CONCERT INVESTMENT SERIES (the "Trust")
on behalf of the
SELECT EMERGING GROWTH PORTFOLIO (the "Portfolio")
Supplement dated January 7, 2000 to the Prospectus dated August 18,
1999
Effective immediately, the Board of Trustees of the Trust has
approved changing the name of the Portfolio to the Concert
Investment Series Select Small Cap Portfolio. The Portfolio's
investment policy of investing in the common stocks of both
small and medium size companies has changed to investing in
the common stocks of small cap companies. Also, the Portfolio's
investment policy of investing in companies that have market
capitalizations in the lowest 25% of all publicly traded U.S.
companies has changed to investing in companies that have
market capitalizations in the lowest 20% of all publicly
traded U.S. companies. The Portfolio's investment objective
will remain unchanged and the Portfolio will continue to seek
capital appreciation.
FD01790
Statement of Additional Information
Concert Investment Series
388 Greenwich Street
New York, NY 10013
August 18, 1999, as amended January 7, 2000
Select Small Cap
Portfolio
Select Growth and Income
Portfolio
Select Mid Cap Portfolio
Select Government
Portfolio
Select Growth Portfolio
Concert Investment Series (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 August 18, 1999 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 Concert Series 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 31
Portfolio Turnover 31
Portfolio Transactions and Brokerage 31
Determination of Net Asset Value 32
Taxes 33
Performance 34
Additional Information about Portfolios 35
Financial Statements 37
Appendix A - Ratings of Bonds, Notes and Commercial Paper A-1
GENERAL INFORMATION tc "General Information"
SSB Citi Fund Management LLC, successor to SSBC Fund Management
Inc. ("SSB Citi" or the "manager"), 388 Greenwich Street, New
York, NY 10013 was incorporated on March 12, 1968 and renders
investment management advice to investment companies with
aggregate assets under management in excess of $115 billion as of
January 31, 1999. The manager is an affiliate of Salomon Smith
Barney Inc. ("Salomon Smith Barney"). The manager and Salomon
Smith Barney are subsidiaries of Citigroup Inc., 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 tc "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 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 January 29, 1999, the largest
market capitalization of a company in the Index was $11.4 billion
and the smallest market capitalization was $0.24 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). 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 CONTRACTS
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 tc "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 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 occurred on January 1,
1999, when 11 European countries adopted a single currency - the
euro. For participating countries, EMU means sharing a single
currency and single official interest rate and adhering to agreed
upon limits on government borrowing. 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 to maintain
price stability within the euro zone. EMU is driven by the
expectation of a number of economic benefits, including lower
transaction costs, reduced exchange risk, greater competition, and
a broadening and deepening of European financial markets.
However, there are a number of significant risks associated with
EMU. Monetary and economic union on this scale has never been
attempted before. There is a significant degree of uncertainty as
to whether participating countries will remain committed to EMU in
the face of changing economic conditions. This uncertainty may
increase the volatility of European markets and may adversely
affect the prices of securities of European issuers held by the
Portfolios.
Year 2000. The investment management services provided to each
Portfolio by the manager depend on the smooth functioning of its
computer systems and those of its service providers. Many computer
software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which
dates were encoded and calculated. That failure could have a
negative impact on each Portfolio's operations, including the
handling of securities trades, pricing and account services. The
manager has advised each Portfolio that it has been reviewing all
of its computer systems and actively working on necessary changes
to its systems to prepare for the year 2000 and expect that its
systems will be compliant before that date. In addition, the
manager has been advised by each Portfolio's custodian,
distributor, transfer agent sub-transfer agent and accounting
service agent that they are also in the process of modifying their
systems with the same goal. There can, however, be no assurance
that the manager or any other service provider will be successful,
or that interaction with other non-complying computer systems will
not impair Portfolio services at that time. The foregoing is a
year 2000 readiness disclosure.
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 tc "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; 51.
HEATH B. McLENDON,* Trustee. Managing Director of Salomon Smith
Barney; President and Chairman of 59 investment companies
associated with SSB, President and Director of the manager and
Travelers Investment Adviser, Inc. ("TIA"); Chairman of Smith
Barney Strategy Advisers Inc.; 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; 57.
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 (See description under "Trustees").
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 of Smith Barney Mutual Funds.
His address is 388 Greenwich Street, New York, New York 10013.
Sandip A. Bhagat, Vice President and Investment Officer (Age 38).
