STATEMENT OF ADDITIONAL INFORMATION MAY 1, 1997
(as revised on June 13, 1997)
AMERICAN SKANDIA TRUST
One Corporate Drive, Shelton, Connecticut 06484
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American Skandia Trust (the "Trust") is a managed, open-end investment company
whose separate portfolios ("Portfolios") are diversified, unless otherwise
indicated. The Trust seeks to meet the differing objectives of its Portfolios.
Currently, these Portfolios are the Lord Abbett Growth and Income Portfolio, the
JanCap Growth Portfolio, the AST Janus Overseas Growth Portfolio, the AST Money
Market Portfolio, the Federated Utility Income Portfolio, the Federated High
Yield Portfolio, the T. Rowe Price Asset Allocation Portfolio, the T. Rowe Price
International Equity Portfolio, the T. Rowe Price Natural Resources Portfolio,
the T. Rowe Price International Bond Portfolio (formerly, the AST Scudder
International Bond Portfolio), the T. Rowe Price Small Company Value Portfolio,
the Founders Capital Appreciation Portfolio, the Founders Passport Portfolio
(formerly, the Seligman Henderson International Small Cap Portfolio), the
INVESCO Equity Income Portfolio, the PIMCO Total Return Bond Portfolio, the
PIMCO Limited Maturity Bond Portfolio, the Berger Capital Growth Portfolio, the
Robertson Stephens Value + Growth Portfolio, the Twentieth Century International
Growth Portfolio, the Twentieth Century Strategic Balanced Portfolio, the AST
Putnam Value Growth & Income Portfolio, the AST Putnam International Equity
Portfolio (formerly, the Seligman Henderson International Equity Portfolio) and
the AST Putnam Balanced Portfolio (formerly, the AST Phoenix Balanced Asset
Portfolio).
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager ("Investment Manager") for the Trust. Currently, ASISI
engages a sub-advisor ("Sub-advisor") for each Portfolio. The Sub-advisor for
each Portfolio is as follows: (a) Lord Abbett Growth and Income Portfolio: Lord,
Abbett & Co.; (b) JanCap Growth Portfolio: Janus Capital Corporation; (c) AST
Janus Overseas Growth Portfolio: Janus Capital Corporation; (d) AST Money Market
Portfolio: J.P. Morgan Investment Management, Inc.; (e) Federated Utility Income
Portfolio: Federated Investment Counseling; (f) Federated High Yield Portfolio:
Federated Investment Counseling; (g) T. Rowe Price Asset Allocation Portfolio:
T. Rowe Price Associates, Inc.; (h) T. Rowe Price International Equity
Portfolio: Rowe Price-Fleming International, Inc.; (i) T. Rowe Price Natural
Resources Portfolio: T. Rowe Price Associates, Inc.; (j) T. Rowe Price
International Bond Portfolio: Rowe Price-Fleming International, Inc.; (k) T.
Rowe Price Small Company Value Portfolio: T. Rowe Price Associates, Inc.; (l)
Founders Capital Appreciation Portfolio: Founders Asset Management, Inc.; (m)
Founders Passport Portfolio: Founders Asset Management, Inc.; (n) INVESCO Equity
Income Portfolio: INVESCO Trust Company; (o) PIMCO Total Return Bond Portfolio:
Pacific Investment Management Company; (p) PIMCO Limited Maturity Bond
Portfolio: Pacific Investment Management Company; (q) Berger Capital Growth
Portfolio: Berger Associates, Inc.; (r) Robertson Stephens Value + Growth
Portfolio: Robertson, Stephens & Company Investment Management, L.P.; (s)
Twentieth Century International Growth Portfolio: American Century Investment
Management, Inc. (which, prior to January 1, 1997, was named Investors Research
Corporation); (t) Twentieth Century Strategic Balanced Portfolio: American
Century Investment Management, Inc.; (u) AST Putnam Value Growth & Income
Portfolio: Putnam Investment Management, Inc.; (v) AST Putnam International
Equity Portfolio: Putnam Investment Management, Inc.; and (w) AST Putnam
Balanced Portfolio: Putnam Investment Management, Inc.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Trust's current Prospectus, a copy of which may be
obtained by writing the Trust's administrative office at One Corporate Drive,
Shelton, Connecticut 06484 or by calling (203) 926-1888.
This Statement relates to the Trust's Prospectus dated May 1, 1997
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TABLE OF CONTENTS
Caption Page
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General Information and History...................................................................................3
Investment Objectives and Policies................................................................................3
Lord Abbett Growth and Income Portfolio......................................................................3
JanCap Growth Portfolio......................................................................................4
AST Janus Overseas Growth Portfolio..........................................................................6
AST Money Market Portfolio..................................................................................10
Federated Utility Income Portfolio..........................................................................11
Federated High Yield Portfolio..............................................................................12
T. Rowe Price Asset Allocation Portfolio....................................................................14
T. Rowe Price International Equity Portfolio................................................................24
T. Rowe Price Natural Resources Portfolio...................................................................33
T. Rowe Price International Bond Portfolio..................................................................43
T. Rowe Price Small Company Value Portfolio.................................................................52
Founders Capital Appreciation Portfolio.....................................................................62
Founders Passport Portfolio.................................................................................70
INVESCO Equity Income Portfolio.............................................................................77
PIMCO Total Return Bond Portfolio...........................................................................78
PIMCO Limited Maturity Bond Portfolio.......................................................................89
Berger Capital Growth Portfolio.............................................................................99
Robertson Stephens Value + Growth Portfolio................................................................100
Twentieth Century International Growth Portfolio...........................................................108
Twentieth Century Strategic Balanced Portfolio.............................................................111
AST Putnam Value Growth & Income Portfolio.................................................................117
AST Putnam International Equity Portfolio..................................................................126
AST Putnam Balanced Portfolio..............................................................................134
Investment Restrictions.........................................................................................143
Certain Risk Factors and Investment Methods.....................................................................161
Portfolio Turnover..............................................................................................178
Management......................................................................................................178
Management of the Trust.........................................................................................180
Brokerage Allocation............................................................................................183
Allocation of Investments.......................................................................................184
Computation of Net Asset Values.................................................................................185
Purchase and Redemption of Shares...............................................................................185
Tax Matters.....................................................................................................185
Underwriter.....................................................................................................185
Performance.....................................................................................................186
Other Information...............................................................................................187
Financial Statements............................................................................................187
Appendix........................................................................................................287
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GENERAL INFORMATION AND HISTORY:
Prior to May 1, 1992, the Trust was known as the Henderson International
Growth Fund, which consisted of only one portfolio. This Portfolio is now known
as the AST Putnam International Equity Portfolio (formerly, the Seligman
Henderson International Equity Portfolio). The Lord Abbett Growth and Income
Portfolio was first offered as of May 1, 1992. The JanCap Growth Portfolio and
the AST Money Market Portfolio were first offered as of November 4, 1992. The
Federated Utility Income Portfolio and the AST Putnam Balanced Portfolio
(formerly, the AST Phoenix Balanced Asset Portfolio) were first offered as of
May 1, 1993. The Federated High Yield Portfolio, the T. Rowe Price Asset
Allocation Portfolio, the T. Rowe Price International Equity Portfolio, the
Founders Capital Appreciation Portfolio, the INVESCO Equity Income Portfolio and
the PIMCO Total Return Bond Portfolio were first offered as of December 31,
1993. The T. Rowe Price International Bond Portfolio (formerly, the AST Scudder
International Bond Portfolio) was first offered as of May 1, 1994. The Berger
Capital Growth Portfolio was first offered as of October 19, 1994. The Founders
Passport Portfolio (formerly, the Seligman Henderson International Small Cap
Portfolio), the T. Rowe Price Natural Resources Portfolio and the PIMCO Limited
Maturity Bond Portfolio were first offered as of May 2, 1995. The Robertson
Stephens Value + Growth Portfolio was first offered as of May 2, 1996. The AST
Janus Overseas Growth Portfolio, the T. Rowe Price Small Company Value
Portfolio, the Twentieth Century International Growth Portfolio, the Twentieth
Century Strategic Balanced Portfolio and the AST Putnam Value Growth & Income
Portfolio were first offered as of January 2, 1997.
INVESTMENT OBJECTIVES AND POLICIES:
The following information supplements, and should be read in conjunction
with, the section in the Trust's Prospectus entitled "Investment Objectives and
Policies." The investment objective and supplemental information regarding the
policies for each of the Portfolios are described below and should be considered
separately. Each Portfolio has a different investment objective and certain
policies may vary. As a result, the risks, opportunities and return in each
Portfolio may differ. There can be no assurance that any Portfolio's investment
objective will be achieved. Certain risk factors in relation to various
securities and instruments in which the Portfolios may invest are described in
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
The objective for each Portfolio, if it is specifically noted as its
"investment objective," and the restrictions described in the section of this
Statement entitled "Investment Restrictions," are "fundamental" policies and may
not be changed without approval of the shareholders of the affected Portfolio.
Investment policies not noted as "investment objectives" or "investment
restrictions" are not "fundamental" policies. As indicated in the "Investment
Restrictions" section of this Statement, certain investment restrictions apply
to all Portfolios, while others only apply to a specific Portfolio. The Trust
has the right to modify without shareholder approval the investment policies of
any Portfolio that are not specifically identified in the Trust's Prospectus or
this Statement as "fundamental."
Lord Abbett Growth and Income Portfolio:
Investment Objective: The investment objective of the Lord Abbett Growth and
Income Portfolio is long-term growth of capital and income without excessive
fluctuation in market value.
Investment Policies:
Covered Call Options. The Portfolio may write covered call options which
are traded on a national securities exchange with respect to its securities in
an attempt to increase income and to provide greater flexibility in the
disposition of securities. A "call option" is a contract sold for a price (the
"premium") giving its holder the right to buy a specific number of shares of
stock at a specific price prior to a specified date. A "covered call option" is
a call option issued on securities already owned by the writer of the call
option for delivery to the holder upon the exercise of the option. During the
period of the option, the Portfolio forgoes the opportunity to profit from any
increase in the market price of the underlying security above the exercise price
of the option (to the extent that the increase exceeds the net premium). The
Portfolio may also enter into "closing purchase transactions" in order to
terminate its obligation to deliver the underlying security (this may result in
a short-term gain or loss). A closing purchase transaction is the purchase of a
call option (at a cost which may be more or less than the premium received for
writing the original call option) on the same security with the same exercise
price and call period as the option previously written. If the Portfolio is
unable to enter into a closing purchase transaction, it may be required to hold
a security that it might otherwise have sold to protect against depreciation.
The Sub-advisor does not intend to have the Portfolio write covered call options
with respect to securities with an aggregate market value of more than 10% of
the Portfolio's gross assets at the time an option is written. This percentage
limitation will not be increased without prior disclosure in the current
Prospectus of the Trust. For an additional discussion of call options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest in illiquid securities.
Investments in illiquid securities are limited to a maximum of 10% of Portfolio
net assets. Illiquid securities for the purposes of this limitation do not
include securities eligible for resale pursuant to Rule 144A of the Securities
Act of 1933 which have been determined to be liquid by the Sub-advisor under the
supervision of the Trustees. Examples of factors which the Sub-advisor may take
into account with respect to a Rule 144A security include the frequency of
trades and quotes for the security, the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, dealer
undertakings to make a market in the security, and the nature of the security
and the nature of the marketplace (e.g., the time period needed to dispose of
the security, the method of soliciting offers, and the mechanics of transfer).
For a discussion of illiquid or restricted securities and certain risks involved
therein see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
JanCap Growth Portfolio:
Investment Objective: The investment objective of the JanCap Growth Portfolio is
growth of capital in a manner consistent with the preservation of capital.
Realization of income is not a significant investment consideration and any
income realized on the Portfolio's investments, therefore, will be incidental to
the Portfolio's objective.
Investment Policies:
.........The Portfolio may, as a fundamental policy, invest all of its assets in
the securities of a single open-end management investment company with
substantially the same fundamental investment objectives, policies and
restrictions as the Portfolio subject to the prior approval of the Investment
Manager. The Investment Manager will not approve such investment unless: (a) the
Investment Manager believes, on the advice of counsel, that such investment will
not have an adverse effect on the tax status of the annuity contracts and/or
life insurance policies supported by the separate accounts of the Participating
Insurance Companies which purchase shares of the Trust; (b) the Investment
Manager has given prior notice to the Participating Insurance Companies that it
intends to permit such investment and has determined whether such Participating
Insurance Companies intend to redeem any shares and/or discontinue the purchase
of shares because of such investment; (c) the Trustees have determined that the
fees to be paid by the Trust for administrative, accounting, custodial and
transfer agency services for the Portfolio subsequent to such an investment are
appropriate, or the Trustees have approved changes to the agreements providing
such services to reflect a reduction in fees; (d) the Sub-advisor for the
Portfolio has agreed to reduce its fee by the amount of any investment advisory
fees paid to the investment manager of such open-end management investment
company; and (e) shareholder approval is obtained if required by law. The
Portfolio will apply for such exemptive or other relief under the provisions of
the Investment Company Act of 1940 (the "1940 Act") and the rules thereunder as
may be necessary regarding investments in such investment companies.
Futures, Options and Other Derivative Instruments. The Portfolio may enter
into futures contracts on securities, financial indices, and foreign currencies
and options on such contracts, and may invest in options on securities,
financial indices and foreign currencies, forward contracts and swaps. The
Portfolio will not enter into any futures contracts or options on futures
contracts if the aggregate amount of the Portfolio's commitments under
outstanding futures contract positions and options on futures contracts written
by the Portfolio would exceed the market value of the total assets of the
Portfolio (i.e., no leveraging). The Portfolio may invest in forward currency
contracts with stated values of up to the value of the Portfolio's assets.
.........The Portfolio may buy or write options in privately negotiated
transactions on the types of securities and indices based on the types of
securities in which the Portfolio is permitted to invest directly. The Portfolio
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted, by the Sub-advisor for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by the Portfolio in a negotiated transaction is illiquid, the
value of an option bought or the amount of the Portfolio's obligations under an
option written by the Portfolio, as the case may be, will be subject to the
Portfolio's limitation on illiquid investments. In the case of illiquid options,
it may not be possible for the Portfolio to effect an offsetting transaction at
a time when the Sub-advisor believes it would be advantageous for the Portfolio
to do so. For a description of these strategies and instruments and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and
Floors. In addition to the strategies noted above, the Portfolio, in order to
attempt to protect the value of its investments from interest rate or currency
exchange rate fluctuations, may enter into interest rate swaps and may buy or
sell interest rate caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its investments. The Portfolio also may enter into these
transactions to protect against any increase in the price of securities the
Portfolio may consider buying at a later date. The Portfolio does not intend to
use these transactions as speculative investments. Interest rate swaps involve
the exchange by the Portfolio 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 exchange commitments can involve payments to be made in
the same currency or in different currencies. 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 contractually
based principal amount from the party selling the 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 contractually based principal amount from the party selling the
interest rate floor.
.........The Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending upon 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 out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be calculated on a daily basis and an amount of cash or other liquid assets
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolio's custodian. If the
Portfolio enters into an interest rate swap on other than a net basis, the
Portfolio would maintain a segregated account in the full amount accrued on a
daily basis of the Portfolio's obligations with respect to the swap. The
Portfolio 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 one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. The Sub-advisor will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party to
such a transaction, the Portfolio 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 standardized swap documentation. The Sub-advisor has determined that,
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. To the extent the
Portfolio sells (i.e., writes) caps and floors, it will maintain in a segregated
account cash or other liquid assets having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Portfolio's
obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that may
be entered into by the Portfolio. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Portfolio
or its counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap that is not collateralized defaults, the Portfolio would risk the loss
of the net amount of the payments that the Portfolio contractually is entitled
to receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement described above. For
an additional discussion of these strategies, see this Statement under "Certain
Risk Factors and Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to
guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may
enter into repurchase agreements. The Portfolio may also enter into reverse
repurchase agreements. For a description of these investment techniques, see the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the JanCap Growth Portfolio. These
limitations are not "fundamental" restrictions, and may be changed by the
Trustees without shareholder approval.
1. The Portfolio will not purchase a security if as a result, more than 15%
of its net assets in the aggregate, at market value, would be invested in
securities which cannot be readily resold because of legal or contractual
restrictions on resale or for which there is no readily available market, or
repurchase agreements maturing in more than seven days or securities used as a
cover for written over-the-counter options, if any. The Trustees, or the
Investment Manager or the Sub-advisor acting pursuant to authority delegated by
the Trustees, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to such rule, and therefore that such securities are not
subject to the foregoing limitation.
2. The Portfolio may borrow money for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the value
of its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation. Under such a circumstance, the Portfolio may have to liquidate
securities at a time when it is disadvantageous to do so. This policy shall not
prohibit reverse repurchase agreements or deposits of assets to margin or
guarantee positions in futures, options, swaps or forward contracts, or the
segregation of assets in connection with such contracts.
3. The Portfolio will not enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions (as
defined by the CFTC) if as a result the sum of the initial margin deposits and
premium required to establish positions in futures contracts and related options
that do not fall within the definition of bona fide hedging transactions would
exceed 5% of the fair market value of the Portfolio's net assets.
4. The Portfolio will not enter into any futures contracts if the
aggregate amount of the Portfolio's commitments under outstanding futures
contracts positions of the Portfolio would exceed the market value of the total
assets of the Portfolio.
5. The Portfolio will not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, swaps and forward futures
contracts are not deemed to constitute selling securities short.
6. The Portfolio will not mortgage or pledge any securities owned or
held by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
AST Janus Overseas Growth Portfolio:
Investment Objective: The investment objective of the AST Janus Overseas
Growth Portfolio is to seek long-term growth of capital.
Investment Policies:
The portfolio pursues its objective by investing primarily in common
stocks of foreign issuers of any size. The Portfolio normally invests at least
65% of its total assets in issuers from at least five different countries
excluding the United States. The Portfolio may invest all of its assets in the
securities of a single open-end management investment company with substantially
the same fundamental investment objectives, policies and restrictions as the
Portfolio subject to the prior approval of the Investment Manager. The
Investment Manager will not approve such investment unless: (a) the Investment
Manager believes, on the advice of counsel, that such investment will not have
an adverse effect on the tax status of the annuity contracts and/or life
insurance policies supported by the separate accounts of the Participating
Insurance Companies which purchase shares of the Trust; (b) the Investment
Manager has given prior notice to the Participating Insurance Companies that it
intends to permit such investment and has determined whether such Participating
Insurance Companies intend to redeem any shares and/or discontinue the purchase
of shares because of such investment; (c) the Trustees have determined that the
fees to be paid by the Trust for administrative, accounting, custodial and
transfer agency services for the Portfolio subsequent to such an investment are
appropriate, or the Trustees have approved changes to the agreements providing
such services to reflect a reduction in fees; (d) the Sub-advisor has agreed to
reduce its fee by the amount of any investment advisory fees paid to the
investment manager of such open-end management investment company; and (e)
shareholder approval is obtained if required by law. The Portfolio will apply
for such exemptive relief under the provisions of the 1940 Act, or other such
relief as may be necessary under the then governing rules and regulations of the
1940 Act, regarding investments in such investment companies.
Futures, Options and Other Derivative Instruments. The Portfolio may
enter into futures contracts on securities, financial indices, and foreign
currencies and options on such contracts, and may invest in options on
securities, financial indices and foreign currencies, forward contracts and
swaps. The Portfolio will not enter into any futures contracts or options on
futures contracts if the aggregate amount of the Portfolio's commitments under
outstanding futures contracts positions and options on futures contracts written
by the Portfolio would exceed the market value of the total assets of the
Portfolio (i.e., no leveraging). The Portfolio may invest in forward currency
contracts with stated values of up to the value of the Portfolio's assets.
The Portfolio may buy or write options in privately negotiated
transactions on the types of securities and indices based on the types of
securities in which the Portfolio is permitted to invest directly. The Portfolio
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted, by the Sub-advisor for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by the Portfolio in a negotiated transaction is illiquid, the
value of an option bought or the amount of the Portfolio's obligations under an
option written by the Portfolio, as the case may be, will be subject to the
Portfolio's limitation on illiquid investments. In the case of illiquid options,
it may not be possible for the Portfolio to effect an offsetting transaction at
a time when the Sub-advisor believes it would be advantageous for the Portfolio
to do so. For a description of these strategies and instruments and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Eurodollar Instruments. The Portfolio may make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed-income instruments are linked.
Swaps and Swap-Related Products. The Portfolio may enter into interest
rate swaps, caps and floors on either an asset-based or liability-based basis,
depending upon 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 out, with the Portfolio receiving or paying, as the case may
be, only the net amount of the two payments). The net amount of the excess, if
any, of the Portfolio's obligations over its entitlement with respect to each
interest rate swap will be calculated on a daily basis and an amount of cash or
high-grade liquid assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by the custodian
of the Portfolio. If the Portfolio enters into an interest rate swap on other
than a net basis, it would maintain a segregated account in the full amount
accrued on a daily basis of its obligations with respect to the swap. The
Portfolio 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 one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. The Sub-advisor will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party to
such a transaction, the Portfolio 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 standardized swap documentation. The Sub-advisor has determined
that, 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. To the extent
the Portfolio sells (i.e., writes) caps and floors, it will segregate cash or
high-grade liquid assets having an aggregate net asset value at least equal to
the full amount, accrued on a daily basis, of its obligations with respect to
any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Portfolio
or its counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap that is not collateralized defaults, the Portfolio would risk the loss
of the net amount of the payments that it contractually is entitled to receive.
The Portfolio may buy and sell (i.e., write) caps and floors without limitation,
subject to the segregation requirement described above. For an additional
discussion of these strategies, see this Statement under "Certain Risk Factors
and Investment Methods."
Illiquid Investments. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
illiquid investments (i.e., securities that are not readily marketable). The
Sub-advisor will make liquidity determinations with respect to the Portfolio
securities, including Rule 144A Securities, commercial paper and municipal lease
obligations. Under the guidelines established by the Trustees, the Sub-advisor
will consider the following factors: 1) the frequency of trades and quoted
prices for the obligation; 2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; 3) the willingness of
dealers to undertake to make a market in the security; and 4) the nature of the
security and the nature of marketplace trades, including the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer. In the case of commercial paper, the Sub-advisor will also
consider whether the paper is traded flat or in default as to principal and
interest and any ratings of the paper by an NRSRO.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Zero-Coupon, Pay-In-Kind and Step Coupon Securities. The Portfolio may
invest up to 10% of its assets in zero-coupon, pay-in-kind and step coupon
securities. For a discussion of zero-coupon debt securities and the risks
involved therein, see this Statement under "Certain Risk Factors and Investment
Methods."
Pass-Through Securities. The Portfolio may invest in various types of
pass-through securities, such as mortgage-backed securities, asset-backed
securities and participation interests. A pass-through security is a share or
certificate of interest in a pool of debt obligations that have been repackaged
by an intermediary, such as a bank or broker-dealer. The purchaser of a
pass-through security receives an undivided interest in the underlying pool of
securities. The issuers of the underlying securities make interest and principal
payments to the intermediary which are passed through to purchasers, such as the
Portfolio. For an additional discussion of pass-through securities and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Depositary Receipts. The Portfolio may invest in sponsored and
unsponsored American Depositary Receipts ("ADRs"), which are receipts issued by
an American bank or trust company evidencing ownership of underlying securities
issued by a foreign issuer. ADRs, in registered form, are designed for use in
U.S. securities markets. Unsponsored ADRs may be created without the
participation of the foreign issuer. Holders of these ADRs generally bear all
the costs of the ADR facility, whereas foreign issuers typically bear certain
costs in a sponsored ADR. The bank or trust company depositary of an unsponsored
ADR may be under no obligation to distribute shareholder communications received
from the foreign issuer or to pass through voting rights. The Portfolio may also
invest in European Depositary Receipts ("EDRs"), receipts issued by a European
financial institution evidencing an arrangement similar to that of ADRs, Global
Depositary Receipts ("GDRs") and in other similar instruments representing
securities of foreign companies. EDRs, in bearer form, are designed for use in
European securities markets. GDRs are securities convertible into equity
securities of foreign issuers.
Other Income-Producing Securities. Other types of income producing
securities that the Portfolio may purchase include, but are not limited to, the
following types of securities:
Variable and Floating Rate Obligations. These types of
securities are relatively long-term instruments that often carry demand features
permitting the holder to demand payment of principal at any time or at specified
intervals prior to maturity.
Standby Commitments. These instruments, which are similar to a
put, give the Portfolio the option to obligate a broker, dealer or bank to
repurchase a security held by that Portfolio at a specified price.
Tender Option Bonds. Tender option bonds are relatively
long-term bonds that are coupled with the agreement of a third party (such as a
broker, dealer or bank) to grant the holders of such securities the option to
tender the securities to the institution at periodic intervals.
Inverse Floaters. Inverse floaters are debt instruments whose
interest bears an inverse relationship to the interest rate on another security.
The Portfolio will not invest more than 5% of its assets in inverse floaters.
The Portfolio will purchase standby commitments, tender option bonds and
instruments with demand features primarily for the purpose of increasing the
liquidity of the Portfolio.
Repurchase and Reverse Repurchase Agreements. Subject to guidelines
promulgated by the Board of Trustees of the Trust, the Portfolio may enter into
repurchase agreements. Repurchase agreements that mature in more than seven days
will be subject to the 15% limit on illiquid investments. While it is not
possible to eliminate all risks from these transactions, it is the policy of the
Sub-advisor to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by Sub-advisor. The
Portfolio may also enter into reverse repurchase agreements. While a reverse
repurchase agreement is outstanding, the Portfolio will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Portfolio will enter into reverse repurchase
agreements only with parties that Sub-advisor deems creditworthy. For an
additional description of these investment techniques, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Janus Overseas Growth
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval:
1. The Portfolio will not (i) enter into any futures contracts and
related options for purposes other than bona fide hedging transactions within
the meaning of Commodity Futures Trading Commission ("CFTC") regulations if the
aggregate initial margin and premiums required to establish positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions will exceed 5% of the fair market value of the
Portfolio's net assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; and (ii) enter into
any futures contracts if the aggregate amount of the Portfolio's commitments
under outstanding futures contracts positions would exceed the market value of
its total assets.
