8
Amount Retained By
Distributor
187,397
- -
21,062
2,349,25
5
656,152
67,974
79,312
Amount Received By PFS
Investments
1,570,9
61
- -
207,883
12,276,6
31
3,948,2
59
504,736
604,976
October 31, 1997
Total Underwriting
Commissions
$2,342,
237
- -
$350,62
9
$16,295,
440
$5,171,
583
$699,85
5
$641,01
2
Amount Retained By
Distributor
251,313
- -
37,022
2,787,46
7
825,074
98,685
87,157
Amount Received By PFS
Investments
2,090,9
24
- -
313,607
13,507,8
33
4,346,5
09
601,170
553,855
* Of these totals, the following amounts were paid to PFS Distributors, Inc.:
$1,084,641, $18,059, $199,002, $12,589,812, $3,662,866, $487,493, and
$604,600, for the above listed funds, respectively.
**For the period November 1, 1997 through October 7, 1998 and for the period
October 8, 1998 through October 31, 1998, the commissions were as follows:
Name of Fund
11/01/97
through
10/07/98+
10/08/98
through
10/31/98++
Growth
$16,442,770
$1,032,664
Growth & Income
$6,490,528
$279,461
Small Cap
$3,169,461
$113,446
International Equity
$471,895
$18,132
Government
$694,243
$38,749
Municipal Bond
$745,848
$64,727
+The entire amount was paid to PFS Distributors, Inc.
++ The following amounts were paid to PFS Distributors, Inc.: $929,398,
$251,515, $102,101, $16,319, $34,874 and $58,254, for the above listed funds,
respectively.
PORTFOLIO TURNOVER
The portfolio turnover rate may vary greatly from year to year as well as
within a year. For the 1997, 1998 and 1999 fiscal years, each Fund's
portfolio turnover rates were:
Fiscal
Year
Ended
10/31
Small Cap
Mid Cap
Internatio
nal Equity
Growth
Growth &
Income
Government
Municipal
Bond
1999
115%
47%
50%
37%
53%
201%
38%
1998
80%
- -
63%
113%
34%
141%
28%
1997
100%
- -
57%
165%
93%
104%
50%
DISTRIBUTION PLANS
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares (''distribution expenses'') and servicing its shareholders in
accordance with a plan adopted by the investment company's board of directors
and approved by its shareholders. Pursuant to such Rule, the Trust has adopted
two Distribution Plans (hereinafter referred to as the ''Class A Plan'' and
the ''Class B Plan'') for its Class A shares and Class B shares, respectively.
The Rules of Conduct of the National Association of Securities Dealers, Inc.
(''NASD Rules'') limit the annual distribution costs and service fees that a
mutual fund may impose on a class of shares. The NASD Rules also limit the
aggregate amount which a Fund may pay for such distribution costs.
Under the Class A Plan, each Fund pays PFS Distributors, Inc. and Salomon
Smith Barney, as administrative agents for PFS Accounts and Other Accounts,
respectively (the "Administrative Agents") 0.25% per annum of its average
daily net assets attributable to such class of shares as a service fee. The
service fee is intended to cover shareholder and account maintenance services
provided to Class A shareholders of each Fund by Financial Professionals.
Under the Class B Plan, Class B shares of each Fund are subject to a combined
annual distribution fee and service fee at the rate of 1.00% of a Fund's
aggregate average daily net assets attributable to such class of shares, which
fees are paid to the Administrative Agents. Payments are made by each Fund
under the Class B Plan of 0.25% per annum, and distribution fee payments of
0.75% per annum, of the aggregate average daily net assets attributable to
Class B shares. The distribution fee payments are used as compensation for
sales and promotional activities and marketing of the Class B shares. The
expenditures under the Class B Plan may consist of sales commissions to
Financial Professionals for selling Class B shares, compensation, sales
incentives and payments to sales and marketing personnel, and the payment of
expenses incurred in its sales and promotional activities, including
advertising expenditures related to the Class B shares of a Fund and the costs
of preparing and distributing promotional materials with respect to such Class
B shares.
The Distributor is entitled to receive the proceeds of the initial sales
charge, if any, paid upon the purchase of Class A shares, and said amount is
paid to Financial Professionals. PFS and Salomon Smith Barney are entitled to
receive the contingent deferred sales charge paid upon certain redemptions of
Class B shares directly from the Fund, for PFS Accounts and other Accounts,
respectively, for any of the distribution and service expenses described
above.
During the period they are in effect, the Class A Plan and the Class B Plan
obligate each Fund to pay fees as compensation for service (and for the Class
B Plan, distribution) activities, not as reimbursement for specific expenses
incurred. Thus, even if such expenses exceed service or distribution fees
paid by any Fund, the Fund will not be obligated to pay more than those fees
and, if expenses are less than such fees, the Administrative Agents may retain
the full fees and realize a profit. Each Fund will pay the applicable service
fees and distribution fees until either the applicable Plan is terminated or
not renewed. In that event, expenses in excess of service fees and
distribution fees received or accrued through the termination date will be the
sole responsibility of and not obligations of a Fund. In their annual
consideration of the continuation of each Fund's Plans, the Trustees will
review each Plan and the corresponding expenses for each class separately.
Actual distribution expenditures incurred by the Administrative Agents and
Service Agents under the Class B Plan for any given year are expected to
exceed the fees received by them form the Funds pursuant to the Class B Plan
and pursuant to contingent deferred sales charges. Such excess will not be
carried forward in future years. If the Class B Plan is terminated or is not
continued, the Fund would not be contractually obligated and has no liability
to pay for any expenses incurred that have not previously reimbursed by the
Fund or recovered through contingent deferred sales charges.
In reporting amounts expended under the Plans to the Trustees, expenses
attributable to the sale of both Class A and Class B shares will be allocated
to each class based on the ratio of sales of Class A and Class B shares to the
sales of both classes of shares. The service fees paid by the Class A shares
will not be used to subsidize the sale of Class B shares; similarly, the
service fees, if any, and distribution fees paid by the Class B shares will
not be used to subsidize the sale of Class A shares.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
related service agreements were approved by the Board of Trustees, including
a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Trust and who have no direct or indirect financial interest
in the operation of the Plans or in any agreements related to each Plan
("Independent Trustees"). In doing so, the Board of Trustees determined that
there is a reasonable likelihood that each Plan will benefit the Trust and its
shareholders.
Each Plan requires that the Trustees be provided at least quarterly with a
written report of the amounts expended pursuant to each Plan and the purposes
for which such expenditures were made. Unless sooner terminated in accordance
with its terms, the Plans continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority
of Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent Trustees,
or by vote of a majority of the outstanding voting shares of the relevant
class, for any Fund. Any change in any of the Plans that would materially
increase the distribution or service expenses borne by a class of a Fund
requires shareholder approval by the relevant class; otherwise, it may be
amended by a majority of the Trustees, including a majority of the Independent
Trustees, by vote cast in person at a meeting called for the purpose of voting
upon such amendment. So long as a Plan is in effect, the selection or
nomination of any additional Independent Trustees is committed to the
discretion of the Independent Trustees.
For the fiscal year ended October 31, 1999, the aggregate expenses for the
Small Cap Fund under the Fund's Class A Plan were $319,921 or 0.25%,
respectively, of the Class A shares' average net assets. For the fiscal year
ended October 31, 1999, the Fund's aggregate expenses under the Class B Plan
were $1,145,992 or 1.00% of the Class B shares' average net assets. Such
expenses include $277,184 for commissions and transaction fees and $851,583
for fees paid for servicing Class B shareholders and administering the Class B
Plan.
For the fiscal year ended October 31, 1999, the aggregate expenses for the Mid
Cap Fund under the Fund's Class A Plan were $9,530 or 0.25%, respectively, of
the Class A shares' average net assets. For the fiscal year ended October 31,
1999, the Fund's aggregate expenses under the Class B Plan were $57,514 or
1.00% of the Class B shares' average net assets. Such expenses included
$3,846 for commissions and transaction fees and $11,537 for fees paid for
servicing Class B shareholders and administering the Class B Plan.
For the fiscal year ended October 31, 1999, the aggregate expenses for the
International Equity Fund under the Fund's Class A Plan were $65,440 or 0.25%,
respectively, of the Class A shares' average net assets. For the fiscal year
ended October 31, 1999, the Fund's aggregate expenses under the Class B Plan
were $256,597 or 1.00% of the Class B shares' average net assets. Such
expenses included $57,908 for commissions and transaction fees and $173,664
for fees paid for servicing Class B shareholders and administering the Class B
Plan.
For the fiscal year ended October 31, 1999, the aggregate expenses for the
Growth Fund under the Class A Plan were $659,586 or 0.25%, respectively, of
the Class A shares' average net assets. For the fiscal year ended October
31, 1999, the Fund's aggregate expenses under the Class B Plan were
$2,669,544 or 1.00% of the Class B shares' average net assets. Such expenses
included $618,460 for commissions and transaction fees and $1,855,380 for fees
paid for servicing Class B shareholders and administering the Class B Plan.
For the fiscal year ended October 31, 1999, the aggregate expenses for the
Growth and Income Fund under the Fund's Class A Plan were $394,715 or 0.25%,
respectively, of the Class A shares' average net assets. For the fiscal year
ended October 31, 1999, the Fund's aggregate expenses under the Class B Plan
were $1,751,910 or 1.00% of the Class B shares' average net assets. Such
expenses included $416,008 for commissions and transaction and $1,248,025 for
fees paid for servicing Class B shareholders and administering the Class B
Plan.
For the fiscal year ended October 31, 1999, the aggregate expenses for the
Government Fund under the Fund's Class A Plan were $50,584 or 0.25%,
respectively, of the Class A shares' average net assets. For the fiscal year
ended October 31, 1999, the Fund's aggregate expenses under the Class B Plan
were $156,434 or 1.00% of the Class B shares' average net assets. Such
expenses included $34,991 for commissions and transaction fees and $104,972
for fees paid for servicing Class B shareholders and administering the Class B
Plan.
For the fiscal year ended October 31, 1999, the aggregate expenses for the
Municipal Bond Fund under the Fund's Class A Plan were $65,278 or 0.25%,
respectively, of the Class A shares' average net assets. For the fiscal year
ended October 31, 1999, the Fund's aggregate expenses under the Class B Plan
were $74,117 or 1.00% of the Class B shares' average net assets. Such
expenses included $15,916 for commissions and transaction fees and $47,749 for
fees paid to for servicing Class B shareholders and administering the Class B
Plan.
The Distributor and/or Service Agents bear the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost
and expense of supplemental sales literature, promotion and advertising. The
Trust pays all expenses attributable to the registrations of its shares under
federal and state blue sky laws, including registration and filing fees, the
cost of preparation of the prospectuses, related legal and auditing expenses,
and the cost of printing prospectuses for current shareholders.
For the fiscal year ended October 31, 1999, the Distributor and/or Service
Agents incurred the following distribution expenses for the funds:
Fund Name
Advertis
ing
Printing
and
Mailing
of
Prospectu
ses
Support
Service
s
Financial
Profession
als
Intere
st
Expens
e
Total
Small Cap
$3,258
$17,777
- -
$403,133
$280,9
24
$705,092
Mid Cap
$174
$1,092
- -
$37,540
$7,317
$46,123
Internatio
nal
Equity
$699
$3,833
- -
$95,916
$53,64
3
$154,091
Growth
$8,551
$47,829
- -
$990,174
$450,9
89
$1,497,5
43
Growth and
Income
$5,387
$29,720
- -
$609,161
$364,0
02
$1,008,2
70
Government
$381
$2,126
- -
$57,522
$46,84
2
$106,871
Municipal
$372
$2,038
- -
$43,524
$16,49
7
$62,431
The Distributor and/or Service Agents will pay for the printing, at printer's
overrun cost, of prospectuses and periodic reports after they have been
prepared, set in type and mailed to shareholders, and will also pay the cost
of distributing such copies used in connection with the offering to
prospective investors and will also pay for supplementary sales literature and
other promotional costs. Such expenses incurred by the Distributor and/or
Service Agents are distribution expenses within the meaning of the Plans and
may be paid from amounts received by the Distributor and/or Service Agents
from the Trust under the Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The manager is responsible for decisions to buy and sell securities for the
Trust and for the placement of its portfolio business and the negotiation of
any commissions paid on such transactions. It is the policy of the manager to
seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Trust may pay
higher brokerage commissions for brokerage and research services (as described
below) on a portion of its transactions executed on securities exchanges, the
manager seeks the best security price at the most favorable commission rate.
From time to time, the Fund may place brokerage transactions with affiliated
persons of the manager. In selecting broker/dealers and in negotiating
commissions, the manager considers the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms that also provide research services to the Trust or the manager.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment adviser, under certain circumstances, to cause an account to pay
a broker or dealer who supplies brokerage and research services a commission
for effecting a securities transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction.
Brokerage and research services include (a) furnishing advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
the performance of accounts, (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody), and (d) furnishing other products or services that assist the
manager or the Subadviser in fulfilling their investment-decision making
responsibilities.
Pursuant to provisions of the relevant Advisory Agreement, the Trustees have
authorized the manager to cause the Trust to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the manager. The manager is of the opinion that the continued
receipt of supplemental investment research services from dealers is essential
to its provision of high quality portfolio management services to the Trust.
The manager undertakes that such higher commissions will not be paid by the
Trust unless (a) the manager determines in good faith that the amount is
reasonable in relation to the services in terms of the particular transaction
or in terms of the manager's overall responsibilities with respect to the
accounts as to which it exercises investment discretion, (b) such payment is
made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the manager, the total
commissions paid by the Trust are reasonable in relation to the expected
benefits to the Trust over the long term. The investment advisory fees paid
by the Trust under the Advisory Agreements are not reduced as a result of the
manager's receipt of research services. During the fiscal year ended October
31, 1999, the Trust directed the payment of $347,989 in brokerage commissions
to brokers because of research services provided.
To the extent consistent with the NASD Rules, and subject to seeking best
execution and such other policies as the Trustees may determine, the manager
may consider sales of shares of the Trust as a factor in the selection of
firms to execute portfolio transactions for the Trust.
The manager places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Funds effect their securities transactions may be used by
the manager in servicing all of its accounts; not all of such services may be
used by the manager in connection with the Funds. In the opinion of the
manager, the benefits from research services to the Funds of the Trust and to
the accounts managed by the manager cannot be measured separately. Because
the volume and nature of the trading activities of the accounts are not
uniform, the amount of commissions in excess of the lowest available rate paid
by each account for brokerage and research services will vary. However, in
the opinion of the manager, such costs to the Funds will not be
disproportionate to the benefits received by the Funds on a continuing basis.
The manager will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Funds and
other accounts that the manager may establish in the future. In some cases,
this procedure could have an adverse effect on the price or the amount of
securities available to the Funds. In making such allocations among the Trust
and other advisory accounts, the main factors considered by the manager over
the respective investment objectives, the relative size of portfolio holdings
of the same or comparable securities, the availability of cash for investment,
and the size of investment commitments generally held.
The following table summarizes for each Fund the total brokerage commissions
paid.
Fiscal
Year
Ended
10/31
Small Cap
Mid Cap
Internationa
l Equity
Growth
Growth &
Income
Governmen
t
Municipal
Bond
1999
$468,173
$22,328
$163,053
$2,767,64
8
$587,368
- -
- -
1998
$348,867
- -
$142,261
$8,191,23
7
$1,123,715
- -
- -
1997
$185,242
- -
$115,016
$10,105,4
82
$2,428,087
$140,190
- -
The Funds may from time to time place brokerage transactions with brokers that
may be considered affiliated persons of the manager or the Distributor. Such
affiliated persons currently include Salomon Smith Barney (successor to Smith
Barney Inc. "Smith Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey"),
because they are affiliated with the manager. For the periods covered below
(including those prior to December 31, 1997, when the manager assumed
investment advisory responsibilities from VKAC), Smith Barney and Robinson
Humphrey were affiliated with PFS Distributors, Inc., which was the
Distributor prior to October 8, 1998. As of October 31, 1996, Morgan Stanley
Group Inc. ("Morgan Stanley") became an affiliate of VKAC and as of May 31,
1997, Dean Witter Discover & Co. ("Dean Witter") also became an affiliate of
VKAC. Effective December 31, 1997, Morgan Stanley and Dean Witter were no
longer affiliated with the manager or the Distributor (or its predecessor).
The Board of Trustees has adopted procedures designed to ensure that
commissions paid to an affiliated broker on any transaction would be
comparable to that payable to a non-affiliated broker in a similar
transaction.
The Funds paid the following commissions to affiliated brokers during the
periods shown:
Robinson Smith
Fiscal 1999 Commissions Humphrey Barney
Small Cap $7,110 $99,800
Mid Cap - $240
International Equity - $6,872
Growth $3,000 $120,692
Growth & Income - $42,940
Government - -
Municipal Bond - -
Fiscal 1999 Percentage
Small Cap 1.52% 21.32%
Mid Cap - 1.07%
International Equity - 4.21%
Growth 0.11% 4.36%
Growth & Income - 7.31%
Government - -
Municipal Bond - -
Percentage of Transactions with
Affiliates to Total Transactions
Robinson Smith
Humphrey Barney
Small Cap 1.20% 14.23%
Mid Cap - 0.64%
International Equity - 3.56%
Growth 0.10% 2.84%
Growth & Income - 5.98%
Government - -
Municipal Bond - -
Robinson Smith
Fiscal 1998 Commissions Humphrey Barney
Small Cap $12,679 $29,294
International Equity -0- 9,442
Growth 34,230 363,234
Growth & Income 3,300 99,771
Government - -
Municipal Bond - -
Fiscal 1998 Percentage
Small Cap 3.63% 8.40%
International Equity N/A 6.60%
Growth 0.42% 4.43%
Growth & Income 0.29% 8.88%
Government - -
Municipal Bond - -
Percentage of Transactions with
Affiliates to Total Transactions
Robinson Smith
Humphrey Barney
Small Cap 3.81% 6.31%
International Equity - 7.30%
Growth 0.52% 3.94%
Growth & Income 0.15% 9.12%
Government - -
Municipal Bond - -
Robinson Smith Morgan Dean
Fiscal 1997 Commissions Humphrey Barney Stanley
Witter
Small Cap - - - -
International Equity - - $9,368 -
Growth $4,500 $327,320 20,688
$17,100
Growth & Income - 90,639 375 -
Government - 27,848 - -
Municipal Bond - - - -
Fiscal 1997 Percentage
Small Cap - - - -
International Equity - - 8.14% -
Growth 0.04% 3.24% 0.20% 0.17%
Growth & Income - 3.73% 0.02% -
Government - 19.86% - -
Municipal Bond - - - -
Percentage of Transactions with
Affiliates to Total Transactions
Small Cap - - - -
International Equity - - 1.43% -
Growth - 0.04% - 0.28%
Growth & Income - - - -
Government - 2.34% - -
Municipal Bond - - - -
DETERMINATION OF NET ASSET VALUE
The assets attributable to the Class A, Class B and Class 1 shares of each
Fund reflect the value of separate interests in a single portfolio of
securities. The net asset value of each class will be determined separately
by subtracting the expenses and liabilities allocated to that class. The net
asset value of the shares of each Fund is determined at 4:00 p.m., New York
time (or at the close of the New York Stock Exchange (the "Exchange"), if
earlier, on each business day on which the Exchange is open.
The value of equity securities is computed by (i) valuing listed or unlisted
securities for market quotations are readily available at the prices reported
by an independent pricing services, or as supplied by the National Association
of Securities Dealers Automated Quotations (NASDAQ) or by broker-dealers, and
(ii) valuing any securities for which market quotations are not readily
available and any other assets at fair value as determined in good faith by
the Board of Trustees. Options on stocks, options on stock indexes and stock
index futures contracts and options thereon, which are traded on exchanges,
are valued (at their last sales or settlement price as of the close of such
exchanges, or, if no sales are reported, at the mean between the last reported
bid and asked prices).
Foreign securities trading may not take place on all days on which the
Exchange is open. Further, trading takes place in various foreign markets on
days on which the Exchange is not open. Events affecting the values of
investments that occur between the time their prices are determined and
4:00 p.m. Eastern time on each day that the Exchange is open will not be
reflected in a Fund's net asset value unless the manager, under the
supervision of the Board of Trustees, determines that the particular event
would materially affect net asset value. As a result, a Fund's net asset
value may be significantly affected by such trading on days when a shareholder
has no access to the Funds.
U.S. Government securities are traded in the over-the-counter market and
valuations are based on quotations of one of more dealers that make markets in
the securities as obtained from such dealers or from a pricing service.
Options and interest rate futures contracts and options thereon, which are
traded on exchanges, are valued at their last sales or settlement price as of
the close of such exchanges, or, if no sales are reported, at the mean between
the last reported bid and asked prices. Debt securities having a remaining
maturity of 60 days or less are valued on an amortized cost basis to the
extent this approximates market value.
Municipal Bonds are valued by an independent pricing service. When, in the
judgment of the service, quoted bid prices for investments are readily
available and are representative of the bid side of the market, these
investments are valued at such quoted bid prices (as obtained by the service
from dealers in such securities). Other investments are carried at fair value
as determined by the service, based on methods which include consideration of:
yields or prices of municipal bonds of comparable quality, coupon, maturity
and type; indications as to values from dealers; and general market
conditions. The service may employ electronic data processing techniques
and/or a matrix system to determine valuations. Any assets which are not
valued by the Service would be valued at fair value using methods determined
in good faith by the Trustees.
PURCHASE AND REDEMPTION OF SHARES
Alternative Purchase Arrangements. Each Fund offers two Classes of shares to
investors purchasing through PFS Accounts and Other Accounts. Class A shares
are sold to investors with an initial sales charge and Class B shares are sold
without an initial sales charge but are subject to a contingent deferred sales
charge ("CDSC") payable upon certain redemptions. In addition, the Funds
offer Class 1 shares only to Eligible Class 1 Purchasers through PFS Accounts.
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B shares are sold without any initial sales charge so the
entire purchase price is immediately invested in a Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of this Class. Because a Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in a Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase. The $500,000 investment may be met by adding
the purchase to the net asset value of all Class A shares offered with a sales
charge held in funds listed below under "Exchange Privilege." Class A share
purchases also may be eligible for a reduced initial sales charge. Because
the ongoing expenses of Class A shares may be lower than those for Class B
shares, purchasers eligible to purchase Class A shares at net asset value or
at a value or at a reduced sales charge should consider doing so.
Financial Professionals may receive different compensation for selling
different Classes of shares. Investors should understand that the purpose of
the CDSC on the Class B shares is the same as that of the initial sales charge
on the Class A shares.
How to Purchase Shares. The procedures for purchasing shares varies according
to whether you purchase through a PFS Account or Other Account:
PFS ACCOUNTS
Initial purchases of shares of each Fund must be made through a PFS
Investments Registered Representative by completing the appropriate
application. The completed application should be forwarded to the Sub-Transfer
Agent, 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30099-0062. Checks
drawn on foreign banks must be payable in U.S. dollars and have the routing
number of the U.S. bank encoded on the check. Subsequent investments may be
sent directly to the Sub-Transfer Agent. In processing applications and
investments, the Sub-Transfer Agent acts as agent for the investor and for PFS
Investments and also as agent for the Distributor, in accordance with the
terms of the Prospectus. If the Sub-Transfer Agent ceases to act as such, a
successor company named by the Trust will act in the same capacity so long as
the account remains open.
Shares purchased will be held in the shareholder's account by the Sub-Transfer
Agent. Share certificates are issued only upon a shareholder's written request
to the Sub-Transfer Agent. A shareholder who has insufficient funds to
complete any purchase, will be charged a fee of $30 per returned purchase by
PFS or the Sub-Transfer Agent.
Investors in Class A and Class B shares may open an account by making an
initial investment of at least $1,000 for each account in each Class (except
for Systematic Investment Plan accounts), or $250 for an IRA or a Self-
Employed Retirement Plan in a Fund. Subsequent investments of at least $50 may
be made for each Class. For participants in retirement plans qualified under
Section 403(b)(7) or Section 401(a) of the Code, the minimum initial
investment requirement for Class A and Class B shares and the subsequent
investment requirement for each Class in a Fund is $25. For each Fund's
Systematic Investment Plan, the minimum initial investment requirement for
Class A and Class B shares and the subsequent investment requirement for each
Class is $25. There are no minimum investment requirements in Class A shares
for employees of Citigroup and its subsidiaries, including Salomon Smith
Barney, Directors or Trustees of any of the Smith Barney Mutual Funds, and
their spouses and children. The Trust reserves the right to waive or change
minimums, to decline any order to purchase its shares and to suspend the
offering of shares from time to time. Purchase orders received by the Sub-
Transfer Agent or Sub-Transfer Agent prior to the close of regular trading on
the NYSE, on any day a Fund calculates its net asset value, are priced
according to the net asset value determined on that day.
Upon completion of certain automated systems, initial purchases of Fund shares
may be made by wire. The minimum investment that can be made by wire is
$10,000. Before sending the wire, the PFS Investments Inc. Registered
Representative must contact the Sub-Transfer Agent at (800) 665-8677 to obtain
proper wire instructions. Once an account is open, a shareholder may make
additional investments by wire. The shareholder should contact the Sub-
Transfer Agent at (800) 544-5445 to obtain proper wire instructions.