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 51).
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 388 Greenwich Street, New York, New York
10013.
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 48). Managing Director of
Salomon Smith Barney; General Counsel and Secretary of the manager
and TIA. Ms. Sydor also serves as Secretary of Smith Barney
Mutual Funds. Her address is 388 Greenwich Street, New York, New
York 10013.
As of August 1, 1999, 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 August 1, 1999, 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
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 calendar year ended
December 31, 1998. 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
INT = International Equity Fund
G = Growth Fund
G/I = Growth and Income Fund
GVT = Government Fund
MB = Municipal Bond Fund
Name
SM INT G
G/I GVT MB
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
$2,640
$478
$36,95
4
$12,58
4
$2,26
9
$1,074
- -
$56,000
Dr. A. Benton
Cocanougher
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Stephen Randolph
Gross
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Heath B. McLendon*
- -
- -
- -
- -
- -
- -
- -
- -
Dr. Alan G. Merten
2,472
443
33,555
11,491
2,062
976
- -
51,000
Dr. Steven
Muller(2)
614
116
11,957
3,923
709
329
- -
17,649
Dr. R. Richardson
Pettit
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Alan B. Shepard,
Jr.(2)
2,100
372
26,093
9,089
1,592
754
- -
40,000
*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 1998 calendar
year were $14,481, $0, $932,542, $278,558, $88,194, and $0, for
the Small Cap Fund, International Equity Fund, Growth Fund, Growth
and Income Fund, Government Fund and Municipal Bond Fund,
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) Mr. Muller and Mr. Shepard are no longer Trustees of the
Trust.
INVESTMENT ADVISORY AGREEMENTS tc "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 July 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.
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.
DISTRIBUTOR tc "Distributor"
CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408 (the
"Distributor"), 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 tc "Portfolio Turnover"
The portfolio turnover rate may vary greatly from year to year as
well as within a year. Each Portfolio's portfolio turnover rate
for prior years, if any, is shown under the "Financial Highlights"
in the Prospectus.
PORTFOLIO TRANSACTIONS AND BROKERAGE tc "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, 1998, the Trust directed the payment
of $519,062 in 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.
Each Portfolio has paid no brokerage commissions to date.
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.
DETERMINATION OF NET ASSET VALUE tc "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
hold 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.
Each Portfolio is newly organized and therefore has no performance
history.
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 Concert Series
shareholder meeting, 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.
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 August 1, 1999, 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,
1998 is incorporated herein by reference in its entirety.
APPENDIX A
RATINGS OF BONDS, NOTES AND COMMERCIAL PAPER tc "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.
46
G:\Fund Accounting\Legal\FUNDS\CIS\1999\SECDOCS\Select SAI 1999.doc
A-5
37
A-
CONCERT INVESTMENT SERIES (the "Trust")
on behalf of the
EMERGING GROWTH FUND (the "Fund")
Supplement dated January 7, 2000 to the Prospectus dated February
28, 1999
Effective immediately, the Board of Trustees of the Trust has
approved changing the name of the Fund to the Concert
Investment Series Small Cap Fund. The Fund's investment
policy of investing in the common stocks of both small and
medium size companies has changed to investing in the common stocks
of small cap companies. Also, the Fund's investment policy of
investing in companies that have market capitalizations in the
lowest 25% of all publicly traded U.S. companies has changed
to investing in companies that have market capitalizations in
the lowest 20% of all publicly traded U.S. companies. The
Fund's investment objective will remain unchanged and the Fund
will continue to seek capital appreciation.
FD01789
STATEMENT OF ADDITIONAL INFORMATION
CONCERT INVESTMENT SERIES
388 Greenwich Street
New York, NY 10013
February 28, 1999, as amended January 7, 2000
Concert Investment Series (the "Trust") is a diversified, open-end
management investment company with seven separate funds, which are
discussed herein: the Small Cap 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, 1999 and March 31, 1999, and should be
read in conjunction with a Prospectus.
For purchases through PFS Investments Inc.:
A Prospectus dated February 28, 1999 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) 625-4554 for information about
the Funds.
For purchases through Citibank Investment Services or other
Service Agents:
A Prospectus dated February 28, 1999, as amended March 31, 1999,
may be obtained without charge from your financial professional or
by calling (800) 625-4554.