2. The Portfolio does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short without the payment of any additional
consideration therefor, and provided that transactions in futures, options,
swaps and forward contracts are not deemed to constitute selling securities
short.
3. The Portfolio does not currently intend to purchase securities on
margin, except that the Portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
and other deposits in connection with transactions in futures, options, swaps
and forward contracts shall not be deemed to constitute purchasing securities on
margin.
4. The Portfolio does not currently intend to purchase securities of other
investment companies, except in compliance with the 1940 Act.
5. The Portfolio may not mortgage or pledge any securities owned or
held by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements, deposits of assets to margin, guarantee positions
in futures, options, swaps or forward contracts, or the segregation of assets in
connection with such contracts.
6. The Portfolio does not currently intend to purchase any security or
enter into a repurchase agreement if, as a result, more than 15% of its net
assets would be invested in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and in securities that are
illiquid by virtue of legal or contractual restrictions on resale or the absence
of a readily available market. The Trustees, or the Investment Manager acting
pursuant to authority delegated by the Trustees, may determine that a readily
available market exists for securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities"), or any successor to
such rule, and Section 4(2) commercial paper. Accordingly, such securities may
not be subject to the foregoing limitation.
7. The Portfolio may not invest in companies for the purpose of exercising
control of management.
<PAGE>
AST Money Market Portfolio:
Investment Objective: The investment objective of the AST Money Market
Portfolio is to seek high current income and maintain high levels of liquidity.
Investment Policies:
Bank Obligations. The Portfolio will not invest in bank obligations for
which any affiliate of the Sub-advisor is the ultimate obligor or accepting
bank.
Asset-Backed Securities. The asset-backed securities in which the
Portfolio may invest are subject to the Portfolio's overall credit requirements.
However, asset-backed securities, in general, are subject to certain risks. Most
of these risks are related to limited interests in applicable collateral. For
example, credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts on
credit card debt thereby reducing the balance due. Additionally, if the letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized. Because asset-backed securities are relatively new,
the market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
For a discussion of asset-backed securities and the risks involved therein see
the Trust's Prospectus and this Statement under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
The repurchase agreements into which the Portfolio may enter will usually be
short, from overnight to one week, and at no time will the Portfolio invest in
repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. For a
discussion of repurchase agreements and certain risks involved therein, see the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio invests the proceeds of
borrowings under reverse repurchase agreements. The Portfolio will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Portfolio may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of the market value of its total assets,
less liabilities other than the obligations created by reverse repurchase
agreements. The Portfolio will establish and maintain with its custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. If
interest rates rise during the term of a reverse repurchase agreement, such
reverse repurchase agreement may have a negative impact on the Portfolio's
ability to maintain a net asset value of $1.00 per share.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depositary receipts and the risks
involved in investing in foreign securities, see the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Loans will be subject to termination by
the Portfolio in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. The Portfolio may pay reasonable finders'
and custodial fees in connection with a loan. In making a loan, the Portfolio
will consider all facts and circumstances surrounding the making of the loan,
including the creditworthiness of the borrowing financial institution. The
Portfolio will not make any loans in excess of one year. The Portfolio will not
lend its securities to any officer, employee or Trustee of the Trust, the
Investment Manager, any Sub-advisor of the Trust, or the Administrator unless
otherwise permitted by applicable law.
<PAGE>
Federated Utility Income Portfolio:
Investment Objective: The investment objective of the Federated Utility Income
Portfolio is high current income and moderate capital appreciation by investing
primarily in equity and debt securities of utility companies.
Investment Policies:
U.S. Government Securities. The Portfolio may invest in U.S. government
obligations which generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes and bonds) and obligations issued or
guaranteed by U.S. government agencies or instrumentalities. These securities
are backed by the full faith and credit of the U.S. Treasury; the issuer's right
to borrow from the U.S. Treasury; the discretionary authority of the U.S.
government to purchase certain obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations. Examples of
instrumentalities and agencies which may not always receive support from the
U.S. government are: Federal Land Banks; Central Bank for Cooperatives; Federal
Intermediate Credit Banks; Federal Home Loan Banks; Farmers Home Administration;
and Federal National Mortgage Association.
Convertible Securities. Convertible securities include a spectrum of
securities which can be exchanged for or converted into common stock of the
issuer or a related financial entity (for example, a merged or acquired company
or partner). Convertible securities may include but are not limited to:
convertible bonds or debentures; convertible preferred stock; units consisting
of usable bonds and warrants; or securities which cap or otherwise limit returns
to the convertible security holder, like DECS (Dividend Enhanced Convertible
Stock, or Debt Exchangeable for Common Stock when issued as a debt security.
DECS offer a substantial dividend advantage with the possibility of unlimited
upside potential if the price of the underlying common stock exceeds a certain
level. DECS convert to common stock at maturity. The amount received is
dependent on the price of the common at the time of maturity. DECS contain two
call options at different strike prices. The DECS participate with the common up
to the first call price. They are effectively capped at that point unless the
common rises above a second price point at which time they participate with
unlimited upside potential.); LYONS (Liquid Yield Option Notes. A corporate bond
which is purchased at a price below par with no coupon, and is convertible into
stock.); PERCS (Preferred Equity Redeemable Preferred Stock. An equity issue
that pays a high cash dividend, has a cap price and mandatory conversion to
common stock at maturity. PERCS offer a substantial dividend advantage, but
capital appreciation potential is limited to a predetermined level. PERCS are
less risky and less volatile than the underlying common stock because their
superior income mitigates declines when the common falls, while the cap price
limits gains when the common rises.); PRIDES (Preferred Redeemable Increased
Dividend Securities. Essentially the same as DECS; the difference is little more
than who initially underwrites the issue). Convertible securities are often
rated below investment grade or are not rated because they fall below straight
debt obligations and just above common equity in order of preference or priority
on the issuer's balance sheet. Hence, an issuer with investment grade senior
debt may issue convertible securities with ratings less than investment grade or
unrated. The Fund does not limit convertible securities by rating.
As with all securities, various market forces influence the market
value of convertible securities, including changes in the level of interest
rates. As the level of interest rates increases, the market value of convertible
securities may decline and, conversely, as interest rates decline, the market
value of convertible securities may increase. The unique investment
characteristic of convertible securities, the right to be exchanged for the
issuer's common stock, causes the market value of convertible securities to
increase when the underlying common stock increases. However, since securities
prices fluctuate, there can be no assurance of capital appreciation, and most
convertible securities will not reflect quite as much capital appreciation as
their underlying common stocks. When the underlying common stock is experiencing
a decline, the value of the convertible security tends to decline to a level
approximating the yield-to-maturity basis of nonconvertible debt of similar
quality, often called "investment value," and may not experience the same
decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion
values (i.e., the number of shares of common stock to be received upon
conversion multiplied by the current market price of the stock). This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital appreciation
due to the conversion privilege. If this appreciation potential is not realized,
the premium may not be recovered.
When-Issued and Delayed Delivery Transactions. These transactions are
made to secure what is considered to be an advantageous price and yield for the
Portfolio. Settlement dates may be a month or more after entering into these
transactions, and the market values of the securities purchased may vary from
the purchase prices. No fees or other expenses, other than normal transaction
costs, are incurred. However, liquid assets of the Portfolio sufficient to make
payment for the securities purchased are segregated on the Portfolio's records
at the trade date. These securities are marked to market daily and maintained
until the transaction is settled. For a discussion of when-issued securities and
certain risks involved therein see this Statement under "Certain Risk Factors
and Investment Methods."
Lending Portfolio Securities. The collateral received when the
Portfolio lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the Portfolio. During the time Portfolio securities are on loan,
the borrower pays the Portfolio any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Portfolio or
the Borrower. The Portfolio may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or equivalent collateral to the borrower or placing broker.
The Portfolio does not have the right to vote the securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important by the Investment Manager with respect to the investment.
Reverse Repurchase Agreements. The use of reverse repurchase agreements
may allow the Portfolio to avoid selling Portfolio instruments at a time when a
sale may be deemed to be disadvantageous, but the ability to enter into a
reverse repurchase agreement does not ensure that the Portfolio will be able to
avoid selling Portfolio instruments at a disadvantageous time. For a discussion
of reverse repurchase agreements, see the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Investment Policy Which May Be Changed Without Shareholder Approval.
The following limitation is applicable to the Federated Utility Income
Portfolio. The limitation is not a "fundamental" restriction and may be changed
by the Trustees without shareholder approval.
The Portfolio will not write call options on securities unless the
securities are held in the Portfolio or unless the Portfolio is entitled to them
in deliverable form without further payment or after segregating cash in the
amount of any further payment. The Portfolio will not purchase options on
securities unless the securities are held in the Portfolio.
Federated High Yield Portfolio:
Investment Objective: The Federated High Yield Portfolio's investment
objective is to seek high current income.
Investment Policies:
Corporate Debt Securities. The Portfolio invests primarily in fixed
rate corporate debt securities. The fixed rate corporate debt obligations in
which the Portfolio intends to invest are expected to be lower-rated. For a
discussion of the special risks associated with lower-rated securities, see the
Trust's Prospectus and this Statement under "Certain Risk Factors and Investment
Methods." Corporate debt obligations in which the Portfolio invests may bear
fixed, floating, floating and contingent, or increasing rates of interest. They
may involve equity features such as conversion or exchange rights, warrants for
the acquisition of common stock of the same or a different issuer,
participations based on revenues, sales or profits, or the purchase of common
stock in a unit transaction (where corporate debt securities and common stock
are offered as a unit).
U.S. Government Obligations. The types of U.S. government obligations in
which the Portfolio may invest include, but are not limited to, direct
obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds)
and obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities may be backed by: the full faith and credit
of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the
discretionary authority of the U.S. government to purchase certain obligations
of agencies or instrumentalities; or the credit of the agency or instrumentality
issuing the obligations. For an additional discussion of the types of U.S.
government obligations in which the Portfolio may invest, see the Trust's
Prospectus under "Investment Objectives and Policies."
Restricted Securities. The Portfolio expects that any restricted
securities would be acquired either from institutional investors who originally
acquired the securities in private placements or directly from the issuers of
the securities in private placements. Restricted securities are generally
subject to legal or contractual delays on resale. Restricted securities and
securities that are not readily marketable may sell at a discount from the price
they would bring if freely marketable. For a discussion of illiquid and
restricted securities and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
When-Issued and Delayed Delivery Transactions. The Portfolio may
purchase fixed-income securities on a when-issued or delayed delivery basis. The
Portfolio may engage in when-issued and delayed delivery transactions only for
the purpose of acquiring portfolio securities consistent with the Portfolio's
investment objective and policies, not for investment leverage. These
transactions are arrangements in which the Portfolio purchases securities with
payment and delivery scheduled for a future time. Settlement dates may be a
month or more after entering into these transactions, and the market values of
the securities purchased may vary from the purchase prices. These transactions
are made to secure what is considered to be an advantageous price and yield for
the Portfolio.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Portfolio sufficient to make payment for
the securities to be purchased are segregated at the trade date. These
securities are marked to market daily and will maintain until the transaction is
settled. For an additional discussion of when-issued securities and certain
risks involved therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements. The Portfolio will require its custodian to take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. To the extent that the original
seller does not repurchase the securities from the Portfolio, the Portfolio
could receive less than the repurchase price on any sale of such securities. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Portfolio might be delayed
pending court action. The Portfolio believes that under the regular procedures
normally in effect for custody of the Portfolio's portfolio securities subject
to repurchase agreements, a court of competent jurisdiction would rule in favor
of the Portfolio and allow retention or disposition of such securities. The
Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Sub-advisor to be creditworthy, pursuant to guidelines established by the Board
of Trustees. For an additional discussion of repurchase agreements and certain
risks involved therein, see the Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
Lending Portfolio Securities. In order to generate additional income,
the Portfolio may lend its securities to brokers/dealers, banks, or other
institutional borrowers of securities. The Portfolio will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
Sub-advisor has determined are creditworthy under guidelines established by the
Trustees. The collateral received when the Portfolio lends portfolio securities
must be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Portfolio.
During the time Portfolio securities are on loan, the borrower pays the
Portfolio any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Portfolio or the borrower. The Portfolio may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or cash
equivalent collateral to the borrower or placing broker. The Portfolio does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
Reverse Repurchase Agreements. The Portfolio may also enter into
reverse repurchase agreements. When effecting reverse repurchase agreements,
liquid assets of the Portfolio, in a dollar amount sufficient to make payment
for the obligations to be purchased, are segregated at the trade date. These
securities are marked to market daily and are maintained until the transaction
is settled. During the period any reverse repurchase agreements are outstanding,
but only to the extent necessary to ensure completion of the reverse repurchase
agreements, the Portfolio will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements. For a discussion of reverse repurchase agreements
and certain risks involved therein, see the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio may experience greater portfolio turnover
than would be expected with a portfolio of higher-rated securities. For an
additional discussion of portfolio turnover, see this Statement and the Trust's
Prospectus under "Portfolio Turnover."
<PAGE>
Adverse Legislation. In 1989, legislation was enacted that required
federally insured savings and loan associations to divest their holdings of
lower-rated bonds by 1994. This legislation also created the Resolution Trust
Corporation (the "RTC"), which disposed of a substantial portion of lower-rated
bonds held by failed savings and loan associations. The reduction of the number
of institutions empowered to purchase and hold lower-rated bonds, and the
divestiture of bonds by these institutions and the RTC, have had an adverse
impact on the overall liquidity of the market for such bonds. Federal and state
legislatures and regulators have and may continue to propose new laws and
regulations designed to limit the number or type of institutions that may
purchase lower-rated bonds, reduce the tax benefits to issuers of such bonds, or
otherwise adversely impact the liquidity of such bonds. The Portfolio cannot
predict the likelihood that any of these proposals will be adopted, or their
potential impact on the liquidity of lower-rated bonds.
Foreign Securities. For a discussion of certain risks involved with
investing in foreign securities, including currency risks, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Federated High Yield Portfolio.
The limitations are not "fundamental" restrictions and may be changed by the
Trustees without shareholder approval.
1. The Portfolio will not invest more than 15% of the value of its net
assets in securities that are not readily marketable;
2. The Portfolio will not purchase the securities of any issuer (other
than the U.S. government, its agencies, or instrumentalities or instruments
secured by securities of such issuers, such as repurchase agreements) if as a
result more than 5% of the value of its total assets would be invested in the
securities of such issuer. For these purposes, the Portfolio takes all common
stock and all preferred stock of an issuer each as a single class, regardless of
priorities, series designations or other differences.
T. Rowe Price Asset Allocation Portfolio:
Investment Objective: The investment objective of the T. Rowe Price Asset
Allocation Portfolio is to seek a high level of total return by investing
primarily in a diversified group of fixed-income and equity securities.
Investment Policies: The Portfolio's share price will fluctuate with changing
market conditions and interest rate levels and your investment may be worth more
or less when redeemed than when purchased. The Portfolio should not be relied
upon for short-term financial needs, nor used to play short-term swings in the
stock or bond markets. The Portfolio cannot guarantee that it will achieve its
investment objectives. Fixed income securities in which the Portfolio may invest
include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury, and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interest in a pool of mortgages. After purchase by the Portfolio, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event will require a sale of
such security by the Portfolio. However, the Sub-advisor will consider such
event in its determination of whether the Portfolio should continue to hold the
security. To the extent that the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies continued in the Trust's Prospectus.
For a discussion of mortgage-backed securities and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities.
For an additional discussion of CMOs and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Asset-Backed Securities. The Portfolio may invest a portion of its
assets in debt obligations known as asset-backed securities. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Portfolio may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus, the
Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in the Sub-advisor's opinion, are not expected
to have any major price increases or moves in the near future but which, over
the long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that the
Portfolio will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies. The Portfolio
will not write a covered call option if, as a result, the aggregate market value
of all Portfolio securities or currencies covering call or put options exceeds
25% of the market value of the Portfolio's net assets. In calculating the 25%
limit, the Portfolio will offset, against the value of assets covering written
calls and puts, the value of purchased calls and puts on identical securities or
currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objectives. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency, The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
Writing Covered Put Options. The Portfolio may write American or
European style covered put options and purchase options to close out options
previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where Sub-advisor wishes to purchase the underlying security or
currency for the Portfolio's portfolio at a price lower than the current market
price of the security or currency. In such event the Portfolio would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Portfolio would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in the exercise of the put, can
not benefit from appreciation, if any, with respect to such specific securities
or currencies. The Portfolio will not write a covered put option if, as a
result, the aggregate market value of all portfolio securities or currencies
covering put or call options exceeds 25% of the market value of the Portfolio's
net assets. In calculating the 25% limit, the Portfolio will offset, against the
value of assets covering written puts and calls, the value of purchased puts and
calls on identical securities or currencies. For a discussion of options, see
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or European
style put options. The Portfolio may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Portfolio
may purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided in this Statement under "Certain Risk
Factors and Investment Methods."
The Portfolio will not commit more than 5% of its assets to premiums
when purchasing call and put options. The Portfolio may also purchase call
options on underlying securities or currencies it owns in order to protect
unrealized gains on call options previously written by it. A call option would
be purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may also
be purchased at times to avoid realizing losses.
Purchasing Call Options. The Portfolio may purchase American or
European call options. The Portfolio may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire. The
Portfolio may purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its current return. The
Portfolio may also purchase call options in order to acquire the underlying
securities or currencies. Examples of such uses of call options are provided
this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio will not commit more than 5% of its assets to premiums
when purchasing call and put options. The Portfolio may also purchase call
options on underlying securities or currencies it owns in order to protect
unrealized gains on call options previously written by it. A call option would
be purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may also
be purchased at times to avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction. For a discussion of dealer options, see this
Statement under "Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts").
Stock index futures contracts may be used to attempt to provide a hedge
for a portion of the Portfolio's portfolio, as a cash management tool, or as an
efficient way for the Sub-advisor to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index. The Portfolio may,
however, purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Portfolio's portfolio successfully, the Portfolio
must sell futures contacts with respect to indices or subindexes whose movements
will have a significant correlation with movements in the prices of the
Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas. For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided, however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash, U.S. government securities or other liquid,
high-grade debt obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be identified in an
account with the Portfolio's custodian to cover the position, or alternative
cover will be employed.
In addition, CFTC regulations may impose limitations on the Portfolio's
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Portfolio would comply with such new
restrictions.
Risks of Transactions in Futures Contracts. See this Statement
and the Trust's Prospectus under "Certain Risks and Investment Methods" for an
additional description of certain risks involved in futures contracts.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds for which T. Rowe Price Associates, Inc. or Rowe Price-Fleming
International, Inc. serve as sub-advisor. Such aggregated orders would be
allocated among the Portfolio and such other mutual funds or portfolios of
mutual funds in a fair and non-discriminatory manner.
See this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods" for a description of certain risks involved in
options on futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has no
current intention of engaging in financial futures or options transactions other
than those described above, it reserves the right to do so. Such futures or
options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to enter into
foreign futures and options transactions. See this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods" for a description
of certain risks involved in foreign futures and options.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
and non-U.S. dollar-denominated securities of foreign issuers in developed
countries. Because the Portfolio may invest in foreign securities, investment in
the Portfolio involves risks that are different in some respects from an
investment in a Portfolio which invests only in securities of U.S. domestic
issuers. Foreign investments may be affected favorably or unfavorably by changes
in currency rates and exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing, and financial
reporting standards and requirements comparable to those applicable to U.S.
companies. There may be less governmental supervision of securities markets,
brokers and issuers of securities. Securities of some foreign companies are less
liquid or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets,
restrictions on foreign investment and repatriation of capital, imposition of
withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the United States), and difficulty
in enforcing legal rights outside the U.S. For an additional discussion of
certain risks involved in investing in foreign securities, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security.
Second, when the Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Portfolio will also not enter into such forward contracts or maintain
a net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's securities or other assets denominated in that
currency. The Portfolio, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess of
the value of the Portfolio's securities or other assets to which the forward
contracts relate (including accrued interest to the maturity of the forward on
such securities) provided the excess amount is "covered" by liquid, high-grade
debt securities, denominated in any currency, at least equal at all times to the
amount of such excess. For these purposes "the securities or other assets to
which the forward contracts relate may be securities or assets denominated in a
single currency, or where proxy forwards are used, securities denominated in
more than one currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the Sub-advisor believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best interests
of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
For a discussion of certain risks involved in foreign currency
transactions, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Portfolio may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in investing in hybrid instruments, see this Statement under
"Certain Risk Factors and Investment Methods."
Illiquid and Restricted Securities. Subject to guidelines promulgated
by the Board of Trustees of the Trust, the Portfolio may invest in illiquid
securities. The Portfolio may invest in illiquid securities including repurchase
agreements which do not provide for payment within seven days, but will not
acquire such securities if, as a result, they would comprise more than 15% of
the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Board of Trustees. If through the appreciation of restricted
securities or the depreciation of unrestricted securities or the depreciation of
liquid securities, the Portfolio should be in a position where more than 15% of
the value of its net assets are invested in illiquid assets, including
restricted securities, the Portfolio will take appropriate steps to protect
liquidity.
The Portfolio may purchase securities which while privately placed, are
eligible for purchase and sale under Rule 144A under the 1933 Act. This rule
permits certain qualified institutional buyers, such as the Portfolio, to trade
in privately placed securities even though such securities are not registered
under the 1933 Act. Sub-advisor, under the supervision of the Trust's Board of
Trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Portfolio's restriction of investing no more
than 15% of its assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination, the Sub-advisor will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, Sub-advisor could consider the (1) frequency of trades
and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) the nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored, and if as a result of changed conditions it is
determined that a Rule 144A security is no longer liquid, the Portfolio's
holdings of illiquid securities would be reviewed to determine what, if any,
steps are required to assure that the Portfolio does not invest more than 15% of
its assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of the Portfolio's assets invested in
illiquid securities if qualified institutional buyers are unwilling to purchase
such securities.
Repurchase Agreements. Subject to the guidelines promulgated by the
Board of Trustees of the Trust, the Portfolio may enter into repurchase
agreements through which an investor (such as the Portfolio) purchases a
security (known as the "underlying security") from a well-established securities
dealer or a bank which is a member of the Federal Reserve System. Any such
dealer or bank will be on Sub-advisor's approved list and have a credit rating
with respect to its short-term debt of at least A1 by Standard & Poor's
Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by
Sub-advisor. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
considered illiquid. The Portfolio will only enter into repurchase agreements
where (i) the underlying securities are of the type (excluding maturity
limitations) which the Portfolio's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. 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 losses, 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 subnormal levels
of income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of Portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
fundamental policy. Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by the
Sub-advisor to be of good standing and will not be made unless, in the judgment
of Sub-advisor, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow Portfolios from,
other mutual funds or portfolios of mutual funds sponsored or advised by
Sub-advisor or Rowe Price-Fleming International, Inc. The Portfolio has no
current intention of engaging in these practices at this time.
When-Issued Securities. The Portfolio may from time to time purchase
securities on a "when-issued" basis. At the time the Portfolio makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Portfolio does not believe that its net asset value or income will be
adversely affected by its purchase of securities on a when-issued basis. The
Portfolio will maintain cash and marketable securities equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. For a
discussion of when-issued securities, see this Statement under "Certain Risk
Factors and Investment Methods."
<PAGE>
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable only to the T. Rowe Price Asset Allocation
Portfolio. These limitations are not fundamental restrictions, and can be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of the
Portfolio's total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities if, as a result, more than 15% of its net
assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
4. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act;
5. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
6. Invest in puts, calls, straddles, spreads, or any combination thereof to
the extent permitted by the Prospectus and this Statement;
7. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts or other
permissible investments;
8. Invest in warrants if, as a result thereof, more than 10% of the
value of the total assets of the Portfolio would be invested in warrants,
provided that this restriction does not apply to warrants acquired as the result
of the purchase of another security. For purposes of these percentage
limitations, the warrants will be valued at the lower of cost or market;
9. Effect short sales of securities;
10. Purchase a futures contract or an option thereon if, with respect
to positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such positions would
exceed 5% of the Portfolio's net assets.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Portfolio may, as a fundamental policy, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and restrictions as the Portfolio subject to the prior approval of the
Investment Manager. The Investment Manager will not approve such investment
unless: (a) the Investment Manager believes, on the advice of counsel, that such
investment will not have an adverse effect on the tax status of the annuity
contracts and/or life insurance policies supported by the separate accounts of
the Participating Insurance Companies which purchase shares of the Trust; (b)
the Investment Manager has given prior notice to the Participating Insurance
Companies that it intends to permit such investment and has determined whether
such Participating Insurance Companies intend to redeem any shares and/or
discontinue purchase of shares because of such investment; (c) the Trustees have
determined that the fees to be paid by the Trust for administrative, accounting,
custodial and transfer agency services for the Portfolio subsequent to such an
investment are appropriate, or the Trustees have approved changes to the
agreements providing such services to reflect a reduction in fees; (d) the
Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any
investment advisory fees paid to the investment manager of such open-end
management investment company; and (e) shareholder approval is obtained if
required by law. The Portfolio will apply for such exemptive relief under the
provisions of the 1940 Act, or other such relief as may be necessary under the
then governing rules and regulations of the 1940 Act, regarding investments in
such investment companies.