Upon completion of certain automated systems, shareholders who establish
telephone transaction authority on their account and supply bank account
information may make additions to their accounts at any time. Shareholders
should contact the Sub-Transfer Agent at (800) 544-5445 between 9:00 a.m. and
6:00 p.m. eastern time any day that the NYSE is open. If a shareholder does
not wish to allow telephone subsequent investments by any person in his
account, he should decline the telephone transaction option on the account
application. The minimum telephone subsequent investment is $250 and can be
up to a maximum of $10,000. By requesting a subsequent purchase by telephone,
you authorize the Sub-Transfer agent to transfer funds from the bank account
provided for the amount of the purchase. A shareholder who has insufficient
funds to complete the transfer will be charged a fee of up to $30 by PFS or
the Sub-Transfer Agent. A shareholder who places a stop payment on a transfer
or the transfer is returned because the account has been closed, will also be
charged a fee of up to $30 by PFS or the Sub-Transfer Agent. Subsequent
investments by telephone may not be available if the shareholder cannot reach
the Sub-Transfer Agent whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the Fund's regular
subsequent investment procedure described above.
OTHER ACCOUNTS
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers. Your Service agent is the
shareholder of record for the shares of the Fund you own.
Investors may be able to establish new accounts in the fund under one of
several tax-sheltered plans. Such plans include IRAs, Keogh or Corporate
Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts, and
certain other qualified pension and profit-sharing plans. Investors should
consult with their Service Agent and their tax and retirement advisers.
Systematic Investment Plan. Shareholders may make additions to their accounts
at any time by purchasing shares through a service known as the Systematic
Investment Plan. Under the Systematic Investment Plan, the Sub-Transfer Agent
or Service Agent is authorized through preauthorized transfers of $25 or more
to charge the regular bank account or other financial institution indicated by
the shareholder on a monthly basis to provide systematic additions to the
shareholder's Fund account. For PFS Accounts, a shareholder who has
insufficient funds to complete the transfer will be charged a fee of up to
$25, and a shareholder who places a stop payment on a transfer or the transfer
is returned because the account has been closed, will also be charged a fee of
$25.
Initial Sales Charge Alternative - Class A Shares. The sales charges
applicable to purchases of Class A shares of the Small Cap Fund, International
Equity Fund, Mid Cap Fund, Growth Fund and Growth and Income Fund are as
follows:
Sales Charge
Dealers'
Reallowance as % of
Offering Price
Amount of
Investment
% of
Offering Price
% of
Amount Invested
Less than $ 25,000
5.00%
5.26%
4.50%
$ 25,000 - 49,999
4.00
4.17
3.60
50,000 - 99,999
3.50
3.63
3.15
100,000 - 249,999
3.00
3.09
2.70
250,000 - 499,999
2.00
2.04
1.80
500,000 and over
*
*
*
The sales charges applicable to purchases of Class A shares of Government Fund
and Municipal Fund are as follows:
Sales Charge
Dealers'
Reallowance as % of
Offering Price
Amount of
Investment
% of
Offering Price
% of
Amount Invested
Less than $ 25,000
4.50%
4.71%
4.05%
$ 25,000 - 49,999
4.00
4.17
3.60
50,000 - 99,999
3.50
3.63
3.15
100,000 - 249,999
2.50
2.56
2.25
250,000 - 499,999
1.50
1.52
1.35
500,000 and over
*
*
*
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase. The CDSC on Class A shares
is payable to the Administrative Agent, which in turn pays Service Agent to
compensate their Financial Professionals whose clients make purchases of
$500,000 or more. The CDSC is waived in the same circumstances in which the
CDSC applicable to Class B shares is waived. See ''Deferred Sales Charge
Alternatives'' and ''Waivers of CDSC.''
Members of the selling group may receive up to 90% of the sales charge and may
be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended. The reduced sales charges shown above apply to the
aggregate of purchases of Class A Shares of a Fund made at one time by ''any
person'', which includes an individual and his or her immediate family, or a
trustee or other fiduciary of a single trust estate or single fiduciary
account.
Initial Sales Charge Waivers. The initial sales charge does not apply to
Class A shares acquired through the reinvestment of dividends and capital
gains distributions.
PFS ACCOUNTS
Purchases of Class A shares through PFS Accounts may be made at net asset
value without a sales charge in the following circumstances:
(a) sales to Board Members and employees of Citigroup and its subsidiaries;
(b) sales to Board Members of the Smith Barney Mutual Funds or any other mutual
funds for which members of Citigroup act as investment advisor,
administrator or service agent (including retired Board Members); the
immediate families of such persons (including the surviving spouse of a
deceased Board Member); and to a pension, profit-sharing or other benefit
plan for such persons;
(c) sales to employees of member firms of the National Association of
Securities Dealers, Inc., provided such sales are made upon the assurance
of the purchaser that the purchase is made for investment purposes and that
the securities will not be resold except through redemption or repurchase;
(d) issuance to any other investment company to effect the combination of such
company with the Fund by merger, acquisition of assets or otherwise;
(e) purchases by shareholders who have redeemed Class A shares in a Fund (or
Class A shares of another fund of the Smith Barney Mutual Funds that are
sold with a maximum sales charge equal to or greater than the maximum sales
charge of the Fund) and who wish to reinvest their redemption proceeds in
the Fund, provided the reinvestment is made within 60 calendar days of the
redemption;
(f) purchases by accounts managed by registered investment advisory
subsidiaries of Citigroup;
(g) sales through Financial Professionals of Service Agents where the amounts
invested represent the redemption proceeds from other investment companies,
on the condition that (i) the redemption has occurred no more than 60 days
prior to the purchase of the shares, (ii) the shareholder paid an initial
sales charge on such redeemed shares and (iii) the shares redeemed were not
subject to a deferred sales charge;
(h) direct rollovers by plan participants of distributions from a 401(k) plan
enrolled in the Salomon Smith Barney 401(k) Program (note: subsequent
investments will be subject to the applicable sales charge);
(i) purchases by separate accounts used to fund certain unregistered variable
annuity contracts; and
(j) purchases by investors participating in a Salomon Smith Barney fee based
arrangement.
PFS may pay its Registered Representatives an amount equal to 0.40% of the
amount invested if the purchase represents redemption proceeds from an
investment company distributed by an entity other than PFS Investments. In
order to obtain such discounts, the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
would qualify for the elimination of the sales charge.
In addition, Class A shares of the Funds may be purchased at net asset value
by the PFS Primerica Corporation Savings and Retirement Plan (the ''Primerica
Plan'') for its participants, subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended (''ERISA''). Class A shares
so purchased are purchased for investment purposes and may not be resold
except by redemption or repurchase by or on behalf of the Primerica Plan.
Class A shares are also offered at net asset value to accounts opened for
shareholders by PFS Investments Registered Representatives where the amounts
invested represent the redemption proceeds from investment companies
distributed by an entity other than PFS, if such redemption has occurred no
more than 60 days prior to the purchase of shares of the Trust, and the
shareholder paid an initial sales charge and was not subject to a deferred
sales charge on the redeemed account. Class A shares are offered at net asset
value to such persons because of anticipated economies in sales efforts and
sales related expenses. The Trust may terminate, or amend the terms of,
offering shares of the Trust at net asset value to such persons at any time.
PFS may pay PFS Investments Registered Representatives through whom purchases
are made at net asset value an amount equal to 0.40% of the amount invested if
the purchase represents redemption proceeds from an investment company
distributed by an entity other than PFS. Contact the Sub-Transfer Agent at
(800) 544-5445 for further information and appropriate forms.
OTHER ACCOUNTS
In certain circumstances, the initial sales charge imposed on purchases of
Class A shares through Other Accounts, and the CDSC imposed upon sales of
Class A or Class B shares through Other Accounts, are waived. Waivers are
generally instituted in order to promote good will with persons or entities
with which Citibank or the Distributor or their affiliates have business
relationships, or because the sales effort, if any, involved in making such
sales is negligible, or, in the case of certain CDSC waivers, because the
circumstances surrounding the sale of Fund shares were not foreseeable or
voluntary. These sales charge waivers may be modified or discontinued at any
time.
Class A shares may be purchased through Other Accounts without a sales charge
by:
(a) tax exempt organizations under Section 501(c)(3-13) of the Internal Revenue
Code;
(b) trust accounts for which Citibank, N.A or any subsidiary or affiliate of
Citibank acts as trustee and exercises discretionary investment management
authority;
(c) accounts for which Citibank or any subsidiary or affiliate of Citibank
performs investment advisory services or charges fees for acting as
custodian;
(d) directors or trustees (and their immediate families), and retired directors
and trustees (and their immediate families), of any investment company for
which Citibank or any subsidiary or affiliate of Citibank serves as the
investment adviser or as a service agent;
(e) employees of Citibank and its affiliates, CFBDS, Inc. and its affiliates or
any Service Agent and its affiliates (including immediate families of any
of the foregoing), and retired employees of Citibank and its affiliates or
CFBDS, Inc. and its affiliates (including immediate families of the
foregoing);
(f) investors participating in a fee-based or promotional arrangement sponsored
or advised by Citibank or its affiliates;
(g) investors participating in a rewards program that offers Fund shares as an
investment option based on an investor's balances in selected Citigroup
Inc. products and services;
(h) employees of members of the National Association of Securities Dealers,
Inc., provided that such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities
will not be resold except through redemption or repurchase;
(i) separate accounts used to fund certain unregistered variable annuity
contracts;
(j) direct rollovers by plan participants from a 401(k) plan offered to
Citigroup employees;
(k) shareholder accounts established through a reorganization or similar form
of business combination approved by a Fund's Board of Trustees or by the
Board of Trustees of any other CitiFund or mutual fund managed or advised
by Citibank (all of such funds being referred to herein as CitiFunds) the
terms of which entitle those shareholders to purchase shares of a Fund or
any other CitiFund at net asset value without a sales charge;
(l) employee benefit plans qualified under Section 401 of the Internal Revenue
Code, including salary reduction plans qualified under Section 401(k) of
the Code, subject to minimum requirements as may be established by CFBDS,
Inc. with respect to the amount of purchase; currently, the amount invested
by the qualified plan in a Fund or in any combination of CitiFunds must
total a minimum of $1 million;
(m) accounts associated with Copeland Retirement Programs;
(n) investors purchasing $500,000 or more of Class A shares; in determining
whether a contingent deferred sales charge on Class A shares is payable,
see "Deferred Sales Charge Alternatives" below in this section;
(o) subject to appropriate documentation, investors where the amount invested
represents redemption proceeds from a mutual fund (other than a Concert
Investment Series(r) Fund), if:
- - the redeemed shares were subject to an initial sales charge or a
deferred sales charge (whether or not actually imposed), and
- - the redemption has occurred no more than 60 days prior to the purchase
of Class A shares of the Fund;
(p) an investor who has a business relationship with an investment consultant
or other registered representative who joined a broker-dealer which has a
sales agreement with CFBDS, Inc. from another investment firm within six
months prior to the date of purchase by the investor, if:
- - the investor redeems shares of another mutual fund sold through the
investment firm that previously employed that investment consultant or
other registered representative, and either paid an initial sales
charge or was at some time subject to, but did not actually pay, a
deferred sales charge or redemption fee with respect to the redemption
proceeds
- - the redemption is made within 60 days prior to the investment in a
Fund, and
- - the net asset value of the shares of the Fund sold to that investor
without a sales charge does not exceed the proceeds of the redemption.
Volume Discounts. The "Amount of Investment'' referred to in the sales charge
table set forth above under "Initial Sales Charge Alternative-Class A Shares''
includes the purchase of Class A shares in a Fund and, in the case of PFS
Accounts, of certain other Concert and Smith Barney mutual funds. A person
eligible for a volume discount includes: an individual; members of a family
unit comprising a husband, wife and minor children; a trustee or other
fiduciary purchasing for a single fiduciary account including pension, profit-
sharing and other employee benefit trusts qualified under Section 401(a) of
the Code; or multiple custodial accounts where more than one beneficiary is
involved if purchases are made by salary reduction and/or payroll deduction
for qualified and nonqualified accounts and transmitted by a common employer
entity. Employer entity for payroll deduction accounts may include trade and
craft associations and any other similar organizations.
PFS ACCOUNTS
Cumulative Purchase Discount. The reduced sales load reflected in the sales
charge tables applies to purchases of Class A and Class 1 shares of the
various Funds. An aggregate investment includes all shares of all of the
Funds (and any other eligible funds, as described above), plus the shares
being purchased. The current offering price is used to determine the value of
all such shares. The same reduction is applicable to purchases under a Letter
of Intent as described below. PFS Investments must notify the Distributor at
the time an order is placed for a purchase which would qualify for the reduced
charge on the basis of previous purchases. Similar notification must be given
in writing when such an order is placed by mail. The reduced sales charge
will not be applied if such notification is not furnished at the time of the
order. The reduced sales charge will also not be applied unless the records
of the Distributor or the Sub-Transfer Agent confirm the investor's
representations concerning his holdings.
OTHER ACCOUNTS
Reduced Sales Charge Plan. A qualified group may purchase shares as a single
purchaser under the reduced sales charge plan. The
purchases by the group are lumped together and the sales charge is based on
the lump sum. A qualified group
must:
(a) have been in existence for more than six months;
(b) have a purpose other than acquiring Fund shares at a discount;
(c) satisfy uniform criteria that enable CFBDS, Inc. to realize economies of
scale in its costs of distributing shares;
(d) have more than ten members;
(e) be available to arrange for group meetings between representatives of the
Funds and the members;
(f) agree to include sales and other materials related to the Funds in its
publications and mailings to members at reduced or no cost to the
distributor; and
(g) seek to arrange for payroll deduction or other bulk transmission of
investments to the Funds.
Letter of Intent. A Letter of Intent for amounts of $50,000 or more for PFS
Accounts, and $25,000 or more for other Accounts, provides an opportunity for
an investor to obtain a reduced sales charge by aggregating investments over a
13-month period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the ''Amount of Investment'' as
referred to in the preceding sales charge table includes purchases of all
Class A shares of each Fund and, in the case of PFS Accounts, other Smith
Barney Mutual Funds, offered with a sales charge over a 13-month period based
on the total amount of intended purchases plus all Class A and Class 1 shares
previously purchased and still owned. An alternative is to compute the 13-
month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please
contact your Service Agent to obtain a Letter of Intent application.
PFS ACCOUNTS
A Letter of Intent applies to purchases of Class A shares of all Funds and
Class 1 shares of all Funds. When an investor submits a Letter of Intent to
attain an investment goal within a 13-month period, the Sub-Transfer Agent
escrows shares totaling 5% of the dollar amount of the Letter of Intent in the
name of the investor. The Letter of Intent does not obligate the investor to
purchase the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the investor is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and the sales charge actually paid. Such payment may be
made directly to the Service Agent or, if not paid, the Service Agent will
liquidate sufficient escrow shares to obtain such difference. If the goal is
exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made at the end of the 13-month period by refunding to the
investor the amount of excess sales commissions, if any, paid during the
13-month period.
OTHER ACCOUNTS
Subject to acceptance by CFBDS, Inc., the Funds' distributor, and the
conditions mentioned below, each purchase under a letter of intent will be
made at a public offering price applicable to a single transaction of the
dollar amount specified in the letter of intent.
(a) The shareholder or, if the shareholder is a customer of a Service Agent,
his or her Service Agent must inform CFBDS that the letter of intent is in
effect each time shares are purchased;
(b) The shareholder makes no commitment to purchase additional shares, but if
his or her purchases within 13 months plus the value of shares credited
toward completion of the letter of intent do not total the sum specified,
an increased sales charge will apply as described below;
(c) A purchase not originally made pursuant to a letter of intent may be
included under a subsequent letter of intent executed within 90 days of the
purchase if CFBDS is informed in writing of this intent within the 90-day
period;
(d) The value of shares of a Fund presently held, at cost or maximum offering
price (whichever is higher), on the date of the first purchase under the
letter of intent, may be included as a credit toward the completion of the
letter, but the reduced sales charge applicable to the amount covered by
the letter is applied only to new purchases;
(e) Instructions for issuance of shares in the name of a person other than the
person signing the letter of intent must be accompanied by a written
statement from the Sub-Transfer Agent or a Service Agent stating that the
shares were paid for by the person signing the letter;
(f) Neither income dividends nor capital gains distributions taken in
additional shares will apply toward the completion of the letter of intent;
and
(g) The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the letter of intent are deducted
from the total purchases made under the letter of intent.
If the investment specified in the letter of intent is not completed (either
prior to or by the end of the 13-month period), the Sub-Transfer Agent will
redeem, within 20 days of the expiration of the letter of intent, an
appropriate number of the shares in order to realize the difference between
the reduced sales charge that would apply if the investment under the letter
of intent had been completed and the sales charge that would normally apply to
the number of shares actually purchased. By completing and signing the letter
of intent, the shareholder irrevocably grants a power of attorney to the Sub-
Transfer Agent to redeem any or all shares purchased under the letter of
intent, with full power of substitution.
Deferred Sales Charge Alternatives. CDSC Shares are sold at net asset value
next determined without an initial sales charge so that the full amount of an
investor's purchase payment may be immediately invested in a Fund. A CDSC,
however, may be imposed on certain redemptions of these shares. "CDSC Shares"
are: (i) Class B shares and (ii) Class A shares that were purchased without an
initial sales charge but subject to a CDSC. Any applicable CDSC will be
assessed on an amount equal to the lesser of the original cost of the shares
being redeemed or their net asset value at the time of redemption. CDSC Shares
that are redeemed will not be subject to a CDSC to the extent that the value
of such shares represents: (a) capital appreciation of Fund assets; (b)
reinvestment of dividends or capital gain distributions; (c) with respect to
Class B shares, shares redeemed more than five years after their purchase; or
(d) with respect to Class A shares that are CDSC Shares, shares redeemed more
than 12 months after their purchase.
Class A shares that are CDSC Shares are subject to a 1.00% CDSC if redeemed
within 12 months of purchase. In circumstances in which the CDSC is imposed on
Class B shares, the amount of the charge will depend on the number of years
since the shareholder made the purchase payment from which the amount is being
redeemed. Solely for purposes of determining the number of years since a
purchase payment, all purchase payments made during a month will be aggregated
and deemed to have been made on the last day of the preceding statement month.
The following table sets forth the rates of the charge for redemptions of
Class B shares by shareholders.
Years Since Purchase
Payment Was Made
CDSC Applicable to
Small Cap Fund, Mid
Cap Fund,
International Equity
Fund, Growth Fund and
Growth and Income Fund
CDSC Applicable to
Government Fund and
Municipal Fund
First
5.00%
4.50%
Second
4.00
4.00
Third
3.00
3.00
Fourth
2.00
2.00
Fifth
1.00
1.00
Sixth and thereafter
0.00
0.00
Class B Conversion Feature. Class B shares will convert automatically to
Class A shares eight years after the date on which they were purchased and
thereafter will no longer be subject to any distribution fees. There will also
be converted at that time such proportion of Class B shares acquired through
the reinvestment of dividends and distributions ("Class B Dividend Shares")
owned by the shareholder as the total number of his or her Class B shares
converting at the time bears to the total number of outstanding Class B shares
(other than Class B Dividend Shares) owned by the shareholder. Because the
per share net asset value of the Class A shares may be higher than that of the
Class B shares at the time of conversion, a shareholder may receive fewer
Class A shares than the number of Class B shares converted, although the
dollar value will be the same.
Class B shares of a Fund purchased in PFS Accounts prior to December 31, 1997
and subsequently redeemed will remain subject to the CDSC at the rates
applicable at the time of purchase.
In determining the applicability of any CDSC or the conversion feature
described above, it will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing the
reinvestment of dividends and capital gain distributions and finally of other
shares held by the shareholder for the longest period of time. The length of
time that CDSC Shares acquired through an exchange have been held will be
calculated from the date that the shares exchanged were initially acquired,
and Fund shares being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gain distribution reinvestments
in such other funds. For Federal income tax purposes, the amount of the CDSC
will reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the
amount that represents appreciation ($200) and the value of the reinvested
dividend shares ($60). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4.00% (the applicable rate for Class
B shares) for a total deferred sales charge of $9.60.
For the year ended October 31, 1999, CDSCs paid for Class B shares were
approximately:
Fund CDSC
Small Cap: $510,297
Mid Cap: $6,541
Government: $113,375
Growth: $767,965
Growth and Income: $639,210
International Equity: $68,326
Municipal Bond: $55,804
Waiver of CDSC.
PFS ACCOUNTS
For PFS Accounts, the CDSC generally is waived on exchanges and on redemptions
of Class A and Class B shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Trust may waive the CDSC on redemptions following the death or disability
of a Class A or Class B shareholder. An individual will be considered
disabled for this purpose if he or she meets the definition thereof in
Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or to be of long-continued and
indefinite duration." While the Trust does not specifically adopt the balance
of the Code's definition which pertains to furnishing the Secretary of
Treasury with such proof as he or she may require, the Sub-Transfer Agent will
require satisfactory proof of death or disability before it determines to
waive the CDSC.
In cases of disability or death, the CDSC may be waived where the decedent or
disabled person is either an individual shareholder or owns the shares as a
joint tenant with right of survivorship or is the beneficial owner of a
custodial or fiduciary account, and where the redemption is made within one
year of the death or initial determination of disability. This waiver of the
CDSC applies to a total or partial redemption, but only to redemptions of
shares held at the time of the death or initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement Plans
The Trust may waive the CDSC when a total or partial redemption is made in
connection with certain distributions from Retirement Plans. The charge may
be waived upon the tax-free rollover or transfer of assets to another
Retirement Plan invested in one or more of the Funds; in such event, as
described below, the Fund will "tack" the period for which the original shares
were held on to the holding period of the shares acquired in the transfer or
rollover for purposes of determining what, if any, CDSC is applicable in the
event that such acquired shares are redeemed following the transfer or
rollover. The charge also may be waived on any redemption which results from
the return of an excess contribution pursuant to Section 408(d)(4) or (5) of
the Code, the return of excess deferral amounts pursuant to Code Section
401(k)(8) or 402(g)(2), or from the death or disability of the employee (see
Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge may be
waived on any minimum distribution required to be distributed in accordance
with Code Section 401(a)(9).
The Trust does not intend to waive the CDSC for any distributions from IRAs or
other Retirement Plans not specifically described above.
(c) Redemption Pursuant to the Trust's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in a Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency
of the systematic withdrawals will be specified by the shareholder upon his or
her election to participate in the Plan. The CDSC may be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the election
to participate in the Plan is made with respect to the Fund is hereinafter
referred to as the "initial account balance." The amount to be systematically
redeemed from such Fund without the imposition of a CDSC may not exceed a
maximum of 12% annually of the shareholder's initial account balance. The
Trust reserves the right to change the terms and conditions of the Plan and
the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Trust reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus
due to shareholder redemptions. The Trust may waive the CDSC upon such
involuntary redemption.
(e) Redemption by manager
The Trust may waive the CDSC when a total or partial redemption is made by the
manager with respect to its investments in a Fund.
OTHER ACCOUNTS
See "Initial Sales Charge Waivers-Other Accounts". There is no CDSC on shares
representing capital appreciation or on shares acquired through reinvestment
of dividends or capital gains distributions.
The CDSC will be waived for Other Accounts in connection with:
(a) a total or partial redemption made within one year of the death of the
shareholder; this waiver is available where the deceased shareholder is
either the sole shareholder or owns the shares with his or her spouse as a
joint tenant with right of survivorship, and applies only to redemption of
shares held at the time of death;
(b) a lump sum or other distribution in the case of an Individual Retirement
Account (IRA), a self-employed individual retirement plan (Keogh Plan) or a
custodian account under Section 403(b) of the Internal Revenue Code, in
each case following attainment of age 59 1/2;
(c) a total or partial redemption resulting from any distribution following
retirement in the case of a tax-qualified retirement plan;
(d) a redemption resulting from a tax-free return of an excess contribution to
an IRA; and
(e) redemptions made under a Fund's Systematic Withdrawal Plan.
Purchases of Class 1 Shares. Class 1 shares are offered only through PFS
Accounts, and only to Eligible Class 1 Purchasers, at the next determined net
asset value plus a sales charge, as set forth below.