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 36
Determination of Net Asset Value 39
Purchase and Redemption of Shares 40
Exchange Privilege 50
Distributions and Federal Taxes 54
Other Information 58
Appendix A - Ratings of Municipal Bonds, Notes and Commercial
Paper 63
GENERAL INFORMATION
SSB Citi Fund Management LLC, successor to SSBC Fund Management
Inc. ("SSB Citi" or the "manager"), 388 Greenwich Street, New
York, NY 10013 was incorporated on March 12, 1968 and renders
investment management advice to investment companies with
aggregate assets under management in excess of $115 billion as of
January 31, 1999. The manager is an affiliate of Salomon Smith
Barney Inc. ("Salomon Smith Barney"). The manager and Salomon
Smith Barney are subsidiaries of Citigroup Inc., 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 (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"),
the Trust's transfer agent (the "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. (the "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, 1999 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, 1999, as
amended March 31, 1999, 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 January 29, 1999, the largest market capitalization
of a company in the Index was $11.4 billion and the smallest
market capitalization was $0.24 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). 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 (Municipal 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 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 (Municipal 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 CONTRACTS
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 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). EMU occurred on January 1,
1999, when 11 European countries adopted a single currency - the
euro. For participating countries, EMU means sharing a single
currency and single official interest rate and adhering to agreed
upon limits on government borrowing. 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 to maintain
price stability within the euro zone. EMU is driven by the
expectation of a number of economic benefits, including lower
transaction costs, reduced exchange risk, greater competition, and
a broadening and deepening of European financial markets.
However, there are a number of significant risks associated with
EMU. Monetary and economic union on this scale has never been
attempted before. There is a significant degree of uncertainty as
to whether participating countries will remain committed to EMU in
the face of changing economic conditions. This uncertainty may
increase the volatility of European markets and may adversely
affect the prices of securities of European issuers in the Funds'
portfolios.
Year 2000. The investment management services provided to each
Fund by the manager depend on the smooth functioning of its
computer systems and those of its service providers. Many computer
software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which
dates were encoded and calculated. That failure could have a
negative impact on each Fund's operations, including the handling
of securities trades, pricing and account services. The manager
has advised each Fund that it has been reviewing all of its
computer systems and actively working on necessary changes to its
systems to prepare for the year 2000 and expect that its systems
will be compliant before that date. In addition, the manager has
been advised by each Fund's custodian, distributor, transfer agent
sub-transfer agent and accounting service agent that they are also
in the process of modifying their systems with the same goal.
There can, however, be no assurance that the manager or any other
service provider will be successful, or that interaction with
other non-complying computer systems will not impair Fund services
at that time. The foregoing is a year 2000 readiness disclosure.
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); 61.
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; 60.
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; 51.
HEATH B. McLENDON,* Trustee. Managing Director of Salomon Smith
Barney; President and Chairman of 59 investment companies
associated with SSB, President and Director of the manager and
Travelers Investment Adviser, Inc. ("TIA"); Chairman of Smith
Barney Strategy Advisers Inc.; 65.
* Denotes a Trustee that is an "interested person" of the Trust
within the meaning of the 1940 Act.
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; 57.
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; 56.
OFFICERS
Heath B. McLendon, President (See description under "Trustees").
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41).
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 of Smith Barney Mutual Funds.
His address is 388 Greenwich Street, New York, New York 10013.
Sandip A. Bhagat, Vice President and Investment Officer (Age 38).
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 47).
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 51).
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 47).
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 41).
Managing Director of Salomon Smith Barney; Mr. Russell is Vice
President and Investment Officer of six other Smith Barney Mutual
Funds. His address is 388 Greenwich Street, New York, New York
10013.
Larry Weissman, Vice President and Investment Officer; (Age 37 ).
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 48). Managing Director of
Salomon Smith Barney; General Counsel and Secretary of the manager
and TIA. Ms. Sydor also serves as Secretary of Smith Barney
Mutual Funds. Her address is 388 Greenwich Street, New York, New
York 10013.
As of December 11, 1998, 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 December 11, 1998, 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
Information regarding compensation paid by the Funds to the
Trustees is set forth below. The compensation shown for the Funds
is for the calendar year ended December 31, 1998. 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. During this period, the Mid Cap
Fund had not commenced operations, therefore, the amounts shown
reflect only the other funds, as set forth below.