<PAGE>
T. Rowe Price International Equity Portfolio:
Investment Objective: The investment objective of the T. Rowe Price
International Equity Portfolio is to seek a total return on its assets from
long-term growth of capital and income principally through investments in common
stocks of established, non-U.S. companies. Investments may be made solely for
capital appreciation or solely for income or any combination of both for the
purpose of achieving a higher overall return.
Investment Policies: Sub-advisor 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 can be expected from each market. Based upon its
current assessment, Sub-advisor believes long-term growth of capital may be
achieved by investing in marketable securities of non-U.S. companies which have
the potential for growth of capital. Of course, there can be no assurance that
Sub-advisor's forecasts of expected return will be reflected in the actual
returns achieved by the Portfolio.
The Portfolio's share price will fluctuate with market, economic and
foreign exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Portfolio should not be relied upon as a
complete investment program, nor used to play short-term swings in the stock or
foreign exchange markets. The Portfolio is subject to risks unique to
international investing. Further, there is no assurance that the favorable
trends discussed below will continue, and the Portfolio cannot guarantee it will
achieve its objective.
It is the present intention of Sub-advisor to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Western Europe (for example, United Kingdom,
Germany, Netherlands, France, Spain, and Switzerland), South Africa, Australia,
Canada, and such other areas and countries as Sub-advisor may determine from
time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, Sub-advisor ordinarily considers the
following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, Sub-advisor ordinarily looks
for one or more of the following characteristics: an above-average earnings
growth per share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which the
Portfolio invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future years
as earnings increase.
It is expected that the Portfolio's investments will ordinarily be
traded on exchanges located at least in the respective countries in which the
various issuers of such securities are principally based.
The Portfolio will invest in securities denominated in currencies
specified elsewhere herein.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Portfolio may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Portfolio's investment in these
funds is subject to the provisions of the 1940 Act discussed below. If the
Portfolio invests in such investment funds, the Portfolio's shareholders will
bear not only their proportionate share of the expenses of the Portfolio
(including operating expenses and the fees of the Investment Manager), but also
will bear indirectly similar expenses of the underlying investment funds. In
addition, the securities of these investment funds may trade at a premium over
their net asset value.
<PAGE>
Apart from the matters described herein, the Portfolio is not aware at
this time of the existence of any investment or exchange control regulations
which might substantially impair the operations of the Portfolio as described in
the Trust's Prospectus and this Statement. It should be noted, however, that
this situation could change at any time.
The Portfolio may invest in companies located in Eastern Europe. The
Portfolio will only invest in a company located in, or a government of, Eastern
Europe or Russia, if the Sub-advisor believes the potential return justifies the
risk. To the extent any securities issued by companies in Eastern Europe and
Russia are considered illiquid, the Portfolio will be required to include such
securities within its 15% restriction on investing in illiquid securities.
Risk Factors of Foreign Investing. There are special risks in
investing in the Portfolio. Certain of these risks are inherent in any
international mutual fund; others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries. Although there is no universally accepted
definition, a developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a per capita gross
national product of less than $8,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the
Portfolio, and there can be no assurance that the Portfolio's investment
policies will be successful, or that its investment objective will be attained.
The Portfolio is designed for individual and institutional investors seeking to
diversify beyond the United States in an actively researched and managed
portfolio, and is intended for long-term investors who can accept the risks
entailed in investment in foreign securities. For a discussion of certain risks
involved in foreign investing see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus,
the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in Sub-advisor's opinion, are not expected to
have any major price increases or moves in the near future but which, over the
long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that
the Portfolio will own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an exercise
price equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies. The Portfolio
will not write a covered call option if, as a result, the aggregate market value
of all Portfolio securities or currencies covering call or put options exceeds
25% of the market value of the Portfolio's net assets. In calculating the 25%
limit, the Portfolio will offset, against the value of assets covering written
calls and puts, the value of purchased calls and puts on identical securities or
currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the average of the latest bid and asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or currency upon
the exercise of the option.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The Portfolio will effect closing transactions in order to realize a
profit on an outstanding call option, to prevent an underlying security or
currency from being called, or, to permit the sale of the underlying security or
currency. The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
Writing Covered Put Options. Although the Portfolio has no current
intention in the foreseeable future of writing American or European style
covered put options and purchasing put options to close out options previously
written by the Portfolio, the Portfolio reserves the right to do so.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" options at all
times while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where Sub-advisor wishes to purchase the underlying security or
currency for the Portfolio's portfolio at a price lower than the current market
price of the security or currency. In such event the Portfolio would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Portfolio would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies. The Portfolio will not write a covered put option if, as a result,
the aggregate market value of all portfolio securities or currencies covering
put or call options exceeds 25% of the market value of the Portfolio's net
assets. In calculating the 25% limit, the Portfolio will offset, against the
value of assets covering written puts and calls, the value of purchased puts and
calls on identical securities or currencies with identical maturity dates. For a
discussion of certain risks involved in options, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or
European style put options. As the holder of a put option, the Portfolio has the
right to sell the underlying security or currency at the exercise price at any
time during the option period (American style) or at the expiration of the
option (European style). The Portfolio may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire. The
Portfolio may purchase put options for defensive purposes in order to protect
against an anticipated decline in the value of its securities or currencies. An
example of such use of put options is provided in this Statement under "Certain
Risk Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be
recorded as an asset of the Portfolio. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Portfolio is computed (close of
New York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to perform would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts"); however, the Portfolio has no current
intention of entering into interest rate futures. The Portfolio, however,
reserves the right to trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a
hedge for a portion of the Portfolio, as a cash management tool, or as an
efficient way for Sub-advisor to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index. The Portfolio may,
however, purchase or sell futures contracts with respect to any stock index
whose movements will, in its judgment, have a significant correlation with
movements in the prices of all or portions of the Portfolio's portfolio
securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas.
For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash or other liquid assets equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be identified in an account with the Portfolio's custodian to
cover the position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the
Portfolio's ability to engage in certain yield enhancement and risk management
strategies. If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Portfolio would
comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds managed by Price-Fleming International, Inc. or T. Rowe Price Associates,
Inc. Such aggregated orders would be allocated among the Portfolio and such
other portfolios in a fair and non-discriminatory manner.
See this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods" for a description of certain risks involved in
options and futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has
no current intention of engaging in financial futures or option transactions
other than those described above, it reserves the right to do so. Such futures
or options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security.
Second, when the Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above and immediately
below, the Portfolio will also not enter into such forward contracts or maintain
a net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's securities or other assets denominated in that
currency. The Portfolio, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess of
the value of the Portfolio's securities or other assets to which the forward
contracts relate (including accrued interest to the maturity of the forward on
such securities) provided the excess amount is "covered" by liquid, high-grade
debt securities, denominated in any currency, at least equal at all times to the
amount of such excess. For these purposes "the securities or other assets to
which the forward contracts relate" may be securities or assets denominated in a
single currency, or where proxy forwards are used, securities denominated in
more than one currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, Sub-advisor believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
For an additional discussion of certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts. The Portfolio may enter into certain option,
futures, and forward foreign exchange contracts, including options and futures
on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in hybrid instruments, see this Statement under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
that is a member of the Federal Reserve System. Any such dealer or bank will be
on T. Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a
credit rating with respect to its short-term debt of at least A1 by Standard &
Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent
rating by T. Rowe Price. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus specified interest.
Repurchase agreements are generally for a short period of time, often less than
a week. Repurchase agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Portfolio will only enter into
repurchase agreements where (i) the underlying securities are of the type
(excluding maturity limitations) which the Portfolio's investment guidelines
would allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry transfer
to the account of the custodian or a bank acting as agent. 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
losses, 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 subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
Illiquid and Restricted Securities. The Portfolio may not invest in
illiquid securities including repurchase agreements which do not provide for
payment within seven days, if as a result, they would comprise more than 15% of
the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Trust's Board of Trustees. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Sub-advisor, under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its assets in illiquid securities.
A determination of whether a Rule 144A security is liquid or not is a question
of fact. In making this determination Sub-advisor will consider the trading
markets for the specific security taking into account the unregistered nature of
a Rule 144A security. In addition, Sub-advisor could consider the (1) frequency
of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, (4) and the nature of the security and of market
place trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the Portfolio's
holdings of illiquid securities would be reviewed to determine what, if any,
steps are required to assure that the Portfolio does not invest more than 15% of
its assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of a Portfolio's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
"fundamental policy." Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by
Sub-advisor to be of good standing and will not be made unless, in the judgment
of Sub-advisor, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow funds from,
other mutual funds sponsored or advised by Sub-advisor or T. Rowe Price
Associates, Inc.
The Portfolio has no current intention of engaging in these practices at this
time.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price International Equity
Portfolio. These limitations are not "fundamental" restrictions, and can be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of the
Portfolio's total assets.
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities if, as a result, more than 15% of its net
assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
4. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act;
5. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the Prospectus and this Statement;
6. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of Portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts and
other permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as a security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging, or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
8. Effect short sales of securities;
9. Invest in warrants if, as a result thereof, more than 10% of the
value of the total assets of the Portfolio would be invested in warrants, except
that this restriction does not apply to warrants acquired as a result of the
purchase of another security. For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or market;
10. Purchase a futures contract or an option thereon if, with respect
to positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such positions would
exceed 5% of the Portfolio's net assets.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Portfolio may, as a fundamental policy, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and restrictions as the Portfolio subject to the prior approval of the
Investment Manager. The Investment Manager will not approve such investment
unless: (a) the Investment Manager believes, on the advice of counsel, that such
investment will not have an adverse effect on the tax status of the annuity
contracts and/or life insurance policies supported by the separate accounts of
the Participating Insurance Companies which purchase shares of the Trust; (b)
the Investment Manager has given prior notice to the Participating Insurance
Companies that it intends to permit such investment and has determined whether
such Participating Insurance Companies intend to redeem any shares and/or
discontinue purchase of shares because of such investment; (c) the Trustees have
determined that the fees to be paid by the Trust for administrative, accounting,
custodial and transfer agency services for the Portfolio subsequent to such an
investment are appropriate, or the Trustees have approved changes to the
agreements providing such services to reflect a reduction in fees; (d) the
Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any
investment advisory fees paid to the investment manager of such open-end
management investment company; and (e) shareholder approval is obtained if
required by law. The Portfolio will apply for such exemptive relief under the
provisions of the 1940 Act, or other such relief as may be necessary under the
then governing rules and regulations of the 1940 Act, regarding investments in
such investment companies.
In addition to the restrictions described above, some foreign
countries limit, or prohibit, all direct foreign investment in the securities of
their companies. However, the governments of some countries have authorized the
organization of investment portfolios to permit indirect foreign investment in
such securities. For tax purposes these portfolios may be known as Passive
Foreign Investment Companies. The Portfolio is subject to certain percentage
limitations under the 1940 Act and certain states relating to the purchase of
securities of investment companies, and may be subject to the limitation that no
more than 10% of the value of the Portfolio's total assets may be invested in
such securities.
T. Rowe Price Natural Resources Portfolio:
Investment Policies: The Portfolio will normally have primarily all of its
assets in equity securities (e.g., common stocks). This portion of the
Portfolio's assets will be subject to all of the risks of investing in the stock
market. There is risk in all investment. The value of the portfolio securities
of the Portfolio will fluctuate based upon market conditions. Although the
Portfolio seeks to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. The fixed-income securities in
which the Portfolio may invest include, but are not limited to, those described
below.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury; and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Debt Obligations. Although primarily all of the Portfolio's assets are
invested in common stocks, the Portfolio may invest in convertible securities,
corporate debt securities and preferred stocks. See this Statement under
"Certain Risk Factors and Investment Methods," for a discussion of debt
obligations.
The Portfolio's investment program permits it to purchase below
investment grade securities. Since investors generally perceive that there are
greater risks associated with investment in lower quality securities, the yields
from such securities normally exceed those obtainable from higher quality
securities. However, the principal value of lower-rated securities generally
will fluctuate more widely than higher quality securities. Lower quality
investments entail a higher risk of default -- that is, the nonpayment of
interest and principal by the issuer than higher quality investments. Such
securities are also subject to special risks, discussed below. Although the
Portfolio seeks to reduce risk by portfolio diversification, credit analysis,
and attention to trends in the economy, industries and financial markets, such
efforts will not eliminate all risk. There can, of course, be no assurance that
the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, Sub-advisor will consider such event in its determination of whether
the Portfolio should continue to hold the security. To the extent that the
ratings given by Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the prospectus.
Risks of Low-Rated Debt Securities. The Portfolio may invest in low
quality bonds commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low and lower-medium
quality bonds involves greater investment risk, to the extent the Portfolio
invests in such bonds, achievement of its investment objective will be more
dependent on Sub-advisor's credit analysis than would be the case if the
Portfolio was investing in higher quality bonds. For a discussion of the special
risks involved in low-rated bonds, see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interest in a pool of mortgages. After purchase by the Portfolio, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event will require a sale of
such security by the Portfolio. However, the Sub-advisor will consider such
event in its determination of whether the Portfolio should continue to hold the
security. To the extent that the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies continued in the Trust's Prospectus.
For a discussion of mortgage-backed securities and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities.
For an additional discussion of CMOs and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Asset-Backed Securities. The Portfolio may invest a portion of its
assets in debt obligations known as asset-backed securities. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Portfolio may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of mortgages, the cash
flow of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion. Stripped
Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The
value of the other mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. Under the Internal Revenue Code of 1986, as amended (the "Code"), POs may
generate taxable income from the current accrual of original issue discount,
without a corresponding distribution of cash to the Portfolio.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
The Portfolio will treat IOs and POs, other than government-issued IOs
or POs backed by fixed rate mortgages, as illiquid securities and, accordingly,
limit its investments in such securities, together with all other illiquid
securities, to 15% of the Portfolio's net assets. Sub-advisor will determine the
liquidity of these investments based on the following guidelines: the type of
issuer; type of collateral, including age and prepayment characteristics; rate
of interest on coupon relative to current market rates and the effect of the
rate on the potential for prepayments; complexity of the issue's structure,
including the number of tranches; size of the issue and the number of dealers
who make a market in the IO or PO. The Portfolio will treat
non-government-issued IOs and POs not backed by fixed or adjustable rate
mortgages as illiquid unless and until the Securities and Exchange Commission
modifies its position.
Writing Covered Call Options. The Portfolio may write (sell) American
or European style "covered" call options and purchase options to close out
options previously written by a Portfolio. In writing covered call options, the
Portfolio expects to generate additional premium income which should serve to
enhance the Portfolio's total return and reduce the effect of any price decline
of the security or currency involved in the option. Covered call options will
generally be written on securities or currencies which, in Sub-advisor is
opinion, are not expected to have any major price increases or moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Portfolio.
The Portfolio will write only covered call options. This means that the
Portfolio will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the optioned
securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The Portfolio does not consider a security or
currency covered by a call to be "pledged" as that term is used in the
Portfolio's policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or
European style covered put options and purchase options to close out options
previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Portfolio at a price lower than the current market price of
the security or currency. In such event the Portfolio would write a put option
at an exercise price which, reduced by the premium received on the option,
reflects the lower price it is willing to pay. Since the Portfolio would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies.
The Portfolio will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Portfolio may purchase American or European
style put options. As the holder of a put option, the Portfolio has the right to
sell the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Portfolio may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Portfolio
may purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided in this Statement under "Certain Risk
Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be
recorded as an asset of the Portfolio. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Portfolio is computed (close of
New York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer (Over-the-Counter) Options. The Portfolio may engage in
transactions involving dealer options. Certain risks are specific to dealer
options. While the Portfolio would look to a clearing corporation to exercise
exchange-traded options, if the Portfolio were to purchase a dealer option, it
would rely on the dealer from whom it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction. For a discussion of dealer options, see this Statement under
"Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into futures
contracts, including stock index, interest rate and currency futures ("futures
or futures contracts"). The Portfolio may also enter into futures on commodities
related to the types of companies in which it invests, such as oil and gold
futures. Otherwise the nature of such futures and the regulatory limitations and
risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge a portion
of the Portfolio, as a cash management tool, or as an efficient way for the
Sub-advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Portfolio may purchase
or sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Portfolio successfully, the Portfolio must sell futures contacts with
respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London, at the London International Financial Futures Exchange, in
Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Portfolio's objectives in these
areas.
Regulatory Limitations. The Portfolio will engage in futures
contracts and options thereon only for bona fide hedging, yield enhancement, and
risk management purposes, in each case in accordance with rules and regulations
of the CFTC and applicable state law.
The Portfolio may not purchase or sell futures contracts or related
options if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
and premiums paid on those positions would exceed 5% of the net asset value of
the Portfolio after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into; provided, however, that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. For purposes of this
policy options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Board of Trustees of the Trust without a shareholder vote and
does not limit the percentage of the Portfolio's assets at risk to 5%.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by the
Portfolio, an amount of cash, U.S. government securities or other liquid,
high-grade debt obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be identified in an
account with the Portfolio's custodian to cover the position, or alternative
cover (such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion of a Portfolio's assets
to cover or identified accounts could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Portfolio would comply with such
new restrictions.
Options on Futures Contracts. The Portfolio may purchase and sell
options on the same types of futures in which it may invest. As an alternative
to writing or purchasing call and put options on stock index futures, the
Portfolio may write or purchase call and put options on stock indices. Such
options would be used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Portfolio and other
mutual funds or portfolios of mutual funds for which the Sub-advisor or Rowe
Price-Fleming International, Inc. serves as Sub-advisor. Such aggregated orders
would be allocated among such portfolios in a fair and non-discriminatory
manner.
See this Statement and Trust's Prospectus under "Certain Risk Factors
and Investment Methods" for a description of certain risks in options and future
contracts.
Additional Futures and Options Contracts. Although the Portfolio has no
current intention of engaging in futures or options transactions other than
those described above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
and non-U.S. dollar-denominated securities of foreign issuers. There are special
risks in foreign investing. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East. For an additional
discussion of certain risks involved in investing in foreign securities, see
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign Currency Transactions. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
The Portfolio may enter into forward contracts for a variety of
purposes in connection with the management of the foreign securities portion of
its portfolio. The Portfolio's use of such contracts would include, but not be
limited to, the following:
First, when the Portfolio enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security.
Second, when the Sub-advisor believes that one currency may experience
a substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Portfolio's
securities denominated in such foreign currency. Alternatively, where
appropriate, the Portfolio may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies. In
such a case, the Portfolio may enter into a forward contract where the amount of
the foreign currency to be sold exceeds the value of the securities denominated
in such currency. The use of this basket hedging technique may be more efficient
and economical than entering into separate forward contracts for each currency
held in the Portfolio. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible since the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, Sub-advisor believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
The Portfolio may enter into forward contracts for any other purpose
consistent with the Portfolio's investment objective and policies. However, the
Portfolio will not enter into a forward contract, or maintain exposure to any
such contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Portfolio's holdings of liquid, high-grade debt
securities and currency available for cover of the forward contract(s). In
determining the amount to be delivered under a contract, the Portfolio may net
offsetting positions.
At the maturity of a forward contract, the Portfolio may sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and either extend the maturity of the forward contract (by
"rolling" that contract forward) or may initiate a new forward contract.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. For a discussion of
certain risk factors involved in foreign currency transactions, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Portfolio may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts) beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Illiquid and Restricted Securities. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets is
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Sub-advisor under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Sub-advisor will consider the
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, Sub-advisor could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market, and (4) the nature of the security and
of marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Portfolio's holdings of illiquid securities would be reviewed to determine what,
if any, steps are required to assure that the Portfolio does not invest more
than 15% of its net assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the Portfolio's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine
the elements of futures contracts, options or other financial instruments with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments. Hybrid Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. For a discussion of
certain risks involved in investing in hybrid instruments see this statement
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into a repurchase agreement
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
that is a member of the Federal Reserve System. Any such dealer or bank will be
on Sub-advisor's approved list and have a credit rating with respect to its
short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by Sub-advisor. At that time,
the bank or securities dealer agrees to repurchase the underlying security at
the same price, plus specified interest. Repurchase agreements are generally for
a short period of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be treated as illiquid
securities. The Portfolio will only enter into repurchase agreements where (i)
the underlying securities are of the type (excluding maturity limitations) which
the Portfolio's investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest accrued, will be
at all times equal to or exceed the value of the repurchase agreement, and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book- entry transfer to the account of the custodian or a bank
acting as agent. 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 security and losses, 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 subnormal levels of income and lack of
access to income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements. Although the Portfolio has no current
intention, in the foreseeable future, of engaging in reverse repurchase
agreements, the Portfolio reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Portfolio is the seller
of, rather than the investor in, securities, and agrees to repurchase them at an
agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because it
avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Portfolio.
Warrants. The Portfolio may acquire warrants. For a discussion of certain
risks involved therein, see this Statement under "Certain Risk Factor and
Investment Methods."
Lending of Portfolio Securities. Securities loans are made to
broker-dealers or institutional investors or other persons, pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Portfolio will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Portfolio has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Portfolio will not have the right
to vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
will only be made to firms deemed by Sub-advisor to be of good standing and will
not be made unless, in the judgment of Sub-advisor, the consideration to be
earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission and certain state regulatory agencies, the Portfolio may
make loans to, or borrow funds from, other mutual funds sponsored or advised by
Sub-advisor or Rowe Price-Fleming International, Inc. The Portfolio has no
current intention of engaging in these practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio
may purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Portfolio's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Portfolio will cover these securities by maintaining cash and/or liquid,
high-grade debt securities with its custodian bank equal in value to commitments
for them during the time between the purchase and the settlement. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date. For a discussion of these securities and the risks involved
therein, see this Statement under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price Natural Resources
Portfolio. These limitations are not "fundamental" restrictions and can be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of its
total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such options would exceed
5% of the Portfolio's net asset value;
4. Purchase illiquid securities if, as a result, more than 15% of its net
assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
5. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act.
6. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts or other
permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
<PAGE>
8. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the Prospectus and this Statement;
9. Effect short sales of securities;
10. Invest in warrants if, as a result thereof, more than 10% of the
value of the net assets of the Portfolio would be invested in warrants, except
that this restriction does not apply to warrants acquired as a result of the
purchase of another security. For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or market.
T. Rowe Price International Bond Portfolio:
Investment Objective: The T. Rowe Price International Bond Portfolio's objective
is to provide high current income and capital appreciation by investing in
high-quality, non dollar-denominated government and corporate bonds outside the
United States.
Investment Policies: The Portfolio also seeks to moderate price fluctuation by
actively managing its maturity structure and currency exposure. The Portfolio's
investments may include debt securities issued or guaranteed by a foreign
national government, its agencies, instrumentalities or political subdivisions,
debt securities issued or guaranteed by supranational organizations, corporate
debt securities, bank or bank holding company debt securities and other debt
securities including those convertible into common stock. The Portfolio will
invest at least 65% of its assets in high-quality bonds but may invest up to 20%
of assets in below investment-grade, high-risk bonds, including bonds in default
or those with the lowest rating.
Sub-advisor 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 can be expected from each market. Of course, there can be no
assurance that Sub-advisor's forecasts of expected return will be reflected in
the actual returns achieved by the Portfolio.
The Portfolio's share price will fluctuate with market, economic and
foreign exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Portfolio should not be relied upon as a
complete investment program, nor used to play short-term swings in the global
bond or foreign exchange markets. The Portfolio is subject to risks unique to
international investing.
The Portfolio will invest in securities denominated in currencies
specified elsewhere herein.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Portfolio may invest in investment portfolios which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Portfolio's investment in these
portfolios is subject to the provisions of the 1940 Act discussed below. If the
Portfolio invests in such investment portfolios, the Portfolio's shareholders
will bear not only their proportionate share of the expenses of the Portfolio
(including operating expenses and the fees of the Investment Manager), but also
will bear indirectly similar expenses of the underlying investment portfolios.
In addition, the securities of these investment portfolios may trade at a
premium over their net asset value.
Apart from the matters described herein, the Portfolio is not aware at
this time of the existence of any investment or exchange control regulations
which might substantially impair the operations of the Portfolio as described in
the Trust's Prospectus and this Statement. It should be noted, however, that
this situation could change at any time.
The Portfolio may invest in companies located in Eastern Europe,
Russia or certain Latin American countries. The Portfolio will only invest in a
company located in, or a government of, Eastern Europe, Russia or Latin America,
if the Sub-advisor believes the potential return justifies the risk.
Risk Factors of Foreign Investing. There are special risks in
investing in the Portfolio. Certain of these risks are inherent in any
international mutual fund others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries. Although there is no universally accepted
definition, a developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a per capita gross
national product of less than $8,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the
Portfolio, and there can be no assurance that the Portfolio's investment
policies will be successful, or that its investment objective will be attained.
The Portfolio is designed for individual and institutional investors seeking to
diversify beyond the United States in an actively researched and managed
portfolio, and is intended for long-term investors who can accept the risks
entailed in investment in foreign securities. For a discussion of certain risks
involved in foreign investing see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus,
the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in Sub-advisor's opinion, are not expected to
have any major price increases or moves in the near future but which, over the
long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that
the Portfolio will own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an exercise
price equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies. The Portfolio
will not write a covered call option if, as a result, the aggregate market value
of all Portfolio securities or currencies covering call or put options exceeds
25% of the market value of the Portfolio's net assets. In calculating the 25%
limit, the Portfolio will offset, against the value of assets covering written
calls and puts, the value of purchased calls and puts on identical securities or
currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency, The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the average of the latest bid and asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or currency upon
the exercise of the option.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The Portfolio will effect closing transactions in order to realize a
profit on an outstanding call option, to prevent an underlying security or
currency from being called, or, to permit the sale of the underlying security or
currency. The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
Writing Covered Put Options. Although the Portfolio has no current
intention in the foreseeable future of writing American or European style
covered put options and purchasing put options to close out options previously
written by the Portfolio, the Portfolio reserves the right to do so.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" options at all
times while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where Sub-advisor wishes to purchase the underlying security or
currency for the Portfolio's portfolio at a price lower than the current market
price of the security or currency. In such event the Portfolio would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Portfolio would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies. The Portfolio will not write a covered put option if, as a result,
the aggregate market value of all portfolio securities or currencies covering
put or call options exceeds 25% of the market value of the Portfolio's net
assets. In calculating the 25% limit, the Portfolio will offset, against the
value of assets covering written puts and calls, the value of purchased puts and
calls on identical securities or currencies with identical maturity dates. For a
discussion of certain risks involved in options, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or
European style put options. As the holder of a put option, the Portfolio has the
right to sell the underlying security or currency at the exercise price at any
time during the option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase put options for defensive purposes in order
to protect against an anticipated decline in the value of its securities or
currencies. An example of such use of put options is provided in this Statement
under "Certain Risk Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be
recorded as an asset of the Portfolio. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Portfolio is computed (close of
New York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided below.