Small Cap Fund, International Equity Fund, Mid Cap Fund, Growth Fund and
Growth and Income Fund
Size of Investment
As % of
Net Amount
Invested
As % of
Offering
Price
Reallowed to
PFS
(as a % of
Offering
Price)*
Less than $10,000
9.29%
8.50%
7.00%
$ 10,000 but less than
$ 25,000
8.40%
7.75%
6.25%
$ 25,000 but less than
$ 50,000
6.38%
6.00%
5.00%
$ 50,000 but less than
$ 100,000
4.71%
4.50%
3.75%
$ 100,000 but less than
$ 250,000
3.63%
3.50%
3.00%
$ 250,000 but less than
$ 400,000
2.56%
2.50%
2.00%
$ 400,000 but less than
$ 600,000
2.04%
2.00%
1.60%
$ 600,000 but less than
$5,000,000
1.01%
1.00%
0.75%
$5,000,000 or more
0.25%
0.25%
0.20%
Government Fund
Size of Investment
As % of
Net Amount
Invested
As % of
Offering
Price
Reallowed to
PFS
(as a % of
Offering
Price)*
Less than $25,000
7.24%
6.75%
6.00%
$ 25,000 but less than
$ 50,000
6.10%
5.75%
5.00%
$ 50,000 but less than
$ 100,000
4.44%
4.25%
3.50%
$ 100,000 but less than
$ 250,000
3.63%
3.50%
2.75%
$ 250,000 but less than
$ 500,000
2.56%
2.50%
2.00%
$ 500,000 but less than
$1,000,000
2.04%
2.00%
1.60%
$1,000,000 but less than
$2,500,000
1.01%
1.00%
0.75%
$2,500,000 but less than
$5,000,000
0.50%
0.50%
0.40%
$5,000,000 or more
0.25%
0.25%
0.20%
Municipal Bond Fund
Size of Investment
As % of
Net Amount
Invested
As % of
Offering
Price
Reallowed
to PFS (as
a % of
Offering
Price)*
Less than $100,000
4.99%
4.75%
4.25%
$ 100,000 but less than
$ 250,000
3.90%
3.75%
3.25%
$ 250,000 but less than
$ 500,000
3.09%
3.00%
2.50%
$ 500,000 but less than
$1,000,000
2.04%
2.00%
1.60%
$1,000,000 but less than
$2,500,000
1.01%
1.00%
0.75%
$2,500,000 but less than
$5,000,000
0.50%
0.50%
0.40%
$5,000,000 or more
0.25%
0.25%
0.20%
* Additionally, PFS Distributors, Inc. pays to PFS Investments a promotional
fee calculated as a percentage of the sales charge reallowed to PFS. The
percentage used in the calculation is 3%.
The Distributor may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, Service Agents or their affiliates
may also pay for certain non-cash sales incentives provided to financial
professionals. Such incentives do not have any effect on the net amount
invested. In addition to the reallowances from the applicable public offering
price described above, Service Agents may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or
other compensation to financial professionals that sell shares of the Trust.
Class 1 shares may be purchased at net asset value by the Primerica Plan for
Eligible Class 1 Purchasers participating in the Primerica Plan, subject to
the provisions of ERISA. Shares so purchased are purchased for investment
purposes and may not be resold except by redemption or repurchase by or on
behalf of the Primerica Plan. Class 1 Shares are also offered at net asset
value to accounts opened for shareholders by PFS Investments Registered
Representatives where the amounts invested represent the redemption proceeds
from investment companies distributed by an entity other than the Distributor,
if such redemption has occurred no more than 60 days prior to the purchase of
shares of the Trust and the shareholder paid an initial sales charge and was
not subject to a deferred sales charge on the redeemed account. Shares are
offered at net asset value to such persons because of anticipated economies in
sales efforts and sales related expenses. The Trust may terminate, or amend
the terms of, offering shares of the Trust at net asset value to such persons
at any time. PFS may pay PFS Investment Registered Representatives through
whom purchases are made at net asset value an amount equal to 0.40% of the
amount invested if the purchase represents redemption proceeds from an
investment company distributed by an entity other than the Distributor.
Contact the Sub-Transfer Agent at (800) 544-5445 for further information and
appropriate forms.
Investors purchasing Class 1 shares may under certain circumstances be
entitled to reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are the same as those described above
under ''Purchases of Shares-''Volume Discounts'' and ''Letter of Intent.''
EXCHANGE PRIVILEGE
Exchange privilege - General.
Class A Exchanges. Class A shareholders of each Fund who wish to exchange all
or a portion of their shares for Class A shares in any funds eligible for the
exchange privilege may do so without imposition of any charge.
Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares into any of the funds imposing a higher CDSC
than that imposed by the Fund then owned, the exchanged Class B shares will be
subject to the higher applicable CDSC. Upon an exchange, the new Class B
shares will be deemed to have been purchased on the same date as the Class B
shares of the Fund that have been exchanged.
PFS ACCOUNTS
For PFS Accounts, shares of each class of a Fund may be exchanged at the net
asset value next determined for shares of the same class in the other Funds of
the Trust and in the following funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class 1 shares
into a fund that does not offer Class 1 shares may be made for Class A shares
of such fund. Exchanges are subject to minimum investment requirements and all
shares are subject to the other requirements of the fund into which exchanges
are made.
- -Concert Peachtree Growth Fund
- -Concert Social Awareness Fund
- -Smith Barney Appreciation Fund Inc.
- -Smith Barney Concert Allocation Series Inc.-Balanced Portfolio
- -Smith Barney Concert Allocation Series Inc.-Conservative Portfolio
- -Smith Barney Concert Allocation Series Inc.- Growth Portfolio
- -Smith Barney Concert Allocation Series Inc.-High Growth Portfolio
- -Smith Barney Concert Allocation Series Inc.-Income Portfolio
- -Smith Barney Investment Grade Bond Fund
- -*Smith Barney Money Funds, Inc.-Cash Portfolio
- -**Smith Barney Exchange Reserve Fund
* Available for exchange with Class A shares of a Fund.
** Available for exchange with Class B shares of a Fund.
Shareholders who establish telephone transaction authorization on their
account may request an exchange by telephone. If a shareholder does not wish
to allow telephone exchanges by any person in his account, he should decline
the telephone transaction option on the account application. Redemption
procedures discussed below are also applicable for exchanging shares, and
exchanges will be made upon receipt of all supporting documents in proper
form. Exchanges between funds involving exact registrations do not require a
signature guarantee.
OTHER ACCOUNTS
For Other Accounts, Class A and Class B shares of a Fund may be exchanged for
shares of the same class in any other Fund of the Trust, or for shares of the
same class of CitiFunds Cash Reserves.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to a Fund's performance and its shareholders. The Trust may
determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of each Fund's other shareholders. In this event, the Trust
may, at its discretion, decide to limit additional purchases and/or exchanges
by the shareholder. Upon such a determination by the Trust, the Trust will
provide notice in writing or by telephone to the shareholder at least 15 days
prior to suspending the exchange privilege and during the 15 day period the
shareholder will be required to (a) redeem his or her shares in the Fund or
(b) remain invested in the Fund or exchange into any of the other funds
eligible for the exchange privilege, and the shareholder would be expected to
maintain such investment for a significant period of time. All relevant
factors will be considered in determining what constitutes an abusive pattern
of exchanges.
By use of the exchange privilege, the investor authorizes the Sub-Transfer
Agent to act on written exchange instructions from any person representing
himself to be the investor or the agent of the investor and believed by the
Sub-Transfer Agent to be genuine. The Sub-Transfer Agent's records of such
instructions are binding.
For purposes of determining the sales charge rate previously paid on Class A
(and for PFS Accounts, Class 1 shares) of a Fund, all sales charges paid on
the exchanged security and on any security previously exchanged for such
security or for any of its predecessors shall be included. If the exchanged
security was acquired through reinvestment, that security is deemed to have
been sold with a sales charge rate equal to the rate previously paid on the
security on which the dividend or distribution was paid. If a shareholder
exchanges less than all of his securities, the security upon which the highest
sales charge rate was previously paid is deemed exchanged first.
Exchange requests received on a business day prior to the time shares of a
Fund involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in a fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset
value per share next determined on the date of receipt. Shares of the new
fund into which the shareholder is investing will also normally be purchased
at the net asset value per share next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the
Funds involved in the request are priced will be processed on the next
business day in the manner described above.
Redemption procedures discussed below are also applicable for exchanging
shares, and exchanges will be made upon receipt of all supporting documents in
proper form. If the account registration of the shares of the fund being
acquired is identical to the registration of the shares of the fund exchanged,
no signature guarantee is required. An exchange involves a redemption of
shares, which is a taxable transaction. Before exchanging shares, investors
should read the current prospectus describing the shares to be acquired. Each
Fund reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
REDEMPTION OF SHARES
Redemption-General. In all cases, the redemption price is the net asset value
per share of the Fund next determined after the request for redemption is
received in proper form by the Sub-Transfer Agent (in the case of PFS
Accounts, the Sub-Transfer Agent). Payment for shares redeemed will be made
by check mailed within three days after acceptance by the Sub-Transfer Agent
(in the case of PFS Accounts, the Sub-Transfer Agent) of the request and any
other necessary documents in proper order. Such payment may be postponed or
the right of redemption suspended as provided by the rules of the SEC. If the
shares to be redeemed have been recently purchased by check or draft, the Sub-
Transfer Agent (in the case of PFS Accounts, the Sub-Transfer Agent) may hold
the payment of the proceeds until the purchase check or draft has cleared,
usually a period of up to 15 days. A redemption of shares is a taxable
transaction for the shareholder.
The Trust may suspend the right of redemption or postpone the date of payment
for shares of a Fund more than seven days during any period when (a) trading
in the markets a Fund normally utilizes is restricted, or an emergency, as
defined by the rules and regulations of the SEC exists making disposal of the
Fund's investments or determination of its net asset value not reasonably
practicable; (b) the New York Stock Exchange is closed (other than customary
weekend and holiday closings); or (c) the SEC has by order permitted such
suspension.
PFS ACCOUNTS
Shareholders may redeem for cash some or all of their shares of a Fund at any
time by sending a written request in proper form directly to the Sub-Transfer
Agent, PFS Shareholder Services, at 3100 Breckinridge Blvd, Bldg. 200, Duluth,
Georgia 30099-0062. If you should have any questions concerning how to redeem
your account after reviewing the information below, please contact the Sub-
Transfer Agent at (800) 544-5445, Spanish-speaking representatives (800) 544-
7278 or TDD Line for the Hearing Impaired (800) 824-1721.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not paid to the record owner(s) at the record address, if the
shareholder(s) has had an address change in the past 45 days, or if the
shareholder(s) is a corporation, sole proprietor, partnership, trust or
fiduciary, signature(s) must be guaranteed by one of the following: a bank or
trust company; a broker-dealer; a credit union; a national securities
exchange, registered securities association or clearing agency; a savings and
loan association; or a federal savings bank.
Generally, a properly completed Redemption Form with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, in the case of shareholders
holding certificates, the certificates for the shares being redeemed must
accompany the redemption request. Additional documentary evidence of authority
is also required by the Sub-Transfer Agent in the event redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator. Additionally, if a shareholder requests a redemption from a
Retirement Plan account (IRA, SEP or 403(b)(7)), such request must state
whether or not federal income tax is to be withheld from the proceeds of the
redemption check.
A shareholder may utilize the Sub-Transfer Agent's Telephone Redemption
service to redeem his or her account as long as they have authorized the
telephone redemption option. If a shareholder does not wish to allow
telephone redemptions by any person in his account, he should decline the
telephone transaction option on the account application. The telephone
redemption option can be used only if: (a) the redemption proceeds are to be
mailed to the address of record and there has been no change of address of
record within the preceding 45 days; (b) the shares to be redeemed are not in
certificate form; (c); the person requesting the redemption can provide proper
identification information; and (d) the proceeds of the redemption do not
exceed $50,000. 403(b)(7) accounts and accounts not registered in the name of
individual(s) are not eligible for the telephone redemption option. Telephone
redemption requests can be made by contacting the Sub-Transfer Agent at (800)
544-5445 between 9:00 a.m. and 6:00 p.m. eastern time any day that the NYSE is
open. Telephone redemption may not be available if the shareholder cannot
reach the Sub-Transfer Agent whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
regular redemption procedure described above.
A shareholder may utilize the Sub-Transfer Agent's FAX to redeem the
shareholder's account as long as a signature guarantee or other documentary
evidence is not required. Redemption requests should be properly signed by all
owners of the account and faxed to the Sub-Transfer Agent at (800) 554-2374.
Facsimile redemptions may not be available if the shareholder cannot reach the
Sub-Transfer Agent by FAX, whether because all telephone lines are busy or for
any other reason; in such case, a shareholder would have to use the Fund's
regular redemption procedure described above. Facsimile redemptions received
by the Sub-Transfer Agent prior to 4:00 p.m. Eastern time on a regular
business day will be processed at the net asset value per share determined
that day.
After following the redemption guidelines stated in the Prospectus and SAI, a
shareholder may elect to have the redemption proceeds transferred via Wire or
ACH directly to the shareholder's bank account of record (defined as a
currently established pre-authorized draft on the shareholder's account
included with the application or with no changes within the previous 30 days)
as long as the bank account is registered in the same name(s) as the account
with the Fund. Redemption proceeds can be sent by check to the address of
record or by wire transfer to a bank account designated on the application. A
shareholder will be charged a $25 service fee for wire transfers and a nominal
service fee for transfers made directly to the shareholder's bank by the
Automated Clearing House (ACH). If the proceeds are not to be transferred to
the bank account of record or mailed to the registered owner, the request must
be submitted in writing and a signature guarantee will be required from all
shareholders. Redemption proceeds will normally be sent to the designated
bank account on the next business day following the redemption, and should
ordinarily be credited to the shareholder's bank account by his/her bank
within 48 to 72 hours for wire transfers and 72 to 96 hours for ACH transfers.
OTHER ACCOUNTS
Each Service Agent has agreed to transmit to its customers who are
shareholders of the Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders for its customers.
Shareholders may redeem or exchange Fund shares by telephone, if their account
applications so permit, by calling the Sub-Transfer Agent or, if they are
customers of a Service Agent, their Service Agent. During periods of drastic
economic or market changes or severe weather or other emergencies,
shareholders may experience difficulties implementing a telephone exchange or
redemption. In such an event, another method of instruction, such as a written
request sent via an overnight delivery service, should be considered. The
Fund, the sub-transfer agent and each Service Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures may include recording of the telephone instructions and
verification of a caller's identity by asking for his or her name, address,
telephone, Social Security number, and account number. If these or other
reasonable procedures are not followed, the Fund, the sub-transfer agent or
the Service Agent may be liable for any losses to a shareholder due to
unauthorized or fraudulent instructions. Otherwise, the shareholder will bear
all risk of loss relating to a redemption or exchange by telephone.
Automatic Cash Withdrawal Plan. Each Fund offers shareholders an automatic
cash withdrawal plan, under which shareholders who own shares with a value of
at least $10,000 may elect to receive cash payments of a specified amount.
PFS ACCOUNTS
For PFS Accounts, the amount of each withdrawal must be at least $50 monthly
or quarterly. Retirement plan accounts are eligible for automatic cash
withdrawal plans only where the shareholder is eligible to receive qualified
distributions and has an account value of at least $5,000. The withdrawal plan
will be carried over on exchanges between funds or Classes of a Fund. The
Trust reserves the right to involuntarily liquidate any shareholder's account
in a Fund if the aggregate net asset value of the shares held in that Fund
account is less than $500. (If a shareholder has more than one account in a
Fund, each account must satisfy the minimum account size.) The Trust, however,
will not redeem shares based solely on market reductions in net asset value.
Before the Trust exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal
plan, shareholders should contact the Sub-Transfer Agent.
OTHER ACCOUNTS
For shareholders who hold shares through Other Accounts, there is a limit of
one withdrawal per month under the plan.
If you redeem Class A or Class B shares under the plan that are subject to a
CDSC, you are not subject to any CDSC applicable to the shares redeemed, but
the maximum amount that you can redeem under the Plan in any year is limited
to 10% of the average daily balance in your account. You may receive your
withdrawals by check, or have the monies transferred directly into your bank
account. Or you may direct that payments be made directly to a third party.
To participate in the plan, you must complete the appropriate forms provided
by your Service Agent.
Additional Purchase and Sale Information.
PFS ACCOUNTS
Neither the Series or its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The
Series reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days prior notice to shareholders.
Check Writing Privilege. This option is available for non-retirement plan
accounts that are not subject to a contingent deferred sales charge in the
Concert Investment Series(r) Government Fund, Concert Investment Series(r)
Municipal Bond Fund (A Shares and Class 1 Shares only). Checks must be
written for at least $250. Each book of 10 check costs $7.50 which will be
deducted form your account balance.
OTHER ACCOUNTS
Each Service Agent has agreed to transmit to its customers who are
shareholders of a Fund appropriate prior written disclosure of any fees that
it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers.
Investors may be able to establish new accounts in the Funds under one of
several tax-sheltered plans. Such plans include IRAs, Keogh or Corporate
Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts, and
certain other qualified pension and profit-sharing plans. Investors should
consult with their Service Agent and their tax and retirement advisers.
Shareholders may redeem or exchange Fund shares by telephone, if their account
applications so permit, by calling the sub-transfer agent or, if they are
customers of a Service Agent, their Service Agent. During periods of drastic
economic or market changes or severe weather or other emergencies,
shareholders may experience difficulties implementing a telephone exchange or
redemption. In such an event, another method of instruction, such as a written
request sent via an overnight delivery service, should be considered. The
Funds, the sub-transfer agent and each Service Agent will employ reasonable
procedures to confirm that instructions communicated
by telephone are genuine. These procedures may include recording of the
telephone instructions and verification of a caller's identity by asking for
his or her name, address, telephone, Social Security number, and account
number. If these or other reasonable procedures are not followed, the Funds,
the sub-transfer agent or the Service Agent may be liable for any losses to a
shareholder due to unauthorized or fraudulent instructions. Otherwise, the
shareholder will bear all risk of loss relating to a redemption or exchange by
telephone.
DISTRIBUTIONS AND FEDERAL TAXES
Small Cap Fund, International Equity Fund, Mid Cap Fund and Growth Fund
distribute dividends and capital gains annually; Growth and Income Fund
declares and pays dividends quarterly. Government Fund and Municipal Bond
Fund declare and distribute dividends monthly. The per share dividends on
Class B shares of each Fund will be lower than the per share dividends on
Class A and Class 1 shares as a result of the distribution fees and
incremental transfer agency fees, if any, applicable to the Class B shares.
Each Fund intends similarly to distribute to shareholders any taxable net
realized capital gains (the excess of net long-term capital gain over net
short-term capital loss). Taxable net realized capital gains are the excess,
if any, of the Fund's total profits on the sale of securities and certain
other transactions during the year over its total losses on such sales and
transactions, including capital losses carried forward from prior years in
accordance with the tax laws. Such capital gains, if any, are distributed at
least once a year. All income dividends and capital gains distributions are
reinvested in shares of a Fund at net asset value without sales charge on the
record date, except that any shareholder may otherwise instruct the
shareholder service agent in writing and receive cash. Shareholders are
informed as to the sources of distributions at the time of payment.
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code by complying with certain requirements regarding the
sources and distribution of its income and the diversification of its assets.
By so qualifying, a Fund will not be subject to federal income tax on amounts
paid by it as dividends and distributions to shareholders in compliance with
the Code's timing and other requirements. If any Fund were to fail to qualify
as a regulated investment company under the Code, all of its income (without
deduction for income dividends or capital gain distributions paid to
shareholders) would be subject to tax at corporate rates. A Fund will be
subject to a nondeductible, 4% federal excise tax if it fails to meet certain
distribution requirements with respect to each calendar year, generally
applicable to its ordinary (taxable) income for that year and the excess of
its capital gains over its capital losses for the one-year period ended on
October 31 of that year. The Funds intend generally to make distributions
sufficient to avoid or minimize any liability for the excise tax. Each Fund
expects to be treated as a separate entity for purposes of determining its
federal tax treatment.
Municipal Bond Fund
The Code permits a regulated investment company whose assets consist primarily
of tax-exempt Municipal Bonds to pass through to its investors, tax-exempt,
net interest income as "exempt-interest dividends". In order for Municipal
Bond Fund to be eligible to pay exempt-interest dividends during any taxable
year, at the close of each fiscal quarter, at least 50% of the aggregate value
of the Fund's assets must consist of obligations that pay interest exempt from
taxation under Section 103(a) of the Code. In addition, the Fund must
distribute at least (i) 90% of the excess of its tax-exempt interest income
over certain disallowed deductions, and (ii) 90% of its "investment company
taxable net income" (i.e., its ordinary taxable income and the excess, if any,
of its net short-term capital gain over any net long-term capital loss)
recognized by the Fund during the taxable year.
Not later than 60 days after the close of its taxable year, Municipal Bond
Fund will notify its shareholders of the portion of the dividends paid by the
Fund to the shareholders for the taxable year which constitutes exempt-
interest dividends. The aggregate amount of dividends so designated cannot
exceed, however, the excess of the amount of interest exempt from tax under
Section 103 of the Code received by the Fund during the year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the Code. Since
the percentage of dividends which are "exempt-interest" dividends is
determined on an average annual method for the fiscal year, the percentage of
income designated as tax-exempt for any particular dividend may be
substantially different from the percentage of the Fund's income that was
tax-exempt during the period covered by the dividend. Shareholders are
required to report their receipt of tax-exempt interest, including exempt-
interest dividends, on their Federal income tax returns.
Although exempt-interest dividends generally may be treated by Municipal Bond
Fund's shareholders as items of interest excluded from their gross income,
each shareholder is advised to consult his or her tax adviser with respect to
whether exempt-interest dividends retain this exclusion if the shareholder
should be treated as a "substantial user" or a "related person" with respect
to any of the tax-exempt obligations held by the Fund.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of Municipal Bond Fund is not deductible for federal income tax purposes. If
a shareholder receives an exempt-interest dividend any capital loss on the
sale or exchange of the shares with respect to which the dividend is received
will be disallowed to the extent of the amount of such exempt-interest
dividend if the shares are not held for more than six months.
Although Municipal Bond Fund does not intend to acquire bonds the interest on
which is a specific item of tax preference for alternative minimum tax
purposes, its exempt-interest dividends may nevertheless result in or increase
a corporate shareholder's liability for the corporate alternative minimum tax,
because tax-exempt interest, including exempt-interest dividends that are not
items of tax preference, is taken into account in determining a corporation's
potential liability for this tax.
The Code also requires a shareholder who receives exempt-interest dividends
to, in some cases, treat as taxable income a portion of certain otherwise non-
taxable social security or railroad retirement benefits.
Shareholders should also consider, in determining when to redeem any shares of
Municipal Bond Fund, that the Fund declares and distributes its exempt-
interest dividends monthly. The net asset value of shares redeemed shortly
before the end of a month will include tax-exempt interest accrued for that
month but not yet declared as an exempt-interest dividend. The amount of the
redemption proceeds attributable to this accrued tax-exempt interest will not
be treated as tax-exempt interest, but instead will be part of the
shareholder's redemption proceeds potentially subject to taxation.
If, during any taxable year, Municipal Bond Fund realizes net capital gains
(the excess of net long-term capital gain over net short-term capital loss)
from the sale or other disposition of Municipal Bonds or other assets, the
Fund will have no tax liability with respect to such gains if they are
distributed to shareholders. Distributions designated as capital gain
dividends are taxable to shareholders as long-term capital gains, regardless
of how long a shareholder has held his or her shares. Not later than 60 days
after the close of the Fund's taxable year, the Fund will send to its
shareholders a written notice designating the amount of any distributions made
during the year which constitute capital gain.
While Municipal Bond Fund expects that a major portion of its investment
income will constitute tax-exempt interest, a portion may consist of
"investment company taxable income" and "net capital gain". For example,
income or gains from certain taxable investments or transactions, including
sales of securities, options and futures transactions, repurchase agreements,
securities lending, the recognition of accrued market discount, and the
disposition of rights to when-issued securities prior to issuance, are
included in investment company taxable income or net capital gain.
Distributions of investment company taxable income are taxable as ordinary
income, and distributions of net capital gain are taxable as long-term capital
gains.
All Funds
Dividends from net investment income and any excess of net short-term capital
gain over net long-term capital loss are taxable to shareholders as ordinary
income. A portion of dividends taxable as ordinary income paid by Small Cap
Fund, International Equity Fund, Mid Cap Fund, Growth Fund and Growth and
Income Fund may qualify for the 70% dividends received deduction for
corporations. Qualifying dividends include only dividends attributable to
dividends a Fund receives from U.S. domestic corporations with respect to
stock for which the Fund satisfies applicable holding period requirements.
The portion of the dividends received from a Fund which qualifies for the
dividends-received deduction for corporations will be reduced to the extent
that the Fund holds dividend-paying stock for less than 46 days (91 days for
certain preferred stock). The Fund's holding period requirement must be
satisfied separately for each dividend during a prescribed period before and
after the ex-dividend date and will not include any period during which the
Fund has reduced its risk of loss from holding the stock by purchasing an
option to sell, granting an option to buy, or entering into a short sale of
substantially identical stock or securities, such as securities convertible
into the stock. The holding period for stock may also be reduced if the Fund
diminishes its risk of loss by holding one or more positions in substantially
similar or related property. The dividends-received deduction will be allowed
only with respect to dividends on Fund shares for which a corporate
shareholder satisfies the same holding period rules applicable to the Fund.
Receipt of dividends that qualify for the dividends-received reduction may
increase a corporate shareholder's liability, if any, for the alternative
minimum tax. Such a shareholder should also consult its tax adviser regarding
the possibility that its federal tax basis in its Fund shares may be reduced
by the receipt of "extraordinary dividends" from the Fund and, to the extent
such basis would be reduced below zero, current recognition of income would be
required.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month and which are
actually paid in January of the following year will be treated as if they were
paid on December 31 of the year in which they are declared. These dividends
will be taxable to shareholders as if actually received on December 31 rather
than in the year in which shareholders actually receive the dividends.