Legend:
M = Small Cap Fund
INT = International Equity Fund
G = Growth Fund
G/I = Growth and Income Fund
GVT = Government Fund
MB = Municipal Bond Fund
Name
SM INT G
G/I GVT MB
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
$2,640
$478
$36,95
4
$12,58
4
$2,26
9
$1,074
- -
$56,000
Dr. A. Benton
Cocanougher
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Stephen Randolph
Gross
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Heath B. McLendon*
- -
- -
- -
- -
- -
- -
- -
- -
Dr. Alan G. Merten
2,472
443
33,555
11,491
2,062
976
- -
51,000
Dr. Steven
Muller(2)
614
116
11,957
3,923
709
329
- -
17,649
Dr. R. Richardson
Pettit
2,640
478
36,954
12,584
2,269
1,074
- -
56,000
Alan B. Shepard,
Jr.(2)
2,100
372
26,093
9,089
1,592
754
- -
40,000
*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 1998 calendar
year were $14,481, $0, $932,542, $278,558, $88,194, and $0, for
the Small 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) Mr. Muller and Mr. Shepard are no longer Trustees of the
Trust.
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 10, 1997 and by shareholders of each Fund at
a meeting held on December 18, 1997. 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, 1998, 1997 and 1996. The Mid Cap Fund had not
commenced operations during these periods.
Small
Cap
Internatio
nal Equity
Growth
Growth &
Income
Governmen
t
Municipa
l Bond
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
Contractual
Expense
Reimbursement
N/A
N/A
N/A
N/A
N/A
N/A
Voluntary
Expense
Reimbursement
N/A
N/A
N/A
N/A
N/A
N/A
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
Contractual
Expense
Reimbursement
-
-
-
-
-
-
Voluntary
Expense
Reimbursement
-
-
-
-
-
-
October 31, 1996
Accounting
Services
$79,620
$30,600
$406,931
$168,039
$93,056
$99,374
Gross Advisory
Fees
376,436
130,149
17,148,5
60
6,017,20
4
1,883,666
728,210
Contractual
Expense
Reimbursement
-
130,149
-
-
-
-
Voluntary
Expense
Reimbursement
-
47,998
-
-
-
-
For the fiscal years ended October 31, 1997 and 1996 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, 1998 is included in the Annual Report dated October
31, 1998. 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) 625-4554.
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 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, 1998, 1997 and 1996. 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
Interna-
tional
Equity
Growth
Growth &
Income
Govern-
ment
Municipa
l Bond
October 31, 1998
Total Underwriting
Commissions*
$3,282,9
07
$490,027
$17,475,
434
$6,769,9
89
$732,992
$810,575
Amount Retained By
Distributor
187,397
21,062
2,349,25
5
656,152
67,974
79,312
Amount Received By PFS
Investments
3,095,51
0
468,965
15,126,1
79
6,113,83
7
665,018
731,263
October 31, 1997
Total Underwriting
Commissions
$3,846,0
82
$608,726
$18,002,
508
$6,979,9
66
$808,858
$487,303
Amount Retained By
Distributor
251,247
37,018
2,787,42
3
825,118
98,702
87,157
Amount Received By PFS
Investments
3,594,83
5
571,708
15,215,0
88
6,154,84
8
710,156
400,146
October 31, 1996
Total Underwriting
Commissions
$1,519,3
51
$235,791
$19,303,
603
$5,144,5
00
$950,019
$1,029,1
47
Amount Retained By
Distributor
124,777
21,437
3,405,10
4
888,760
162,072
124,395
Amount Received By PFS
Investments
1,394,57
4
214,354
15,898,4
99
4,255,74
0
1,173,86
7
904,752
*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.
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.
PORTFOLIO TURNOVER
The portfolio turnover rate may vary greatly from year to year as
well as within a year. Each Fund's portfolio turnover rate for
prior years is shown under the "Financial Highlights" in the
Prospectus.
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, 1998, the aggregate expenses
for the Small Cap Fund under the Fund's Class A Plan were $277,226
or 0.25%, respectively, of the Class A shares' average net assets.