The Portfolio may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts"); however, the Portfolio has no current
intention of entering into interest rate futures. The Portfolio, however,
reserves the right to trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a
hedge for a portion of the Portfolio's portfolio, as a cash management tool, or
as an efficient way for Sub-advisor to implement either an increase or decrease
in portfolio market exposure in response to changing market conditions. Stock
index futures contracts are currently traded with respect to the S&P 500 Index
and other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Portfolio
may, however, purchase or sell futures contracts with respect to any stock index
whose movements will, in its judgment, have a significant correlation with
movements in the prices of all or portions of the Portfolio's portfolio
securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas.
For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash or other liquid assets equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be identified in an account with the Portfolio's custodian to
cover the position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the
Portfolio's ability to engage in certain yield enhancement and risk management
strategies. If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Portfolio would
comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds managed by the Sub-advisor or T. Rowe Price Associates, Inc. Such
aggregated orders would be allocated among the Portfolio and such other
portfolios in a fair and non-discriminatory manner.
See this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods" for a description of certain risks involved in
options and futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has
no current intention of engaging in financial futures or option transactions
other than those described above, it reserves the right to do so. Such futures
or options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security.
Second, when the Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Portfolio will also not enter into such forward contracts or maintain
a net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's securities or other assets denominated in that
currency. The Portfolio, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess of
the value of the Portfolio's securities or other assets to which the forward
contracts relate (including accrued interest to the maturity of the forward on
such securities) provided the excess amount is "covered" by liquid, high-grade
debt securities, denominated in any currency, at least equal at all times to the
amount of such excess. For these purposes "the securities or other assets to
which the forward contracts relate may be securities or assets denominated in a
single currency, or where proxy forwards are used, securities denominated in
more than one currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, Sub-advisor believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
For an additional discussion of certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts. The Portfolio may enter into certain options,
futures, and forward foreign exchange contracts, including options and futures
on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in hybrid instruments, see this Statement under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
that is a member of the Federal Reserve System. Any such dealer or bank will be
on T. Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a
credit rating with respect to its short-term debt of at least A1 by Standard &
Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent
rating by T. Rowe Price. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus specified interest.
Repurchase agreements are generally for a short period of time, often less than
a week. Repurchase agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Portfolio will only enter into
repurchase agreements where (i) the underlying securities are of the type
(excluding maturity limitations) which the Portfolio's investment guidelines
would allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry transfer
to the account of the custodian or a bank acting as agent. 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
losses, 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 subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
Illiquid and Restricted Securities. Subject to guidelines promulgated
by the Board of Trustees of the Trust, the Portfolio may invest in illiquid
securities. The Portfolio may invest in illiquid securities, including
restricted securities and repurchase agreements which do not provide for payment
within seven days, but will not acquire such securities if, as a result, they
would comprise more than 15% of the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Trust's Board of Trustees. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. The Sub-advisor, under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, the Sub-advisor will consider
the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Sub-advisor could
consider the (1) frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market, and (4) the
nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if as a
result of changed conditions it is determined that a Rule 144A security is no
longer liquid, the Portfolio's holdings of illiquid securities would be reviewed
to determine what, if any, steps are required to assure that the Portfolio does
not invest more than 15% of its net assets in illiquid securities. Investing in
Rule 144A securities could have the effect of increasing the amount of the
Portfolio's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Debt Securities. The Portfolio's investment program permits it to
purchase below investment grade securities. Since investors generally perceive
that there are greater risks associated with investment in lower quality
securities, the yields from such securities normally exceed those obtainable
from higher quality securities. However, the principal value of lower-rated
securities generally will fluctuate more widely than higher quality securities.
Lower quality investments entail a higher risk of default -- that is, the
nonpayment of interest and principal by the issuer than higher quality
investments. Such securities are also subject to special risks, discussed below.
Although the Portfolio seeks to reduce risk by portfolio diversification, credit
analysis, and attention to trends in the economy, industries and financial
markets, such efforts will not eliminate all risk. There can, of course, be no
assurance that the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, Sub-advisor will consider such event in its determination of whether
the Portfolio should continue to hold the security. To the extent that the
ratings given by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P") may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the prospectus. The Portfolio may invest up to
20% of its total assets in securities rated below BBB or Baa, including bonds in
default or those with the lowest rating. See the Appendix to this Statement for
a more complete description of the ratings assigned by ratings organizations and
their respective characteristics.
High Yield, High Risk Securities. Below investment grade securities
(rated below Baa by Moody's and below BBB by S&P) or unrated securities of
equivalent quality in the Sub-advisor's judgment, carry a high degree of risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of principal
and income, and may be less liquid, than securities in the higher rating
categories and are
<PAGE>
considered speculative. The lower the ratings of such debt securities, the
greater their risks render them like equity securities.
For an additional discussion of certain risks involved in investing in
lower-rated debt securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Zero-Coupon Securities. The Portfolio may invest in zero-coupon
securities which pay no cash income and are sold at substantial discounts from
their value at maturity. For a discussion of zero-coupon securities and certain
risks involved therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
"fundamental policy." Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by
Sub-advisor to be of good standing and will not be made unless, in the judgment
of Sub-advisor, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow funds from,
other mutual funds sponsored or advised by Sub-advisor or T. Rowe Price
Associates, Inc.
The Portfolio has no current intention of engaging in these practices at this
time.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price International Bond
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Pledge, mortgage or hypothecate its assets in excess, together with
permitted borrowings, of 1/3 of its total assets;
2. Purchase securities on margin, unless, by virtue of its ownership of
other securities, it has the right to obtain securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale is made
upon the same conditions, except in connection with arbitrage transactions and
except that the Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities;
3. Purchase illiquid securities if, as a result, more than 15% of its net
assets would be invested in such securities;
4. Buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Portfolio at any time do
not exceed 20% of its net assets; or sell put options on securities if, as a
result, the aggregate value of the obligations underlying such put options would
exceed 50% of the Portfolio's net assets;
5. Enter into futures contracts or purchase options thereon which do
not represent bona fide hedging unless immediately after the purchase, the value
of the aggregate initial margin with respect to all such futures contracts
entered into on behalf of the Portfolio and the premiums paid for such options
on futures contracts does not exceed 5% of the Portfolio's total assets,
provided that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in computing the 5% limit;
<PAGE>
6. Purchase warrants if as a result warrants taken at the lower of cost
or market value would represent more than 10% of the value of the Portfolio's
total net assets, except that this restriction does not apply to warrants
acquired as a result of the purchase of another security;
7. Make securities loans if the value of such securities loaned exceeds
30% of the value of the Portfolio's total assets at the time any loan is made;
all loans of portfolio securities will be fully collateralized and marked to
market daily. The Portfolio has no current intention of making loans of
portfolio securities that would amount to greater than 5% of the Portfolio's
total assets; or
8. Purchase or sell real estate limited partnership interests.
9. Purchase securities which are not bonds denominated in foreign
currency ("international bonds") if, immediately after such purchase, less than
65% of its total assets would be invested in international bonds, except that
for temporary defensive purposes the Portfolio may purchase securities which are
not international bonds without limitation;
10. Borrow money in excess of 5% of its total assets (taken at market
value) or borrow other than from banks; however, in the case of reverse
repurchase agreements, the Portfolio may invest in such agreements with other
than banks subject to total asset coverage of 300% for such agreements and all
borrowings;
11. Invest more than 20% of its total assets in below investment grade,
high-risk bonds, including bonds in default or those with the lowest rating;
12. Invest in companies for the purpose of exercising management or
control;
13. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act.
14. Effect short sales of securities.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment funds to permit indirect foreign investment in such
securities. For tax purposes these funds may be known as Passive Foreign
Investment Companies. The Portfolio is subject to certain percentage limitations
under the 1940 Act relating to the purchase of securities of investment
companies, and may be subject to the limitation that no more than 10% of the
value of the Portfolio's total assets may be invested in such securities.
Restrictions with respect to repurchase agreements shall be construed
to be for repurchase agreements entered into for the investment of available
cash consistent with the Portfolio's repurchase agreement procedures, not
repurchase commitments entered into for general investment purposes.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Investment Policies" above is
adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of Portfolio's assets will
not be considered a violation of the restriction.
T. Rowe Price Small Company Value Portfolio:
Investment Objective: The investment objective of the T. Rowe Price Small
Company Value Portfolio is to provide long-term capital appreciation by
investing primarily in small-capitalization stocks that appear to be
undervalued.
Investment Policies:
Although primarily all of the Portfolio's assets are invested in common
stocks, the Portfolio may invest in convertible securities, corporate debt
securities and preferred stocks. The fixed-income securities in which the
Portfolio may invest include, but are not limited to, those described below. See
this Statement under "Certain Risk Factors and Investment Methods," for an
additional discussion of debt obligations.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury; and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Lower-Rated Debt Securities. The Portfolio's investment program permits
it to purchase below investment grade securities, commonly referred to as "junk
bonds." Since investors generally perceive that there are greater risks
associated with investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will fluctuate
more widely than higher quality securities. Lower quality investments entail a
higher risk of default -- that is, the nonpayment of interest and principal by
the issuer than higher quality investments. Such securities are also subject to
special risks, discussed below. Although the Portfolio seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate all
risk. There can, of course, be no assurance that the Portfolio will achieve its
investment objective.
After purchase by the Portfolio, a debt security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, Sub-advisor will consider such event in its determination of whether
the Portfolio should continue to hold the security. To the extent that the
ratings given by Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the prospectus.
Junk bonds are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments. Because
investment in low and lower-medium quality bonds involves greater investment
risk, to the extent the Portfolio invests in such bonds, achievement of its
investment objective will be more dependent on Sub-advisor's credit analysis
than would be the case if the Portfolio was investing in higher quality bonds.
For a discussion of the special risks involved in low-rated bonds, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interests in a pool of mortgages. After purchase by the Portfolio,
a security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event will require a sale of
such security by the Portfolio. However, the Sub-advisor will consider such
event in its determination of whether the Portfolio should continue to hold the
security. To the extent that the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the Trust's Prospectus.
For a discussion of mortgage-backed securities and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities.
For an additional discussion of CMOs and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of mortgages, the cash
flow of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion. Stripped
Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The
value of the other mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. Under the Internal Revenue Code of 1986, as amended (the "Code"), POs may
generate taxable income from the current accrual of original issue discount,
without a corresponding distribution of cash to the Portfolio.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
The Portfolio will treat IOs and POs, other than government-issued IOs
or POs backed by fixed rate mortgages, as illiquid securities and, accordingly,
limit its investments in such securities, together with all other illiquid
securities, to 15% of the Portfolio's net assets. Sub-advisor will determine the
liquidity of these investments based on the following guidelines: the type of
issuer; type of collateral, including age and prepayment characteristics; rate
of interest on coupon relative to current market rates and the effect of the
rate on the potential for prepayments; complexity of the issue's structure,
including the number of tranches; size of the issue and the number of dealers
who make a market in the IO or PO. The Portfolio will treat
non-government-issued IOs and POs not backed by fixed or adjustable rate
mortgages as illiquid unless and until the Securities and Exchange Commission
modifies its position.
Asset-Backed Securities. The Portfolio may invest a portion of its
assets in debt obligations known as asset-backed securities. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Portfolio may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Call Options. The Portfolio may write (sell) American
or European style "covered" call options and purchase options to close out
options previously written by a Portfolio. In writing covered call options, the
Portfolio expects to generate additional premium income which should serve to
enhance the Portfolio's total return and reduce the effect of any price decline
of the security or currency involved in the option. Covered call options will
generally be written on securities or currencies which, in the Sub-advisor's
opinion, are not expected to have any major price increases or moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Portfolio.
The Portfolio will write only covered call options. This means that the
Portfolio will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The Portfolio does not consider a security or
currency covered by a call to be "pledged" as that term is used in the
Portfolio's policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or
European style covered put options and purchase options to close out options
previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Portfolio at a price lower than the current market price of
the security or currency. In such event the Portfolio would write a put option
at an exercise price which, reduced by the premium received on the option,
reflects the lower price it is willing to pay. Since the Portfolio would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies.
The Portfolio will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Portfolio may purchase American or European
style put options. As the holder of a put option, the Portfolio has the right to
sell the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Portfolio may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Portfolio
may purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided in this Statement under "Certain Risk
Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be
recorded as an asset of the Portfolio. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Portfolio is computed (close of
New York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer (Over-the-Counter) Options. The Portfolio may engage in
transactions involving dealer options. Certain risks are specific to dealer
options. While the Portfolio would look to a clearing corporation to exercise
exchange-traded options, if the Portfolio were to purchase a dealer option, it
would rely on the dealer from whom it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction. For a discussion of dealer options, see this Statement under
"Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into futures
contracts, including stock index, interest rate and currency futures ("futures
or futures contracts"). The Portfolio may also enter into futures on commodities
related to the types of companies in which it invests, such as oil and gold
futures. Otherwise the nature of such futures and the regulatory limitations and
risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge a portion
of the Portfolio, as a cash management tool, or as an efficient way for the
Sub-advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Portfolio may purchase
or sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Portfolio successfully, the Portfolio must sell futures contacts with
respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London, at the London International Financial Futures Exchange, in
Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Portfolio's objectives in these
areas.
Regulatory Limitations. The Portfolio will engage in futures
contracts and options thereon only for bona fide hedging, yield enhancement, and
risk management purposes, in each case in accordance with rules and regulations
of the CFTC and applicable state law.
The Portfolio may not purchase or sell futures contracts or related
options if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
and premiums paid on those positions would exceed 5% of the net asset value of
the Portfolio after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into; provided, however, that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. For purposes of this
policy options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Board of Trustees of the Trust without a shareholder vote and
does not limit the percentage of the Portfolio's assets at risk to 5%.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by the
Portfolio, an amount of cash or other liquid assets equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified in an account with the Portfolio's custodian to cover the
position, or alternative cover (such as owning an offsetting position) will be
employed. Assets used as cover or held in an identified account cannot be sold
while the position in the corresponding option or future is open, unless they
are replaced with similar assets. As a result, the commitment of a large portion
of a Portfolio's assets to cover or identified accounts could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Portfolio would comply with such
new restrictions.
Options on Futures Contracts. The Portfolio may purchase and sell
options on the same types of futures in which it may invest. As an alternative
to writing or purchasing call and put options on stock index futures, the
Portfolio may write or purchase call and put options on stock indices. Such
options would be used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Portfolio and other
mutual funds or portfolios of mutual funds managed by the Sub-advisor or Rowe
Price-Fleming International, Inc. Such aggregated orders would be allocated
among the Portfolio and such other portfolios in a fair and non-discriminatory
manner.
See this Statement and Trust's Prospectus under "Certain Risk Factors
and Investment Methods" for a description of certain risks in options and future
contracts.
Additional Futures and Options Contracts. Although the Portfolio has no
current intention of engaging in futures or options transactions other than
those described above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
and non-U.S. dollar-denominated securities of foreign issuers. There are special
risks in foreign investing. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East. For an additional
discussion of certain risks involved in investing in foreign securities, see
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign Currency Transactions. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
The Portfolio may enter into forward contracts for a variety of
purposes in connection with the management of the foreign securities portion of
its portfolio. The Portfolio's use of such contracts would include, but not be
limited to, the following:
First, when the Portfolio enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security.
Second, when the Sub-advisor believes that one currency may experience
a substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Portfolio's
securities denominated in such foreign currency. Alternatively, where
appropriate, the Portfolio may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies. In
such a case, the Portfolio may enter into a forward contract where the amount of
the foreign currency to be sold exceeds the value of the securities denominated
in such currency. The use of this basket hedging technique may be more efficient
and economical than entering into separate forward contracts for each currency
held in the Portfolio. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible since the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, Sub-advisor believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
The Portfolio may enter into forward contracts for any other purpose
consistent with the Portfolio's investment objective and policies. However, the
Portfolio will not enter into a forward contract, or maintain exposure to any
such contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Portfolio's holdings of liquid assets and currency
available for cover of the forward contract(s). In determining the amount to be
delivered under a contract, the Portfolio may net offsetting positions.
At the maturity of a forward contract, the Portfolio may sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and either extend the maturity of the forward contract (by
"rolling" that contract forward) or may initiate a new forward contract.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. For a discussion of
certain risk factors involved in foreign currency transactions, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Portfolio may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
<PAGE>
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts) beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Illiquid and Restricted Securities. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets is
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Sub-advisor, under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Sub-advisor will consider the
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, Sub-advisor could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market, and (4) the nature of the security and
of marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Portfolio's holdings of illiquid securities would be reviewed to determine what,
if any, steps are required to assure that the Portfolio does not invest more
than 15% of its net assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the Portfolio's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine
the elements of futures contracts, options or other financial instruments with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments). Hybrid Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. For a discussion of
certain risks involved in investing in hybrid instruments see this statement
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into a repurchase agreement
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
that is a member of the Federal Reserve System. Any such dealer or bank will be
on Sub-advisor's approved list and have a credit rating with respect to its
short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by Sub-advisor. At that time,
the bank or securities dealer agrees to repurchase the underlying security at
the same price, plus specified interest. Repurchase agreements are generally for
a short period of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be treated as illiquid
securities. The Portfolio will only enter into repurchase agreements where (i)
the underlying securities are of the type (excluding maturity limitations) which
the Portfolio's investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest accrued, will be
at all times equal to or exceed the value of the repurchase agreement, and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book- entry transfer to the account of the custodian or a bank
acting as agent. 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 security and losses, 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 subnormal levels of income and lack of
access to income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements. Although the Portfolio has no current
intention, in the foreseeable future, of engaging in reverse repurchase
agreements, the Portfolio reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Portfolio is the seller
of, rather than the investor in, securities, and agrees to repurchase them at an
agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because it
avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Portfolio.
Warrants. The Portfolio may acquire warrants. For a discussion of certain
risks involved therein, see this Statement under "Certain Risk Factor and
Investment Methods."
Lending of Portfolio Securities. Securities loans are made to
broker-dealers or institutional investors or other persons, pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Portfolio will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Portfolio has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Portfolio will not have the right
to vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
will only be made to firms deemed by Sub-advisor to be of good standing and will
not be made unless, in the judgment of Sub-advisor, the consideration to be
earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow funds from,
other mutual funds sponsored or advised by Sub-advisor or Rowe Price-Fleming
International, Inc. The Portfolio has no current intention of engaging in these
practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio
may purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Portfolio's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Portfolio will cover these securities by maintaining cash and/or other liquid
assets with its custodian bank equal in value to commitments for them during the
time between the purchase and the settlement. Such segregated securities either
will mature or, if necessary, be sold on or before the settlement date. For a
discussion of these securities and the risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price Small Company Value
Portfolio. These limitations are not "fundamental" restrictions, and can be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of its
total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such options would exceed
5% of the Portfolio's net asset value;
4. Purchase illiquid securities if, as a result, more than 15% of its net
assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
5. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act;
6. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts or other
permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
8. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the Prospectus and this Statement;
9. Effect short sales of securities;
10. Invest in warrants if, as a result thereof, more than 10% of the
value of the net assets of the Portfolio would be invested in warrants, except
that this restriction does not apply to warrants acquired as a result of the
purchase of another security. For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or market.
Founders Capital Appreciation Portfolio:
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or
sell a security at a specified price within a limited period of time. The
Portfolio may write ("sell") covered call options on any or all of its portfolio
securities. In addition, the Portfolio may purchase options on securities. The
Portfolio may also purchase put and call options on stock indices.
The Portfolio may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Portfolio's assets
is invested in securities with respect to which options may be written. The
extent of the Portfolio's option writing activities will vary from time to time
depending upon the Sub-advisor's evaluation of market, economic and monetary
conditions.
When the Portfolio purchases a security with respect to which it
intends to write an option, it is likely that the option will be written
concurrently with or shortly after purchase. The Portfolio will write an option
on a particular security only if the Sub-advisor believes that a liquid
secondary market will exist on an exchange for options of the same series, which
will permit the Portfolio to enter into a closing purchase transaction and close
out its position. If the Portfolio desires to sell a particular security on
which it has written an option, it will effect a closing purchase transaction
prior to or concurrently with the sale of the security.
The Portfolio may enter into closing purchase transactions to reduce
the percentage of its assets against which options are written, to realize a
profit on a previously written option, or to enable it to write another option
on the underlying security with either a different exercise price or expiration
time or both.
Options written by the Portfolio will normally have expiration dates
between three and nine months from the date written. The exercise prices of
options may be below, equal to or above the current market values of the
underlying securities at the times the options are written. From time to time
for tax and other reasons, the Portfolio may purchase an underlying security for
delivery in accordance with an exercise notice assigned to it, rather than
delivering such security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Portfolio
purchases put options on stock indices to protect the Portfolio against decline
in value. The Portfolio purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Portfolio. Any gain in the price of a
call option is likely to be offset by higher prices the Portfolio must pay in
rising markets, as cash reserves are invested. In declining markets, any
increase in the price of a put option is likely to be offset by lower prices of
stocks owned by the Portfolio.
The Portfolio may purchase only those put and call options that are
listed on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on
stock exchanges are either broadly based, such as the Standard & Poor's 500
Stock Index and 100 Stock Index, or involve stocks in a designated industry or
group of industries. The Portfolio may utilize either broadly based or market
segment indices in seeking a better correlation between the indices and its
portfolio.
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Portfolio may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this Statement, the Sub-advisor believes that these limitations will not affect
the purchase of stock index options by the Portfolio.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Portfolio. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Portfolio may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Portfolio will lose the right to appreciation of
the stock for the duration of the option. For an additional discussion of
options on stock indices and stocks and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts. The Portfolio may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant (an "FCM") or brokerage firm which is a member of the relevant contract
market. Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the value
of the underlying commodities, in most cases the contractual obligation is
offset before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange. Such
a transaction cancels the obligation to make or take delivery of the
commodities.
<PAGE>
The acquisition or sale of a futures contract could occur, for example,
if the Portfolio held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
could sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Portfolio and
thereby prevent the Portfolio's net asset value from declining as much as it
otherwise would have. The Portfolio also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Portfolio to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Portfolio could
take advantage of the potential rise in the value of equity securities without
buying them until the market had stabilized. At that time, the futures contracts
could be liquidated and the Portfolio could buy equity securities on the cash
market.
The Portfolio may also enter into interest rate and foreign currency
futures contracts. Interest rate futures contracts currently are traded on a
variety of fixed-income securities, including long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
The Portfolio will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Portfolio may use futures and options thereon solely for
bona fide hedging or for other non-speculative purposes. As to long positions
which are used as part of the Portfolio's strategies and are incidental to its
activities in the underlying cash market, the "underlying commodity value" of
the Portfolio's futures and options thereon must not exceed the sum of (i) cash
set aside in an identifiable manner, or short-term U.S. debt obligations or
other dollar-denominated high-quality, short-term money instruments so set
aside, plus sums deposited on margin; (ii) cash proceeds from existing
investments due in 30 days; and (iii) accrued profits held at the futures
commission merchant. The "underlying commodity value" of a future is computed by
multiplying the size of the future by the daily settlement price of the future.
For an option on a future, that value is the underlying commodity value of the
future underlying the option.
Unlike the situation in which the Portfolio purchases or sells a
security, no price is paid or received by the Portfolio upon the purchase or
sale of a futures contract. Instead, the Portfolio is required to deposit in a
segregated asset account an amount of cash or qualifying securities (currently
U.S. Treasury bills), currently in a minimum amount of $15,000. This is called
"initial margin." Such initial margin is in the nature of a performance bond or
good faith deposit on the contract. However, since losses on open contracts are
required to be reflected in cash in the form of variation margin payments, the
Portfolio may be required to make additional payments during the term of a
contract to its broker. Such payments would be required, for example, where,
during the term of an interest rate futures contract purchased by the Portfolio,
there was a general increase in interest rates, thereby making the Portfolio's
securities less valuable. In all instances involving the purchase of financial
futures contracts by the Portfolio, an amount of cash together with such other
securities as permitted by applicable regulatory authorities to be utilized for
such purpose, at least equal to the market value of the future contracts, will
be deposited in a segregated account with the Portfolio's custodian to
collateralize the position. At any time prior to the expiration of a futures
contract, the Portfolio may elect to close its position by taking an opposite
position which will operate to terminate the Portfolio's position in the futures
contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of three business
days for most types of securities, the futures markets can provide superior
liquidity to the securities markets. Nevertheless, there is no assurance a
liquid secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Portfolio to enter into new positions or close out existing positions.
If the secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Portfolio would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Portfolio's access to other assets held
to cover its futures positions also could be impaired. For an additional
discussion of futures contracts and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Options on Futures Contracts. The Portfolio may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Portfolio would be able to buy a put option on a
futures contract to hedge its portfolio against the risk of falling prices. For
an additional discussion of options on futures contracts and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risks Factors and Investment Methods."