A capital gain dividend (i.e., a dividend from the excess of a Fund's net
long-term capital gain over its net short-term capital loss) received after
the purchase of the shares of any of the Funds reduces the net asset value of
the shares by the amount of the distribution and will nevertheless be subject
to income taxes. The same is true of dividends treated as ordinary income, as
described above. Investors may therefore wish to avoid purchasing Fund shares
shortly before an anticipated dividend (other than an exempt-interest dividend
from Municipal Bond Fund) or capital gain dividend in order to avoid being
taxed on a distribution that is economically a return of a portion of the
purchase price. These capital gain dividends are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Any loss on the sale of Fund shares held for six months or less is
treated as a long-term capital loss to the extent of any capital gain dividend
paid on such shares. All dividends and distributions are taxable to the
shareholder in the same manner whether or not reinvested in shares.
Shareholders are notified annually by the Fund as to the federal tax status of
dividends and distributions paid by the Fund.
If shares of a Fund purchased subject to a sales charge are sold or exchanged
within 90 days of acquisition, and shares of the same or another mutual fund
are acquired, to the extent the sales charge on the initial purchase is
reduced or waived on the subsequent acquisition, the sales charge may not be
used to determine the basis in the disposed shares for purposes of determining
gain or loss. To the extent the sales charge is not allowed in determining
gain or loss on the initial shares, it is capitalized in the basis of the
subsequent shares. Additionally, any loss realized on a redemption or exchange
of Fund shares may be disallowed under "wash sale" rules to the extent the
shares disposed of are replaced with other shares of the same Fund within a
period of 61 days, beginning 30 days before and ending 30 days after such
disposition, such as pursuant to reinvestment of dividends in Fund shares.
Periodic withdrawals under the systematic withdrawal plan involve redemptions
of shares, which may result in tax liability for the redeeming shareholder.
Additionally, any redemption of shares is a potentially taxable transaction,
even if a reinvestment privilege is later exercised.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced
rate of withholding or a withholding exemption is provided under applicable
treaty laws. Non-resident shareholders are urged to consult their own tax
advisers concerning the applicability of the United States withholding tax.
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax
advisers regarding specific questions as to federal, state or local taxes.
Back-up Withholding. Each Fund is required to withhold and remit to the
United States Treasury 31% of (i) reportable taxable dividends and
distributions and (ii) the proceeds of any redemptions of Fund shares with
respect to any shareholder who is not exempt from withholding and who fails to
furnish the Fund with a correct taxpayer identification number, who fails to
report fully dividend or interest income or who fails to certify to the Trust
that he has provided a correct taxpayer identification number and that he is
not subject to withholding. (An individual's taxpayer identification number
is his or her social security number.) The 31% "Back-up withholding tax" is
not an additional tax and may be credited against a taxpayer's regular federal
income tax liability.
The Code includes special rules applicable to certain listed options
(excluding equity options as defined in the Code), futures contracts, and
options on futures contracts which a Fund may write, purchase or sell. Such
options and contracts are generally classified as Section 1256 contracts under
the Code. The character of gain or loss resulting from the sale, disposition,
closing out, expiration or other termination of Section 1256 contracts is
generally treated as long-term capital gain or loss to the extent of
60 percent thereof and short-term capital gain or loss to the extent of
40 percent thereof ("60/40 gain or loss"). Such contracts, when held by the
Fund at the end of a fiscal year, generally are required to be treated as sold
at market value on the last day of such fiscal year for federal income tax
purposes ("marked-to-market"). Over-the-counter options, equity options, and
certain other options or future contracts are not classified as Section 1256
contracts and are not subject to the mark-to-market rule or to 60/40 gain or
loss treatment. Any gains or losses from transactions in over-the-counter
options generally constitute short-term capital gains or losses. If
over-the-counter call options written, or over-the-counter put options
purchased, by a Fund are exercised, the gain or loss realized on the sale of
the underlying securities may be either short-term or long-term, depending on
the holding period of the securities. In determining the amount of gain or
loss, the sales proceeds are reduced by the premium paid for over-the-counter
puts or increased by the premium received for over-the-counter calls.
Certain transactions in options, futures contracts, or options on futures
contracts may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle in which
at least one (but not all) of the positions are Section 1256 contracts is a
"mixed straddle" under the Code if certain conditions are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position,
(ii) "wash sale" rules which may postpone recognition for tax purposes of
losses where a position is sold and a new offsetting position is acquired
within a prescribed period and (iii) "short sale" rules which may terminate
the holding period of securities owned by the Fund when offsetting positions
are established and which may convert certain losses from short-term to
long-term.
The Code provides that certain elections may be made for mixed straddles that
can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other
elections are also provided in the Code. No determination has been reached to
make any of these elections.
The effect of the tax rules described above with respect to options and
futures contracts may be to change the amount, timing and character of a
Fund's income, gains and losses and therefore of its distributions to
shareholders.
These rules also generally apply to options, futures and forward contracts
relating to foreign currency, except that (1) options, futures and forward
contracts on certain foreign currencies are not governed by Section 1256, (2)
gains and losses on foreign currency forward contracts are generally treated
as ordinary income and losses, and (3) gains and losses on a Fund's foreign
currency options and futures contracts that are not governed by Section 1256,
if any, are generally treated as ordinary income and loss.
Additionally, under the Code gains or losses attributable to fluctuations in
exchange rates between the time a Fund accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such income or pays such liabilities, are treated
as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities denominated in foreign currency, to the extent
attributable to fluctuations in exchange rates between the acquisition and
disposition dates, are treated as ordinary income or loss.
If a Fund purchases shares in certain foreign investment entities, referred to
as "passive foreign investment companies," the Fund itself may be subject to
U.S. federal income tax and an additional charge in the nature of interest on
a portion of any "excess distribution" from such company or gain from the
disposition of such shares, even if the distribution or gain is distributed by
the Fund to its shareholders in a manner that satisfies the distribution
requirements referred to above. If a Fund were able and elected to treat a
passive foreign investment company as a "qualified electing fund," in lieu of
the treatment described above, the Fund would be required each year to include
in income, and distribute to shareholders in accordance with the distribution
requirements described above, the Fund's pro rata share of the ordinary
earnings and net capital gains of the company, whether or not actually
received by the Fund. A Fund generally should be able to make an alternative
election to mark these investments to market annually, resulting in the
recognition of ordinary income (rather than capital gain) or ordinary loss,
subject to limitations on the ability to use any such loss.
A Fund may be required to treat amounts as taxable income or gain, subject to
the distribution requirements referred to above, even though no corresponding
amounts of cash are received concurrently, as a result of (1) mark to market,
constructive sale or other rules applicable to passive foreign investment
companies, partnerships or trusts in which the Fund invests or to certain
options, futures, forward contracts, or "appreciated financial positions" or
(2) the inability to obtain cash distributions or other amounts due to
currency controls or restrictions on repatriation imposed by a foreign country
with respect to the Fund's investments in issuers in such country or (3) tax
rules applicable to debt obligations acquired with "original issue discount,"
including zero-coupon or deferred payment bonds and pay-in-kind debt
obligations, or to market discount if an election is made with respect to such
market discount. A Fund may therefore be required to obtain cash to be used
to satisfy these distribution requirements by selling portfolio securities at
times that it might not otherwise be desirable to do so or borrowing the
necessary cash, thereby incurring interest expenses.
Dividends or other income (including, in some cases, capital gains) received
by a Fund from sources within foreign countries may be subject to withholding
and other taxes imposed by such countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes in some
cases. If eligible, the International Equity Fund will determine whether to
make an election to treat any qualified foreign income taxes paid by it as
paid by its shareholders. In determining whether to make this election, the
Fund will take into consideration such factors as the amount of foreign taxes
paid and the administrative costs associated with making the election. If the
election is made, shareholders of the Fund would be required to include their
respective pro rata portions of such qualified foreign taxes in computing
their taxable income and would then generally be entitled to credit such
amounts against their United States federal income taxes due, if any, provided
that certain holding period requirements are satisfied, or to include such
amounts in their itemized deductions, if any. For any year for which it makes
such an election, the International Equity Fund will report to its
shareholders (shortly after the close of its fiscal year) the amount per share
of such foreign taxes that must be included in the shareholder's gross income
and will be potentially available as a credit or deduction, subject to the
limitations generally applicable under the Code. The other Funds will not
qualify to make this election, and consequently their shareholders will not
report on their own tax returns their shares of the foreign taxes paid by
these Funds.
Municipal Bond Fund may acquire an option to "put" specified portfolio
securities to banks or municipal bond dealers from whom the securities are
purchased. See "Investment Practices - Stand-By Commitments." The Fund has
been advised by its legal counsel that it will be treated for federal income
tax purposes as the owner of the Municipal Securities acquired subject to the
put; and the interest on the Municipal Securities will be tax-exempt to the
Fund. Counsel has pointed out that although the Internal Revenue Service has
issued a favorable published ruling on a similar but not identical situation,
it could reach a different conclusion from that of counsel. Counsel has also
advised the Fund that the Internal Revenue Service presently will not
ordinarily issue private letter rulings regarding the ownership of securities
subject to stand-by commitments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect, and no
attempt is made to describe special tax rules that may be applicable to
certain categories of shareholders, such as tax-exempt or tax-deferred
entities or retirement plans, insurance companies, and financial institutions.
For the complete provisions, reference should be made to the pertinent Code
sections and the Treasury Regulations promulgated thereunder. The Code and
these Treasury Regulations are subject to change by legislative or
administrative action either prospectively or retroactively.
OTHER INFORMATION
Performance Information
From time to time a Fund may include its total return, average annual total
return, yield and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class 1, Class
A and Class B shares of each Fund. These figures are based on historical
earnings and are not intended to indicate future performance. The Trust may
include comparative performance information in advertising or marketing the
Portfolio's shares. Such performance information may include data from the
following industry and financial publications: Barron's, Business Week, CDA
Investment Technologies Inc., Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual Fund Values, The New York
Times, USA Today and The Wall Street Journal.
Yield
A Portfolio's 30-day yield figure described below is calculated according to a
formula prescribed by the SEC. The formula can be expressed as follows: YIELD
= 2[( [(a-b/(c*d))/l] + 1)6 - 1], where
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations purchased by the Portfolio at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that in periods of declining interest rates a
Portfolio's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates, the Portfolio's yield will
tend to be somewhat lower. In addition, when interest rates are falling, the
inflow of net new money to the Portfolio from the continuous sale of its
shares will likely be invested in portfolio instruments producing lower yields
than the balance of the Portfolio's investments, thereby reducing the current
yield of the Portfolio. In periods of rising interest rates, the opposite can
be expected to occur.
Average Annual Total Return
"Average annual total return" figures, as described below, are computed
according to a formula prescribed by the SEC. The formula can be expressed as
follows: P(l+T)/n = ERV, where:
P = a hypothetical initial payment of $ 1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a Hypothetical $ 1,000
investment made at the beginning of a 1-, 5- or 10-year
period at the end of the 1-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions.
The average annual total return (computed in the manner described in the
Prospectus) and yield for each Fund are shown in the table below. These
results are based on historical earnings and asset value fluctuations and are
not intended to indicate future performance. Such information should be
considered in light of each Fund's investment objectives and policies as well
as the risks incurred in each Fund's investment practices.
Class 1 Class A
Class B
Shares Shares
Shares
Small Cap Fund
i) total return for one year period ended 22.10% 26.37%
27.00%
10/31/99
total return since inception
(based on inception date of 2/21/95) -- 18.04%
18.33%
total return since inception
(based on inception date of 8/08/96) 10.93% --
--
Mid Cap Fund
i) total return since inception
(based on inception date of 3/15/99) (3.76)% 0.08%
(0.37)%
International Equity Fund
i) total return for one year period ended
10/31/99 56.36% 61.69%
63.98%
ii) total return since inception
(based on inception date of 3/17/95) -- 22.62%
22.98%
iii) total return since inception
(based on inception date of 8/08/96) 21.23% --
--
Growth Fund
i) total return for one year period ended
10/31/99 24.07% 28.47%
29.31%
ii) total return for five year period ended
10/31/99 21.40% --
--
iii) Total return for the ten year period ended
10/31/99 15.73% --
--
iv) total return since inception
(based on inception date of 4/14/87) 13.78% --
--
v) total return since inception
(based on inception date of 8/18/96) -- 23.94%
24.63%
Growth and Income Fund
i) total return for one year period ended
10/31/99 10.05% 13.90%
14.03%
ii) total return for five year period ended
10/31/99 18.08% --
--
iii) total return for ten year period ended
10/31/99 13.67% --
--
iv) total return since inception
(based on inception date of 4/14/87) 12.06% --
--
v) total return since inception
(based on inception date of 8/18/96) -- 18.75%
19.32%
Class 1 Class A
Class B
Shares Shares
Shares
Government Fund
i) total return for one year period ended
10/31/99 (9.68)% (7.83)%
(8.29)%
ii) total return for five year period ended
10/31/99 4.69% -- --
iii) total return for ten year period ended
10/31/99 5.67% -- --
iv) total return since inception
(based on inception date of 4/14/87) 6.11% --
--
v) total return since inception
(based on inception date of 8/08/96) -- 3.04%
3.22%
vi) yield 6.52% 6.46% 6.00%
Municipal Bond Fund
i) total return for one year period ended
10/31/99 (8.89)% (8.88)%
(9.33)%
ii) total return for five year period ended
10/31/99 4.77% -- --
iii) total return for ten year period ended
10/31/99 5.75% -- --
iv) total return since inception
(based on inception date of 7/13/88) 6.12% --
--
v) total return since inception
(based on inception date of 8/18/96) -- 2.34%
2.02%
vi) yield 4.86% 4.63% 4.09%
vii) tax equivalent yield* 7.05% 6.71% 11.73%
* The Fund's equivalent taxable 30-day yield for a Class is computed by
dividing that portion of the Class' 30-day yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the Class' yield that is not tax-exempt. The tax equivalent yield assumes
the payment of Federal income taxes at a rate of 31%.
The yield for Class A and Class B shares is not fixed and will fluctuate in
response to prevailing interest rates and the market value of portfolio
securities, and as a function of the type of securities owned by the Fund,
portfolio maturity and the Fund's expenses.
Yield and total return for the Government Fund and the Municipal Bond Fund are
computed separately for each class of shares.
The Funds may illustrate in advertising materials the use of a Payroll
Deduction Plan as a convenient way for business owners to help their employees
set up either IRA or voluntary mutual fund accounts. The Funds may illustrate
in advertising materials retirement planning through employee contributions
and/or salary reductions. Such advertising material will illustrate that
employees may have the opportunity to save for retirement and reduce taxes by
electing to defer a portion of their salary into a special mutual fund IRA
account. The Funds may illustrate in advertising materials that Uniform Gift
to Minors Act accounts may be used as a vehicle for saving for a child's
financial future. Such illustrations will include statements to the effect
that upon reaching the age of majority, such custodial accounts become the
child's property.
Shareholder Services
Uniform Gifts to Minors Act. The Trust recognizes the importance to a child
of establishing a savings and investment plan early in life for education and
other purposes when the child becomes older. The advantages of regular
investment with interest or earnings compounding over a number of years are
great. In addition, taxes on these earnings are assessed against the income
of the child rather than the donor, usually at a lower bracket.
Investors wishing to establish a UGMA account should call their Financial
Professional for an application. Individuals desiring to open an account
under UGMA are also advised to consult with a tax adviser before establishing
the account.
Individual Retirement Account. Any individual who has compensation or earned
income from employment or self-employment and who is under age 70 1/2 may
establish an IRA. The limitation on an individual's annual contribution to an
IRA is the lesser of 100% of compensation or $2,000.
The Small Business Job Protection Act of 1996 changed the eligibility
requirements for participants in Individual Retirement Accounts ("IRAs").
Under these new provisions, if you or your spouse have earned income, each of
you may establish an IRA and make maximum annual contributions equal to the
lesser of earned income or $2,000. As a result of this legislation, married
couples where one spouse is non-working may now contribute a total of $4,000
annually to their IRAs.
The Taxpayer Relief Act of 1997 changed the requirements for determining
whether or not you are eligible to make a deductible IRA contribution. Under
the new rules effective beginning January 1, 1998, if you are considered an
active participant in an employer-sponsored retirement plan, you may still be
eligible for a full or partial deduction depending upon your combined adjusted
gross income ("AGI"). For married couples filing jointly for 1998 a full
deduction is permitted if your combined AGI is $50,000 or less ($30,000 for
unmarried individuals); a partial deduction will be allowed when AGI is
between $50,000-$60,000 ($30,000-$40,000 for an unmarried individual); and no
deduction is available when AGI is above $60,000 ($40,000 for an unmarried
individual). However, if you are married and your spouse is covered by an
employer-sponsored retirement plan, but you are not, you will be eligible for
a full deduction if your combined AGI is $150,000 or less. A partial
deduction is permitted if your combined AGI is between $150,000-160,000, and
no deduction is permitted when AGI is above $160,000.
The rules applicable to so-called "Roth IRAs" differ from those described
above.
In addition, any individual, regardless of age, may establish a rollover IRA
to receive an eligible rollover distribution from an employer-sponsored plan.
Simplified Employee Pension Plan (SEP) and Salary Reduction Simplified
Employee Pension Plan (SARSEP). A SEP/SARSEP is a means for an employer to
provide retirement contributions to IRAs for all employees, without the
complicated reporting and record keeping involved in a qualified plan.
Employees covered by a SEP/SARSEP can use the same IRA to receive their own
allowable IRA contribution.
Section 403(b)(7) Plan. Employees of certain exempt organizations and schools
can have a portion of their compensation set aside, and income taxes
attributable to such portion deferred, in a Section 403(b)(7) plan. Teachers,
school administrators, ministers, employees of hospitals, libraries, community
chests, funds, foundations, and many others may be eligible. The employer
must be an organization described in Section 501(c)(3) of the Internal Revenue
Code and must be exempt from tax under Section 501(a) of the Code. In
addition, any employee of most public educational institutions is eligible if
his employer is a state or a political subdivision of a state, or any agency
or instrumentality of either. The employee is not taxed on the amount set
aside or the earnings thereon until the funds are withdrawn, normally at
retirement.
Sub-Transfer Agent
PFPC Global Fund Services is located at 101 Federal Street, Boston,
Massachusetts 02110 and serves as the Sub-Transfer Agent for Other Accounts.
The Trust has engaged the services of PFS Shareholder Services, located at
3100 Breckinridge Blvd., Bldg 200, Duluth, Georgia 30099-0062, as the Sub-
Transfer Agent for PFS Accounts.
Custody of Assets
Securities owned by the Trust and all cash, including proceeds from the sale
of shares of the Trust and of securities in the Trust's investment portfolio,
are held by PNC Bank, National Association, located at 17th and Chestnut
Streets, Philadelphia, PA 19103, as Custodian for each Fund other than
International Equity Fund. Chase Manhattan Bank, located at Chase Metrotech
Center, Brooklyn, NY 11245 serves as Custodian for International Equity Fund.
Shareholder Reports
Semi-annual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
PFS ACCOUNTS
An Account Transcript is available at a shareholder's request, which
identifies every financial transaction in an account since it was opened. To
defray administrative expenses involved with providing multiple years worth of
information, there is a $15 charge for each Account Transcript requested.
Additional copies of tax forms are available at the shareholder's request. A
$10 fee for each tax form will be assessed.
Additional information regarding the Sub-Transfer Agent's services may be
obtained by contacting the Client Services Department at (800) 544-5445.
Independent Auditors
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, the
independent auditors for the Trust, perform annual examinations of the Trust's
financial statements.
Legal Counsel
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036
Shareholder and Trustee Responsibility
Under the laws of certain states, including Massachusetts where the Trust was
organized, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the Trust. However, the risk of a shareholder incurring any financial loss on
account of shareholder liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations. The Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the Trust and provides that notice of the disclaimer may be
given in each agreement, obligation, or instrument which is entered into or
executed by the Trust or Trustees. The Declaration of Trust provides for
indemnification out of Trust property to any shareholder held personally
liable for the obligations of the Trust and also provides for the Trust to
reimburse such shareholder for all legal and other expenses reasonably
incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees and Officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust
will provide indemnification to its Trustees and Officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
About the Trust
The Trust was organized on January 29, 1987 under the laws of The Commonwealth
of Massachusetts and is a business entity commonly known as a ''Massachusetts
business trust.'' It is a diversified, open-end management investment company
authorized to issue an unlimited number of Class A, Class B and Class 1 shares
of beneficial interest of $.01 par value, in the Funds. Shares issued are
fully paid, non-assessable and have no preemptive or conversion rights. In the
event of liquidation of any Fund, shareholders of such Fund are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders.
As of December 31, 1997, the name of the Trust was changed from the Common
Sense Funds Trust to Concert Investment Series(r).
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. Each class of shares represents interest in the assets of each
Fund and has identical voting, dividend, liquidation and other rights on the
same terms and conditions, except that the distribution fees and service fees
and any incremental transfer agency fees related to each class of shares of
each Fund are borne solely by that class, and each class of shares of each
Fund has exclusive voting rights with respect to provisions of the Plan which
pertains to that class of each Fund. All shares have equal voting rights,
except that only shares of the respective Fund are entitled to vote on matters
concerning only that Fund. There will normally be no meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting for
the election of Trustees. Shareholders may, in accordance with the Declaration
of Trust, cause a meeting of shareholders to be held for the purpose of voting
on the removal of Trustees. Except as set forth above, the Trustees shall
continue to hold office and appoint successor Trustees.
As of February 14, 2000, no person was known to own beneficially or of record
as much as five percent of the outstanding shares of any Fund of the Trust.
PFS Investments acts as custodian for certain employee benefit plans and
individual retirement accounts.
Other Information about Certain Banking Laws
The Glass-Steagall Act prohibits certain financial institutions, such as
Citibank, from underwriting securities of open-end investment companies, such
as the Fund. Citibank believes that its services under the Management
Agreements and the activities performed by it or its affiliates as Service
Agents are not under-writing and are consistent with the Glass-Steagall Act
and other relevant federal and state laws. However, there is no controlling
precedent regarding the performance of the combination of investment advisory,
share-holder servicing and administrative activities by banks. State laws on
this issue may differ from applicable federal law, and banks and financial
institutions may be required to register as dealers pursuant to state
securities laws. Changes in either federal or state statutes or regulations,
or in their interpretations, could prevent Citibank or its affiliates from
continuing to perform these services. If Citibank or its affiliates were to be
prevented from acting as the Manager or Service Agent, the Fund would seek
alternative means for obtaining these services. The Fund does not expect that
shareholders would suffer any adverse financial consequences as a result of
any such occurrence.
Other Information Regarding Smith Barney Mutual Funds
In an industry where the average portfolio manager has seven years of
experience (source: ICI, 1998), the portfolio managers of Smith
Barney Mutual Funds average 21 years in the industry and 15 years with the
firm.
Smith Barney Mutual Funds offers more than 60 mutual funds. We understand
that many investors prefer an active role in allocating
the mix of funds in their portfolio, while others want the asset allocation
decisions to be made by experienced managers.
That's why we offer four "styles" of fund management that can be tailored to
suit each investor's unique financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested within their asset class and
investment style, enabling investors to make
asset allocation decisions in conjunction with their Salomon Smith Barney
Financial Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range of equity and fixed income
strategies that seek to capture opportunities across
asset classes and investment styles using disciplined investment approaches.
The Concert Allocation Series
As a fund of funds, investors can select a Concert Portfolio that may help
their investment needs. As needs change, investors can
easily choose another long-term, diversified investment from our Concert
family.
Special Discipline Series
Our Special Discipline Series funds are designed for investors who are looking
beyond more traditional market categories: from
natural resources to a roster of state-specific municipal funds.
FINANCIAL STATEMENTS
The Trust's Annual Report for the fiscal year ended October 31, 1999, is
incorporated herein by reference in its entirety.
APPENDIX A
RATINGS OF MUNICIPAL BONDS, NOTES AND COMMERCIAL PAPER
Moody's Investors Service, Inc.
Aaa - Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present that make the long term risks appear somewhat larger
than in "Aaa" securities. A - Bonds that are rated "A" possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - 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.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Poor's
AAA - Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A- Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB - 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.
BB, B, CCC, CC, C - Debt rated 'BB', 'B', 'CCC', 'CC' or 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' 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. Plus (+) or Minus (-): The ratings from 'AA'
to 'B' may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L - The letter "L" indicates that the rating pertains to the principal amount
of those bonds where the underlying deposit collateral is fully insured by the
Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance Corp.
+ - Continuance of the rating is contingent upon S&P's receipt of closing
documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Fitch IBCA, Inc.
AAA - Bonds rated AAA by Fitch have the lowest expectation of credit risk. The
obligor has an exceptionally strong capacity for timely payment of financial
commitments which is highly unlikely to be adversely affected by foreseeable
events.
AA - Bonds rated AA by Fitch have a very low expectation of credit risk. They
indicate very strong capacity for timely payment of financial commitment. This
capacity is not significantly vulnerable to foreseeable events.