For the fiscal year ended October 31, 1998, the Fund's aggregate
expenses under the Class B Plan were $903,219 or 1.00% of the
Class B shares' average net assets. Such expenses include
$226,993 for commissions and transaction fees and $674,800 for
fees paid for servicing Class B shareholders and administering the
Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate expenses
for the International Equity Fund under the Fund's Class A Plan
were $47,690 or 0.25%, respectively, of the Class A shares'
average net assets. For the fiscal year ended October 31, 1998,
the Fund's aggregate expenses under the Class B Plan were $166,306
or 1.00% of the Class B shares' average net assets. Such expenses
included $41,290 for commissions and transaction fees and $123,371
for fees paid for servicing Class B shareholders and administering
the Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate expenses
for the Growth Fund under the Class A Plan were $372,160 or 0.25%,
respectively, of the Class A shares' average net assets. For the
fiscal year ended October 31, 1998, the Fund's aggregate expenses
under the Class B Plan were $1,589,474 or 1.00% of the Class B
shares' average net assets. Such expenses included $390,858 for
commissions and transaction fees and $1,164,573 for fees paid for
servicing Class B shareholders and administering the Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate expenses
for the Growth and Income Fund under the Fund's Class A Plan were
$262,767 or 0.25%, respectively, of the Class A shares' average
net assets. For the fiscal year ended October 31, 1998, the
Fund's aggregate expenses under the Class B Plan were $1,219,023
or 1.00% of the Class B shares' average net assets. Such expenses
included $300,735 for commissions and transaction and $896,931 for
fees paid for servicing Class B shareholders and administering the
Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate expenses
for the Government Fund under the Fund's Class A Plan were $38,540
or 0.25%, respectively, of the Class A shares' average net assets.
For the fiscal year ended October 31, 1998, the Fund's aggregate
expenses under the Class B Plan were $134,001 or 1.00% of the
Class B shares' average net assets. Such expenses included
$32,944 for commissions and transaction fees and $98,333 for fees
paid for servicing Class B shareholders and administering the
Class B Plan.
For the fiscal year ended October 31, 1998, the aggregate expenses
for the Municipal Bond Fund under the Fund's Class A Plan were
$30,259 or 0.25%, respectively, of the Class A shares' average net
assets. For the fiscal year ended October 31, 1998, the Fund's
aggregate expenses under the Class B Plan were $38,339 or 1.00% of
the Class B shares' average net assets. Such expenses included
$9,074 for commissions and transaction fees and $27,221 for fees
paid to for servicing Class B shareholders and administering the
Class B Plan.
The Mid Cap Fund did not begin operations in the fiscal year ended
October 31, 1998, and thus had no expenses 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, 1998, the Trust directed the payment
of $519,062 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 (except Mid Cap Fund,
which had not commenced operations during the relevant periods)
the total brokerage commissions paid.
Fiscal
Year
Ended
10/31
Small Cap
Internationa
l Equity
Growth
Growth &
Income
Governmen
t
Municipal
Bond
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
- -
1996
$99,218
$94,895
$10,114,6
47
$2,273,725
$160,181
- -
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 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 - - -
-
Robinson Smith
Fiscal 1996 Commissions Humphrey Barney
Small Cap - $1,835
International Equity - -
Growth $7,200 240,982
Growth & Income 2,400 92,761
Government - 28,322
Municipal Bond - -
Fiscal 1996 Percentages
Small Cap - 1.87%
International Equity - -
Growth 0.07% 2.38%
Growth & Income 0.10% 4.08%
Government - 17.68%
Municipal Bond - -
Percentage of Transactions with
Affiliates to Total Transactions
Small Cap - -
International Equity - -
Growth - 0.002%
Growth & Income - 0.027%
Government - 4.65%
Municipal Bond - 5.35%
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 found in this Prospectus. 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 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 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 $27.50 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 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 $27.50 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 $27.50 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 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 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 the value of all Class A 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 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 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 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 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, 1998, CDSCs paid for Class B shares
were approximately:
Fund CDSC
Small Cap: $445,331
Government: $75,664
Growth: $552,399
Growth and Income: $458,157
International Equity: $63,366
Municipal Bond: $27,338
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.
Upon completion of certain automated systems, 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
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 Transfer Agent to be genuine. The
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 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 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 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 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 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
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.
This option is available for non-retirement plan accounts that are
not subject to a contingent deferred sales charge in the Concert
Investment Series Government Fund, Concert Investment Series
Municipal Bond Fund (A Shares and Class 1 Shares only).
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 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 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 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. 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 would 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-exempts 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 comments 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.