Options on Foreign Currencies. The Portfolio may buy and sell options
on foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Portfolio could buy
put options on the foreign currency. If the value of the currency declines, the
Portfolio would have the right to sell such currency for a fixed amount in U.S.
dollars and would thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted. Conversely, when a rise is
projected in the U.S. dollar value of a currency in which securities to be
acquired are denominated, thereby increasing the cost of such securities, the
Portfolio could buy call options thereon. The purchase of such options could
offset, at least partially, the effects of the adverse movements in exchange
rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Portfolio invests.
Should interest or exchange rates or the prices of securities or financial
indices move in an unexpected manner, the Portfolio may not achieve the desired
benefits of futures and options or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies and negotiated or
over-the-counter instruments, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Portfolio as the possible loss of the entire premium
paid for an option bought by the Portfolio and the possible need to defer
closing out positions in certain instruments to avoid adverse tax consequences.
As a result, no assurance can be given that the Portfolio will be able to use
those instruments effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
the risks involved in foreign investments, see the Trust's Prospectus and this
Statement under "Certain Risk Factors and Investment Methods."
Forward Contracts For Purchase or Sale of Foreign Currencies. The
Portfolio generally will conduct its foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
currency market. When the Portfolio purchases or sells a security denominated in
a foreign currency, it may enter into a forward foreign currency contract
("forward contract") for the purchase or sale, for a fixed amount of dollars, of
the amount of foreign currency involved in the underlying security transaction.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. In this manner, the Portfolio may obtain protection against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date the security
is purchased or sold and the date upon which payment is made or received.
Although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
The Portfolio will not speculate in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When the Sub-Advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Portfolio may each enter into a forward contract to sell, for a
fixed dollar or other currency amount, foreign currency approximating the value
of some or all of those Portfolio securities denominated in that currency. The
Portfolio will not enter into such forward contracts or maintain a net exposure
to such contracts where the fulfillment of the contracts would require the
Portfolio to deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency. Forward
contracts may, from time to time, be considered illiquid, in which case they
would be subject to the Portfolio's limitation on investing in illiquid
securities.
At the consummation of a forward contract for delivery by the Portfolio
of a foreign currency, the Portfolio may either make delivery of the foreign
currency or terminate its contractual obligation to deliver the foreign currency
by purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Portfolio chooses
to make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Portfolio assets into such currency.
Dealings in forward contracts by the Portfolio will be limited to the
transactions described above. Of course, the Portfolio is not required to enter
into such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by the Sub-advisor. It
also should be realized that this method of protecting the value of the
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to the decline in the value of the hedged currency, at the same time they
tend to limit any potential gain which might result should the value of such
currency increase. For an additional discussion of forward foreign currency
contracts and certain risks involved therein, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Prospectus, the Portfolio may
invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Portfolio from disposing of such a
security at the time desired or at a reasonable price. In addition, in order to
resell a restricted security, the Portfolio might have to bear the expense and
incur the delays associated with effecting registration. In purchasing illiquid
securities, the Portfolio does not intend to engage in underwriting activities,
except to the extent the Portfolio may be deemed to be a statutory underwriter
under the Securities Act in purchasing or selling such securities. Illiquid
securities will be purchased for investment purposes only and not for the
purpose of exercising control or management of other companies. For an
additional discussion of illiquid or restricted securities and certain risks
involved therein, see the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
<PAGE>
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Portfolio may invest in Rule 144A securities
which, as disclosed in the Prospectus, are restricted securities which may or
may not be readily marketable. Rule 144A securities are readily marketable if
institutional markets for the securities develop pursuant to Rule 144A which
provide both readily ascertainable values for the securities and the ability to
liquidate the securities when liquidation is deemed necessary or advisable.
However, an insufficient number of qualified institutional buyers interested in
purchasing a Rule 144A security held by the Portfolio could affect adversely the
marketability of the security. In such an instance, the Portfolio might be
unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any
successor to such rule, and that such securities are not subject to the
Portfolio's limitations on investing in securities that are not readily
marketable. The Sub-advisor will consider the following factors, among others,
in making this determination: (1) the unregistered nature of a Rule 144A
security; (2) the frequency of trades and quotes for the security; (3) the
number of dealers willing to purchase or sell the security and the number of
additional potential purchasers; (4) dealer undertakings to make a market in the
security; and (5) the nature of the security and the nature of market place
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfers).
Low-Rated and Unrated Fixed-Income Securities. The Portfolio may invest
up to 5% of its total assets in fixed-income securities which are unrated or are
rated below investment grade either at the time of purchase or as a result of
reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investment in lower-rated or
unrated securities is generally considered to be high risk investment. These
debt securities are generally subject to two kinds of risk, credit risk and
market risk. Credit risk relates to the ability of the issuer to meet interest
or principal payments, or both, as they come due. The ratings given a security
by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P")
provide a generally useful guide as to such credit risk. The Appendix to this
Statement provides a description of such debt security ratings. The lower the
rating given a security by a rating service, the greater the credit risk such
rating service perceives to exist with respect to the security. Increasing the
amount of the Portfolio's assets invested in unrated or lower grade securities,
while intended to increase the yield produced by those assets, will also
increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Portfolio invests generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium and lower-rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher rated securities
and may have speculative characteristics. In order to decrease the risk in
investing in debt securities, in no event will the Portfolio ever invest in a
debt security rated below B by Moody's or by S&P. Of course, relying in part on
ratings assigned by credit agencies in making investments will not protect the
Portfolio from the risk that the securities in which they invest will decline in
value, since credit ratings represent evaluations of the safety of principal,
dividend, and interest payments on debt securities, and not the market values of
such securities, and such ratings may not be changed on a timely basis to
reflect subsequent events.
Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Portfolio's investment objectives may be
more dependent on the Sub-advisor's own credit analysis than is the case for
funds that do not invest in such securities. In addition, the share price and
yield of the Portfolio may fluctuate more than in the case of funds investing in
higher quality, shorter term securities. Moreover, a significant economic
downturn or major increase in interest rates may result in issuers of
lower-rated securities experiencing increased financial stress, which would
adversely affect their ability to service their principal, dividend, and
interest obligations, meet projected business goals, and obtain additional
financing. In this regard, it should be noted that while the market for high
yield, high risk debt securities has been in existence for many years and from
time to time has experienced economic downturns in recent years, this market has
involved a significant increase in the use of high yield debt securities to fund
highly leveraged corporate acquisitions and restructurings. Past experience may
not, therefore, provide an accurate indication of future performance of the high
yield debt securities market, particularly during periods of economic recession.
Furthermore, expenses incurred in recovering an investment in a defaulted
security may adversely affect the Portfolio's net asset value. Finally, while
the Sub-advisor attempts to limit purchases of medium and lower-rated securities
to securities having an established secondary market, the secondary market for
such securities may be less liquid than the market for higher quality
securities. The reduced liquidity of the secondary market for such securities
may adversely affect the market price of, and ability of the Portfolio to value,
particular securities at certain times, thereby making it difficult to make
specific valuation determinations. The Portfolio does not invest in any medium
and lower-rated securities which present special tax consequences, such as
zero-coupon bonds or pay-in-kind bonds. For an additional discussion of certain
risks involved in lower-rated securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Portfolio's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Portfolio will achieve its investment objective.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements with
respect to money market instruments eligible for investment by the Portfolio
with member banks of the Federal Reserve system, registered broker-dealers, and
registered government securities dealers. A repurchase agreement may be
considered a loan collateralized by securities. Repurchase agreements maturing
in more than seven days are considered illiquid and will be subject to the
Portfolio's limitation with respect to illiquid securities.
The Portfolio has not adopted any limits on the amounts of its total
assets that may be invested in repurchase agreements which mature in less than
seven days. The Portfolio may invest up to 15% of the market value of its net
assets, measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Convertible Securities. The Portfolio may buy securities convertible
into common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Portfolio; consequently, warrant positions are generally
accompanied by cash positions equivalent to the required exercise amount.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Founders Capital Appreciation
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of the market value of its net assets in securities
which are not readily marketable, including repurchase agreements maturing in
over seven days;
2. Purchase more than 10% of any class of securities of any single issuer
or purchase more than 10% of the voting securities of any single issuer;
3. Purchase securities of other investment companies except in compliance
with the 1940 Act;
4. Invest in companies for purposes of exercising control or management;
5. Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of the Portfolio's assets would be
invested in securities of that issuer.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Portfolio may depart from its basic
investment objective and assume a defensive position with up to 100% of its
assets temporarily invested in high quality corporate bonds or notes and
government issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
Founders Passport Portfolio:
Investment Objective: The investment objective of the Founders Passport
Portfolio is to seek capital appreciation.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or
sell a security at a specified price within a limited period of time. The
Portfolio may write ("sell") covered call options on any or all of its portfolio
securities. In addition, the Portfolio may purchase options on securities. The
Portfolio may also purchase put and call options on stock indices.
The Portfolio may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Portfolio's assets
is invested in securities with respect to which options may be written. The
extent of the Portfolio's option writing activities will vary from time to time
depending upon the Sub-advisor's evaluation of market, economic and monetary
conditions.
When the Portfolio purchases a security with respect to which it
intends to write an option, it is likely that the option will be written
concurrently with or shortly after purchase. The Portfolio will write an option
on a particular security only if the Sub-advisor believes that a liquid
secondary market will exist on an exchange for options of the same series, which
will permit the Portfolio to enter into a closing purchase transaction and close
out its position. If the Portfolio desires to sell a particular security on
which it has written an option, it will effect a closing purchase transaction
prior to or concurrently with the sale of the security.
The Portfolio may enter into closing purchase transactions to reduce
the percentage of its assets against which options are written, to realize a
profit on a previously written option, or to enable it to write another option
on the underlying security with either a different exercise price or expiration
time or both.
Options written by the Portfolio will normally have expiration dates
between three and nine months from the date written. The exercise prices of
options may be below, equal to or above the current market values of the
underlying securities at the times the options are written. From time to time
for tax and other reasons, the Portfolio may purchase an underlying security for
delivery in accordance with an exercise notice assigned to it, rather than
delivering such security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Portfolio
purchases put options on stock indices to protect the Portfolio against decline
in value. The Portfolio purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Portfolio. Any gain in the price of a
call option is likely to be offset by higher prices the Portfolio must pay in
rising markets, as cash reserves are invested. In declining markets, any
increase in the price of a put option is likely to be offset by lower prices of
stocks owned by the Portfolio.
The Portfolio may purchase only those put and call options that are
listed on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on
stock exchanges are either broadly based, such as the Standard & Poor's 500
Stock Index and 100 Stock Index, or involve stocks in a designated industry or
group of industries. The Portfolio may utilize either broadly based or market
segment indices in seeking a better correlation between the indices and the
portfolio.
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Portfolio may hold may be affected by
options held by other advisory clients of the Sub-Advisor. As of the date of
this Statement, the Sub-advisor believes that these limitations will not affect
the purchase of stock index options by the Portfolio.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Portfolio. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Portfolio may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Portfolio will lose the right to appreciation of
the stock for the duration of the option. For an additional discussion of
options on stock indices and stocks and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts. The Portfolio may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant (an "FCM") or brokerage firm which is a member of the relevant contract
market. Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the value
of the underlying commodities, in most cases the contractual obligation is
offset before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange. Such
a transaction cancels the obligation to make or take delivery of the
commodities.
The acquisition or sale of a futures contract could occur, for example,
if the Portfolio held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
could sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Portfolio and
thereby prevent the Portfolio's net asset value from declining as much as it
otherwise would have. The Portfolio also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Portfolio to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Portfolio could
take advantage of the potential rise in the value of equity securities without
buying them until the market had stabilized. At that time, the futures contracts
could be liquidated and the Portfolio could buy equity securities on the cash
market.
The Portfolio may also enter into interest rate and foreign currency
futures contracts. Interest rate futures contracts currently are traded on a
variety of fixed-income securities, including long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
The Portfolio will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Portfolio may use futures and options thereon solely for
bona fide hedging or for other non-speculative purposes. As to long positions
which are used as part of the Portfolio's strategies and are incidental to its
activities in the underlying cash market, the "underlying commodity value" of
the Portfolio's futures and options thereon must not exceed the sum of (i) cash
set aside in an identifiable manner, or short-term U.S. debt obligations or
other dollar-denominated high-quality, short-term money instruments so set
aside, plus sums deposited on margin; (ii) cash proceeds from existing
investments due in 30 days; and (iii) accrued profits held at the futures
commission merchant. The "underlying commodity value" of a future is computed by
multiplying the size of the future by the daily settlement price of the future.
For an option on a future, that value is the underlying commodity value of the
future underlying the option.
Unlike the situation in which the Portfolio purchases or sells a
security, no price is paid or received by the Portfolio upon the purchase or
sale of a futures contract. Instead, the Portfolio is required to deposit in a
segregated asset account an amount of cash or qualifying securities (currently
U.S. Treasury bills), currently in a minimum amount of $15,000. This is called
"initial margin." Such initial margin is in the nature of a performance bond or
good faith deposit on the contract. However, since losses on open contracts are
required to be reflected in cash in the form of variation margin payments, the
Portfolio may be required to make additional payments during the term of a
contract to its broker. Such payments would be required, for example, where,
during the term of an interest rate futures contract purchased by the Portfolio,
there was a general increase in interest rates, thereby making the Portfolio's
securities less valuable. In all instances involving the purchase of financial
futures contracts by the Portfolio, an amount of cash together with such other
securities as permitted by applicable regulatory authorities to be utilized for
such purpose, at least equal to the market value of the future contracts, will
be deposited in a segregated account with the Portfolio's custodian to
collateralize the position. At any time prior to the expiration of a futures
contract, the Portfolio may elect to close its position by taking an opposite
position which will operate to terminate the Portfolio's position in the futures
contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of three business
days for most types of securities, the futures markets can provide superior
liquidity to the securities markets. Nevertheless, there is no assurance a
liquid secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Portfolio to enter into new positions or close out existing positions.
If the secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Portfolio would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Portfolio's access to other assets held
to cover its futures positions also could be impaired. For an additional
discussion of futures contracts and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Options on Futures Contracts. The Portfolio may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Portfolio would be able to buy a put option on a
futures contract to hedge the Portfolio against the risk of falling prices. For
an additional discussion of options on futures contracts and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risks Factors and Investment Methods."
Options on Foreign Currencies. The Portfolio may buy and sell options
on foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Portfolio could buy
put options on the foreign currency. If the value of the currency declines, the
Portfolio would have the right to sell such currency for a fixed amount in U.S.
dollars and would thereby offset, in whole or in part, the adverse effect on the
Portfolio which otherwise would have resulted. Conversely, when a rise is
projected in the U.S. dollar value of a currency in which securities to be
acquired are denominated, thereby increasing the cost of such securities, the
Portfolio could buy call options thereon. The purchase of such options could
offset, at least partially, the effects of the adverse movements in exchange
rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Portfolio invests.
Should interest or exchange rates or the prices of securities or financial
indices move in an unexpected manner, the Portfolio may not achieve the desired
benefits of futures and options or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies and negotiated or
over-the-counter instruments, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Portfolio as the possible loss of the entire premium
paid for an option bought by the Portfolio and the possible need to defer
closing out positions in certain instruments to avoid adverse tax consequences.
As a result, no assurance can be given that the Portfolio will be able to use
those instruments effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The
Portfolio generally conducts its foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
currency market. When the Portfolio purchases or sells a security denominated in
a foreign currency, it may enter into a forward foreign currency contract
("forward contract") for the purchase or sale, for a fixed amount of dollars, of
the amount of foreign currency involved in the underlying security transaction.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. In this manner, the Portfolio may obtain protection against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date the security
is purchased or sold and the date upon which payment is made or received.
Although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
The Portfolio will not speculate in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Portfolio may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Portfolio's securities denominated in that currency. The
Portfolio will not enter into such forward contracts or maintain a net exposure
to such contracts where the fulfillment of the contracts would require the
Portfolio to deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency. Forward
contracts may, from time to time, be considered illiquid, in which case they
would be subject to the Portfolio's limitation on investing in illiquid
securities.
At the consummation of a forward contract for delivery by the Portfolio
of a foreign currency, the Portfolio may either make delivery of the foreign
currency or terminate its contractual obligation to deliver the foreign currency
by purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Portfolio chooses
to make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Portfolio assets into such currency.
Dealings in forward contracts by the Portfolio will be limited to the
transactions described above. Of course, the Portfolio is not required to enter
into such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by the Sub-advisor. It
also should be realized that this method of protecting the value of the
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to the decline in the value of the hedged currency, at the same time they
tend to limit any potential gain which might result should the value of such
currency increase. For an additional discussion of forward foreign currency
contracts and certain risks involved therein, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Prospectus, the Portfolio may
invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Portfolio from disposing of such a
security at the time desired or at a reasonable price. In addition, in order to
resell a restricted security, the Portfolio might have to bear the expense and
incur the delays associated with effecting registration. In purchasing illiquid
securities, the Portfolio does not intend to engage in underwriting activities,
except to the extent the Portfolio may be deemed to be a statutory underwriter
under the Securities Act in purchasing or selling such securities. Illiquid
securities will be purchased for investment purposes only and not for the
purpose of exercising control or management of other companies. For an
additional discussion of illiquid or restricted securities and certain risks
involved therein, see the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Portfolio may invest in Rule 144A securities
which, as disclosed in the Prospectus, are restricted securities which may or
may not be readily marketable. Rule 144A securities are readily marketable if
institutional markets for the securities develop pursuant to Rule 144A which
provide both readily ascertainable values for the securities and the ability to
liquidate the securities when liquidation is deemed necessary or advisable.
However, an insufficient number of qualified institutional buyers interested in
purchasing a Rule 144A security held by the Portfolio could affect adversely the
marketability of the security. In such an instance, the Portfolio might be
unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any
successor to such rule, and that such securities are not subject to the
Portfolio's limitations on investing in securities that are not readily
marketable. The Sub-advisor will consider the following factors, among others,
in making this determination: (1) the unregistered nature of a Rule 144A
security; (2) the frequency of trades and quotes for the security; (3) the
number of dealers willing to purchase or sell the security and the number of
additional potential purchasers; (4) dealer undertakings to make a market in the
security; and (5) the nature of the security and the nature of market place
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Portfolio may
invest up to 5% of its total assets in fixed-income securities which are unrated
or are rated below investment grade either at the time of purchase or as a
result of reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. The Appendix to this Statement provides a description of such debt
security ratings. The lower the rating given a security by a rating service, the
greater the credit risk such rating service perceives to exist with respect to
the security. Increasing the amount of the Portfolio's assets invested in
unrated or lower grade securities, while intended to increase the yield produced
by those assets, will also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Portfolio invests generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium and lower-rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher rated securities
and may have speculative characteristics. In order to decrease the risk in
investing in debt securities, in no event will the Portfolio ever invest in a
debt security rated below B by Moody's or by S&P. Of course, relying in part on
ratings assigned by credit agencies in making investments will not protect the
Portfolio from the risk that the securities in which they invest will decline in
value, since credit ratings represent evaluations of the safety of principal,
dividend, and interest payments on debt securities, and not the market values of
such securities, and such ratings may not be changed on a timely basis to
reflect subsequent events.
Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Portfolio's investment objective may be
more dependent on the Sub-advisor's own credit analysis than is the case for
funds that do not invest in such securities. In addition, the share price and
yield of the Portfolio may fluctuate more than in the case of funds investing in
higher quality, shorter term securities. Moreover, a significant economic
downturn or major increase in interest rates may result in issuers of
lower-rated securities experiencing increased financial stress, which would
adversely affect their ability to service their principal, dividend, and
interest obligations, meet projected business goals, and obtain additional
financing. In this regard, it should be noted that while the market for high
yield debt securities has been in existence for many years and from time to time
has experienced economic downturns in recent years, this market has involved a
significant increase in the use of high yield debt securities to fund highly
leveraged corporate acquisitions and restructurings. Past experience may not,
therefore, provide an accurate indication of future performance of the high
yield debt securities market, particularly during periods of economic recession.
Furthermore, expenses incurred in recovering an investment in a defaulted
security may adversely affect the Portfolio's net asset value. Finally, while
the Sub-advisor attempts to limit purchases of medium and lower-rated securities
to securities having an established secondary market, the secondary market for
such securities may be less liquid than the market for higher quality
securities. The reduced liquidity of the secondary market for such securities
may adversely affect the market price of, and ability of the Portfolio to value,
particular securities at certain times, thereby making it difficult to make
specific valuation determinations. The Portfolio does not invest in any medium
and lower-rated securities which present special tax consequences, such as
zero-coupon bonds or pay-in-kind bonds. For an additional discussion of certain
risks involved in lower-rated securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Portfolio's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Portfolio will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with respect to money market instruments eligible for investment by the
Portfolio with member banks of the Federal Reserve system, registered
broker-dealers, and registered government securities dealers. A repurchase
agreement may be considered a loan collateralized by securities. Repurchase
agreements maturing in more than seven days are considered illiquid and will be
subject to the Portfolio's limitation with respect to illiquid securities.
The Portfolio has not adopted any limits on the amounts of its total
assets that may be invested in repurchase agreements which mature in less than
seven days. The Portfolio may invest up to 15% of the market value of its net
assets, measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Convertible Securities. The Portfolio may buy securities convertible
into common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Portfolio; consequently, warrant positions are generally
accompanied by cash positions equivalent to the required exercise amount.
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are applicable to the Founders Passport Portfolio.
These limitations are not "fundamental" restrictions, and may be changed by the
Trustees without shareholder approval. The Portfolio will not:
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1. Invest more than 15% of the market value of its net assets in securities
which are not readily marketable, including repurchase agreements maturing in
over seven days;
2. Purchase securities of other investment companies except in compliance
with the 1940 Act;
3. Invest in companies for the purpose of exercising control or management.
4. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions, and provided that
margin payments and other deposits in connection with transactions in options,
futures and forward contracts shall not be deemed to constitute purchasing
securities on margin; or
5. Sell securities short.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Portfolio may depart from its basic
investment objective and assume a defensive position with up to 100% of its
assets temporarily invested in high quality corporate bonds or notes and
government issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
INVESCO Equity Income Portfolio:
Investment Objective: The INVESCO Equity Income Portfolio seeks high
current income while following sound investment practices.
Investment Policies: The Portfolio will pursue its objective by investing its
assets in securities which will provide a relatively high-yield and stable
return and which, over a period of years, may also provide capital appreciation.
Capital growth potential is an additional consideration in the selection of
portfolio securities. The Portfolio invests in common stocks, as well as
convertible bonds and preferred stocks.
In pursuing its investment objective, the Portfolio normally invests at
least 65% of its total assets in dividend paying common stocks. Up to 10% of the
Portfolio's assets may be invested in equity securities that do not pay regular
dividends. The remaining assets are invested in other income-producing
securities, such as corporate bonds. Sometimes warrants are acquired when
offered with income-producing securities, but the warrants are disposed of at
the first favorable opportunity. Acquiring warrants involves a risk that the
Portfolio will lose the premium it pays to acquire warrants if the Portfolio
does not exercise a warrant before it expires. The major portion of the
investment portfolio normally consists of common stocks, convertible bonds and
debentures, and preferred stocks; however, there may also be substantial
holdings of debt securities, including non-investment grade and unrated debt
securities.
The debt securities in which the Portfolio invests are generally
subject to two kinds of risk, credit risk and market risk. The ratings given a
debt security by Moody's and Standard & Poor's ("S&P") provide a generally
useful guide as to such credit risk. The lower the rating given a debt security
by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of
Portfolio assets invested in unrated or lower grade (Ba or less by Moody's, BB
or less by S&P) debt securities, while intended to increase the yield produced
by the Portfolio's debt securities, will also increase the credit risk to which
those debt securities are subject.
Lower-rated debt securities and non-rated securities of comparable
quality tend to be subject to wider fluctuations in yields and market values
than higher rated debt securities and may have speculative characteristics.
Although the Portfolio may invest in debt securities assigned lower grade
ratings by S&P or Moody's, the Portfolio's investments have generally been
limited to debt securities rated B or higher by either S&P or Moody's. Debt
securities rated lower than B by either S&P or Moody's may be highly
speculative. The Sub-advisor intends to limit such Portfolio investments to debt
securities which are not believed by the Sub-advisor to be highly speculative
and which are rated at least CCC or Caa, respectively, by S&P or Moody's. In
addition, a significant economic downturn or major increase in interest rates
may well result in issuers of lower-rated debt securities experiencing increased
financial stress which would adversely affect their ability to service their
principal and interest obligations, to meet projected business goals, and to
obtain additional financing. While the Sub-advisor attempts to limit purchases
of lower-rated debt securities to securities having an established retail
secondary market, the market for such securities may not be as liquid as the
market for higher rated debt securities.
For an additional discussion of certain risks involved in lower-rated
or unrated securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
As discussed in the Trust's Prospectus, the Portfolio may enter into
repurchase agreements with respect to debt instruments eligible for investment
by the Portfolio, with member banks of the Federal Reserve System, registered
broker-dealers, and registered government securities dealers. A repurchase
agreement may be considered a loan collateralized by securities. The resale
price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Portfolio (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement, and are held by the Portfolio's
Custodian Bank until repurchased. For an additional discussion of repurchase
agreements and certain risks involved therein, see this Statement under "Certain
Risk Factors and Investment Methods."
Another practice in which the Portfolio may engage is to lend its
securities to qualified brokers, dealers, banks, or other financial
institutions. While voting rights may pass with the loaned securities, if a
material event (e.g., proposed merger, sale of assets, or liquidation) is to
occur affecting an investment on loan, the loan must be called and the
securities voted. Loans of securities made by the Portfolio will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange and the requirements of the 1940 Act and the Rules of the
Securities and Exchange Commission thereunder.