A - Bonds rated A by Fitch are considered to have a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
to be strong, but may be more vulnerable to changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to impair this capacity. This is the lowest
investment grade category assigned by Fitch.
BB - Bonds rated BB by Fitch carry the possibility of credit risk developing,
particularly as the result of adverse economic change over time. Business or
financial alternatives may, however, be available to allow financial
commitments to be met. Securities rated in this category are not considered by
Fitch to be investment grade.
B - Bonds rated B by Fitch carry significant credit risk, however, a limited
margin of safety remains. Although financial commitments are currently being
met, capacity for continued payment depends upon a sustained, favorable
business and economic environment.
CCC, CC, C - Default on bonds rated CCC, CC, and C by Fitch is a real
possibility. The capacity to meet financial commitments depends solely on a
sustained, favorable business and economic environment. Default of some kind
on bonds rated CC appears probable, a C rating indicates imminent default.
Plus and minus signs are used by Fitch to indicate the relative position of a
credit within a rating category. Plus and minus signs however, are not used in
the AAA category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
will normally be evidenced by the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial changes and high internal cash generation; well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have 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.
Standard & Poor's
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issuers determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2 - Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Fitch IBCA, Inc.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet financial commitment in a timely
manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payments of financial commitments. The "+" denotes an
exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the strongest capacity
for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for timely
payment of financial commitments, but the margin of safety is not as great as
in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non
investment grade.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty of timely payment: short-term
liquidity is clearly outstanding, and safety is just below risk-free United
States Treasury short-term obligations.
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment: liquidity factors and
company fundamentals are sound. The Thomson BankWatch ("TBW")
TBW-1 - Indicates a very high degree of likelihood that principal and interest
will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is not
as high as for issues rated TBW-1.
G: legal\funds\cis\2000\secdocs\SAI 2000
61
93
Statement of Additional Information
Concert Investment Series(r)
388 Greenwich Street
New York, NY 10013
February 28, 2000
Select Small Cap
Portfolio
Select Growth and Income Portfolio
Select Mid Cap Portfolio
Select Government Portfolio
Select Growth Portfolio
Concert Investment Series(r) (the "Trust") currently offers twelve separate
investment portfolios, five of which are described in this Statement of
Additional Information ("SAI") (the investment portfolios described herein
are individually referred to as a "Portfolio," and collectively, the
"Portfolios"). This SAI expands upon and supplements the information
contained in the prospectus dated February 28, 2000 for the Portfolios, as
amended or supplemented from time to time, and should be read in conjunction
therewith.
The prospectus may be obtained from designated insurance companies offering
separate accounts ("separate accounts") which fund certain variable annuity
and variable life insurance contracts (each, a "contract") and qualified
pension and retirement plans or by writing or calling the Trust at the
address or telephone number listed above. This SAI, although not in itself
a prospectus, is incorporated by reference into the prospectus in its
entirety.
TABLE OF CONTENTS
Page
General Information 2
Goals and Investment Policies 2
Investment Practices 6
Risk Factors 20
Investment Restrictions 25
Trustees and Officers 27
Investment Advisory Agreements 29
Distributor 32
Portfolio Turnover 32
Portfolio Transactions and Brokerage 32
Determination of Net Asset Value 34
Taxes 35
Performance 36
Additional Information about Portfolios 37
Financial Statements 39
Appendix A - Ratings of Bonds, Notes and Commercial Paper A-1
GENERAL INFORMATION
SSB Citi Fund Management LLC, a limited liability company formed September
21, 1999 ("SSB Citi" or the "manager"), successor to SSBC Fund Management
Inc. (which was incorporated on March 12, 1968), 388 Greenwich Street, New
York, NY 10013, renders investment management advice to investment companies
with aggregate assets under management in excess of $127 billion as of
January 31, 2000. The manager is an affiliate of Salomon Smith Barney Inc.
("Salomon Smith Barney"). The manager and Salomon Smith Barney are
subsidiaries of Citigroup Inc. ("Citigroup"), a financial services company
that uses diverse channels to offer a broad range of financial services to
consumer and corporate customers around the world. Among these businesses
are Citibank, Commercial Credit, Primerica Financial Services, Salomon Smith
Barney, SSB Citi Asset Management, Travelers Life & Annuity, and Travelers
Property Casualty.
CFBDS, Inc. (the "Distributor") is the distributor of the Portfolios'
shares.
GOALS AND INVESTMENT POLICIES
The following disclosures supplement disclosures set forth in the Prospectus
and do not, standing alone, present a complete and accurate explanation of
the matters disclosed.
The differences in goals and investment policies among the Portfolios can be
expected to affect the return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject. The goal and investment
policies, the percentage limitations, and the kinds of securities in which
each Portfolio may invest are generally not fundamental policies and
therefore may be changed by the Trustees without shareholder approval.
Although each Portfolio has a different goal which it pursues through
separate investment policies, each Portfolio, except the Mid Cap Portfolio,
will not purchase any securities issued by any company primarily engaged in
the manufacture of alcohol or tobacco.
Each of the Portfolios may depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term
debt securities. If a Portfolio takes a temporary defensive position, it
may be unable to achieve its investment objective.
Select Small Cap Portfolio
Select Small Cap Portfolio (formerly known as Select Emerging Growth
Portfolio) seeks capital appreciation by investing in a portfolio of
securities consisting principally of common stocks of small sized companies
considered by the manager to be emerging growth companies. Any ordinary
income received from portfolio securities is entirely incidental. There can
be no assurance that the objective of capital appreciation will be realized;
therefore, full consideration should be given to the risks inherent in the
investment techniques that the manager may use to achieve such objective.
Under normal conditions, the Portfolio invests at least 65% of its total
assets in common stocks of small sized companies, both domestic and foreign,
in the early stages of their life cycle that the manager believes have the
potential to become major enterprises. Investments in such companies may
offer greater opportunities for growth of capital than larger, more
established companies, but also may involve certain special risks. Small Cap
companies often have limited product lines, markets, or financial resources,
and they may be dependent upon one or a few key people for management. The
securities of such companies may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or the
market averages in general. While the portfolio will invest primarily in
common stocks, to a limited extent, it may invest in other securities such
as preferred stocks, convertible securities and warrants.
The Portfolio may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers
or liquidations. Investments in unseasoned companies and special situations
often involve much greater risks than are inherent in ordinary investments,
because securities of such companies may be more likely to experience
unexpected fluctuations in price.
The Portfolio may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. Short-term investments may include repurchase agreements with
banks or broker-dealers. The Portfolio may invest up to 20% of its total
assets in securities of foreign issuers.
Select Mid Cap Portfolio
Select Mid Cap Portfolio seeks long-term growth of capital. The Portfolio
attempts to achieve its investment objective by investing, under normal
market conditions, substantially all of its assets in equity securities and
at least 65% of its total assets in equity securities of medium-sized
companies. Medium sized companies are those whose market capitalization is
within the market capitalization range of companies in the S&P MidCap Index
at the time of the Portfolio's investment. The size of the companies in the
Index changes with market conditions and the composition of the Index. As
of February 18, 2000, the largest market capitalization of a company in the
Index was $44.8 billion and the smallest market capitalization was $0.15
billion. Companies whose capitalization falls outside this range after
purchase continue to be considered medium-sized companies for purposes of
the 65% policy. Investing in medium-capitalization stocks may involve
greater risk than investing in large capitalization stocks since they can be
subject to more abrupt or erratic movements. However, they tend to involve
less risk than stocks of small capitalization companies. The Portfolio may
invest up to 35% of its assets in equity securities of companies with market
capitalizations that do not qualify them as medium sized at the time of the
Portfolio's investment.
The Portfolio will normally invest in all types of equity securities,
including common stocks, preferred stocks, securities that are convertible
into common or preferred stocks, such as warrants and convertible bonds, and
depository receipts for those securities. The Portfolio may maintain a
portion of its assets, which will usually not exceed 10%, in U.S. Government
securities, money market obligations, and in cash to provide for payment of
the Portfolio's expenses and to meet redemption requests. It is the policy
of the Portfolio to be as fully invested in equity securities as practicable
at all times.
Consistent with its investment objective and policies described above, the
Portfolio may invest up to 25% of its total assets in foreign securities,
including both direct investments and investments made through depository
receipts. The Portfolio may also invest in real estate investment trusts;
purchase or sell securities on a when-issued or delayed-delivery basis;
enter into forward commitments to purchase securities; lend portfolio
securities; purchase and sell put and call options; and enter into interest
rate futures contracts, stock index futures contracts and related options.
Select Growth Portfolio
Select Growth Portfolio seeks capital appreciation through investments in
common stocks and options on common stocks. Any income realized on its
investments will be purely incidental to its goal of capital appreciation.
The Portfolio also may hold a portion of its assets in high grade short-term
debt securities and high grade corporate or government bonds in order to
provide liquidity. The amount of assets the Portfolio may hold for liquidity
purposes is based on market conditions and the need to meet redemption
requests. A description of the ratings of commercial paper and bonds is
contained in the Appendix. Short-term investments may include repurchase
agreements with banks or broker-dealers.
Certain policies of the Portfolio, such as purchasing and selling options on
stocks, purchasing options on stock indices and purchasing stock index
futures contracts and options thereon involve inherently greater investment
risk and could result in more volatile price fluctuations. The Portfolio
may also invest up to 20% of its total assets in securities of foreign
issuers and in investment companies. Since the Portfolio may take
substantial risks in seeking its goal of capital appreciation, it is not
suitable for investors unable or unwilling to assume such risks.
Select Growth and Income Portfolio
Select Growth and Income Portfolio seeks reasonable growth and income
through investments in equity securities that provide dividend or interest
income, including common and preferred stocks and securities convertible
into common and preferred stocks.
Convertible securities rank senior to common stocks in a corporation's
capital structure. They are consequently of higher quality and entail less
risk than the corporation's common stock, although the extent to which such
risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security. The
Portfolio may purchase convertible securities rated Ba or lower by Moody's
Investors Service, Inc. ("Moody's") or BB or lower by Standard & Poor's
Ratings Group ("S&P") and may also purchase non-rated securities considered
by the manager to be of comparable quality. Although the Portfolio selects
these securities primarily on the basis of their equity characteristics,
investors should be aware that debt securities rated in these categories are
considered high risk securities; the rating agencies consider them
speculative, and payment of interest and principal is not considered well
assured. To the extent that such convertible securities are acquired by the
Portfolio, there is a greater risk as to the timely payment of the principal
of, and timely payment of interest or dividends on, such securities than in
the case of higher rated convertible securities.
Although the portfolio turnover rate will not be considered a limiting
factor, the Portfolio does not intend to engage in trading directed at
realizing short-term profits. Nevertheless, changes in the portfolio will be
made promptly when determined to be advisable by reason of developments not
foreseen at the time of the investment decision, and usually without
reference to the length of time the security has been held.
The Portfolio may hold a portion of its assets in high grade short-term debt
securities and high grade corporate or government bonds in order to provide
liquidity. The amount of assets the Portfolio may hold for liquidity
purposes is based on market conditions and the need to meet redemption
requests. Short-term investments may include repurchase agreements with
banks or broker-dealers. The Portfolio may also invest up to 20% of its
total assets in securities of foreign issuers and in investment companies.
The Portfolio may engage in portfolio management strategies and techniques
involving options, futures contracts and options on futures.
Select Government Portfolio
Select Government Portfolio seeks high current return consistent with
preservation of capital. The Portfolio intends to invest at least 80% of
its assets in debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. Securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities include: (1) U.S.
Treasury obligations, which differ in their interest rates, maturities and
times of issuance: U.S. Treasury bills (maturity of one year or less), U.S.
Treasury notes (maturity of one to ten years), and U.S. Treasury bonds
(generally maturities of greater than ten years), including the principal
components or the interest components issued by the U.S. Government under
the Separate Trading of Registered Interest and Principal of Securities
program (i.e. ''STRIPS''), 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, including government
guaranteed mortgage-related securities, some of which are backed by the full
faith and credit of the U.S. Treasury, some of which are supported by the
right of the issuer to borrow from the U.S. Government and some of which are
backed only by the credit of the issuer itself.
The Portfolio may enter into repurchase agreements with domestic banks or
broker-dealers deemed creditworthy by the manager solely for purposes of
investing the Portfolio's cash reserves or when the Portfolio is in a
temporary defensive posture. The Portfolio may write covered or fully
collateralized call options on U.S. Government securities and enter into
closing or offsetting purchase transactions with respect to certain of such
options. The Portfolio may also write secured put options and enter into
closing or offsetting purchase transactions with respect to such options.
The Portfolio may write both listed and over-the-counter options.
The Portfolio seeks to obtain a high current return from the following
sources:
? interest paid on the Portfolio's portfolio securities;
? premiums earned upon the expiration of options written;
? net profits from closing transactions; and
? net gains from the sale of portfolio securities on the exercise of
options or otherwise.
The Portfolio is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect
the value of and yields on U.S. Government securities. Accordingly, there
is no assurance that the Portfolio's investment objective will be achieved.
The Portfolio may engage in transactions involving obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the U.S.
Government (such as Government National Mortgage Association ("GNMA")
Certificates), (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Government, (c) discretionary
authority of the U.S. Government agency or instrumentality, or (d) the
credit of the instrumentality. Agencies and instrumentalities include, but
are not limited to: Federal Land Banks, Farmers Home Administration, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks and Federal National Mortgage Association ("FNMA").
While the Portfolio has no policy limiting the maturities of the debt
securities in which it may invest, the manager seeks to moderate market risk
by generally maintaining a portfolio duration within a range of
approximately four to six years. Duration is a measure of the expected life
of a debt security that was developed as a more precise alternative to the
concept of "term to maturity." Duration incorporates a debt security's
yield, coupon interest payments, final maturity and call features into one
measure. Traditionally, a debt security's "term to maturity" has been used
as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "price volatility" of
the security). However, "term to maturity" measures only the time until a
debt security provides its final payment taking no account of the pattern of
the security's payments of interest or principal prior to maturity.
Duration measures the length of the time interval between the present and
the time when the interest and principal payments are scheduled to be
received (or in the case of a callable bond, expected to be received),
weighing them by the present value of the cash to be received at each future
point in time. In general, the lower the coupon rate of interest or the
longer the maturity, or the lower the yield-to-maturity of a debt security,
the longer its duration; conversely, the higher the coupon rate of interest,
the shorter the maturity or the higher the yield-to-maturity of a debt
security, the shorter its duration.
With respect to some securities, there may be some situations where even the
standard duration calculation does not properly reflect the interest rate
exposure of a security. In these and other similar situations, the manager
will use more sophisticated analytical techniques that incorporate the
economic life of a security into the determination of its interest rate
exposure. The duration is likely to vary from time to time as the manager
pursues its strategy of striving to maintain an active balance between
seeking to maximize income and endeavoring to maintain the value of the
Portfolio's capital. Thus, the objective of providing high current return
consistent with preservation of capital to shareholders is tempered by
seeking to avoid undue market risk and thus provide reasonable total return
as well as high distributed return. There is, of course, no assurance that
the manager will be successful in achieving such results for the Portfolio.
The Portfolio generally purchases debt securities at a premium over the
principal or face value in order to obtain higher current income. The amount
of any premium declines during the term of the security to zero at maturity.
Such decline generally is reflected in the market price of the security and
thus in the Portfolio's net asset value. Any such decline is realized for
accounting purposes as a capital loss at maturity or upon resale. Prior to
maturity or resale, such decline in value could be offset, in whole or part,
or increased by changes in the value of the security due to changes in
interest rate levels.
The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Portfolio reduces its
potential for capital appreciation on debt securities if interest rates
decline. Thus, if market prices of debt securities increase, the Portfolio
would receive a lower total return from its optioned positions than it would
have received if the options had not been sold. The purpose of selling
options is intended to improve the Portfolio's total return and not to
"enhance" monthly distributions. During periods when the Portfolio has
capital loss carryforwards, any capital gains generated from such
transactions will be retained in the Portfolio. The purchase and sale of
options may result in a high portfolio turnover rate.
INVESTMENT PRACTICES
This section contains a discussion of certain investment practices. The
Portfolios indicated may engage in these and any other practices not
prohibited by their investment restrictions. For further information about
risks associated with these practices, see "Risk Factors" below.
EQUITY SECURITIES
Common Stocks (All Portfolios except Government Portfolio). Each Portfolio
may purchase common stocks. Common stocks are shares of a corporation or
other entity that entitle the holder to a pro rata share of the profits of
the corporation, if any, without preference over any other shareholder or
class of shareholders, including holders of the entity's preferred stock and
other senior equity. Common stock usually carries with it the right to vote
and frequently an exclusive right to do so.
Preferred Stocks and Convertible Securities (All Portfolios except
Government Portfolio). Each Portfolio may invest in convertible debt and
preferred stocks. Convertible debt securities and preferred stock entitle
the holder to acquire the issuer's stock by exchange or purchase for a
predetermined rate. Convertible securities are subject both to the credit
and interest rate risks associated with fixed income securities and to the
stock market risk associated with equity securities.
Warrants (All Portfolios except Government Portfolio). Each Portfolio may
purchase warrants. Warrants acquired by a Portfolio entitle it to buy
common stock from the issuer at a specified price and time. Warrants are
subject to the same market risks as stocks, but may be more volatile in
price. A Portfolio's investment in warrants will not entitle it to receive
dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before the expiration dates.
REITs (All Portfolios except Government Portfolio). Each Portfolio may
invest in shares of real estate investment trusts (REITs), which are pooled
investment vehicles that invest in real estate or real estate loans or
interests. Investing in REITs involves risks similar to those associated
with investing in equity securities of small capitalization companies.
REITs are dependent upon management skills, are not diversified, and are
subject to risks of project financing, default by borrowers, self-
liquidation, and the possibility of failing to qualify for the exemption
from taxation on distributed amounts under the Internal Revenue Code of
1986, as amended (the "Code").
Illiquid and Restricted Securities. The Portfolios each invest in
restricted securities and illiquid assets. As used herein, restricted
securities are those that have been sold in the United States without
registration under the Securities Act of 1933 and are thus subject to
restrictions on resale. Excluded from the limitation, however, are any
restricted securities which are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 and which have been determined to be liquid
by the Trustees or by the manager pursuant to board-approved guidelines. The
determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. This investment practice
could have the effect of increasing the level of illiquidity in each
Portfolio to the extent that qualified institutional buyers become for a
time uninterested in purchasing these restricted securities. These
difficulties and delays could result in a Portfolio's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time desired by the
Portfolio impossible. Since market quotations are not readily available for
restricted securities, such securities will be valued by a method that the
Trustees believe accurately reflects fair value.
Securities of Foreign Issuers (All Portfolios except Government Portfolio).
The Small Cap Portfolio, the Growth Portfolio and the Growth and Income
Portfolio may invest up to 20% of the value of their total assets and the
Mid Cap Portfolio may invest up to 25% of the value of its total assets in
securities of foreign governments and companies of developed and emerging
markets countries.
Each Portfolio may also purchase foreign securities in the form of American
Depositary Receipts (''ADRs'') and European Depositary Receipts (''EDRs'')
or other securities representing underlying shares of foreign companies.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through ''sponsored'' or ''unsponsored'' arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to
pay some or all of the depositary's transaction fees, whereas under an
unsponsored arrangement, the foreign issuer assumes no obligation and the
depositary's transaction fees are paid by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR, and the financial information about a company may not
be as reliable for an unsponsored ADR as it is for a sponsored ADR. Each
Portfolio may invest in ADRs through both sponsored and unsponsored
arrangements.
The Small Cap Portfolio, the Mid Cap Portfolio, the Growth Portfolio and the
Growth and Income Portfolio may invest in the securities of developing
countries, commonly known as "emerging markets" countries. See "Risk Factors
Securities of Developing /Emerging Market Countries".
FIXED INCOME SECURITIES
Corporate Debt Obligations (All Portfolios). Each Portfolio may invest in
corporate debt obligations and zero coupon securities issued by financial
institutions and corporations. Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on
the obligations and may also be subject to price volatility due to such
factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity. Zero coupon securities are
securities sold at a discount to par value and on which interest payments
are not made during the life of the security.
U.S. Government Securities (All Portfolios). The U.S. Government
securities in which the Portfolios may invest include: bills, certificates
of indebtedness, and notes and bonds issued by the U.S. Treasury or by
agencies or instrumentalities of the U.S. Government. Some U.S. Government
securities, such as U.S. Treasury bills and bonds, are supported by the full
faith and credit of the U.S. Treasury; others are supported by the right of
the issuer to borrow from the U.S. Treasury; others are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others are supported only by the credit of the
instrumentality.
Mortgage Related Securities (Government Portfolio). The Government
Portfolio may invest in mortgage-related securities, including those
representing an undivided ownership interest in a pool of mortgage loans,
e.g., GNMA, FNMA, FHLMC Certificates. Mortgage loans made by banks, savings
and loan institutions, and other lenders are often assembled into pools,
which are issued or guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. Interests
in such pools are collectively referred to as ''mortgage-related
securities.''
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received
the underlying mortgage loans. The payments to the securityholders (such as
the Portfolio), like the payments on the underlying loans, represent both
principal and interest. Although the underlying mortgage loans are for
specified periods of time, such as 20 or 30 years, the borrowers can, and
typically do, pay them off sooner. Thus, the securityholders frequently
receive prepayments of principal, in addition to the principal which is part
of the regular monthly payment. A borrower is more likely to prepay a
mortgage which bears a relatively high rate of interest. This means that in
times of declining interest rates, some of the Portfolio's higher yielding
securities might be converted to cash, and the Portfolio will be forced to
accept lower interest rates when that cash is used to purchase additional
securities. The increased likelihood of prepayment when interest rates
decline also limits market price appreciation of mortgage-related
securities. If the Portfolio buys mortgage-related securities at a premium,
mortgage foreclosures or mortgage prepayments may result in a loss to the
Portfolio of up to the amount of the premium paid since only timely payment
of principal and interest is guaranteed.
The Government National Mortgage Association ("GNMA") is a wholly owned
corporate instrumentality of the United States within the U.S. Department of
Housing and Urban Development. GNMA's principal programs involve its
guarantees of privately issued securities backed by pools of mortgages.
Certificates of the Government National Mortgage Association ("GNMA
Certificates") are mortgage-backed securities, which evidence an undivided
interest in a pool of mortgage loans. GNMA Certificates differ from bonds
in that principal is paid back monthly by the borrower over the term of the
loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Portfolio purchases are the "modified pass-through" type. "Modified
pass-through" GNMA Certificates entitle the holder to receive a share of all
interest and principal payments paid and owned on the mortgage pool net of
fees paid to the "issuer" and GNMA, regardless of whether or not the
mortgagor actually makes the payment. The National Housing Act authorizes
GNMA to guarantee the timely payment of principal and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration
("FHA") or the Farmers' Home Administration ("FMHA"), or guaranteed by the
Veterans Administration ("VA"). Once a pool of such mortgages is assembled
and approved by GNMA, the GNMA guarantee is backed by the full faith and
credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The average life of a GNMA Certificate is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will
usually result in the return of the greater part of principal investment
long before maturity of the mortgages in the pool. The Portfolio normally
will not distribute principal payments (whether regular or prepaid) to its
shareholders. Rather, it will invest such payments in additional
mortgage-related securities of the types described above or other
U.S. Government securities. Interest received by the Portfolio will,
however, be distributed to shareholders. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.
As prepayment rates of the individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA indicate that
the average life of single-family dwelling mortgages with 25-to 30-year
maturities, the type of mortgages backing the vast majority of GNMA
Certificates, is approximately 12 years. Therefore, it is customary to
treat GNMA Certificates as 30-year mortgage-backed securities which prepay
fully in the twelfth year.
The coupon rate of interest of GNMA Certificates is lower than the interest
rate paid on the VA-guaranteed or FHA-insured mortgages underlying the GNMA
Certificates, but only by the amount of the fees paid to GNMA and the GNMA
Certificate issuer. For the most common type of mortgage pool, containing
single-family dwelling mortgages, GNMA receives an annual fee of 0.06 of one
percent of the outstanding principal for providing its guarantee, and the
GNMA Certificate issuer is paid an annual servicing fee of 0.44 of one
percent for assembling the mortgage pool and for passing through monthly
payments of interest and principal to Certificate holders. The coupon rate
by itself, however, does not indicate the yield which will be earned on the
GNMA Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to assume
that the Certificates will have a 12 year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1.00% more than
high grade corporate bonds and 1/2 of 1.00% more than U.S. Government and
U.S. Government agency bonds.
Since the inception of the GNMA mortgage-backed securities program in 1970,
the amount of GNMA Certificates outstanding has grown rapidly. The size of
the market and the active participation in the secondary market by
securities dealers and many types of investors make GNMA Certificates highly
liquid instruments. Quotes for GNMA Certificates are readily available from
securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the
pool of mortgages backing each Certificate.