Total return is computed for a specified period of time assuming
deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and
capital gain distributions on the reinvestment dates at prices
calculated as stated in the Prospectus, then dividing the value of
the investment at the end of the period so calculated by the
initial amount invested and subtracting 100%. The standard average
annual total return, as prescribed by the SEC is derived from this
total return, which provides the ending redeemable value. Such
standard total return information may also be accompanied with
nonstandard total return information for differing periods
computed in the same manner but without annualizing the total
return or taking sales charges into account. The yield of a Fund's
Class refers to the net investment income earned by investments in
the Class over a 30-day period. This net investment income is then
annualized, i.e., the amount of income earned by the investments
during that 30-day period is assumed to be earned each 30-day
period for twelve periods and is expressed as a percentage of the
investments. The yield is calculated according to a formula
prescribed by the SEC to facilitate comparison with yields quoted
by other investment companies. Government Fund and Municipal Fund
calculate current dividend return for each of their Classes by
annualizing the most recent monthly distribution and dividing by
the net asset value or the maximum public offering price
(including sales charge) on the last day of the period for which
current dividend return is presented. Each Class' current dividend
return may vary from time to time depending on market conditions,
the composition of the investment portfolio and its operating
expenses. These factors and possible differences in the methods
used in calculating current dividend return should be considered
when comparing current return of a Class to yields published for
other investment companies and other investment vehicles. Each
Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information
may include data from Lipper Analytical Services, Inc. and other
financial publications.
The average annual total return (computed in the manner described
in the Prospectus) and yield for each Fund are shown in the table
below (except Mid Cap Fund, which had not commenced operations
during the relevant period). 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 (7.52)%
(7.81)% (8.45)%
10/31/98
total return since inception
(based on inception date of 2/21/95) --
15.88% 15.02%
total return since inception
(based on inception date of 8/08/96) 6.26%
-- --
International Equity Fund
i) total return for one year period ended
10/31/98 4.96% 4.41%
3.54%
ii) total return since inception
(based on inception date of 2/21/95) --
13.62% 12.78%
iii) total return since inception
(based on inception date of 8/08/96) 8.16%
-- --
Class 1 Class
A Class B
Shares Shares
Shares
Growth Fund
i) total return for one year period ended
10/31/98 12.54%
12.27% 11.43
ii) total return for five year period ended
10/31/98 16.75%
-- --
iii) Total return for the ten year period ended
10/31/98 15.62%
-- --
iv) total return since inception
(based on inception date of 4/14/87) 12.93%
-- --
v) total return since inception
(based on inception date of 8/18/96) --
17.58 16.77%
Growth and Income Fund
i) total return for one year period ended
10/31/98 10.90%
10.63% 9.85%
ii) total return for five year period ended
10/31/98 15.95%
-- --
iii) total return for ten year period ended
10/31/98 14.88%
-- --
iv) total return since inception
(based on inception date of 4/14/87) 12.23%
-- --
v) total return since inception
(based on inception date of 8/18/96) --
16.92% 16.07%
Government Fund
i) total return for one year period ended
10/31/98 7.29% 7.00%
6.20%
ii) total return for five year period ended
10/31/98 5.64% --
--
iii) total return for ten year period ended
10/31/98 8.05% --
--
iv) total return since inception
(based on inception date of 4/14/87) 7.60%
-- --
v) total return since inception
(based on inception date of 8/08/96) --
6.15% 5.36%
vi) yield 5.04% 4.91%
4.41%
Municipal Bond Fund
i) total return for one year period ended
10/31/98 7.20% 6.93%
6.10%
ii) total return for five year period ended
10/31/98 6.00% --
--
iii) total return for ten year period ended
10/31/98 7.49% --
--
iv) total return since inception
(based on inception date of 7/13/88) 7.70%
-- --
v) total return since inception
(based on inception date of 8/18/96) --
7.10% 6.28%
vi) yield 3.58% 3.36%
2.77%
vii) tax equivalent yield 5.19% 4.87%
4.01%
* 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 the
Trust 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.
Transfer Agent
PFPC Global Fund Services is located at Exchange Place, Boston,
Massachusetts 02109. The Trust has engaged the services of PFS
Shareholder Services as the Sub-Transfer Agent for PFS Accounts.
The Sub-Transfer Agent is located at 3100 Breckinridge Blvd., Bldg
200, Duluth, Georgia 30099-0062.
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.
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 November 30, 1998, 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.
FINANCIAL STATEMENTS
The Trust's Annual Report for the fiscal year ended October 31,
1998 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.
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