PIMCO Total Return Bond Portfolio:
Investment Policies:
Borrowing. The Portfolio may borrow for temporary administrative
purposes. This borrowing may be unsecured. The 1940 Act requires the Portfolio
to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Portfolio may be required to sell some of its
holdings within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time. Borrowing will tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of the
Portfolio. Money borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. The Portfolio also may
be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
In addition to the above, the Portfolio may enter into reverse
repurchase agreements and "mortgage dollar rolls." A reverse repurchase
agreement involves the sale of a security by the Portfolio and its agreement to
repurchase the instrument at a specified time and price, and for some purposes
may be considered a borrowing. In a "dollar roll" transaction the Portfolio
sells a mortgage-related security (such as a GNMA security) to a dealer and
simultaneously agrees to repurchase a similar security (but not the same
security) in the future at a pre-determined price. A "dollar roll" can be
viewed, like a reverse repurchase agreement, as a collateralized borrowing in
which the Portfolio pledges a mortgage-related security to a dealer to obtain
cash. Unlike in the case of reverse repurchase agreements, the dealer with which
the Portfolio enters into a dollar roll transaction is not obligated to return
the same securities as those originally sold by the Portfolio, but only
securities which are "substantially identical". To be considered "substantially
identical," the securities returned to the Portfolio generally must: (1) be
collateralized by the same types of underlying mortgages; (2) be issued by the
same agency and be part of the same program; (3) have a similar original stated
maturity; (4) have identical net coupon rates; (5) have similar maturity: (4)
have identical net coupon rates; (5) have similar market yields (and therefore
price); and (6) satisfy "good delivery" requirements, meaning that the aggregate
principal amounts of the securities delivered and received back must be within
2.5% of the initial amount delivered.
The Portfolio's obligations under a dollar roll agreement must be
covered by cash or other liquid assets equal in value to the securities subject
to repurchase by the Portfolio, maintained in a segregated account. Both dollar
rolls and reverse repurchase agreements will be subject to the 1940 Act's
limitations on borrowing, as discussed above. Furthermore, because dollar roll
transactions may be for terms ranging between one and six months, dollar roll
transactions may be deemed "illiquid" and subject to the Portfolio's overall
limitations on investments in illiquid securities.
Corporate Debt Securities. The Portfolio's investments in U.S. dollar-
or foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Portfolio,
or, if unrated, are in the Sub-advisor's opinion comparable in quality to
corporate debt securities in which the Portfolio may invest. The rate of return
or return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Among the corporate bonds in which the Portfolio may invest are
convertible securities. A convertible security is a bond, debenture, note, or
other security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. A convertible security generally
entitles the holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally 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.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the
Portfolio is called for redemption, the Portfolio will be required to permit the
issuer to redeem the security and convert it to underlying common stock, or will
sell the convertible security to a third party. The Portfolio generally would
invest in convertible securities for their favorable price characteristics and
total return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Portfolio (i.e., rated B or better by Moody's or
S&P) are described as "speculative" by both Moody's and S&P. Investment in
lower-rated corporate debt securities ("high yield securities") generally
provides greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as high risk and predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The market for these
securities is relatively new, and many of the outstanding high yield securities
have not endured a major business recession. A long-term track record on default
rates, such as that for investment grade corporate bonds, does not exist for
this market. Analysis of the creditworthiness of issuers of debt securities that
are high yield may be more complex than for issuers of higher quality debt
securities.
High yield, high risk securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. The price of high yield securities have been found to be less
sensitive to interest-rate adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield security prices
because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. If an
issuer of high yield securities defaults, in addition to risking payment of all
or a portion of interest and principal, the Portfolio may incur additional
expenses to seek recovery. In the case of high yield securities structured as
zero-coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes, and therefore tend to be more volatile
than securities which pay interest periodically and in cash.
The secondary market on which high yield, high risk securities are
traded may be less liquid than the market for higher grade securities. Less
liquidity in the secondary trading market could adversely affect the price at
which the Portfolio could sell a high yield security, and could adversely affect
the daily net asset value of the shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities especially in a thinly-traded
market. When secondary markets for high yield securities are less liquid than
the market for higher grade securities, it may be more difficult to value the
securities because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there is less
reliable, objective data available. The Sub-advisor seeks to minimize the risks
of investing in all securities through diversification, in-depth credit analysis
and attention to current developments in interest rates and market conditions.
<PAGE>
For an additional discussion of certain risks involved in lower-rated
debt securities, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Objectives."
Participation on Creditors Committees. The Portfolio may from time to
time participate on committees formed by creditors to negotiate with the
management of financially troubled issuers of securities held by the Portfolio.
Such participation may subject the Portfolio to expenses such as legal fees and
may make the Portfolio an "insider" of the issuer for purposes of the federal
securities laws, and therefore may restrict the Portfolio's ability to trade in
or acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by the Portfolio on such committees also may
expose the Portfolio to potential liabilities under the federal bankruptcy laws
or other laws governing the rights of creditors and debtors. The Portfolio will
participate on such committees only when the Sub-advisor believes that such
participation is necessary or desirable to enforce the Portfolio's rights as a
creditor or to protect the value of securities held by the Portfolio.
Mortgage-Related Securities. The Portfolio may invest in
mortgage-backed securities. Mortgage-related securities are interests in pools
of mortgage loans made to residential home buyers, including mortgage loans made
by savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations (see
"Mortgage Pass-Through Securities"). The Portfolio may also invest in debt
securities which are secured with collateral consisting of mortgage-related
securities (see "Collateralized Mortgage Obligations"), and in other types of
mortgage-related securities.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owned on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-though securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PC's") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-though pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such nongovernmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Portfolio may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Sub-advisor determines that the securities meet the Trust's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. The Portfolio will not purchase mortgage-related securities or any
other assets which in the Sub-advisor's opinion are illiquid if, as a result,
more than 15% of the value of the Portfolio's total assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the
Portfolio's industry concentration restrictions, set forth below under
"Investment Restrictions," by virtue of the exclusion from that test available
to all U.S. Government securities. In the case of privately issued
mortgage-related securities, the Portfolio takes the position that
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may be
represented by a portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or portfolios of
mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be insured or
guaranteed by the Federal Housing Administration or the Department of Veterans
Affairs. In the case of private issue mortgage-related securities whose
underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical region, the security may be
subject to a greater risk of default that other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal is paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
or principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of the CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
For an additional discussion of mortgage-backed securities and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, homebuilders, mortgage banks, commercial banks, investment
banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, which the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Portfolio's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the security is in one of the highest rating
categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities may be offered
to investors, including Certificates for Automobile Receivables. For a
discussion of automobile receivables, see this Statement under "Certain Risk
Factors and Investment Methods." Consistent with the Portfolio's investment
objectives and policies, the Sub-advisor also may invest in other types of
asset-backed securities.
Foreign Securities. The Portfolio may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers (including
preferred or preference stock), certain foreign bank obligations (see "Bank
Obligations") and U.S. dollar- or foreign currency-denominated obligations of
foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. The Portfolio may invest up
to 20% of its assets in securities denominated in foreign currencies, and may
invest beyond this limit in U.S. dollar-denominated securities of foreign
issuers. The Portfolio will limit its foreign investments to securities of
issuers based in developed countries (which include newly industrialized
countries such as Mexico, Taiwan and South Korea). Investing in the securities
of foreign issuers involves special risks and considerations not typically
associated with investing in U.S. companies. For a discussion of certain risks
involved in foreign investments, see the Trust's Prospectus and this Statement
under "Certain Risk Factors and Investment Methods."
The Portfolio also may purchase and sell foreign currency options and
foreign currency futures contracts and related options (see ""Derivative
Instruments"), and enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign exchange
rates in the purchase and sale of securities.
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the tine of the contract. These contracts may be bought or sold to protect the
Portfolio against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar or to increase
exposure to a particular foreign currency. Open positions in forward contracts
are covered by the segregation with the Trust's custodian of cash or other
liquid assets and are marked to market daily. Although such contracts are
intended to minimize the risk of loss due to a decline on the value of the
hedged currencies, at the same time, they tend to limit any potential gain which
might result should the value of such currencies increase.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented in a number of countries, including in Argentina, Bolivia,
Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger,
Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil
has concluded a Brady-like plan. It is expected that other countries will
undertake a Brady Plan in the future, including Panama and Peru.
Brady Bonds have been issued only recently, and accordingly do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively
traded in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year or
longer rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of floating rate bonds, initially is equal to at least one year's
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds
(or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the Federal Reserve Bank
of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings.
Bank Obligations. Bank obligations in which the Portfolios invest
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Portfolio will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Portfolio will limit its investments in United States bank
obligations to obligations of United States bank (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are member of the Federal Reserve System, are examined by the Comptroller of the
Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation. The Portfolio also may invest in certificates of deposit of savings
and loan associations (federally or state chartered and federally insured)
having total assets in excess $1 billion.
The Portfolio will limit its investments in foreign bank obligations to
United States dollar- or foreign currency-denominated obligations of foreign
banks (including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Sub-advisor, are of an investment quality comparable to
obligations of United States banks in which the Portfolio may invest. Subject to
the Portfolio's limitation on concentration of no more than 25% of its assets in
the securities of issuers in particular industry, there is no limitation on the
amount of the Portfolio's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any United
States Government agency or instrumentality.
Derivative Instruments. In pursuing its individual objective, the
Portfolio may, as described in the Prospectus, purchase and sell (write) both
put options and call options on securities, securities indexes, and foreign
currencies, and enter into interest rate, foreign currency and index futures
contracts and purchase and sell options on such futures contracts ("future
options") for hedging purposes. The Portfolio also may enter into swap
agreements with respect to foreign currencies, interest rates and indexes of
securities. If other types of financial instruments, including other types of
options, futures contracts, or futures options are traded in the future, the
Portfolio may also use those instruments, provided that the Trust's Board of
Trustees determines that their use is consistent with the Portfolio's investment
objective, and provided that their use is consistent with restrictions
applicable to options and futures contracts currently eligible for use by the
Trust (i.e., that written call or put options will be "covered" or "secured" and
that futures and futures options will be used only for hedging purposes).
Options on Securities and Indexes. The Portfolio may purchase and sell
both put and call options on debt or other securities or indexes in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
The Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio. For a call option on an
index, the option is covered if the Portfolio maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Portfolio holds a call on the same security or index as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written, provided the difference is maintained by the Portfolio in cash
or cash equivalents in a segregated account with its custodian. A put option on
a security or an index is "covered" if the Portfolio maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Portfolio holds a put on the same
security or index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Portfolio expires, the Portfolio realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Portfolio expires unexercised, the Portfolio
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.
<PAGE>
The premium paid for a put or call option purchased by the Portfolio is
an asset of the Portfolio. The premium received for a option written by the
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
For a discussion of certain risks involved in options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Options. The Portfolio may buy or sell put and call
options on foreign currencies either on exchanges or in the over-the-counter
market. A put option on a foreign currency gives the purchaser of the option the
right to sell a foreign currency at the exercise price until the option expires.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller, and generally do not have as much market liquidity as
exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Portfolio may
use interest rate, foreign currency or index futures contracts, as specified for
the Portfolio in the Prospectus. An interest rate, foreign currency or index
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument, foreign
currency or the cash value of an index at a specified price and time. A futures
contract on an index is an agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to the difference between the value
of the index at the close of the last trading day of the contract and the price
at which the index contract was originally written. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of these securities is made.
The Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading
Commission under which the Trust and the Portfolio avoid being deemed a
"commodity pool" or a "commodity pool operator," the Portfolio intends generally
to limit its use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Portfolio might use futures contracts to hedge
against anticipated changes in interest rates that might adversely affect either
the value of the Portfolio's securities or the price of the securities which the
Portfolio intends to purchase. The Portfolio's hedging activities may include
sales of futures contracts as an offset against the effect or expected increases
in interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce that Portfolio's exposure to interest rate fluctuations, the
Portfolio may be able to hedge its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio,
the Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by the Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Portfolio pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Portfolio but is instead a settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In computing
daily net asset value, each Portfolio will mark to market its open futures
positions.
The Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.
Limitations on Use of Futures and Futures Options. In general, the
Portfolios intend to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Portfolio will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating to
such positions plus premiums paid by it for open futures option positions, less
the amount by which any such options are "in-the-money," would exceed 5% of the
Portfolio's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price. A
put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with
its custodian (and mark-to-market on a daily basis) cash or other liquid assets
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Portfolio may "cover" its position by purchasing a put option on the same
futures contract with a strike price as high or higher than the price of the
contract held by the Portfolio.
When selling a futures contract, the Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Portfolio may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Portfolio to
purchase the same futures contract at a price no higher than the price of the
contract written by the Portfolio (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash or other
liquid assets that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Portfolio may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Portfolio to purchase the same futures contract at a price
not higher than the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to market on a daily basis) cash or other
liquid assets that equal the purchase price of the futures contract, less any
margin on deposit. Alternatively, the Portfolio may cover the position either by
entering into a short position in the same futures contract, or by owning a
separate put option permitting it to sell the same futures contract so long as
the strike price of the purchased put option is the same or higher than the
strike price of the put option sold by the Portfolio.
Swap Agreements. The Portfolios may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. For a
discussion of swap agreements, see the Trust's Prospectus under "Investment
Objectives and Policies." The Portfolio's obligations under a swap agreement
will be accrued daily (offset against any amounts owing to the Portfolio) and
any accrued but unpaid net amounts owed to a swap counterparty will be covered
by the maintenance of a segregated account consisting of cash or other liquid
assets to avoid any potential leveraging of the Portfolio. The Portfolio will
not enter into a swap agreement with any single party if the net amount owned or
to be received under existing contracts with that party would exceed 5% of the
Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Sub-advisor's ability correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
Sub-advisor will cause the Portfolio to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Portfolio's repurchase agreement guidelines. Certain
restrictions imposed on the Portfolios by the Internal Revenue Code may limit
the Portfolios' ability to use swap agreements. The swaps market is a relatively
new market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
the Portfolio's ability to terminate existing swap agreements or to realize
amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission ("CFTC"). To qualify for this
exemption, a swap agreement must be entered into by "eligible participants." To
be eligible, natural persons and most other entities must have total assets
exceeding $10 million; commodity pools and employee benefit plans must have
assets exceeding $5 million. In addition, an eligible swap transaction must meet
three conditions. First, the swap agreement may not be part of a fungible class
of agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and partnerships may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individual tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Foreign Currency Exchange-Related Securities. The Portfolio may invest
in foreign currency warrants, principal exchange rate linked securities and
performance indexed paper. For a description of these instruments, see this
Statement under "Certain Risk Factor and Investment Methods."
Warrants to Purchase Securities. The Portfolio may invest in or acquire
warrants to purchase equity or fixed-income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed-income securities at the same coupon rate. A decline in
interest rates would permit the Portfolio to buy additional bonds at the
favorable rate or to sell the warrants at a profit. If interest rates rise, the
warrants would generally expire with no value.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the PIMCO Total Return Bond
Portfolio. These limitations are not "fundamental" restrictions, and may be
changed by the Trustees without shareholder approval.
1. The Portfolio will not invest more than 15% of the assets of the
Portfolio (taken at market value at the time of the investment) in "illiquid
securities," illiquid securities being defined to include securities subject to
legal or contractual restrictions on resale (which may include private
placements), repurchase agreements maturing in more than seven days, certain
options traded over the counter that the Portfolio has purchased, securities
being used to cover options a Portfolio has written, securities for which market
quotations are not readily available, or other securities which legally or in
the Sub-advisor's option may be deemed illiquid.
2. The Portfolio will not purchase securities for the Portfolio from,
or sell portfolio securities to, any of the officers and directors or Trustees
of the Trust or of the Investment Manager or of the Sub-advisor.
3. The Portfolio will not invest more than 5% of the assets of the
Portfolio (taken at market value at the time of investment) in any combination
of interest only, principal only, or inverse floating rate securities.
PIMCO Limited Maturity Bond Portfolio:
Investment Policies:
Borrowing. The Portfolio may borrow for temporary administrative
purposes. This borrowing may be unsecured. The 1940 Act requires the Portfolio
to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Portfolio may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing will tend to exaggerate
the effect on net asset value of any increase or decrease in the market value of
the Portfolio's securities. Money borrowed will be subject to interest costs
which may or may not be recovered by appreciation of the securities purchased.
The Portfolio also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
Among the forms of borrowing in which the Portfolio may engage is the
entry into reverse repurchase agreements. A reverse repurchase agreement
involves the sale of the Portfolio-eligible security by the Portfolio, coupled
with its agreement to repurchase the instrument at a specified time and price.
The Portfolio will maintain a segregated account with its Custodian consisting
of cash or other liquid assets equal (on a daily mark-to-market basis) to its
obligations under reverse repurchase agreements with broker-dealers (but not
banks). However, reverse repurchase agreements involve the risk that the market
value of securities retained by the Portfolio may decline below the repurchase
price of the securities sold by the Portfolio which it is obligated to
repurchase. To the extent that the Portfolio collateralizes its obligations
under a reverse repurchase agreement, the asset coverage requirements of the
1940 Act will not apply.
In addition to the above, the Portfolio may enter into reverse
repurchase agreements and "mortgage dollar rolls." A reverse repurchase
agreement involves the sale of a security by the Portfolio and its agreement to
repurchase the instrument at a specified time and price, and for some purposes
may be considered a borrowing. In a "dollar roll" transaction the Portfolio
sells a mortgage-related security (such as a GNMA security) to a dealer and
simultaneously agrees to repurchase a similar security (but not the same
security) in the future at a pre-determined price. A "dollar roll" can be
viewed, like a reverse repurchase agreement, as a collateralized borrowing in
which the Portfolio pledges a mortgage-related security to a dealer to obtain
cash. Unlike in the case of reverse repurchase agreements, the dealer with which
the Portfolio enters into a dollar roll transaction is not obligated to return
the same securities as those originally sold by the Portfolio, but only
securities which are "substantially identical." To be considered "substantially
identical," the securities returned to the Portfolio generally must: (1) be
collateralized by the same types of underlying mortgages; (2) be issued by the
same agency and be part of the same program; (3) have a similar original stated
maturity; (4) have identical net coupon rates; (5) have similar market yields
(and therefore price); and (6) satisfy "good delivery" requirements, meaning
that the aggregate principal amounts of the securities delivered and received
back must be within 2.5% of the initial amount delivered.
The Portfolio's obligations under a dollar roll agreement must be
covered by cash or other liquid assets equal in value to the securities subject
to repurchase by the Portfolio, maintained in a segregated account. Both dollar
rolls and reverse repurchase agreements will be subject to the 1940 Act's
limitations on borrowing, as discussed above. Furthermore, because dollar roll
transactions may be for terms ranging between one and six months, dollar roll
transactions may be deemed "illiquid" and subject to the Portfolio's overall
limitations on investments in illiquid securities.
Corporate Debt Securities. The Portfolio's investments in U.S. dollar-
or foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Portfolio,
or, if unrated, are in the Sub-advisor's opinion comparable in quality to
corporate debt securities in which the Portfolio may invest. The rate of return
or return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Among the corporate bonds in which the Portfolio may invest are
convertible securities. A convertible security is a bond, debenture, note, or
other security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. A convertible security generally
entitles the holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally 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.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the
Portfolio is called for redemption, the Portfolio would be required to permit
the issuer to redeem the security and convert it to underlying common stock, or
would sell the convertible security to a third party. The Portfolio generally
would invest in convertible securities for their favorable price characteristics
and total return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Portfolio (i.e., rated B or better by Moody's or
S&P), are described as "speculative" by both Moody's and S&P. Investment in
lower-rated corporate debt securities ("high yield securities") generally
provides greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. The market for these securities
is relatively new, and many of the outstanding high yield securities have not
endured a major business recession. A long-term track record on default rates,
such as that for investment grade corporate bonds, does not exist for this
market. Analysis of the creditworthiness of issuers of debt securities that are
high yield may be more complex than for issuers of higher quality debt
securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of high yield securities have been found to be less
sensitive to interest-rate changes than higher-rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Portfolio may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Portfolio
could sell a high yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities especially in a thinly-traded market. When secondary markets
for high yield securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
The Sub-advisor seeks to minimize the risks of investing in all securities
through diversification, in-depth credit analysis and attention to current
developments in interest rates and market conditions.
For a discussion of the risks involved in lower-rated debt securities,
see this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Participation on Creditors Committees. The Portfolio may from time to
time participate on committees formed by creditors to negotiate with the
management of financially troubled issuers of securities held by the Portfolio.
Such participation may subject the Portfolio to expenses such as legal fees and
may make the Portfolio an "insider" of the issuer for purposes of the federal
securities laws, and therefore may restrict the Portfolio's ability to trade in
or acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by the Portfolio on such committees also may
expose the Portfolio to potential liabilities under the federal bankruptcy laws
or other laws governing the rights of creditors and debtors. The Portfolio would
participate on such committees only when the Adviser believed that such
participation was necessary or desirable to enforce the Portfolio's rights as a
creditor or to protect the value of securities held by the Portfolio.
Mortgage-Related Securities. The Portfolio may invest in
mortgage-backed securities. Mortgage-related securities are interests in pools
of residential or commercial mortgage loans, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations (see
"Mortgage Pass-Through Securities"). The Portfolio may also invest in debt
securities which are secured with collateral consisting of mortgage-related
securities (see "Collateralized Mortgage Obligations"), and in other types of
mortgage-related securities.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Fixed-Income
Portfolio may buy mortgage-related securities without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Adviser determines that the securities
meet the Trust's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. No Portfolio will purchase mortgage-related
securities or any other assets which in the Adviser's opinion are illiquid if,
as a result, more than 15% of the value of the Portfolio's total assets will be
illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Portfolio'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the Portfolio takes the position that mortgage-related securities do
not represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by the Portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the Federal
Housing Administration or the Department of Veterans Affairs. In the case of
private issue mortgage-related securities whose underlying assets are neither
U.S. Government securities nor U.S. Government-insured mortgages, to the extent
that real properties securing such assets may be located in the same
geographical region, the security may be subject to a greater risk of default
than other comparable securities in the event of adverse economic, political or
business developments that may affect such region and, ultimately, the ability
of residential homeowners to make payments of principal and interest on the
underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal is paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
For an additional discussion of mortgage-backed securities and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, homebuilders, mortgage banks, commercial banks, investment
banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Portfolio's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the security is in one of the highest rating
categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities maybe offered
to investors, including Certificates for Automobile Receivables. For a
discussion of automobile receivables, see this Statement under "Certain Risk
Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers (including
preferred or preference stock), certain foreign bank obligations (see "Bank
Obligations") and U.S. dollar- or foreign currency-denominated obligations of
foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. The Portfolio will limit its
foreign investments to securities of issuers based in developed countries (which
include newly industrialized countries such as Mexico, Taiwan and South Korea).
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. The
Portfolio also may purchase and sell foreign currency options and foreign
currency futures contracts and related options (see "Derivative Instruments"),
and enter into forward foreign currency exchange contracts in order to protect
against uncertainty in the level of future foreign exchange rates in the
purchase and sale of securities.
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts may be bought or sold to protect the
Portfolio against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar or to increase
exposure to a particular foreign currency. Open positions in forward contracts
are covered by the segregation with the Trust's custodian of cash or other
liquid assets and are marked to market daily. Although such contracts are
intended to minimize the risk of loss due to a decline in the value of the
hedged currencies, at the same time, they tend to limit any potential gain which
might result should the value of such currencies increase.
Bank Obligations. Bank obligations in which the Portfolio invests
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Portfolio will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Portfolio will limit its investments in United States bank
obligations to obligations of United States banks (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are members of the Federal Reserve System, are examined by the Comptroller of
the Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation. The Portfolio also may invest in certificates of deposit of savings
and loan associations (federally or state chartered and federally insured)
having total assets in excess of $1 billion.
The Portfolio will limit its investments in foreign bank obligations to
United States dollar- or foreign currency-denominated obligations of foreign
banks (including United States branches of foreign banks) which at the time of
investment (I) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Sub-advisor, are of an investment quality comparable to
obligations of United States banks in which the Portfolio may invest. Subject to
the Trust's limitation on concentration of no more than 25% of its assets in the
securities of issuers in a particular industry, there is no limitation on the
amount of the Portfolio's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or because the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
United States banks. Foreign banks are not generally subject to examination by
any United States Government agency or instrumentality.
Short Sales. The Portfolio may make short sales of securities as part
of their overall portfolio management strategies involving the use of derivative
instruments and to offset potential declines in long positions in similar
securities. A short sale is a transaction in which the Portfolio sells a
security it does not own in anticipation that the market price of that security
will decline.
When the Portfolio makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of the
sale. The Portfolio may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of
the short sale and the time and the Portfolio replaces the borrowed security,
the Portfolio will incur a loss; conversely, if the price declines, the
Portfolio will realize a capital gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. The successful use of short
selling may be adversely affected by imperfect correlation between movements in
the price of the security sold short and the securities being hedged.
To the extent that the Portfolio engages in short sales, it will
provide collateral to the broker-dealer and (except in the case of short sales
"against the box") will maintain additional asset coverage in the form of cash,
U.S. Government securities or high grade debt obligations in a segregated
account. The Portfolio does not intend to enter into short sales (other than
those "against the box") if immediately after such sale the aggregate of the
value of all collateral plus the amount in such segregated account exceeds
one-third of the value of the Portfolio's net assets. This percentage may be
varied by action of the Trust's Board of Trustees. 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. The
Portfolio will engage in short selling to the extent permitted by the 1940 Act
and rules and interpretations thereunder.