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional
residential mortgages. FHLMC issues two types of mortgage pass-through
securities, mortgage participation certificates ("PCs") and guaranteed
mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each
PC represents a pro rata share of all interest and principal payments made
and owed on the underlying pool. Like GNMA Certificates, PCs are assumed to
be prepaid fully in their twelfth year. FHLMC guarantees timely monthly
payment of interest of PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semiannually and return principal once a year
in guaranteed minimum payments. The expected average life of these
securities is approximately 10 years.
The Federal National Mortgage Association ("FNMA") creates a secondary
market in mortgages insured by the FHA. FNMA issues guarantee mortgage
pass-through certificates ("FNMA Certificates"). FNMA Certificates resemble
GNMA Certificates in that each Certificate represents a pro rata share of
all interest and principal payments made and owed on the underlying pool.
FNMA guarantees timely payment of interest on FNMA Certificates and the full
return of principal. Like GNMA Certificates, FNMA Certificates are assumed
to be prepaid fully in their twelfth year.
Risk of foreclosure of the underlying mortgages is greater with FHLMC and
FNMA securities because, unlike GNMA securities, FHLMC and FNMA securities
are not guaranteed by the full faith and credit of the U.S. Government.
Forward Commitments (Government Portfolio and Mid Cap Portfolio). The
Portfolio may purchase or sell U.S. Government securities on a ''when-
issued'' or ''delayed delivery'' basis (''Forward Commitments''). These
transactions occur when securities are purchased or sold by the Portfolio
with payment and delivery taking place in the future, frequently a month or
more after such transactions. The price is fixed on the date of the
commitment, and the seller continues to accrue interest on the securities
covered by the Forward Commitment until delivery and payment take place. At
the time of settlement, the market value of the securities may be more or
less than the purchase or sale price.
A Forward Commitment sale is covered if the Portfolio owns or has the right
to acquire the underlying securities subject to the Forward Commitment. A
Forward Commitment sale is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in value of a security
which the Portfolio owns or has the right to acquire. In either
circumstance, the Portfolio maintains in a segregated account (which is
marked to market daily) either the security covered by the Forward
Commitment or appropriate securities as required by the Investment Company
Act of 1940, as amended (the "1940 Act") (which may have maturities which
are longer than the term of the Forward Commitment) with the Portfolio's
custodian in an aggregate amount equal to the amount of its commitment as
long as the obligation to sell continues. By entering into a Forward
Commitment sale transaction, the Portfolio forgoes or reduces the potential
for both gain and loss in the security which is being hedged by the Forward
Commitment sale.
The Portfolio may either settle a Forward Commitment by taking delivery of
the securities or may either resell or repurchase a Forward Commitment on or
before the settlement date in which event the Portfolio may reinvest the
proceeds in another Forward Commitment. The Portfolio's use of Forward
Commitments may increase its overall investment exposure and thus its
potential for gain or loss. When engaging in Forward Commitments, the
Portfolio relies on the other party to complete the transaction; should the
other party fail to do so, the Portfolio might lose a purchase or sale
opportunity that could be more advantageous than alternative opportunities
at the time of the failure.
The Portfolio maintains a segregated account (which is marked to market
daily) of appropriate securities as required by the 1940 Act covered by the
Forward Commitment with the Portfolio's custodian in an aggregate amount
equal to the amount of its commitment as long as the obligation to purchase
or sell continues.
Short-Term Investments (All Portfolios). In certain circumstances the
Portfolios may invest without limitation in all types of short-term money
market instruments, including U.S. Government securities; certificates of
deposit, time deposits and bankers' acceptances issued by domestic banks
(including their branches located outside the United States and subsidiaries
located in Canada), domestic branches of foreign banks, savings and loan
associations and similar institutions; high grade commercial paper; and
repurchase agreements. To the extent a Portfolio is investing in short-term
investments as a temporary defensive posture, the applicable Portfolio's
investment objective may not be achieved.
Commercial Paper (All Portfolios). Commercial paper consists of short-term
(usually 1 to 270 days) unsecured promissory notes issued by corporations in
order to finance their current operations. A variable amount master demand
note (which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender, such as one of the Portfolios pursuant to which the lender may
determine to invest varying amounts. Transfer of such notes is usually
restricted by the issuer, and there is no secondary trading market for such
notes.
DERIVATIVE INSTRUMENTS
Options, Futures Contracts and Related Options (All Portfolios)
Selling Call and Put Options (Small Cap Portfolio, Mid Cap Portfolio, Growth
Portfolio, Growth and Income Portfolio and Government Portfolio). The
principal reason for selling options is to obtain, through receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. A Portfolio's current return can be expected to fluctuate
because premiums earned from writing options and dividend or interest income
yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities also results in a higher
portfolio turnover. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from
the writer at a specified price during a certain period. Small Cap
Portfolio, Growth Portfolio and Growth and Income Portfolio sell call
options only on a covered basis. Government Portfolio sells call options
either on a covered basis, or for cross-hedging purposes. A call option is
covered if the Portfolio owns or has the right to acquire the underlying
securities subject to the call option at all times during the option period.
Thus, Government Portfolio may sell options on U.S. Government securities or
forward commitments of such securities. An option is for cross-hedging
purposes (relative to Government Portfolio only) to hedge against a security
which the Portfolio owns or has the right to acquire. In such
circumstances, Government Portfolio maintains in a segregated account with
the Portfolio's Custodian, cash or U.S. Government securities in an amount
not less than the market value of the underlying security, marked to market
daily, while the option is outstanding. The purchaser of a put option pays
a premium to the seller (i.e., the writer) for the right to sell the
underlying security to the writer at a specified price during a certain
period. A Portfolio sells put options only on a secured basis, which means
that, at all times during the option period, the Portfolio would maintain in
a segregated account with its Custodian cash, cash equivalents or liquid
securities in an amount of not less than the exercise price of the option,
or will hold a put on the same underlying security at an equal or greater
exercise price. A Portfolio generally sells put options when the manager
wishes to purchase the underlying security for the Portfolio's portfolio at
a price lower than the current market price of the security.
In order to terminate its position as writer of a call or put option, a
Portfolio may enter into a "closing purchase transaction," which is the
purchase of a call (put) on the same underlying security and having the same
exercise price and expiration date as the call (put) previously sold by the
Portfolio. The Portfolio will realize a gain (loss) if the premium plus
commission paid in the closing purchase transaction is less (greater) than
the premium it received on the sale of the option. A Portfolio would also
realize a gain if an option it has sold lapses unexercised. A Portfolio may
sell options that are listed on an exchange as well as options that are
traded over-the-counter. A Portfolio may close out its position as writer
of an option only if a liquid secondary market exists for options of that
series, but there is no assurance that such a market will exist,
particularly in the case of over-the-counter options, since they can be
closed out only with the other party to the transaction. Alternatively, a
Portfolio may purchase an offsetting option, which does not close out its
position as a writer, but provides an asset of equal value to its obligation
under the option sold. If a Portfolio is not able to enter into a closing
purchase transaction or to purchase an offsetting option with respect to an
option it has sold, it will be required to maintain the securities subject
to the call or the collateral securing the put until a closing purchase
transaction can be entered into (or the option is exercised or expires),
even though it might not be advantageous to do so.
By selling a call option, a Portfolio loses the potential for gain on the
underlying security above the exercise price while the option is
outstanding; by writing a put option a Portfolio might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the United States exchanges has established limitations governing
the maximum number of call or put options on the same underlying security
(whether or not covered) that may be written by a single investor, whether
acting alone or in concert with others, regardless of whether such options
are written on one or more accounts or through one or more brokers. An
exchange may order the liquidation of positions found to be in violation of
those limits, and it may impose other sanctions or restrictions. These
position limits may restrict the number of options the Portfolio may be able
to write.
Purchasing Call and Put Options (All Portfolios). A Portfolio may purchase
call options to protect (e.g., hedge) against anticipated increases in the
prices of securities it wishes to acquire. Alternatively, call options may
be purchased for their leverage potential. Since the premium paid for a
call option is typically a small fraction of the price of the underlying
security, a given amount of funds will purchase call options covering a much
larger quantity of such security than could be purchased directly. By
purchasing call options, a Portfolio can benefit from any significant
increase in the price of the underlying security to a greater extent than
had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, a Portfolio could bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired. Conversely, put options may be purchased to protect (e.g., hedge)
against anticipated declines in the market value of either specific
portfolio securities or of a Portfolio's assets generally. Alternatively,
put options may be purchased for capital appreciation in anticipation of a
price decline in the underlying security and a corresponding increase in the
value of the put option. The purchase of put options for capital
appreciation involves the same significant risk of loss as described above
for call options. In any case, the purchase of options for capital
appreciation would increase the Portfolio's volatility by increasing the
impact of changes in the market price of the underlying securities on the
Portfolio's net asset value. The Portfolios may purchase either listed or
over-the-counter options.
Options on Stock Indexes (All Portfolios except Government Portfolio).
Options on stock indices are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive an amount of cash upon exercise of the option.
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than (in the case of a
call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be the difference between the closing price
of the index and the exercise price of the option, multiplied by a specified
dollar multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Some stock index options
are based on a broad market index such as the Standard & Poor's 500 or the
New York Stock Exchange Composite Index, or a narrower index such as the
Standard & Poor's 100. Indexes are also based on an industry or market
segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options are currently traded on The Chicago Board Options
Exchange, the New York Stock Exchange, the American Stock Exchange and other
exchanges. Gain or loss to a Portfolio on transactions in stock index
options will depend on price movements in the stock market generally (or in
a particular industry or segment of the market) rather than price movements
of individual securities. As with stock options, the Portfolio may offset
its position in stock index options prior to expiration by entering into a
closing transaction on an Exchange, or it may let the option expire
unexercised.
Foreign Currency Options (Mid Cap Portfolio). The Portfolio may purchase
put and call options on foreign currencies to reduce the risk of currency
exchange fluctuation. Premiums paid for such put and call options will be
limited to no more than 5% of the Portfolio's net assets at any given time.
Options on foreign currencies operate similarly to options on securities,
and are traded primarily in the over-the-counter market, although options on
foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the Portfolio from
time to time and over-the-counter options may also be purchased, but only
when the manager believes that a liquid secondary market exists for such
options, although there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign
exchange rates and investment generally.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the
price of the option position may vary with changes in the value of either or
both currencies and has no relationship to the investment merits of a
foreign security. Because foreign currency transactions occurring in the
interbank market (conducted directly between currency traders, usually large
commercial banks, and their customers) involve substantially larger amounts
than those that may be involved in the use of foreign currency options,
investors may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis. Quotation information available is generally representative of very
large transactions in the interbank market and thus may not reflect
relatively smaller transactions (i.e., less than $1 million) where rates may
be less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are
closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying
markets that cannot be reflected in the options markets.
Futures Contracts (All Portfolios). Each Portfolio may engage in
transactions involving futures contracts and related options in accordance
with rules and interpretations of the Commodity Futures Trading Commission
("CFTC") under which the Portfolios are exempt from registration as a
"commodity pool".
An interest rate futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of a specific type of debt
security at a specified future time and at a specified price. Although
interest rate futures contracts call for delivery of specified securities,
in most cases the contracts are closed out (by an offsetting purchase or
sale) prior to actual delivery, with the difference between the contract
price and the offsetting price paid in cash.
A stock index futures contract is a bilateral agreement pursuant to which
two parties agree to take or make delivery of cash equal to a specified
dollar amount times the difference between the stock index value at a
specified time and the price at which the futures contract is originally
struck. A stock index fluctuates with changes in the market values of the
stocks included. No physical delivery of the underlying stocks in the index
is made.
Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in differences
in correlation of the futures contracts with movements in the value of the
securities being hedged.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded
on the Osaka Exchange, Financial Times Stock Exchange Index of the
100 largest stocks on the London Stock Exchange, the All Ordinaries Share
Price Index of 307 stocks on the Sydney, Melbourne Exchanges, Hang Seng
Index of 33 stocks on the Hong Kong Stock Exchange, Barclays Share Price
Index of 40 stocks on the New Zealand Stock Exchange and Toronto Index of
35 stocks on the Toronto Stock Exchange. Futures and futures options on the
Nikkei Index are traded on the CME and United States commodity exchanges may
develop futures and futures options on other indices of foreign securities.
Futures and options on United States devised index of foreign stocks are
also being developed. Investments in securities of foreign entities and
securities denominated in foreign currencies involve risks not typically
involved in domestic investment, including fluctuations in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments.
In contrast to the purchase or sale of a security, no price is paid or
received upon the purchase or sale of a futures contract. Initially, a
Portfolio is required to deposit with its Custodian in an account in the
broker's name an amount of appropriate securities as required by the 1940
Act equal to a percentage (which will normally range between 2% and 10%) of
the contract amount. This amount is known as initial margin. The nature of
initial margin in futures transactions is different from that of margin in
securities transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transaction. Rather, the
initial margin is in the nature of a performance bond or good faith deposit
on the contract, which is returned to the Portfolio upon termination of the
futures contract and satisfaction of its contractual obligations.
Subsequent payments to and from the broker, called variation margin, are
made on a daily basis as the price of the underlying securities or index
fluctuates, making the long and short positions in the futures contract more
or less valuable, a process known as marking to market.
For example, when a Portfolio purchases a futures contract and the price of
the underlying security or index rises, that position increases in value,
and the Portfolio receives from the broker a variation margin payment equal
to that increase in value. Conversely, where the Portfolio purchases a
futures contract and the value of the underlying security or index declines,
the position is less valuable, and the Portfolio is required to make a
variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Portfolio may
elect to terminate the position by taking an opposite position. A final
determination of variation margin is then made, additional cash is required
to be paid by or released to the Portfolio, and the Portfolio realizes a
loss or a gain.
When a Portfolio anticipates a significant market or market sector advance,
the purchase of a futures contract affords a hedge against not participating
in the advance at a time when the Portfolio is otherwise fully invested
("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As
individual securities are purchased, an equivalent amount of futures
contracts could be terminated by offsetting sales. A Portfolio may sell
futures contracts in anticipation of or in a general market or market sector
decline that may adversely affect the market value of the Portfolio's
securities ("defensive hedge"). To the extent that the Portfolio's
portfolio of securities changes in value in correlation with the underlying
security or index, the sale of futures contracts substantially reduces the
risk to the Portfolio of a market decline and, by so doing, provides an
alternative to the liquidation of securities positions in the Portfolio with
attendant transaction costs.
For example, if Government Portfolio holds long-term U.S. Government
securities, and a rise in long-term interest rates is anticipated, it could,
in lieu of selling its portfolio securities, sell futures contracts for
similar long-term securities. If interest rates increased and the value of
the Portfolio's securities declined during the period the contracts were
outstanding, the value of the Portfolio's futures contracts should increase,
thereby protecting the Portfolio by preventing net asset value from
declining as much as it otherwise would have.
In the event of the bankruptcy of a broker through which a Portfolio engages
in transactions in listed options, futures or related options, the Portfolio
could experience delays and/or losses in liquidating open positions
purchased incur a loss of all or part of its margin deposits with the
broker. Similarly, in the event of the bankruptcy of the writer of an
over-the-counter option purchased by Government Portfolio, the Portfolio
could experience a loss of all or part of the value of the option.
Transactions are entered into by a Portfolio only with brokers or financial
institutions deemed creditworthy by the manager.
Each Portfolio's futures transactions will be entered into for traditional
hedging purposes; that is, futures contracts will be sold to protect against
a decline in the price of securities or currencies that the Portfolio owns,
or futures contracts will be purchased to protect a Portfolio against an
increase in the price of securities of currencies it has committed to
purchase or expects to purchase. A Portfolio pays commissions on futures
contracts and options transactions.
Options on Futures Contracts (All Portfolios). A Portfolio may also
purchase and sell options on futures contracts which are traded on an
Exchange. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is
a put), at a specified exercise price at any time during the option period.
As a seller of an option on a futures contract, a Portfolio is subject to
initial margin and maintenance requirements similar to those applicable to
futures contracts. In addition, net option premiums received by a Portfolio
are required to be included as initial margin deposits. When an option on a
futures contract is exercised, delivery of the futures position is
accompanied by cash representing the difference between the current market
price of the futures contract and the exercise price of the option. A
Portfolio may purchase put options on futures contracts in lieu of, and for
the same purposes as, the sale of a futures contract. The purchase of call
options on futures contracts in intended to serve the same purpose as the
actual purchase of the futures contract.
Forward Currency Contracts and Options on Currency (Mid Cap Portfolio). A
forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. The Portfolio may either accept or make delivery of the currency
at the maturity of the forward contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale or an offsetting
contract. The Portfolio engages in forward currency transactions in
anticipation of, or to protect itself against fluctuations in exchange
rates. The Portfolio might sell a particular foreign currency forward, for
example, when it holds bonds denominated in that currency but anticipates,
and seeks to be protected against, decline in the currency against the
U.S. dollar. Similarly, the Portfolio might sell the U.S. dollar forward
when it holds bonds denominated in U.S. dollars but anticipates, and seeks
to be protected against, a decline in the U.S. dollar relative to other
currencies. Further, the Portfolio might purchase a currency forward to
"lock in" the price of securities denominated in that currency which it
anticipates purchasing.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated
asset, that is the subject of the hedge, generally will not be precise. In
addition, the Portfolio may not always be able to enter into foreign
currency forward contracts at attractive prices and this will limit the
Portfolio's ability to use such contract to hedge or cross-hedge its assets.
Also, with regard to the Portfolio's use of cross-hedges, there can be no
assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any
time poor correlation may exist between movements in the exchange rates of
the foreign currencies underlying the Portfolio's cross-hedges and the
movements in the exchange rates of foreign currencies in which the
Portfolio's assets that are the subject of such cross-hedges are
denominated.
Forward contracts are traded in an interbank market conducted directly
between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement and is
consummated without payment of any commission. The Portfolio, however, may
enter into forward contracts with deposit requirements or commissions.
A put option on currency gives the Portfolio, as purchaser, the right (but
not the obligation) to sell a specified amount of currency at the exercise
price until the expiration of the option. A call option gives the
Portfolio, as purchaser, the right (but not the obligation) to purchase a
specified amount of currency at the exercise price until its expiration.
The Portfolio might purchase a currency put option, for example, to protect
itself during the contract period against a decline in the value of a
currency in which it holds or anticipates holding securities. If the
currency's value should decline, the loss in currency value should be
offset, in whole or in part, by an increase in the value of the put. If the
value of the currency instead should rise, any gain to the Portfolio would
be reduced by the premium it had paid for the put option. A currency call
option might be purchased, for example, in anticipation of, or to protect
against, a rise in the value of a currency in which the Portfolio
anticipates purchasing securities.
The Portfolio's ability to establish and close out positions in foreign
currency options is subject to the existence of a liquid market. There can
be no assurance that a liquid market will exist for a particular option at
any specific time. In addition, options on foreign currencies are affected
by all of those factors that influence foreign exchange rates and investment
generally.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Exchange
markets for options on foreign currencies exist but are relatively new, and
the ability to establish and close out positions on the exchanges is subject
to maintenance of a liquid secondary market. Closing transactions may be
effected with respect to options traded in the over-the-counter ("OTC")
markets (currently the primary markets for options on foreign currencies)
only by negotiating directly with the other party to the option contract or
in a secondary market for the option if such market exists. Although the
Portfolio intends to purchase only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market will exist for any particular option at any specific time. In such
event, it may not be possible to effect closing transactions with respect to
certain options, with the result that the Portfolio would have to exercise
those options which it has purchased in order to realize any profit. The
staff of the Securities and Exchange Commission ("SEC") has taken the
position that, in general, purchased OTC options and the underlying
securities used to cover written OTC options are illiquid securities.
However, the Portfolio may treat as liquid the underlying securities used to
cover written OTC options, provided it has arrangements with certain
qualified dealers who agree that the Portfolio may repurchase any option it
writes for a maximum price to be calculated by a predetermined formula. In
these cases, the OTC option itself would only be considered illiquid to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Use of Segregated and Other Special Accounts (All Portfolios). Use of many
hedging and other strategic transactions including currency and market index
transactions by the Portfolio will require, among other things, that the
Portfolio segregate cash, liquid securities or other assets with its
Custodian, or a designated sub-custodian, to the extent the Portfolio's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full
amount of any obligation by the Portfolio to pay or deliver securities or
assets must be covered at all times by the securities, instruments or
currency required to be delivered, or, subject to any regulatory
restrictions, appropriate securities as required by the 1940 Act at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is
no longer necessary to segregate them. A call option on securities written
by the Portfolio, for example, will require the Portfolio to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Portfolio on an index will require the
Portfolio to own portfolio securities that correlate with the index or to
segregate liquid securities equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by
the Portfolio will require the Portfolio to segregate liquid securities
equal to the exercise price. Except when the Portfolio enters into a
forward contract in connection with the purchase or sale of a security
denominated in a foreign currency or for other non-speculative purposes,
which requires no segregation, a currency contract that obligates the
Portfolio to buy or sell a foreign currency will generally require the
Portfolio to hold an amount of that currency, liquid securities denominated
in that currency equal to the Portfolio's obligations or to segregate liquid
securities equal to the amount of the Portfolio's obligations.
OTC options entered into by the Portfolio, including those on securities,
currency, financial instruments or indices, and OCC-issued and
exchange-listed index options will generally provide for cash settlement,
although the Portfolio will not be required to do so. As a result, when the
Portfolio sells these instruments it will segregate an amount of assets
equal to its obligations under the options. OCC-issued and exchange-listed
options sold by the Portfolio other than those described above generally
settle with physical delivery, and the Portfolio will segregate an amount of
assets equal to the full value of the option. OTC options settling with
physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, the
Portfolio must deposit initial margin and, in some instances, daily
variation margin in addition to segregating assets sufficient to meet its
obligations to purchase or provide securities or currencies, or to pay the
amount owed at the expiration of an index-based futures contract. These
assets may consist of cash, cash equivalents, liquid securities or other
acceptable assets. The Portfolio will accrue the net amount of the excess,
if any, of its obligations relating to swaps over its entitlements with
respect to each swap on a daily basis and will segregate with its custodian,
or designated sub-custodian, an amount of cash or liquid securities having
an aggregate value equal to at least the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the Portfolio's
net obligation, if any.
Hedging and other strategic transactions may be covered by means other than
those described above when consistent with applicable regulatory policies.
The Portfolio may also enter into offsetting transactions so that its
combined position, coupled with any segregated assets, equals its net
outstanding obligation in related options and hedging and other strategic
transactions. The Portfolio could purchase a put option, for example, if
the strike price of that option is the same or higher than the strike price
of a put option sold by the Portfolio. Moreover, instead of segregating
assets if it holds a futures contract or forward contract, the Portfolio
could purchase a put option on the same futures contract or forward contract
with a strike price as high or higher than the price of the contract held.
Other hedging and other strategic transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation
would need to be segregated.
OTHER PRACTICES
Repurchase Agreements (All Portfolios). Each Portfolio may enter into
repurchase agreements with broker-dealers or domestic banks. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the
Portfolio) acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, usually not more
than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are
collateralized by the underlying debt securities and may be considered to be
loans under the 1940 Act. The Portfolio will make payment for such
securities only upon physical delivery or evidence of book entry transfer to
the account of a custodian or bank acting as agent. The seller under a
repurchase agreement is required to maintain the value of the underlying
securities marked to market daily at not less than the repurchase price.
The underlying securities (normally securities of the U.S. Government, or
its agencies and instrumentalities), may have maturity dates exceeding one
year. The Portfolio does not bear the risk of a decline in value of the
underlying security unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Portfolio could experience both delays in
liquidating the underlying securities and loss including: (a) possible
decline in the value of the underlying security during the period while the
Portfolio seeks to enforce its rights thereto, (b) possible lack of access
to income on the underlying security during this period, and (c) expenses of
enforcing its rights.
For the purpose of investing in repurchase agreements, the manager may
aggregate the cash that certain funds or accounts that are advised or
subadvised by the manager or its affiliates would otherwise invest
separately into a joint account. The cash in the joint account is then
invested in repurchase agreements and the Portfolios, funds or accounts that
contributed to the joint account share pro rata in the net revenue
generated. The manager believes that the joint account produces efficiencies
and economies of scale that may contribute to reduced transaction costs,
higher returns, higher quality investments and greater diversity of
investments for a Portfolio than would be available to a Portfolio investing
separately. The manner in which the joint account is managed is subject to
conditions set forth in an SEC exemptive order authorizing this practice,
which conditions are designed to ensure the fair administration of the joint
account and to protect the amounts in that account.
Reverse Repurchase Agreements (Mid Cap and Government Portfolios). Mid Cap
Portfolio and Government Portfolio may invest in reverse repurchase
agreements with broker/dealers and other financial institutions. Such
agreements involve the sale of portfolio securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest
payment. Any securities purchased with the funds obtained from the
agreement and securities collateralizing the agreement will have a maturity
date no later than the repayment date. Generally, the Portfolio will be
able to keep the interest income associated with the "coupon" on those
securities, subject to the payment of a fee to the dealer. Such
transactions are generally advantageous because the Portfolio attempts to
lock-in a greater rate of interest on the cash derived from the transaction
than the interest cost of obtaining that cash. Opportunities to realize
earnings from the use of the proceeds equal to or greater than the interest
required to be paid may not always be available, and the Portfolio intends
to use the reverse repurchase technique only when the manager believes it
will be advantageous to the Portfolio. The use of reverse repurchase
agreements may exaggerate any interim increase or decrease in the value of
the Portfolio's assets. The Portfolio's custodian bank will maintain a
separate account for the Portfolio with securities having a value equal to
or greater than such commitments.