Derivative Instruments. In pursuing its objective, the Portfolio may,
as described in the Prospectus, purchase and sell (write) both put options and
call options on securities, securities indexes, and foreign currencies, and
enter into interest rate, foreign currency and index futures contracts and
purchase and sell options on such futures contracts ("futures options") for
hedging purposes. The Portfolio also may purchase and sell foreign currency
options for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one country to another. The
Portfolio also may enter into swap agreements with respect to foreign
currencies, interest rates and indexes of securities. If other types of
financial instruments, including other types of options, futures contracts, or
futures options are traded in the future, the Portfolio may also use those
instruments, provided that the Trust's Board of Trustees determines that their
use is consistent with the Portfolio's investment objective, and provided that
their use is consistent with restrictions applicable to options and futures
contracts currently eligible for use by the Trust (i.e., that written call or
put options will be "covered" or "secured" and that futures and futures options
will be used only for hedging purposes).
Options on Securities and Indexes. The Portfolio may purchase and sell
both put and call options on debt or other securities or indexes in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements, sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
The Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio. For a call option on an
index, the option is covered if the Portfolio maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Portfolio holds a call on the same security or index as the call written
where the exercise price of the call held is (I) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written, provided the difference is maintained by the Portfolio in cash
or cash equivalents in a segregated account with its custodian. A put option on
a security or an index is "covered" if the Portfolio maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Portfolio holds a put on the same
security or index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Portfolio expires, the Portfolio realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Portfolio expires unexercised, the Portfolio
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Portfolio is
an asset of the Portfolio. The premium received for an option written by the
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
For a discussion of certain risks involved in options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Options. The Portfolio may buy or sell put and call
options on foreign currencies either on exchanges or in the over-the-counter
market. A put option on a foreign currency gives the purchaser of the option the
right to sell a foreign currency at the exercise price until the option expires.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller, and generally do not have as much market liquidity as
exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Portfolio may
use interest rate, foreign currency or index futures contracts. An interest
rate, foreign currency or index futures contract provides for the future sale by
one party and purchase by another party of a specified quantity of a financial
instrument, foreign currency or the cash value of an index at a specified price
and time. A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is made.
The Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading
Commission under which the Trust and the Portfolio avoid being deemed a
"commodity pool" or a "commodity pool operator," the Portfolio intends generally
to limit its use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Portfolio might use futures contracts to hedge
against anticipated changes in interest rates that might adversely affect either
the value of the Portfolio's securities or the price of the securities which the
Portfolio intends to purchase. The Portfolio's hedging activities may include
sales of futures contracts as an offset against the effect of expected increases
in interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce that Portfolio's exposure to interest rate fluctuations, the
Portfolio may be able to hedge its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio,
the Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by the Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Portfolio pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Portfolio but is instead a settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In computing
daily net asset value, the Portfolio will mark to market its open futures
positions.
The Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.
Limitations on Use of Futures and Futures Options. In general, the
Portfolio intends to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Portfolio will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating to
such positions plus premiums paid by it for open futures option positions, less
the amount by which any such options are "in-the-money," would exceed 5% of the
Portfolio's total net assets. A call option is "in-the-money" if the value of
the futures contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price exceeds the value of
the futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with
its custodian (and mark-to-market on a daily basis) cash or other liquid assets
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Portfolio may "cover" its position by purchasing a put option on the same
futures contract with a strike price as high or higher than the price of the
contract held by the Portfolio.
When selling a futures contract, the Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Portfolio may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Portfolio to
purchase the same futures contract at a price no higher than the price of the
contract written by the Portfolio (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash or other
liquid assets that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Portfolio may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Portfolio to purchase the same futures contract at a price
not higher than the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash or other
liquid assets that equal the purchase price of the futures contract, less any
margin on deposit. Alternatively, the Portfolio may cover the position either by
entering into a short position in the same futures contract, or by owning a
separate put option permitting it to sell the same futures contract so long as
the strike price of the purchased put option is the same or higher than the
strike price of the put option sold by the Portfolio.
Risks in Futures Contracts and Related Options. For a discussion of the
risks involved in futures contracts and related options, see the Trust's
Prospectus and this Statement under "Certain Factors and Investment Methods."
<PAGE>
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. For a
discussion of swap agreements, see the Trust's Prospectus under "Investment
Objectives and Policies." The Portfolio's obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). The Portfolio's obligations under a
swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash or
other liquid assets to avoid any potential leveraging of the Portfolio's
portfolio. The Portfolio will not enter into a swap agreement with any single
party if the net amount owed or to be received under existing contracts with
that party would exceed 5% of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Sub-advisor's ability correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
Sub-advisor will cause the Portfolio to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Portfolio' repurchase agreement guidelines. Certain
restrictions imposed on the Portfolio by the Internal Revenue Code may limit the
Portfolio' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect the
Portfolio's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission ("CFTC"). To qualify for this
exemption, a swap agreement must be entered into by "eligible participants,"
which includes the following, provided the participants' total assets exceed
established levels: a bank or trust company, savings association or credit
union, insurance company, investment company subject to regulation under the
1940 Act, commodity pool, corporation, partnership, proprietorship,
organization, trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have assets exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Foreign Currency Exchange Related Securities. The Portfolio may also
invest in foreign currency warrants, principal exchange rate linked securities
and performance indexed paper. For a discussion of these, see this Statement
under "Certain Risk Factors and Investment Methods."
Warrants to Purchase Securities. The Portfolio may invest in or acquire
warrants to purchase equity or fixed-income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed-income securities at the same coupon rate. A decline in
interest rates would permit the Portfolio to buy additional bonds at the
favorable rate or to sell the warrants at a profit. If interest rates rise, the
warrants would generally expire with no value.
<PAGE>
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the PIMCO Limited Maturity Bond
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of the assets of the Portfolio (taken at market
value at the time of the investment) in "illiquid securities", illiquid
securities being defined to include securities subject to legal or contractual
restrictions on resale (which may include private placements), repurchase
agreements maturing in more than seven days, certain options traded over the
counter that a Portfolio has purchased, securities being used to cover such
options a Portfolio has written, securities for which market quotations are not
readily available, or other securities which legally or in the Sub-advisor's
opinion may be deemed illiquid.
2. Invest more than 5% of the assets of the Portfolio (taken at market
value at the time of investment) in any combination of interest only, principal
only, or inverse floating rate securities.
The Staff of the Securities and Exchange Commission has taken the
position that purchased OTC options and the assets used as cover for written OTC
options are illiquid securities. Therefore, the Portfolio has adopted an
investment policy pursuant to which the Portfolio will not purchase or sell OTC
options if, as a result of such transactions, the sum of the market value of OTC
options currently outstanding which are held by the Portfolio, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Portfolio and margin deposits on the Portfolio's existing
OTC options on futures contracts exceeds 15% of the total assets of the
Portfolio, taken at market value, together with all other assets of the
Portfolio which are illiquid or are otherwise not readily marketable. However,
if an OTC option is sold by the Portfolio to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Portfolio has the unconditional contractual right to repurchase such OTC option
from the dealer at a predetermined price, then the Portfolio will treat as
illiquid such amount of the underlying securities equal to the repurchase price
less the amount by which the option is "in-the-money" (i.e., current market
value of the underlying securities minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money."
Berger Capital Growth Portfolio:
Investment Policies:
Index Options. An option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index on which the option is based is less than (in the case of a put)
or a greater than (in the case of a call) the exercise price of the options.
This amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the "multiplier"). The writer of the option is obligated, in
return for the purchase price (the "premium") paid to him, to make delivery of
this amount. Options are traded on a number of different indices.
Hedging. The Portfolio will purchase put and call options on stock
indices for the purpose of hedging and not for speculation. Hedging may be
employed to cushion the Portfolio against possible declines in the market value
of its securities, or to establish a position in an equity equivalent as a
temporary substitute for the purchase of individual stocks. To hedge a Portfolio
against a decline in value, the Portfolio may buy a put on a stock index. To
protect the Portfolio against an increase in the price of equities at a time
when the Portfolio has a substantial cash equivalent position, the Portfolio may
buy a call on a stock index pending investment in equities.
When the Sub-advisor believes the trend of stock prices may be
downward, particularly over a short period of time, the Portfolio may hedge
through the purchase of a put on a stock index to cushion the anticipated
decline in value of the Portfolio's holdings. This is an alternative to the sale
and possible subsequent repurchase of stocks, which might involve significant
transaction costs. Conversely, the purchase of a call option on a stock index
may allow the Portfolio to quickly obtain exposure to common stock equivalents
in a rising market, thus permitting the Portfolio to purchase stocks gradually
over the option period in a manner designed to minimize adverse price movements,
and with more thorough evaluation of investment alternatives. The purpose of
purchasing put and call options on stock indices is therefore not to generate
gains, but to hedge. Successful hedging activities are not designed to produce a
net gain to a Portfolio. Any gain in the price of a put option is likely to be
offset by lower prices of stocks owned by the Portfolio and any gain in the
price of a call option is likely to be offset by the higher prices the Portfolio
must pay in rising markets as it increases its holdings of common stocks.
Restricted Securities. The Portfolio may purchase securities that are
subject to legal or contractual restrictions on resale ("restricted
securities"), including securities that may be purchased from or sold to certain
institutional investors under Rule 144A under the Securities Act of 1933. The
Sub-advisor, under the supervision of the Board of Trustees, will consider
whether securities purchased under Rule 144A are illiquid and thus subject to
the Portfolio's restrictions on investing no more than 15% of its net assets in
illiquid securities. In making this determination, the Sub-advisor will consider
the trading markets for each such security taking into account the unregistered
nature of a Rule 144A security. Specifically, the Sub-advisor will consider,
among other things, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wanting to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of the transfer).
Restricted securities and securities that are not readily marketable may sell at
a discount from the price they would bring if freely marketable. For a
discussion of illiquid and restricted securities and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
which is a member of the Federal Reserve System. Any such dealer or bank will be
on Sub-advisor's approved list and have a credit rating with respect to its
short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by Sub-advisor. At that time,
the bank or securities dealer agrees to repurchase the underlying security at
the same price, plus specified interest. Repurchase agreements are generally for
a short period of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be considered illiquid. The
Portfolio will only enter into repurchase agreements where (i) the underlying
securities are of the type (excluding maturity limitations) which the
Portfolio's investment guidelines would allow it to purchase directly, (ii) the
market value of the underlying security, including interest accrued, will be at
all times equal to or exceed the value of the repurchase agreement, and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book-entry transfer to the account of the custodian or a bank acting
as agent. 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 losses, 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 subnormal levels of income and lack of
access to income during this period; and (c) expenses of enforcing its rights.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Berger Capital Growth Portfolio.
These limitations are not "fundamental" restrictions and may be changed by the
Trustees without shareholder approval:
1. The Portfolio may purchase put and call options on stock indexes for the
purpose of hedging, but no more than 1% of the Portfolio's total net assets at
the time of purchase of such an option may be invested in put and call options;
2. The Portfolio may not purchase or sell any interest in an oil, gas or
mineral development or exploration program, including investments in oil, gas or
mineral leases;
3. The Portfolio does not currently intend to purchase any security,
including any repurchase agreement maturing in more than seven days, which is
not readily marketable, if more than 15% of the net assets of the Portfolio
taken at market value at the time of purchase would be invested in such
securities.
Robertson Stephens Value + Growth Portfolio:
Investment Objective: The investment objective of the Robertson Stephens
Value + Growth Portfolio is to seek capital appreciation.
<PAGE>
Investment Policies:
Options. The Portfolio may purchase and sell put and call options on its
securities to enhance performance and to protect against changes in market
prices.
Covered Call Options. The Portfolio may write covered call
options on its securities to realize a greater current return through the
receipt of premiums than it would realize on its securities alone. Such option
transactions may also be used as a limited form of hedging against a decline in
the price of securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, the Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Portfolio realizes a
gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
The Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. The Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
Covered Put Options. The Portfolio may write covered put
options in order to enhance its current return. Such options transactions may
also be used as a limited form of hedging against an increase in the price of
securities that the Portfolio plans to purchase. A put option gives the holder
the right to sell, and obligates the writer to buy, a security at the exercise
price at any time before the expiration date. A put option is "covered" if the
writer segregates cash and high-grade short-term debt obligations or other
permissible collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
The Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing Put and Call Options. The Portfolio may also
purchase put options to protect portfolio holdings against a decline in market
value. This protection lasts for the life of the put option because the
Portfolio, as a holder of the option, may sell the underlying security at the
exercise price regardless of any decline in its market price. In order for a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs that the Portfolio must pay. These costs will reduce any
profit the Portfolio might have realized had it sold the underlying security
instead of buying the put option.
The Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
The Portfolio may also purchase put and call options to attempt to
enhance its current return.
Options on Foreign Securities. The Portfolio may purchase and
sell options on foreign securities if the Sub-advisor believes that the
investment characteristics of such options, including the risks of investing in
such options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be less
liquid than comparable markets in the U.S.
Risks Associated with Options. See this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a
description of certain risks involved in options transactions.
Special Expiration Price Options. The Portfolio may purchase
over-the-counter ("OTC") puts and calls with respect to specified securities
("special expiration price options") pursuant to which the Portfolio in effect
may create a custom index relating to a particular industry or sector that the
Sub-advisor believes will increase or decrease in value generally as a group. In
exchange for a premium, the counterparty, whose performance is guaranteed by a
broker-dealer, agrees to purchase (or sell) a specified number of shares of a
particular stock at a specified price and further agrees to cancel the option at
a specified price that decreases straight line over the term of the option.
Thus, the value of the special expiration price option is comprised of the
market value of the applicable underlying security relative to the option
exercise price and the value of the remaining premium. However, if the value of
the underlying security increases (or decreases) by a prenegotiated amount, the
special expiration price option is canceled and becomes worthless. A portion of
the dividends during the term of the option are applied to reduce the exercise
price if the options are exercised. Brokerage commissions and other transaction
costs will reduce the Portfolio's profits if the special expiration price
options are exercised. The Portfolio will not purchase special expiration price
options with respect to more than 25% of the value of its net assets.
LEAPs and BOUNDs. The Portfolio may purchase certain long-term
exchange-traded equity options called Long-Term Equity Anticipation Securities
("LEAPs") and Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a
holder the opportunity to participate in the underlying securities' appreciation
in excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to
retain dividends on the underlying security while potentially participating in
the underlying securities' capital appreciation up to a fixed dollar amount. The
Portfolio will not purchase these options with respect to more than 25% of the
value of its net assets.
LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a specified
strike price, without receiving payments equivalent to any cash dividends
declared on the underlying securities. A LEAP holder will be entitled to receive
a specified number of shares of the underlying stock upon payment of the
exercise price, and therefore the LEAP will be exercisable at any time the price
of the underlying stock is above the strike price. However, if at expiration the
price of the underlying stock is at or below the strike price, the LEAP will
expire worthless.
BOUNDs are long-term options which are expected to have the same
economic characteristics as covered call options, with the added benefits that
BOUNDs can be traded in a single transaction and are not subject to early
exercise. Covered call writing is a strategy by which an investor sells a call
option while simultaneously owning the number of shares of the stock underlying
the call. BOUND holders are able to participate in a stock's price appreciation
up to but not exceeding a specified strike price while receiving payments
equivalent to any cash dividends declared on the underlying stock. At
expiration, a BOUND holder will receive a specified number of shares of the
underlying stock for each BOUND held if, on the last day of trading, the
underlying stock closes at or below the strike price. However, if at expiration
the underlying stock closes above the strike price, the BOUND holder will
receive a payment equal to a multiple of the BOUND's strike price for each BOUND
held. The terms of a BOUND are not adjusted because of cash distributions to the
shareholders of the underlying security. BOUNDs are subject to the position
limits for equity options imposed by the exchanges on which they are traded.
The settlement mechanism for BOUNDs operates in conjunction with that
of the corresponding LEAPs. For example, if at expiration the underlying stock
closes at or below the strike price, the LEAP will expire worthless, and the
holder of a corresponding BOUND will receive a specified number of shares of
stock from the writer of the BOUND. If, on the other hand, the LEAP is "in the
money" at expiration, the holder of the LEAP is entitled to receive a specified
number of shares of the underlying stock from the LEAP writer upon payment of
the strike price, and the holder of a BOUND on such stock is entitled to the
cash equivalent of a multiple of the strike price from the writer of the BOUND.
An investor holding both a LEAP and a corresponding BOUND, where the underlying
stock closes above the strike price at expiration, would be entitled to receive
a multiple of the strike price from the writer of the BOUND and, upon exercise
of the LEAP, would be obligated to pay the same amount to receive shares of the
underlying stock. LEAPs are American-style options (exercisable at any time
prior to expiration), whereas BOUNDs are European-style options (exercisable
only on the expiration date).
Futures Contracts.
Index Futures Contracts and Options. The Portfolio may buy and
sell futures contracts and related options for hedging purposes or to attempt to
increase investment return. The Portfolio currently expects that it will only
purchase and sell stock index futures contracts and related options. A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x $180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Portfolio enters into a futures contract to
buy 100 units of the S&P 100 Index at a specified future date at a contract
price of $180 and the S&P 100 Index is at $184 on that future date, the
Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters into
a futures contract to sell 100 units of the stock index at a specified future
date at a contract price of $180 and the S&P 100 Index is at $182 on that future
date, the Portfolio will lose $200 (100 units x loss of $2).
The Portfolio may purchase or sell futures contracts with respect to
any securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge its investments successfully using futures contracts
and related options, the Portfolio must invest in futures contracts with respect
to indexes or sub-indexes the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the Portfolio's
securities.
Options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index 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 period of the option.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to purchasing and selling call and put options on
index futures contracts, the Portfolio may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options are
traded on national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount." This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier."
The Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. The Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to the Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
Margin Payments. When the Portfolio purchases or sells a
futures contract, it is required to deposit with its custodian an amount of
cash, U.S. Treasury bills, or other permissible collateral equal to a small
percentage of the amount of the futures contract. This amount is known as
"initial margin." The nature of initial margin is different from that of margin
in security transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Portfolio upon termination of the
contract, assuming the Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when the Portfolio sells a futures contract and the price of the
underlying index rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the value of the index underlying the futures contract. Conversely, if the price
of the underlying index falls below the delivery price of the contract, the
Portfolio's futures position increases in value. The broker then must make a
variation margin payment equal to the difference between the delivery price of
the futures contract and the value of the index underlying the futures contract.
When the Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
See this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods" for a description of certain risks involved in
transactions in futures contracts and related options.
Indexed Securities. The Portfolio may purchase securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a put option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Portfolio's present intention to enter into repurchase agreements only
with member banks of the Federal Reserve System and securities dealers which the
Sub-advisor deems to be creditworthy, pursuant to guidelines established by the
Trust's Board of Trustees, and only with respect to obligations of the U.S.
government or its agencies or instrumentalities or other high-quality,
short-term debt obligations. Repurchase agreements may also be viewed as loans
made by the Portfolio which are collateralized by the securities subject to
repurchase. The Sub-advisor will monitor such transactions to ensure that the
value of the underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including the interest factor. For a
discussion of repurchase agreements and the risks involved therein, see the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Securities Lending. The Portfolio may lend its securities,
provided: (1) the loan is secured continuously by collateral consisting of U.S.
Government securities, cash, or cash equivalents adjusted daily to have market
value at least equal to the current market value of the securities loaned; (2)
the Portfolio may at any time call the loan and regain the securities loaned;
(3) the Portfolio will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third (or such other limit as the Trust's Board of Trustees
may establish) of the total assets of the Portfolio. In addition, it is
anticipated that the Portfolio may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan.
Before the Portfolio enters into a loan, the Sub-advisor considers all
relevant facts and circumstances, including the creditworthiness of the
borrower. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, the Portfolio retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Portfolio if the holders of such securities are asked to vote upon or
consent to matters materially affecting the investment. The Portfolio will not
lend portfolio securities to borrowers affiliated with the Portfolio.
Short Sales. The Portfolio may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which the
Portfolio sells a security it does not own, in anticipation of a decline in the
market value of that security. To complete such a transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio then is
obligated to replace the security borrowed by purchasing it at the market price
at or prior to the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Portfolio. Until the
security is replaced, the Portfolio is required to repay the lender any
dividends or interest that accrue during the period of the loan. To borrow the
security, the Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale will
be retained by the broker (or by the Portfolio's custodian in a special custody
account), to the extent necessary to meet margin requirements, until the short
position is closed out. The Portfolio also will incur transaction costs in
effecting short sales.
The Portfolio will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Portfolio replaces the borrowed security. The Portfolio will
realize a gain if the security declines in price between those dates. The amount
of any gain will be decreased, and the amount of any loss increased, by the
amount of the premium, dividends, interest or expenses the Portfolio may be
required to pay in connection with a short sale.
Foreign Investments. The Portfolio may invest in foreign securities,
securities denominated in or indexed to foreign currencies, and certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks. For a discussion of the risks involved in foreign
currency fluctuations and investing in foreign securities, in general, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
The considerations associated with foreign investments generally are
intensified for investments in developing countries. For a discussion of the
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage in currency
exchange transactions to protect against uncertainty in the level of future
foreign currency exchange rates and to increase current return. The Portfolio
may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, the Portfolio enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its portfolio securities. The Portfolio will engage in transaction hedging when
it desires to "lock in" the U.S. dollar price of a security it has agreed to
purchase or sell, or the U.S. dollar equivalent of a dividend or interest
payment in a foreign currency. By transaction hedging, the Portfolio will
attempt to protect against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold or
on which the dividend or interest payment is declared, and the date on which
such payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (i.e.,
cash) basis at the prevailing spot rate in connection with transaction hedging.
The Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts.
For transaction hedging purposes, the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Portfolio the
right to sell a currency at a specified exercise price until the expiration of
the option. A call option on a futures contract gives the Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. The Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Sub-advisor, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which the Portfolio expects to purchase. In connection
with position hedging, the Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Portfolio may also
purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of the
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency the Portfolio is obligated to deliver and if
a decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security or
securities of the Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to the Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
The Portfolio may also seek to increase its current return by
purchasing and selling foreign currency on a spot basis, by purchasing and
selling options on foreign currencies and on foreign currency futures contracts,
and by purchasing and selling foreign currency forward contracts.
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the
New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Portfolio will normally
purchase or sell foreign currency futures contracts and related options only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board of
trade will exist for any particular contract or option or at any particular
time. In such event, it may not be possible to close a futures or related option
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on its
futures positions.
Foreign Currency Options. 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 have recently
been listed on several exchanges. Such options will be purchased or written only
when the Sub-advisor believes that a liquid secondary market exists for such
options. 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 exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market 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.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (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 U.S. options
markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
<PAGE>
Zero-Coupon Debt Securities and Pay-in-Kind Securities. The Portfolio
may invest in zero-coupon securities. Zero-coupon securities allow an issuer to
avoid the need to generate cash to meet current interest payments. For a
discussion of zero-coupon debt securities and the risks involved therein, see
this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio also may purchase pay-in-kind securities. Pay-in-kind
securities pay all or a portion of their interest or dividends in the form of
additional securities.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Robertson Stephens Value +
Growth Portfolio. These limitations are not "fundamental" restrictions and may
be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Portfolio's net assets (taken at current value) would then be
invested in the aggregate in securities described in (a), (b), and (c) above;
2. Purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase or sell financial futures contracts, options on financial
futures contracts, and futures contracts, forward contracts, and options with
respect to foreign currencies, and may enter into swap transactions;
3. Invest in securities of other registered investment companies, except in
compliance with the 1940 Act;
4. Invest in real estate limited partnerships;
5. Acquire more than 10% of the voting securities of any issuer;
6. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell securities which
are secured by real estate and securities of companies, including limited
partnership interests, that invest or deal in real estate and it may purchase
interests in real estate investment trusts. (For purposes of this restriction,
investments by the Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the purchase or
sale of real estate or interests in real estate or real estate mortgage loans.);
7. Make investments for the purpose of exercising control or management;
8. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs.
In addition, the Portfolio will only sell short securities that are
traded on a national securities exchange in the U.S. (including the National
Association of Securities Dealers' Automated Quotation National Market System)
or in the country where the principal trading market in the securities is
located. (This limitation does not apply to short sales against the box).
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
Twentieth Century International Growth Portfolio:
Investment Objective: The investment objective of the Twentieth Century
International Growth Portfolio is to seek capital growth.
<PAGE>
Investment Policies:
In general, within the restrictions outlined herein, the Portfolio has
broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It will be the Sub-advisor's policy to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held, subject to the investment
restrictions described below. It is the Sub-advisor's intention that the
Portfolio will generally consist of common stocks. However, the Sub-advisor may
invest the assets of the Portfolio in varying amounts in other instruments and
in senior securities, such as bonds, debentures, preferred stocks and
convertible issues, when such a course is deemed appropriate in order to attempt
to attain its financial objective.
Forward Currency Exchange Contracts. The Portfolio conducts its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward currency exchange contracts to purchase or sell foreign currencies.
The Portfolio expects to use forward contracts under two circumstances:
(1) when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Portfolio is purchasing or selling a security denominated in a foreign
currency, the Portfolio would be able to enter into a forward contract to do so;
(2) when the Sub-advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the Portfolio
would be able to enter into a forward contract to sell foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of the
Portfolio's securities either denominated in, or whose value is tied to, such
foreign currency.
As to the first circumstance, when the Portfolio enters into a trade
for the purchase or sale of a security denominated in a foreign currency, it may
be desirable to establish (lock in) the U.S. dollar cost or proceeds. By
entering into forward contracts in U.S. dollars for the purchase or sale of a
foreign currency involved in an underlying security transaction, the Portfolio
will be able to protect itself against a possible loss between trade and
settlement dates resulting from the adverse change in the relationship between
the U.S. dollar and the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, the Portfolio could enter into a forward contract to sell for a
fixed dollar amount the amount in foreign currencies approximating the value of
some or all of its portfolio securities either denominated in, or whose value is
tied to, such foreign currency. The Portfolio will place cash or high-grade
liquid securities in a separate account with its custodian in an amount
sufficient to cover its obligation under the contract entered into under the
second circumstance. If the value of the securities placed in the separate
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account equals the amount of the
Portfolio's commitments with respect to such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. Normally, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
respect to overall diversification strategies. However, the Sub-advisor believes
that it is important to have flexibility to enter into such forward contracts
when it determines that the Portfolio's best interests may be served.