Short Sales against the Box (Small Cap Portfolio, Mid Cap Portfolio, Growth
Portfolio and Growth and Income Portfolio). Each Portfolio may from time
to time make short sales of securities it owns or has the right to acquire
through conversion or exchange of other securities it owns. A short sale is
''against the box'' to the extent that the Portfolio contemporaneously owns
or has the right to obtain at no added cost securities identical to those
sold short. In a short sale, the Portfolio does not immediately deliver the
securities sold and does not receive the proceeds from the sale. The
Portfolio is said to have a short position in the securities sold until it
delivers the securities sold, at which time it receives the proceeds of the
sale.
To secure its obligation to deliver the securities sold short, the Portfolio
will deposit in escrow in a separate account with its custodian an equal
amount of the securities sold short or securities convertible into or
exchangeable for such securities. The Portfolio may close out a short
position by purchasing and delivering an equal amount of the securities sold
short, rather than by delivering securities already held by the Portfolio,
because the Portfolio may want to continue to receive interest and dividend
payments on securities in its portfolio that are convertible into the
securities sold short.
Loans of Portfolio Securities (All Portfolios). Each of the Portfolios may
lend portfolio securities to unaffiliated brokers, dealers and financial
institutions provided that cash equal to 100% of the market value of the
securities loaned is deposited by the borrower with the particular Portfolio
and is marked to market daily. While such securities are on loan, the
borrower is required to pay the Portfolio any income accruing thereon.
Furthermore, the Portfolio may invest the cash collateral in portfolio
securities thereby increasing the return to the Portfolio as well as
increasing the market risk to the Portfolio. A Portfolio will not lend its
portfolio securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for sale.
However, should the Portfolio believe that lending securities is in the best
interests of the Portfolio's shareholders, it would consider withdrawing its
shares from sale in any such state.
Loans would be made for short-term purposes and subject to termination by
the Portfolio in the normal settlement time, currently five business days
after notice, or by the borrower on one day's notice. Borrowed securities
must be returned when the loan is terminated. Any gain or loss in the
market price of the borrowed securities which occurs during the term of the
loan inures to the Portfolio and its shareholders, but any gain can be
realized only if the borrower does not default. Each Portfolio may pay
reasonable finders', administrative and custodial fees in connection with a
loan.
RISK FACTORS
General. Investors should realize that risk of loss is inherent in the
ownership of any securities and that each Portfolio's net asset value will
fluctuate, reflecting fluctuations in the market value of its portfolio
positions.
Fixed Income Securities. Investments in fixed income securities may subject
the Portfolios to risks, including the following:
Interest Rate Risk. When interest rates decline, the market value of
fixed income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed income securities tends to decline. The
volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer of the security could default on its
obligations, causing a Portfolio to sustain losses on such investments. A
default could impact both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject
to both call risk and extension risk. Call risk exists when the issuer may
exercise its right to pay principal on an obligation earlier than scheduled,
which would cause cash flows to be returned earlier than expected. This
typically results when interest rates have declined and a Portfolio will
suffer from having to reinvest in lower yielding securities. Extension risk
exists when the issuer may exercise its right to pay principal on an
obligation later than scheduled, which would cause cash flows to be returned
later than expected. This typically results when interest rates have
increased, and a Portfolio will suffer from the inability to invest in
higher yield securities.
Below Investment Grade Fixed-Income Securities. Securities rated in the
fourth highest ratings category by an NRSRO, such as those rated BBB by S&P
or Baa by Moody's, are generally regarded as having adequate capacity to pay
interest and repay principal, but may have some speculative characteristics.
Securities rated below the fourth highest ratings category by an NRSRO,
including those rated below Baa by Moody's or BBB by S&P, are not
"investment grade," and may have more speculative characteristics, including
the possibility of default or bankruptcy of the issuers of such securities,
market price volatility based upon interest rate sensitivity, questionable
creditworthiness and relative liquidity of the secondary trading market.
Because high yield bonds have been found to be more sensitive to adverse
economic changes or individual corporate developments and less sensitive to
interest rate changes than higher-rated investments, an economic downturn
could disrupt the market for high yield bonds and adversely affect the value
of outstanding bonds and the ability of issuers to repay principal and
interest. In addition, in a declining interest rate market, issuers of high
yield bonds may exercise redemption or call provisions, which may force a
Portfolio, to the extent it owns such securities, to replace those
securities with lower yielding securities. This could result in a decreased
return.
Small Capitalization Companies. Small companies (those companies that have
market capitalizations in the lowest 20% of all publicly traded U.S.
companies) may (i) be subject to more volatile market movements than
securities of larger, more established companies; (ii) have limited product
lines, markets or financial resources; and (iii) depend upon a limited or
less experienced management group. The securities of small companies may be
traded only on the over-the-counter market or on a regional securities
exchange and may not be traded daily or in the volume typical of trading on
a national securities exchange. Disposition by the Portfolio of small
company securities in order to meet redemptions may require the Portfolio to
sell these securities at a discount from market prices, over a longer period
of time or during periods when disposition is not desirable.
Foreign Securities. Investments in securities of foreign issuers involve
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include fluctuations in foreign exchange
rates, future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. Since each Portfolio (except the Government Portfolio) will
invest heavily in securities denominated or quoted in currencies other than
the U.S. dollar, changes in foreign currency exchange rates will, to the
extent the Portfolio does not adequately hedge against such fluctuations,
affect the value of securities in its portfolio and the unrealized
appreciation or depreciation of investments so far as U.S. investors are
concerned. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could affect investment in
those countries. There may be less publicly available information about a
foreign security than about a security issued by a U.S. company, and foreign
entities may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States entities. In
addition, certain foreign investments made by the Portfolio may be subject
to foreign withholding taxes, which would reduce the Portfolio's total
return on such investments and the amounts available for distributions by
the Portfolio to its shareholders. See ''Dividends, Distributions and
Taxes.'' Foreign financial markets, while growing in volume, have, for the
most part, substantially less volume than United States markets, and
securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. The foreign
markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Portfolio are not invested and no return is
earned thereon. The inability of each Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
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. Costs associated with
transactions in foreign securities, including custodial costs and foreign
brokerage commissions, are generally higher than with transactions in United
States securities. In addition, each Portfolio will incur cost in connection
with conversions between various currencies. There is generally less
government supervision and regulation of exchanges, financial institutions
and issuers in foreign countries than there are in the United States. These
risks may be intensified in the case of investments in developing or
emerging markets. In many developing markets, there is less government
supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United States. The
foreign securities markets of many of the countries in which the Portfolio
may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the United States. Finally, in the event of a
default on any such foreign debt obligations, it may be more difficult for
the Portfolio to obtain or to enforce a judgment against the issuers of such
securities.
Currency Risks. The U.S. dollar value of securities denominated in a
foreign currency will vary with changes in currency exchange rates, which
can be volatile. Accordingly, changes in the value of the currency in which
a Portfolio's investments are denominated relative to the U.S. dollar will
affect the Portfolio's net asset value. Exchange rates are generally
affected by the forces of supply and demand in the international currency
markets, the relative merits of investing in different countries and the
intervention or failure to intervene of U.S. or foreign governments and
central banks. However, currency exchange rates may fluctuate based on
factors intrinsic to a country's economy. Some emerging market countries
also may have managed currencies, which are not free floating against the
U.S. dollar. In addition, emerging markets are subject to the risk of
restrictions upon the free conversion of their currencies into other
currencies. Any devaluations relative to the U.S. dollar in the currencies
in which a Portfolio's securities are quoted would reduce the Portfolio's
net asset value per share.
Special Risks of Countries in the Asia Pacific Region. Certain of the
risks associated with international investments are heightened for
investments in these countries. For example, some of the currencies of these
countries have experienced devaluations relative to the U.S. dollar, and
adjustments have been made periodically in certain of such currencies.
Certain countries, such as Indonesia, face serious exchange constraints.
Jurisdictional disputes also exist. In addition, Hong Kong reverted to
Chinese administration on July 1, 1997. The long-term effects of this
reversion are not known at this time.
Securities of Developing/Emerging Markets Countries. A developing or
emerging markets country generally is considered to be a country that is in
the initial stages of its industrialization cycle. Investing in the equity
markets of developing countries involves exposure to economic structures
that are generally less diverse and mature, and to political systems that
can be expected to have less stability, than those of developed countries.
Historical experience indicates that the markets of developing countries
have been more volatile than the markets of the more mature economies of
developed countries; however, such markets often have provided higher rates
of return to investors.
One or more of the risks discussed above could affect adversely the economy
of a developing market or a Portfolio's investments in such a market. In
Eastern Europe, for example, upon the accession to power of Communist
regimes in the past, the governments of a number of Eastern European
countries expropriated a large amount of property. The claims of many
property owners against those of governments may remain unsettled. There
can be no assurance that any investments that a Portfolio might make in such
emerging markets would not be expropriated, nationalized or otherwise
confiscated at some time in the future. In such an event, the Portfolio
could lose its entire investment in the market involved. Moreover, changes
in the leadership or policies of such markets could halt the expansion or
reverse the liberalization of foreign investment policies now occurring in
certain of these markets and adversely affect existing investment
opportunities.
Many of a Portfolio's investments in the securities of emerging markets may
be unrated or rated below investment grade. Securities rated below
investment grade (and comparable unrated securities) are the equivalent of
high yield, high risk bonds, commonly known as "junk bonds." Such securities
are regarded as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligations and involve major risk exposure to adverse business,
financial, economic, or political conditions.
Derivative Instruments. In accordance with its investment policies, each
Portfolio may invest in certain 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.
Essentially, a derivative instrument is a financial arrangement or a
contract between two parties (and not a true security like a stock or a
bond). Transactions in derivative instruments can be, but are not
necessarily, riskier than investments in conventional stocks, bonds and
money market instruments. A derivative instrument is more accurately viewed
as a way of reallocating risk among different parties or substituting one
type of risk for another. Every investment by a Portfolio, including an
investment in conventional securities, reflects an implicit prediction about
future changes in the value of that investment. Every Portfolio investment
also involves a risk that the portfolio manager's expectations will be
wrong. Transactions in derivative instruments often enable a Portfolio to
take investment positions that more precisely reflect the portfolio
manager's expectations concerning the future performance of the various
investments available to the Portfolio. Derivative instruments can be a
legitimate and often cost-effective method of accomplishing the same
investment goals as could be achieved through other investment in
conventional securities.
Derivative contracts include options, futures contracts, forward contracts,
forward commitment and when-issued securities transactions, forward foreign
currency exchange contracts and interest rate, mortgage and currency swaps.
The following are the principal risks associated with derivative
instruments:
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 investment objective of even a
conservative Portfolio in order to achieve an average portfolio volatility
that is within the expected range for that type of Portfolio.
Credit risk: The issuer of the instrument may default on its
obligation to pay interest and principal.
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 Portfolios are not readily
marketable and are subject to a Portfolio'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.
Each derivative instrument purchased for a Portfolio's portfolio is reviewed
and analyzed by the Portfolio's portfolio manager to assess the risk and
reward of each such instrument in relation to the Portfolio's portfolio
investment strategy. The decision to invest in derivative instruments or
conventional securities is made by measuring the respective instrument's
ability to provide value to the Portfolio and its shareholders.
Special Risks of Using Futures Contracts. The prices of Futures Contracts
are volatile and are influenced by, among other things, actual and
anticipated changes in interest rates, which in turn are affected by fiscal
and monetary policies and national and international political and economic
events.
At best, the correlation between changes in prices of Futures Contracts and
of the securities or currencies being hedged can be only approximate. The
degree of imperfection of correlation depends upon circumstances such as:
variations in speculative market demand for Futures and for debt securities
or currencies, including technical influences in Futures trading; and
differences between the financial instruments being hedged and the
instruments underlying the standard Futures Contracts available for trading,
with respect to interest rate levels, maturities, and creditworthiness of
issuers. A decision of whether, when, and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or interest rate trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the Futures Contract is deposited as margin, a
subsequent 10% decrease in the value of the Futures Contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in
a loss equal to 150% of the original margin deposit, if the Futures Contract
were closed out. Thus, a purchase or sale of a Futures Contract may result
in losses in excess of the amount invested in the Futures Contract. A
Portfolio, however, would presumably have sustained comparable losses if,
instead of the Futures Contract, it had invested in the underlying financial
instrument and sold it after the decline. Where a Portfolio enters into
Futures transactions for non-hedging purposes, it will be subject to greater
risks and could sustain losses which are not offset by gains on other
Portfolio assets.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that each Portfolio has sufficient assets to satisfy its obligations
under a Futures Contract, the Portfolio segregates and commits to back the
Futures Contract an amount of cash and liquid securities equal in value to
the current value of the underlying instrument less the margin deposit.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type
of Futures Contract, no trades may be made on that day at a price beyond
that limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures Contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt
liquidation of Futures positions and subjecting some Futures traders to
substantial losses.
Economic and Monetary Union (EMU). EMU began on January 1, 1999 when 11
European countries adopted a single currency -- the Euro. EMU may create
new economic opportunities for investors, such as lower interest rates,
easier cross-border mergers, acquisitions and similar restructurings, more
efficient distribution and product packaging and greater competition.
Budgetary decisions remain in the hands of each participating country, but
are subject to each country's commitment to avoid "excessive deficits" and
other more specific budgetary criteria. A European Central Bank is
responsible for setting the official interest rate within the Euro zone.
EMU and the introduction of the Euro, however, present unique risks and
uncertainties for investors in EMU-participating countries, including: (i)
monetary and economic union on this scale has never before been attempted;
(ii) there is uncertainty whether participating countries will remain
committed to EMU in the face of changing economic conditions; (iii)
instability within EMU may increase the volatility of European markets and
may adversely affect the prices of securities of European issuers held by
the Portfolios; (iv) there is uncertainty concerning the fluctuation of the
Euro relative to non-Euro currencies during the transition period from
January 1, 1999 to December 31, 2000, and beyond; and (v) there is no
assurance that interest rate, tax and labor regimes of EMU-participating
countries will converge over time. These and other factors may cause market
disruption and could adversely affect European securities and currencies
held by the Portfolios.
Year 2000. As the year 2000 began, there were few problems caused by the
inability of certain computer systems to tell the difference between the
year 2000 and the year 1900 (commonly known as the "Year 2000" issue). It
is still possible that some computer systems could malfunction in the future
because of the Year 2000 issue or as a result of actions taken to address
the Year 2000 issue. The manager does not anticipate that its services or
those of the Portfolios' other service providers will be adversely affected,
but the manager will continue to monitor the situation. If malfunctions
related to the Year 2000 issue do arise, the Portfolios and their
investments could be negatively affected.
Portfolio Turnover. Each Portfolio may purchase or sell securities without
regard to the length of time the security has been held and thus may
experience a high rate of portfolio turnover. A 100% turnover rate would
occur, for example, if all the securities in a portfolio were replaced in a
period of one year. Under certain market conditions, the Growth Portfolio
and the Government Portfolio may experience a high rate of portfolio
turnover. This may occur, for example, if the Portfolio writes a substantial
number of covered call options and the market prices of the underlying
securities appreciate. The rate of portfolio turnover is not a limiting
factor when the manager deems it desirable to purchase or sell securities or
to engage in options transactions. The annual turnover rates of the Growth
Portfolio and the Government Portfolio are not expected to exceed 400%; and
the annual turnover rates of the Small Cap Portfolio, the Mid Cap Portfolio
and the Growth and Income Portfolio are not expected to exceed 100%. High
portfolio turnover involves correspondingly greater transaction costs,
including any brokerage commissions, which are borne directly by the
respective Portfolio and may increase the recognition of short-term, rather
than long-term, capital gains if securities are held for one year or less
and may be subject to applicable income taxes. See ''Dividends,
Distributions and Taxes.''
INVESTMENT RESTRICTIONS
The Portfolios have adopted the following fundamental investment
restrictions for the protection of shareholders. Under the 1940 Act, a
fundamental policy of a portfolio may not be changed without the vote of a
majority, as defined in the 1940 Act, of the outstanding voting securities
of the portfolio. Such majority is defined as the lesser of (a) 67% or more
of the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the portfolio are present or represented by proxy, or
(b) more than 50% of the outstanding shares. The percentage limitations
contained in the restrictions listed below (other than with respect to (1)
below) apply at the time of purchases of securities.
The investment policies adopted by the Portfolios prohibit each Portfolio
from:
1. Borrowing money except that (a) the Portfolio may borrow from
banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, and
(b) the Portfolio may, to the extent consistent with its
investment policies, enter into reverse repurchase agreements,
forward roll transactions and similar investment strategies and
techniques. To the extent that it engages in transactions
described in (a) and (b), the Portfolio will be limited so that
no more than 33-1/3% of the value of its total assets (including
the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) valued at
the time the borrowing is made, is derived from such
transactions.
2. Making loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities, to the fullest extent permitted under the 1940 Act.
3. Engaging in the business of underwriting securities issued by
other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
4. Purchasing or selling real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests
therein; (b) holding or selling real estate received in
connection with securities it holds or held; (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the
Portfolio's investment objective and policies); or (d) investing
in real estate investment trust securities.
5. Issuing "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
The Portfolios have also adopted certain nonfundamental investment
restrictions that may be changed by the Trust's Board of Trustees at any
time. Accordingly the Portfolios are prohibited from:
1. Purchasing securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and
sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with
respect to initial or maintenance margin in connection with
futures contracts and related options and options on securities,
indexes or similar items is not considered to be the purchase
of a security on margin.
2. Making short sales of securities or maintaining a short
position.
3. Pledging, hypothecating, mortgaging or otherwise encumbering
more than 33-1/3% of the value of a Portfolio's total assets.
4. Making investments for the purpose of exercising control or
management.
5. Invest in oil, gas or other mineral exploration or development
programs.
6. Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that
are illiquid.
If any percentage restriction described above is complied with at the time
of an investment, a later increase or decrease in percentage resulting from
a change in values or assets will not constitute a violation of such
restriction.
TRUSTEES AND OFFICERS
The Trustees and executive officers and their principal occupations for the
past five years are listed below.
TRUSTEES
DONALD M. CARLTON, Trustee. Radian International L.L.C., 8501 N. Mopac
Blvd., Building No. 6, Austin, Texas 78759. President and Chief Executive
of Radian International L.L.C. (chemical engineering). Director of
National Instruments Corp. and Central and Southwest Corporation. Formerly
Director of The Hartford Steam Boiler Inspection and Insurance Company
(insurance/engineering services); 62.
A. BENTON COCANOUGHER, Trustee. Texas A & M University, 601 Blocker Bldg.,
College Station, Texas 77843-4113. Dean of College of Business
Administration and Graduate School of Business of Texas A & M University;
Director of Randall's Food Markets, Inc.; Director of First American Bank;
and Director of First American Savings Bank; 61.
STEPHEN RANDOLPH GROSS, Trustee. 2625 Cumberland Parkway, Suite 400,
Atlanta, Georgia 30339. Managing Partner of Gross, Collins & Cress, P.C.
(accounting firm); Director of Charter Bank & Trust; 52.
HEATH B. McLENDON,* Trustee. Managing Director of Salomon Smith Barney;
President and Chairman of 71 investment companies associated with Citigroup,
President and Director of the manager and Travelers Investment Adviser, Inc.
("TIA"); 66.
ALAN G. MERTEN, Trustee. George Mason University, 4400 University Drive,
Fairfax, Virginia 22030-4444. President of George Mason University.
Director of Comshare, Inc. (information technology), and Tompkins County
Trust Company, Ithaca, New York; formerly The Anne and Elmer Lindseth Dean
of Johnson Graduate School of Management of Cornell University; 58.
R. RICHARDSON PETTIT, Trustee. Department of Finance, College of Business,
University of Houston, 4800 Calhoun, Houston, Texas 77204-6283. Duncan
Professor of Finance of the University of Houston; formerly Hanson
Distinguished Professor of Business of the University of Washington; 57.
_______________
* Denotes a Trustee that is an "interested person" of the Trust within the
meaning of the 1940 Act.
OFFICERS
Heath B. McLendon, President and Chief Executive Officer (See description
under "Trustees"). His address is 7 World Trade Center, New York, New York
10048.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 42). Managing
Director of Salomon Smith Barney; Director and Senior Vice President of the
manager and TIA. Mr. Daidone serves as Senior Vice President and Treasurer
or Executive Vice President and Treasurer of 61 investment companies
associated with Citigroup. His address is 388 Greenwich Street, New York,
New York 10013.
Sandip A. Bhagat, Vice President and Investment Officer (Age 39). Managing
Director of Salomon Smith Barney. President of TIMCO; prior to 1995, Senior
Portfolio Manager for TIMCO. His address is One Tower Square, Hartford,
Connecticut 06183-2030.
James E. Conroy, Vice President and Investment Officer (Age 48). Managing
Director of Salomon Smith Barney; Mr. Conroy serves as Investment Officer of
four Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer (Age 52). Managing
Director of Salomon Smith Barney; Mr. Deane serves as Investment Officer of
8 Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
R. Jay Gerken, Vice President and Investment Officer (Age 48). Managing
Director of Salomon Smith Barney; Mr. Gerken is Vice President and
Investment Officer of three Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Jeffrey Russell, Vice President and Investment Officer (Age 42). Managing
Director of Salomon Smith Barney; Mr. Russell is Vice President and
Investment Officer of seven Smith Barney Mutual Funds. His address is 7
World Trade Center, New York, New York 10048.
Larry Weissman, Vice President and Investment Officer; (Age 38). Managing
Director of Salomon Smith Barney. Prior to October 1997, Portfolio Manager
of Newberger & Berman LLC. His address is 388 Greenwich Street, New York,
New York 10013.
Christina T. Sydor, Secretary (Age 49). Managing Director of Salomon Smith
Barney; General Counsel and Secretary of the manager and TIA. Ms. Sydor
serves as Secretary of 61 investment companies associated with Citigroup.
Her address is 388 Greenwich Street, New York, New York 10013.
Paul A. Brook, Controller (Age 46). Managing Director of Salomon Smith
Barney; Controller or Assistant Treasurer of 43 investment companies
associated with Citigroup since 1998; Prior to 1998 Managing Director of AMT
Capital Services Inc.; Prior to 1997, Partner with Ernst & Young LLP.
As of February 14, 2000, the Trustees and officers of the Trust as a group
own less than one percent of the outstanding shares of each Portfolio of the
Trust. As of February 14, 2000, to the knowledge of the Trust and its
Trustees, no shareholder or "group" (as the term is used in Section 13(d) of
the Securities Act of 1933) beneficially owned more than 5% of the
outstanding shares of each Portfolio of the Trust.
TRUSTEE COMPENSATION
Information regarding compensation paid to the Trustees of the Trust is set
forth below. Because the Portfolios are newly organized, the compensation
shown below pertains to amounts paid by the previously established
investment portfolios of the Trust (collectively, the "Funds"), which Funds
are not offered by this SAI or the related Prospectus, for the fiscal year
ended October 31, 1999. Mr. McLendon is not compensated for his service as
Trustee, because of his affiliation with the manager. With the exception of
Mr. McLendon, no Trustee serves on the Board of any other investment company
in the Smith Barney Fund Complex.
The Portfolios pay each of the Trustees who is not a director, officer or
employee of the manager or any of its affiliates an annual fee of $48,000
plus $2000 for each Board of Trustees meeting attended, $1000 for each
Committee meeting attended (each Committee chairman is paid an additional
$300 for each Committee meeting attended), $1000 for each telephonic Board
meeting in which each Trustee participated (unless such meeting is for
information purposes only in which case $100 is paid). In addition, the
Portfolios will reimburse these directors for travel and out-of-pocket
expenses incurred in connection with Board of Directors meetings. For the
fiscal year ended October 31, 1999, such expenses totaled $14,367.50.
Legend:
SM = Small Cap Fund
MC = Mid Cap Fund
G = Growth Fund
G/I = Growth and Income Fund
GVT = Government Fund
Name
SM
MC(2)
G
G/I
GVT
Retire-
ment
Benefit
s
Accrued
as Part
of Fund
Expense
s
(1)
Total
Compen-
sation
Paid From
Trust and
Fund
Complex
Dr. Donald M.
Carlton
$2,599
$79
$37,85
6
$12,03
0
$1,81
3
- -
$56,000
Dr. A. Benton
Cocanougher
$2,643
$85
$38,53
2
$11,69
3
$2,39
5
- -
$57,000
Stephen Randolph
Gross
$2,711
$85
$39,92
0
$12,12
2
$2,46
2
- -
$59,000
Heath B. McLendon*
- -
- -
- -
- -
- -
- -
- -
Dr. Alan G. Merten
$2,643
$85
$38,53
2
$11,69
3
$2,39
5
- -
$56,000
Dr. R. Richardson
Pettit
$2,711
$85
$39,92
0
$11,69
3
$2,46
2
- -
$59,000
*Designates an "Interested Person" of the Trust, as defined under the 1940
Act.
(1) The Trustees instituted a retirement plan effective April 1, 1996.
For the current Trustees who are not "interested persons" of the Trust, the
retirement benefits payable thereunder are payable for a ten year period
following retirement, with the annual payment to be based upon the highest
total annual compensation received in any of the three calendar years
preceding retirement. Trustees with more than five but less than ten years
of service at retirement will receive a prorated benefit. Total retirement
benefits accrued under the plan for the 1999 fiscal year were $15,901, $0,
$1,124,006, $304,766, and $88,194 for the Small Cap Fund, Mid Cap Fund,
Growth Fund, Growth and Income Fund, and Government, respectively. Because
the amount of retirement benefits an individual Trustee will receive is
based upon the time of retirement, an exact amount of accrual is not known
for any individual; however, each fund accrues an amount based upon
actuarial assumptions meant to provide retirement benefits for all of its
Trustees. The amount of benefits to be paid upon retirement is therefore
not currently determinable for any current Trustee.
(2) Totals reflect compensation received from March 15, 1999, the date of
inception for the Mid Cap Fund.
INVESTMENT ADVISORY AGREEMENTS
Investment Manager. The manager provides investment advisory and management
services to the Trust, and to other investment companies affiliated with
Salomon Smith Barney.
The Trust and the manager are parties to a separate Investment Advisory
Agreement for each Portfolio (each, an "Advisory Agreement" and together,
the "Advisory Agreements"). An investment advisory agreement with the
manager and the Trust, on behalf of each Portfolio, was approved by the
Board of Trustees of the Trust at a meeting held on June 14, 1999. Under
the Advisory Agreements, the Trust retains the manager to manage the
investment of its assets and to place orders for the purchase and sale of
its portfolio securities. The manager is responsible for obtaining and
evaluating economic, statistical, and financial data and for formulating and
implementing investment programs in furtherance of each Portfolio's
investment objectives. The manager also furnishes at no cost to the Trust
(except as noted herein) the services of sufficient executive and clerical
personnel for the Trust as are necessary to prepare registration statements,
prospectuses, shareholder reports, and notices and proxy solicitation
materials. In addition, the manager furnishes at no cost to the Trust the
services of a President of the Trust, one or more Vice Presidents as needed,
and a Secretary.
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Portfolio. The costs of such
accounting services include the salaries and overhead expenses of a
Treasurer or other principal financial officer and the personnel operating
under his direction. The services are provided at cost which is allocated
among all investment companies advised or subadvised by the manager. The
Trust also pays transfer agency fees, custodian fees, legal fees, the costs
of reports to shareholders and all other ordinary expenses not specifically
assumed by the manager.
The Trust retains the manager to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under
the relevant Advisory Agreement, the Trust pays the manager investment
management fees at the following rates, based on the following amounts of
their average daily net assets:
? For Small Cap Portfolio, Growth and Income Portfolio, Mid Cap Portfolio,
and Growth Portfolio (calculated separately for each Portfolio), 0.75% of
the Portfolio's average daily net assets.
? For the Government Portfolio, 0.60% of the Portfolio's average daily net
assets.
The manager may, from time to time, agree to waive its investment advisory
fees or any portion thereof or elect to reimburse a Portfolio for ordinary
business expenses in excess of an agreed upon amount.
The average daily net assets of each Portfolio are determined by taking the
average of all of the determinations of net asset value of such Portfolio
for each business day during a given calendar month. Such fee is payable
for each calendar month as soon as practicable after the end of that month.
The following table shows expenses paid under the relevant investment
advisory agreement during the fiscal year ended October 31, 1999. The
Portfolios were not in existence for prior fiscal years.
Select
Small
Cap
Select Mid
Cap
Select
Growth
Select
Growth &
Income
Select
Governmen
t
October 31, 1999
Gross Advisory
Fees*
$4,490
$2,674
$4,582
$2,689
$3,709
*Had the manager not waived the management fee and reimbursed certain
expenses in order to cap total annual portfolio expenses, the Gross Advisory
Fees would have been: $20,253, $15,856, $24,854, $15,325 and $18,000 for the
Select Small Cap, Select Mid Cap, Select Growth, Select Growth and Income
and Select Government Portfolios, respectively.
Each Portfolio's Advisory Agreement provides that the manager shall not be
liable to the Trust for any actions or omissions if it acted in good faith
without negligence or misconduct. The Advisory Agreements provide that the
manager shall not be liable to the Trust for any actions or omissions if it
acted in good faith without negligence or misconduct.
Each Advisory Agreement has an initial term of two years and thereafter with
respect to each Portfolio may be continued from year to year if specifically
approved at least annually (a)(i) by the Trustees or (ii) by vote of a
majority of the Portfolio's outstanding voting securities, and (b) by the
affirmative vote of a majority of the Trustees who are not parties to the
agreement or interested persons of any such party by votes cast in person at
a meeting called for such purpose. The Advisory Agreements provide that
they shall terminate automatically if assigned and that they may be
terminated without penalty by either party on 60 days written notice.
Code of Ethics. Pursuant to Rule 17j-1 of the 1940 Act, the Portfolios,
their investment advisers and principal underwriter have adopted codes of
ethics that permit personnel to invest in securities for their own accounts,
including securities that may be purchased or held by the Portfolios. All
personnel must place the interests of clients first and avoid activities,
interests and relationships that might interfere with the duty to make
decisions in the best interests of the clients. All personal securities
transactions by employees must adhere to the requirements of the codes and
must be conducted in such a manner as to avoid any actual or potential
conflict of interest, the appearance of such a conflict, or the abuse of an
employee's position of trust and responsibility.
DISTRIBUTOR
CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408, distributes
shares of the Portfolios as their principal underwriter, and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring the Distributor to take and pay for only those securities sold to
the public.
The Distributor may be deemed to be an underwriter for purposes of the
Securities Act of 1933.
The Distributor acts as the principal underwriter of the shares of the
Portfolios pursuant to a written agreement for the Portfolios ("Underwriting
Agreement"). The Distributor's obligation is an agency or "best efforts"
arrangement under which the Distributor is required to take and pay only for
such shares of each Portfolio as may be sold to the public. The Distributor
is not obligated to sell any stated number of shares. The Underwriting
Agreement is renewable from year to year if approved (a) by the Trustees or
by a vote of a majority of the Trust's outstanding voting securities, and
(b) by the affirmative vote of a majority of Trustees who are not parties to
the Agreement or interested persons of any party by votes cast in person at
a meeting called for such purpose. The Underwriting Agreement provides that
it will terminate if assigned, and that it may be terminated without penalty
by either party on 60 days' written notice.
PORTFOLIO TURNOVER
The portfolio turnover rate may vary greatly from year to year as well as
within a year. For the period September 15, 1999, to October 31, 1999, each
Portfolio's portfolio turnover rates were:
Period
Ended
10/31
Select
Small Cap
Select Mid
Cap
Select
Growth
Select
Growth &
Income
Select
Government
1999
0%
8%
6%
1%
0%
The portfolio turnover rates are not annualized.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The manager is responsible for decisions to buy and sell securities for the
Trust and for the placement of its portfolio transactions and the
negotiation of any commissions paid on such transactions. It is the policy
of the manager to seek the best security price available with respect to
each transaction. In over-the-counter transactions, orders are placed
directly with a principal market maker unless it is believed that a better
price and execution can be obtained by using a broker. Except to the extent
that the Trust may pay higher brokerage commissions for brokerage and
research services (as described below) on a portion of its transactions
executed on securities exchanges, the manager seeks the best security price
at the most favorable commission rate. From time to time, the Portfolio may
place brokerage transactions with affiliated persons of the manager. In
selecting broker/dealers and in negotiating commissions, the manager
considers the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. When more than one firm is
believed to meet these criteria, preference may be given to firms that also
provide research services to the Trust or the manager.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an
account to pay a broker or dealer who supplies brokerage and research
services a commission for effecting a securities transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting the transaction. Brokerage and research services include
(a) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (b) furnishing analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts, (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody), and (d) furnishing other products or
services that assist the manager or the Subadviser in fulfilling their
investment-decision making responsibilities.
Pursuant to provisions of the relevant Advisory Agreement, the Trustees have
authorized the manager to cause the Trust to incur brokerage commissions in
an amount higher than the lowest available rate in return for research
services provided to the manager. The manager is of the opinion that the
continued receipt of supplemental investment research services from dealers
is essential to its provision of high quality portfolio management services
to the Trust. The manager undertakes that such higher commissions will not
be paid by the Trust unless (a) the manager determines in good faith that
the amount is reasonable in relation to the services in terms of the
particular transaction or in terms of the manager's overall responsibilities
with respect to the accounts as to which it exercises investment discretion,
(b) such payment is made in compliance with the provisions of
Section 28(e) and other applicable state and federal laws, and (c) in the
opinion of the manager, the total commissions paid by the Trust are
reasonable in relation to the expected benefits to the Trust over the long
term. The investment advisory fees paid by the Trust under the Advisory
Agreements are not reduced as a result of the manager's receipt of research
services. During the fiscal year ended October 31, 1999, the Trust directed
no brokerage commissions to brokers because of research services provided
to the Trust's Portfolios.
To the extent consistent with the NASD Rules, and subject to seeking best
execution and such other policies as the Trustees may determine, the manager
may consider sales of shares of the Trust as a factor in the selection of
firms to execute portfolio transactions for the Trust.
The manager places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Portfolios effect their securities transactions may be
used by the manager in servicing all of its accounts; not all of such
services may be used by the manager in connection with the Portfolios. In
the opinion of the manager, the benefits from research services to the
Portfolios of the Trust and to the accounts managed by the manager cannot be
measured separately. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in
excess of the lowest available rate paid by each account for brokerage and
research services will vary. However, in the opinion of the manager, such
costs to the Portfolios will not be disproportionate to the benefits
received by the Portfolios on a continuing basis.
The manager will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the
Portfolios and other accounts that the manager may establish in the future.
In some cases, this procedure could have an adverse effect on the price or
the amount of securities available to the Portfolios. In making such
allocations among the Trust and other advisory accounts, the main factors
considered by the manager over the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities,
the availability of cash for investment, and the size of investment
commitments generally held.
The following table summarizes for each Portfolio the total brokerage
commissions paid.
Fiscal
Year
Ended
10/31
Select
Small Cap
Select Mid
Cap
Select
Growth
Select
Growth &
Income
Select
Governmen
t
1999
$5,455
$1,691
$2,258
$1,571
- -
The Portfolios may from time to time place brokerage transactions with
brokers that may be considered affiliated persons of the manager or the
Distributor. Such affiliated persons currently include Salomon Smith Barney
(successor to Smith Barney Inc. "Smith Barney") and Robinson Humphrey, Inc.
("Robinson Humphrey"), because they are affiliated with the manager.
The Portfolios paid the following commissions to affiliated brokers during
the periods shown:
Robinson Smith
Fiscal 1999 Commissions Humphrey Barney
Select Small Cap - -
Select Growth - -
Select Growth & Income - -
Select Government - -
Fiscal 1999 Percentage
Select Small Cap - -
Select Growth - -
Select Growth & Income - -
Select Government - -
Percentage of Transactions with
Affiliates to Total Transactions
Robinson Smith
Humphrey Barney
Select Small Cap - -
Select Growth - -
Select Growth & Income - -
Select Government - -
Each Portfolio paid no brokerage commissions prior to 1999.
DETERMINATION OF NET ASSET VALUE
The assets attributable to each Portfolio reflect the value of separate
interests in a single portfolio of securities. The net asset value of the
shares will be determined separately by subtracting the expenses and
liabilities. The net asset value of the shares of each Portfolio is
determined at 4:00 p.m., New York time (or at the close of the New York
Stock Exchange (the "Exchange"), if earlier) on each business day on which
the Exchange is open.
The value of equity securities is computed by (i) valuing listed or unlisted
securities for which market quotations are readily available at the prices
reported by an independent pricing services, or as supplied by the National
Association of Securities Dealers Automated Quotations (NASDAQ) or by
broker-dealers, and (ii) valuing any securities for which market quotations
are not readily available and any other assets at fair value as determined
in good faith by the Board of Trustees. Options on stocks, options on stock
indexes and stock index futures contracts and options thereon, which are
traded on exchanges, are valued at their last sales or settlement price as
of the close of such exchanges, or, if no sales are reported, at the mean
between the last reported bid and asked prices.
Foreign securities trading may not take place on all days on which the
Exchange is open. Further, trading takes place in various foreign markets
on days on which the Exchange is not open. Events affecting the values of
investments that occur between the time their prices are determined and
4:00 p.m. Eastern time on each day that the Exchange is open will not be
reflected in a Portfolio's net asset value unless the manager, under the
supervision of the Board of Trustees, determines that the particular event
would materially affect net asset value. As a result, a Portfolio's net
asset value may be significantly affected by such trading on days when a
shareholder has no access to the Portfolios.
U.S. Government securities are traded in the over-the-counter market and
valuations are based on quotations of one of more dealers that make markets
in the securities as obtained from such dealers or from a pricing service.
Options and interest rate futures contracts and options thereon, which are
traded on exchanges, are valued at their last sales or settlement price as
of the close of such exchanges, or, if no sales are reported, at the mean
between the last reported bid and asked prices. Debt securities having a
remaining maturity of 60 days or less are valued on an amortized cost basis
to the extent this approximates market value.
TAXES
General. The following is a summary of certain federal income tax
considerations that may affect the Portfolios and their shareholders. The
discussion relates only to Federal income tax law as applicable to U.S.
citizens. Distributions by the Portfolios also may be subject to state,
local and foreign taxes, and their treatment under state, local and foreign
income tax laws may differ from the Federal income tax treatment. The
summary is not intended as a substitute for individual tax advice, and
investors are urged to consult their tax advisors as to the tax consequences
of an investment in any Portfolio of the Trust.
Tax Status of the Portfolios.
Each Portfolio will be treated as a separate taxable entity for Federal
income tax purposes.
Each Portfolio intends to qualify separately each year as a "regulated
investment company" under the Code. A qualified Portfolio will not be
liable for Federal income taxes to the extent that its taxable net
investment income and net realized capital gains are distributed to its
shareholders, provided that each Portfolio distributes at least 90% of the
sum of its net investment income and any excess of its net short-term
capital gain over its net long-term capital loss.
Each Portfolio intends to accrue dividend income for Federal income tax
purposes in accordance with the rules applicable to regulated investment
companies. In some cases, these rules may have the effect of accelerating
(in comparison to other recipients of the dividend) the time at which the
dividend is taken into account by a Portfolio as taxable income.
Each intends at least annually to declare and make distributions of
substantially all of its taxable income and net taxable capital gains to its
shareowners (i.e., the Separate Accounts). Such distributions are
automatically reinvested in additional shares of the Portfolio at net asset
value and are includable in gross income of the separate accounts holding
such shares. See the accompanying contract prospectus for information
regarding the federal income tax treatment of distributions to the separate
accounts and to holders of the contracts.
Tax treatment of shareholders. The Trust has been informed that certain of
the life insurance companies offering contracts intend to qualify each of
the subaccounts as a "segregated asset account" within the meaning of the
Code. For a subaccount to qualify as a segregated asset account, the
Portfolio in which such subaccount holds shares must meet the
diversification requirements of Section 817(h) of the Code and the
regulations promulgated thereunder. To meet those requirements, a Portfolio
generally may not invest more than certain specified percentages of its
assets in the securities of any one, two, three or four issuers. For these
purposes, all obligations of the United States Treasury and each
governmental instrumentality are treated as securities of separate issuers.
Income on assets of a subaccount qualified as a segregated asset account
whose underlying investments are adequately diversified will not be taxable
to contract owners. However, in the event a subaccount is not so qualified,
all annuities allocating any amount of premiums to such subaccount will not
qualify as annuities for federal income tax purposes and the holders of such
annuities would be taxed on any income on the annuities for any taxable
year.
The Trust has undertaken to meet the diversification requirements of Section
817(h) of the Code. This undertaking may limit the ability of a particular
Portfolio to make certain otherwise permitted investments.
PERFORMANCE
From time to time, the Portfolios may quote a yield or total return in
advertisements or in reports and other communications to shareholders. The
Trust may include comparative performance information in advertising or
marketing the Portfolio's shares. Such performance information may include
data from the following industry and financial publications: Barron's,
Business Week, CDA Investment Technologies Inc., Changing Times, Forbes,
Fortune, Institutional Investor, Investors Daily, Money, Morningstar Mutual
Fund Values, The New York Times, USA Today and The Wall Street Journal.
Yield
A Portfolio's 30-day yield figure described below is calculated according to
a formula prescribed by the SEC. The formula can be expressed as follows:
YIELD = 2[( [(a-b/(c*d))/l] + 1)6 - 1], where
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations purchased by the Portfolio at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
Investors should recognize that in periods of declining interest rates a
Portfolio's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates, the Portfolio's yield will
tend to be somewhat lower. In addition, when interest rates are falling,
the inflow of net new money to the Portfolio from the continuous sale of its
shares will likely be invested in portfolio instruments producing lower
yields than the balance of the Portfolio's investments, thereby reducing the
current yield of the Portfolio. In periods of rising interest rates, the
opposite can be expected to occur.
Average Annual Total Return
"Average annual total return" figures, as described below, are computed
according to a formula prescribed by the SEC. The formula can be expressed
as follows: P(l+T)/n = ERV, where:
P = a hypothetical initial payment of $ 1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a Hypothetical $ 1,000
investment made at the beginning of a 1-, 5- or 10-year
period at the end of the 1-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions.
The average annual total return (computed in the manner described in the
Prospectus) and yield (if applicable) for each Portfolio are shown in the
table below. These results are based on historical earnings and asset value
fluctuations and are not intended to indicate future performance. Such
information should be considered in light of each Portfolio's investment
objectives and policies as well as the risks incurred in each Portfolio's
investment practices.
Select
Small
Cap
Select Mid
Cap
Select
Growth
Select
Growth &
Income
Select
Governmen
t
Total Return
since inception
(based on
inception date
of 9/15/99)
(0.8)%
1.1%
5.1%
1.00%
1.30%
Yield
- --
- --
- --
- --
6.52%
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS
Voting. The Trust offers shares of the Portfolios only for purchase by
insurance company separate accounts. Thus, the insurance company is
technically the shareholder of the Portfolios, and under the 1940 Act, is
deemed to be in control of the Portfolios. Nevertheless, with respect to
any shareholder meeting of the Trust, an insurance company will solicit and
accept timely voting instructions from its contract owners who own units in
a separate account investment division which corresponds to shares in the
Portfolios in accordance with the procedures set forth in the accompanying
prospectus of the applicable contract issued by the insurance company and to
the extent required by law. Shares of the Trust attributable to contract
owner interests for which no voting instructions are received will be voted
by an insurance company in proportion to the shares for which voting
instructions are received.
Transfer Agent
PFPC Global Fund Services is located at 101 Federal Street, Boston,
Massachusetts 02110.
Custody of Assets
Securities owned by the Trust and all cash, including proceeds from the sale
of shares of the Trust and of securities in the Trust's investment
portfolio, are held by PNC Bank, National Association, located at 17th and
Chestnut Streets, Philadelphia, PA 19103, as Custodian for each Portfolio.
Shareholder Reports
Semi-annual statements are furnished to shareholders, and annually such
statements are audited by the independent auditors.
Independent Auditors
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, the
independent auditors for the Trust, perform annual examinations of the
Trust's financial statements.
Shareholder and Trustee Responsibility
Under the laws of certain states, including Massachusetts where the Trust
was organized, shareholders of a Massachusetts business trust may, under
certain circumstances, be held personally liable as partners for the
obligations of the Trust. However, the risk of a shareholder incurring any
financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its
obligations. The Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Trust or Trustees. The
Declaration of Trust provides for indemnification out of Trust property to
any shareholder held personally liable for the obligations of the Trust and
also provides for the Trust to reimburse such shareholder for all legal and
other expenses reasonably incurred in connection with any such claim or
liability.
Under the Declaration of Trust, the Trustees and Officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust
will provide indemnification to its Trustees and Officers as authorized by
its By-Laws and by the 1940 Act and the rules and regulations thereunder.
About the Trust
The Trust was organized on January 29, 1987 under the laws of The
Commonwealth of Massachusetts and is a business entity commonly known as a
''Massachusetts business trust.'' It is a diversified, open-end management
investment company authorized to issue an unlimited number of shares of
beneficial interest of $.01 par value, in the Portfolios. Shares issued are
fully paid, non-assessable and have no preemptive or conversion rights. In
the event of liquidation of any Portfolio, shareholders of such Portfolio
are entitled to share pro rata in the net assets of the Portfolio available
for distribution to shareholders.
As of December 31, 1997, the name of the Trust was changed from the Common
Sense Funds Trust to Concert Investment Series(r).
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. Each class of shares represents interest in the assets of each
Portfolio and has identical voting, dividend, liquidation and other rights
on the same terms and conditions, except that the distribution fees and
service fees and any incremental transfer agency fees related to each class
of shares of each Portfolio are borne solely by that class, and each class
of shares of each Portfolio has exclusive voting rights with respect to
provisions of the Plan which pertains to that class of each Portfolio. All
shares have equal voting rights, except that only shares of the respective
Portfolio are entitled to vote on matters concerning only that Portfolio.
There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders may, in accordance with the Declaration of Trust,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Trustees. Except as set forth above, the Trustees shall continue
to hold office and appoint successor Trustees.
As of February 14, 2000, no person was known to own beneficially or of
record as much as five percent of the outstanding shares of any Portfolio of
the Trust.
Other Information about Certain Banking Laws
The Glass-Steagall Act prohibits certain financial institutions, such as
Citibank, from underwriting securities of open-end investment companies,
such as the Trust. Citibank believes that its services under the Management
Agreements and the activities performed by it or its affiliates as Service
Agents are not under-writing and are consistent with the Glass-Steagall Act
and other relevant federal and state laws. However, there is no controlling
precedent regarding the performance of the combination of investment
advisory, share-holder servicing and administrative activities by banks.
State laws on this issue may differ from applicable federal law, and banks
and financial institutions may be required to register as dealers pursuant
to state securities laws. Changes in either federal or state statutes or
regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the Manager or Service Agent,
the Trust would seek alternative means for obtaining these services. The
Trust does not expect that shareholders would suffer any adverse financial
consequences as a result of any such occurrence.
FINANCIAL STATEMENTS
The Trust's Annual Report for the fiscal year ended October 31, 1999, is
incorporated herein by reference in its entirety.
APPENDIX A
RATINGS OF BONDS, NOTES AND COMMERCIAL PAPER
Moody's Investors Service, Inc.
Aaa - Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present that make the long term risks appear somewhat
larger than in "Aaa" securities.
A - Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present that suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds that are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - 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.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's
AAA - Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A- Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB - 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.
BB, B, CCC, CC, C - Debt rated 'BB', 'B', 'CCC', 'CC' or 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
'BB' indicates the lowest degree of speculation and 'C' 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. Plus (+) or Minus (-): The ratings from
'AA' to 'B' may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.
L - The letter "L" indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully
insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp.
+ - Continuance of the rating is contingent upon S&P's receipt of closing
documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Fitch IBCA, Inc.
AAA - Bonds rated AAA by Fitch have the lowest expectation of credit risk.
The obligor has an exceptionally strong capacity for timely payment of
financial commitments which is highly unlikely to be adversely affected by
foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial
commitment. This capacity is not significantly vulnerable to foreseeable
events.
A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be strong, but may be more vulnerable to changes in economic
conditions and circumstances than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to impair this capacity. This is the lowest
investment grade category assigned by Fitch.
BB - Bonds rated BB by Fitch carry the possibility of credit risk
developing, particularly as the result of adverse economic change over time.
Business or financial alternatives may, however, be available to allow
financial commitments to be met. Securities rated in this category are not
considered by Fitch to be investment grade.
B - Bonds rated B by Fitch carry significant credit risk, however, a limited
margin of safety remains. Although financial commitments are currently being
met, capacity for continued payment depends upon a sustained, favorable
business and economic environment.
CCC, CC, C - Default on bonds rated CCC, CC, and C by Fitch is a real
possibility. The capacity to meet financial commitments depends solely on a
sustained, favorable business and economic environment. Default of some kind
on bonds rated CC appears probable, a C rating indicates imminent default.
Plus and minus signs are used by Fitch to indicate the relative position of
a credit within a rating category. Plus and minus signs however, are not
used in the AAA category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of
return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in
earnings coverage of fixed financial changes and high internal cash
generation; well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have 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.
Standard & Poor's
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issuers determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2 - Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.
Fitch IBCA, Inc.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet financial commitment in a timely
manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payments of financial commitments. The "+" denotes an
exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for timely
payment of financial commitments, but the margin of safety is not as great
as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non investment grade.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty of timely payment: short-term
liquidity is clearly outstanding, and safety is just below risk-free United
States Treasury short-term obligations.
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment: liquidity factors and
company fundamentals are sound.
The Thomson BankWatch ("TBW")
TBW-1 - Indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely repayment of principal
and interest is strong, the relative degree of safety is not as high as for
issues rated TBW-1.
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