Generally, the Portfolio will not enter into a forward contract with a
term of greater than one year. At the maturity of the forward contract, the
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the Portfolio to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the forward contract. Accordingly,
it may be necessary for the Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency the Portfolio is obligated to deliver. For an
additional discussion of forward currency exchange contracts and the risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Short Sales. The Portfolio may engage in short sales if, at the time of
the short sale, the Portfolio owns or has the right to acquire an equal amount
of the security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. To make delivery to the purchaser, the executing broker borrows the
securities being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If the Portfolio engages in a short sale the collateral account will be
maintained by the Portfolio's custodian. While the short sale is open the
Portfolio will maintain in a segregated custodial account an amount of
securities convertible into or exchangeable for such equivalent securities at no
additional cost. These securities would constitute the Portfolio's long
position.
The Portfolio may make a short sale, as described above, when it wants
to sell the security it owns at a current attractive price, but also wishes to
defer recognition of gain or loss for federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code. In such a case, any future losses in
the Portfolio's long position should be reduced by a gain in the short position.
The extent to which such gains or losses are reduced would depend upon the
amount of the security sold short relative to the amount the Portfolio owns.
There will be certain additional transaction costs associated with short sales,
but the Portfolio will endeavor to offset these costs with income from the
investment of the cash proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial.
The Sub-advisor intends to purchase a given security whenever the
Sub-advisor believes it will contribute to the stated objective of the
Portfolio, even if the same security has only recently been sold. The Portfolio
will sell a given security, no matter for how long or for how short a period it
has been held, and no matter whether the sale is at a gain or at a loss, if the
Sub-advisor believes that such security is not fulfilling its purpose, either
because, among other things, it did not live up to the Sub-advisor's
expectations, or because it may be replaced with another security holding
greater promise, or because it has reached its optimum potential, or because of
a change in the circumstances of a particular company or industry or in general
economic conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the Portfolio
may decrease or eliminate entirely its equity position and increase its cash
position, and when a rise in price levels is anticipated, the Portfolio may
increase its equity position and decrease its cash position. However, it should
be expected that the Portfolio will, under most circumstances, be essentially
fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of
the security in question to the Portfolio's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Portfolio's annual portfolio turnover rate
cannot be anticipated and may be comparatively high. Since the Sub-advisor does
not take portfolio turnover rate into account in making investment decisions,
(1) the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates
should not be considered as a representation of the rates that will be attained
in the future.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Twentieth Century International
Growth Portfolio. These limitations are not "fundamental" restrictions and may
be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of its assets in illiquid investments;
2. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
3. Buy securities on margin or sell short (unless it owns or by virtue
of its ownership of other securities has the right to obtain securities
equivalent in kind and amount to the securities sold); however, the Portfolio
may make margin deposits in connection with the use of any financial instrument
or any transaction in securities permitted under its investment policies;
4. Invest in oil, gas or other mineral leases;
5. Invest for control or for management.
Twentieth Century Strategic Balanced Portfolio:
Investment Objective: The investment objective of the Twentieth Century
Strategic Balanced Portfolio is to seek capital growth and current income.
Investment Policies:
In general, within the restrictions outlined herein, the Sub-advisor
has broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It will be the policy of the Sub-advisor to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held subject to the investment
restrictions described below. However, the Sub-advisor may invest the assets of
the Portfolio in varying amounts in other instruments and in senior securities,
such as bonds, debentures, preferred stocks and convertible issues, when such a
course is deemed appropriate in order to attempt to attain its financial
objectives. Senior securities that, in the opinion of the Sub-advisor, are
high-grade issues may also be purchased for defensive purposes.
The above statement of investment policy gives the Sub-advisor
authority to invest in securities other than common stocks and traditional debt
and convertible issues. The Sub-advisor may invest in master limited
partnerships (other than real estate partnerships) and royalty trusts which are
traded on domestic stock exchanges when such investments are deemed appropriate
for the attainment of the Portfolio's investment objectives.
The Sub-advisor will invest approximately 60% of the Portfolio in
common stocks and the balance in fixed income securities. Common stock
investments are described above. The fixed income assets will be invested
primarily in investment grade securities. The Portfolio may invest in securities
of the United States government and its agencies and instrumentalities,
corporate, sovereign government, municipal, mortgage-backed, and other
asset-backed securities. It can be expected that the Sub-advisor will invest
from time to time in bonds and preferred stock convertible into common stock.
Forward Currency Exchange Contracts. The Portfolio conducts its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward foreign currency exchange contracts to purchase or sell foreign
currencies.
The Portfolio expects to use forward contracts under two circumstances:
(1) when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Portfolio is purchasing or selling a security denominated in a foreign
currency, the Portfolio would be able to enter into a forward contract to do so;
(2) when the Sub-advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the Portfolio
would be able to enter into a forward contract to sell foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of the
Portfolio's securities either denominated in, or whose value is tied to, such
foreign currency.
As to the first circumstance, when the Portfolio enters into a trade
for the purchase or sale of a security denominated in a foreign currency, it may
be desirable to establish (lock in) the U.S. dollar cost or proceeds. By
entering into forward contracts in U.S. dollars for the purchase or sale of a
foreign currency involved in an underlying security transaction, the Portfolio
will be able to protect itself against a possible loss between trade and
settlement dates resulting from the adverse change in the relationship between
the U.S. dollar at the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, the Portfolio could enter into a foreign contract to sell for a
fixed dollar amount the amount in foreign currencies approximating the value of
some or all of its portfolio securities either denominated in, or whose value is
tied to, such foreign currency. The Portfolio will place cash or high-grade
liquid securities in a separate account with its custodian in an amount
sufficient to cover its obligation under the contract. If the value of the
securities placed in the separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account equals the amount of the Portfolio's commitments with respect to
such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The Sub-advisor does not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the
Sub-advisor believes that it is important to have flexibility to enter into such
forward contracts when it determines that the Portfolio 's best interests may be
served.
Generally, the Portfolio will not enter into a forward contract with a
term of greater than one year. At the maturity of the forward contract, the
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the Portfolio to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of the Portfolio's securities at the expiration of the forward contract.
Accordingly, it may be necessary for the Portfolio to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency the
Portfolio is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency the Portfolio is obligated to deliver.
For an additional discussion of forward currency exchange contracts and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Futures Contracts. As described in the Prospectus, the Portfolio may
enter into futures contracts. Unlike when the Portfolio purchases securities, no
purchase price for the underlying securities is paid by the Portfolio at the
time it purchases a futures contract. When a futures contract is entered into,
both the buyer and seller of the contract are required to deposit with a futures
commission merchant ("FCM") cash or high-grade debt securities in an amount
equal to a percentage of the contract's value, as set by the exchange on which
the contract is traded. This amount is known as "initial margin" and is held by
the Portfolio's custodian for the benefit of the FCM in the event of any default
by the Portfolio in the payment of any future obligations.
The value of a futures contract is adjusted daily to reflect the
fluctuation of the value of the underlying securities. This is a process known
as marking the contract to market. If the value of a party's position declines,
that party is required to make additional "variation margin" payments to the FCM
to settle the change in value. The party that has a gain is generally entitled
to receive all or a portion of this amount.
The Portfolio maintains from time to time a percentage of its assets in
cash or high-grade liquid securities to provide for redemptions or to hold for
future investment in securities consistent with the Portfolio's investment
objectives. The Portfolio may enter into index futures contracts as an efficient
means to expose the Portfolio's cash position to the domestic equity market. The
Sub-advisor believes that the purchase of futures contracts is an efficient
means to effectively be fully invested in equity securities.
The principal risks generally associated with the use of futures
include: (i) the possible absence of a liquid secondary market for any
particular instrument may make it difficult or impossible to close out a
position when desired (liquidity risk); (ii) the risk that the counter party to
the contract may fail to perform its obligations or the risk of bankruptcy of
the FCM holding margin deposits (counter-party risk); (iii) the risk that the
securities to which the futures contract relates may go down in value (market
risk); and (iv) adverse price movements in the underlying securities can result
in losses substantially greater than the value of the Portfolio's investment in
that instrument because only a fraction of a contract's value is required to be
deposited as initial margin (leverage risk); provided, however, that the
Portfolio may not purchase leveraged futures, so there is no leverage risk
involved in the Portfolio's use of futures.
A liquid secondary market is necessary to close out a contract. The
Portfolio may seek to manage liquidity risk by investing in exchange-traded
futures. Exchange-traded futures pose less risk that there will not be a liquid
secondary market than privately negotiated instruments. Through their clearing
corporations, the futures exchanges guarantee the performance of the contracts.
Futures contracts are generally settled within a day from the date they
are closed out, as compared to three days for most types of equity securities.
As a result, futures contracts can provide more liquidity than an investment in
the actual underlying securities. Nevertheless, there is no assurance that a
liquid secondary market will exist for any particular futures contract at any
particular time. Liquidity may also be influenced by an exchange-imposed daily
price fluctuation limit, which halts trading if a contract's price moves up or
down more than the established limit on any given day. On volatile trading days
when the price fluctuation limit is reached, it may be impossible for the
Portfolio to enter into new positions or close out existing positions. If the
secondary market for a futures contract is not liquid because of price
fluctuation limits or otherwise, the Portfolio may not be able to promptly
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until liquidity in the market is
re-established. As a result, the Portfolio's access to other assets held to
cover its futures positions also could be impaired until liquidity in the market
is re-established.
The Portfolio manages counter-party risk by investing in
exchange-traded index futures. In the event of the bankruptcy of the FCM that
holds margin on behalf of the Portfolio, the Portfolio may be entitled to the
return of margin owed to the Portfolio only in proportion to the amount received
by the FCM's other customers. The Sub-advisor will attempt to minimize the risk
by monitoring the creditworthiness of the FCMs with which the Portfolio does
business.
Short Sales. The Portfolio may engage in short sales if, at the time of
the short sale, the Portfolio owns or has the right to acquire an equal amount
of the security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. To make delivery to the purchaser, the executing broker borrows the
securities being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If the Portfolio engages in a short sale, the collateral account will
be maintained by the Portfolio's custodian. While the short sale is open, the
Portfolio will maintain in a segregated custodial account an amount of
securities convertible into, or exchangeable for, such equivalent securities at
no additional cost. These securities would constitute the Portfolio's long
position.
The Portfolio may make a short sale, as described above, when it wants
to sell the security it owns at a current attractive price, but also wishes to
defer recognition of gain or loss for federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code. In such a case, any future losses in
the Portfolio's long position should be reduced by a gain in the short position.
The extent to which such gains or losses are reduced would depend upon the
amount of the security sold short relative to the amount the Portfolio owns.
There will be certain additional transaction costs associated with short sales,
but the Portfolio will endeavor to offset these costs with income from the
investment of the cash proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial.
The Sub-advisor intends to purchase a given security whenever the
Sub-advisor believes it will contribute to the stated objective of the
Portfolio, even if the same security has only recently been sold. The Portfolio
will sell a given security, no matter for how long or for how short a period it
has been held, and no matter whether the sale is at a gain or at a loss, if the
Sub-advisor believes that it is not fulfilling its purpose, either because,
among other things, it did not live up to the Sub-advisor's expectations, or
because it may be replaced with another security holding greater promise, or
because it has reached its optimum potential, or because of a change in the
circumstances of a particular company or industry or in general economic
conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the equity
portion of the Portfolio may decrease or eliminate entirely its equity position
and increase its cash position, and when a rise in price levels is anticipated,
it may increase its equity position and decrease its cash position. However, it
should be expected that the Portfolio will, under most circumstances, be
essentially fully invested in equity securities.
<PAGE>
Since investment decisions are based on the anticipated contribution of
the security in question to the Portfolio's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Portfolio's annual portfolio turnover rate
cannot be anticipated and may be comparatively high. Since the Sub-advisor does
not take portfolio turnover rate into account in making investment decisions,
(1) the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates in
the past should not be considered as a representation of the rates which will be
attained in the future.
Interest Rate Futures Contracts and Related Options. The Portfolio may
buy and sell interest rate futures contracts relating to debt securities ("debt
futures," i.e., futures relating to debt securities, and "bond index futures,"
i.e., futures relating to indexes on types or groups of bonds) and write and buy
put and call options relating to interest rate futures contracts.
The Portfolio will not purchase or sell futures contracts and options
thereon for speculative purposes but rather only for the purpose of hedging
against changes in the market value of its portfolio securities or changes in
the market value of securities that the Sub-advisor anticipates it may wish to
include in the Portfolio. The Portfolio may sell a future or write a call or
purchase a put on a future if the Sub-advisor anticipates that a general market
or market sector decline may adversely affect the market value of any or all of
the Portfolio's holdings. The Portfolio may buy a future or purchase a call or
sell a put on a future if the Sub-advisor anticipates a significant market
advance in the type of securities it intends to purchase for the Portfolio at a
time when the Portfolio is not invested in debt securities to the extent
permitted by its investment policies. The Portfolio may purchase a future or a
call option thereon as a temporary substitute for the purchase of individual
securities which may then be purchased in an orderly fashion. As securities are
purchased, corresponding futures positions would be terminated by offsetting
sales.
The "sale" of a debt future means the acquisition by the Portfolio of
an obligation to deliver the related debt securities (i.e., those called for by
the contract) at a specified price on a specified date. The "purchase" of a debt
future means the acquisition by the Portfolio of an obligation to acquire the
related debt securities at a specified time on a specified date. The "sale" of a
bond index future means the acquisition by the Portfolio of an obligation to
deliver an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of the last trading day of the
future and the price at which the future is originally struck. No physical
delivery of the bonds making up the index is expected to be made. The "purchase"
of a bond index future means the acquisition by the Portfolio of an obligation
to take delivery of such an amount of cash.
Unlike when the Portfolio purchases or sells a bond, no price is paid
or received by the Portfolio upon the purchase or sale of the future. Initially,
the Portfolio will be required to deposit an amount of cash or securities equal
to a varying specified percentage of the contract amount. This amount is known
as initial margin. Cash held in the margin account is not income producing.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying debt securities or index
fluctuates, making the future more or less valuable, a process known as mark to
the market. Changes in variation margin are recorded by the Portfolio as
unrealized gains or losses. At any time prior to expiration of the future, the
Portfolio may elect to close the position by taking an opposite position that
will operate to terminate its position in the future. 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 the Portfolio writes an option on a futures contract it becomes
obligated, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the term of the
option. If the Portfolio has written a call, it becomes obligated to assume a
"long" position in a futures contract, which means that it is required to take
delivery of the underlying securities. If it has written a put, it is obligated
to assume a "short" position in a futures contract, which means that it is
required to deliver the underlying securities. When the Portfolio purchases an
option on a futures contract it acquires a right in return for the premium it
pays to assume a position in a futures contract.
If the Portfolio writes an option on a futures contract it will be
required to deposit initial and variation margin pursuant to requirements
similar to those applicable to futures contracts. Premiums received from the
writing of an option on a future are included in the initial margin deposit.
For options sold, the Portfolio will segregate cash or high-quality
debt securities equal to the value of securities underlying the option unless
the option is otherwise covered.
The Portfolio will deposit in a segregated account with its custodian
bank cash or other liquid assets in an amount equal to the fluctuating market
value of long futures contracts it has purchased less any margin deposited on
its long position. It may hold cash or acquire such other assets for the purpose
of making these deposits.
Changes in variation margin are recorded by the Portfolio as unrealized
gains or losses. Initial margin payments will be deposited in the Portfolio's
custodian bank in an account registered in the broker's name; access to the
assets in that account may be made by the broker only under specified
conditions. At any time prior to expiration of a futures contract or an option
thereon, the Portfolio may elect to close the position by taking an opposite
position that will operate to terminate its position in the futures contract or
option. A final determination of variation margin is made at that time;
additional cash is required to be paid by or released to it and it realizes a
loss or gain.
Although futures contracts by their terms call for the actual delivery
or acquisition of the underlying securities or cash, in most cases the
contractual obligation is so fulfilled without having to make or take delivery.
The Sub-advisor does not intend to make or take delivery of the underlying
obligation. All transactions in futures contracts and options thereon are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the instruments are traded. Although the Sub-advisor intends to buy and
sell futures contracts only on exchanges where there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular future at any particular time. In such event, it may
not be possible to close a futures contract position.
Similar market liquidity risks occur with respect to options.
The use of futures contracts and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities is
referred to as having a "short futures position." The use of futures contracts
and options thereon to attempt to protect against the market risk that the
Portfolio might not be fully invested at a time when the value of the securities
in which it invests is increasing is referred to as having a "long futures
position." The Portfolio must operate within certain restrictions as to long and
short positions in futures contracts and options thereon under a rule (CFTC
Rule) adopted by the Commodity Futures Trading Commission (CFTC) under the
Commodity Exchange Act (CEA) to be eligible for the exclusion provided by the
CFTC Rule from registration by the Portfolio with the CFTC as a "commodity pool
operator" (as defined under the CEA), and must represent to the CFTC that it
will operate within such restrictions. Under these restrictions the Portfolio
will not, as to any positions that do not qualify as "bona fide hedging" under
the CFTC Rule, whether long, short or a combination thereof, enter into futures
contracts and options thereon for which the aggregate initial margins and
premiums exceed 5% of the fair market value of the Portfolio's assets after
taking into account unrealized profits and losses on options the Portfolio has
entered into; in the case of an option that is "in-the-money" (as defined under
the CEA), the in-the-money amount may be excluded in computing such 5%. (In
general, a call option on a futures contract is in-the-money if the value of the
future exceeds the strike, i.e., exercise, price of the call; a put option on a
futures contract is in-the-money if the value of the futures contract that is
the subject of the put is exceeded by the strike price of the put.) As to its
long positions that are used as part of the Portfolio's strategy and are
incidental to the Portfolio's activities in the underlying cash market, the
"underlying commodity value" (see below) of the Portfolio's futures contract and
options thereon must not exceed the sum of (i) cash set aside in an identifiable
manner, or short-term U.S. debt obligations or other U.S. dollar-denominated,
high-quality, short-term money market instruments so set aside, plus any funds
deposited as margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant.
There are described above the segregated accounts that the Portfolio
must maintain with its custodian bank as to its options and futures contracts
activities due to Securities and Exchange Commission (SEC) requirements. The
Portfolio will, as to its long positions, be required to abide by the more
restrictive of these SEC and CFTC requirements. The underlying commodity value
of a futures contract is computed by multiplying the size (dollar amount) of the
futures contract by the daily settlement price of the futures contract. For an
option on a futures contract, that value is the underlying commodity value of
the future underlying the option.
Since futures contracts and options thereon can replicate movements in
the cash markets for the securities in which the Portfolio invests without the
large cash investments required for dealing in such markets, they may subject
the Portfolio to greater and more volatile risks than might otherwise be the
case. The principal risks related to the use of such instruments are (i) the
offsetting correlation between movements in the market price of the portfolio
investments (held or intended) being hedged and in the price of the futures
contract or option may be imperfect; (ii) possible lack of a liquid secondary
market for closing out futures or options positions; (iii) the need for
additional portfolio management skills and techniques; (iv) losses due to
unanticipated market price movements; and (v) the bankruptcy or failure of a
futures commission merchant holding margin deposits made by the Portfolio and
the Portfolio's inability to obtain repayment of all or part of such deposits.
For a hedge to be completely effective, the price change of the hedging
instrument should equal the price change of the security being hedged. Such
equal price changes are not always possible because the investment underlying
the hedging instrument may not be the same investment that is being hedged. The
Sub-advisor will attempt to create a closely correlated hedge, but hedging
activity may not be completely successful in eliminating market value
fluctuation. The ordinary spreads between prices in the cash and futures
markets, due to the differences in the natures of those markets, are subject to
the following factors which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures market depends on participants entering into off-setting transactions
rather than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest trends by the Sub-advisor may
still not result in a successful transaction. The Sub-advisor may be incorrect
in its expectations as to the extent of various interest rate movements or the
time span within which the movements take place.
The risk of imperfect correlation between movements in the price of a
bond index future and movements in the price of the securities that are the
subject of the hedge increases as the composition of the Portfolio diverges from
the securities included in the applicable index. The price of the bond index
future may move more than or less than the price of the securities being hedged.
If the price of the bond index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being hedged has moved in
a favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
security, the Portfolio will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the bond index futures, the Portfolio may buy or sell
bond index futures in a greater dollar amount than the dollar amount of
securities being hedged if the historical volatility of the prices of such
securities being hedged is less than the historical volatility of the bond
index. It is also possible that, where the Portfolio has sold futures contracts
to hedge its securities against a decline in the market, the market may advance
and the value of securities held in the portfolio may decline. If this occurred,
the Portfolio would lose money on the futures contract and also experience a
decline in value in its portfolio securities. However, while this could occur
for a brief period or to a very small degree, over time the value of a portfolio
of debt securities will tend to move in the same direction as the market indexes
upon which the futures contracts are based.
Where bond index futures are purchased to hedge against a possible
increase in the price of bonds before the Portfolio is able to invest in
securities in an orderly fashion, it is possible that the market may decline
instead; if the Portfolio then concludes not to invest in securities at that
time because of concern as to possible further market decline or for other
reasons, it will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities it had anticipated purchasing.
The risks of investment in options on bond indexes may be greater than
options on securities. Because exercises of bond index options are settled in
cash, when the Portfolio writes a call on a bond index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Portfolio can offset some of the risk of its writing
position by holding a portfolio of bonds similar to those on which the
underlying index is based. However, the Portfolio cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as the
underlying index and, as a result, bears a risk that the value of the securities
held will vary from the value of the index. Even if the Portfolio could assemble
a portfolio that exactly reproduced the composition of the underlying index, it
still would not be fully covered from a risk standpoint because of the "timing
risk" inherent in writing index options. When an index option is exercised, the
amount of cash that the holder is entitled to receive is determined by the
difference between the exercise price and the closing index level on the date
when the option is exercised. As with other kinds of options, the Portfolio, as
the call writer, will not learn that it has been assigned until the next
business day at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security because there, the writer's obligation is to deliver the
underlying security, not to pay its value as of a fixed time in the past. So
long as the writer already owns the underlying security, it can satisfy its
settlement obligations by simply delivering it, and the risk that its value may
have declined since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds securities that exactly
match the composition of the underlying index, it will not be able to satisfy
its assignment obligations by delivering those securities against payment of the
exercise price. Instead, it will be required to pay cash in an amount based on
the closing index value of the exercise date; and by the time it learns that it
has been assigned, the index may have declined with a corresponding decline in
the value of its portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding securities
positions.
If the Portfolio has purchased an index option and exercises it before
the closing index value for that day is available, it runs the risk that the
level of the underlying index may subsequently change. If such a change causes
the exercised option to fall out-of-the-money, the Portfolio must pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Twentieth Century Strategic
Balanced Portfolio. These limitations are not "fundamental" restrictions and may
be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of its assets in illiquid investments;
2. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
3. Buy securities on margin or sell short (unless it owns, or by virtue
of its ownership of, other securities has the right to obtain securities
equivalent in kind and amount to the securities sold); however, the Portfolio's
funds may make margin deposits in connection with the use of any financial
instrument or any transaction in securities permitted under its investment
policies;
4. Invest for control or for management.
AST Putnam Value Growth & Income Portfolio:
Investment Objective: The primary investment objective of the AST Putnam
Value Growth & Income Portfolio is to seek capital growth. Current income is a
secondary investment objective.
Investment Policies:
Short-Term Trading. In seeking the Portfolio's objectives, the
Sub-advisor will buy or sell portfolio securities whenever the Sub-advisor
believes it appropriate to do so. In deciding whether to sell a portfolio
security, the Sub-advisor does not consider how long the Portfolio has owned the
security. From time to time the Sub-advisor will buy securities intending to
seek short-term trading profits. A change in the securities held by the
Portfolio is known as "portfolio turnover" and generally involves some expense
to the Portfolio. This expense may include brokerage commissions or dealer
markups and other transaction costs on both the sale of securities and the
reinvestment of the proceeds in other securities. As a result of the Portfolio's
investment policies, under certain market conditions the Portfolio turnover rate
may be higher than that of other mutual funds. Portfolio turnover rate for a
fiscal year is the ratio of the lesser of purchases or sales of portfolio
securities to the monthly average of the value of portfolio securities excluding
securities whose maturities at acquisition were one year or less. The Portfolio
turnover rate is not a limiting factor when the Sub-advisor considers a change
in the Portfolio.
Lower-Rated Fixed-Income Securities. The Portfolio may invest in
lower-rated fixed-income securities (commonly known as "junk bonds"). The lower
ratings of certain securities held by the Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, the Portfolio at times may be unable to establish the fair value of
such securities. For an additional discussion of certain risks involved in
lower-rated securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
The Portfolio will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase. However, the
Sub-advisor will monitor the investment to determine whether its retention will
assist in meeting the Portfolio's investment objective. At times, a substantial
portion of the Portfolio's assets may be invested in securities as to which the
Portfolio, by itself or together with other mutual funds and accounts managed by
the Sub-advisor and its affiliates, holds all or a major portion. Although the
Sub-advisor generally considers such securities to be liquid because of the
availability of an institutional market for such securities, it is possible
that, under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Portfolio could find it
more difficult to sell these securities when the Sub-advisor believes it
advisable to do so or may be able to sell the securities only at prices lower
than if they were more widely held. Under these circumstances, it may also be
more difficult to determine the fair value of such securities for purposes of
computing the Portfolio's net asset value. In order to enforce its rights in the
event of a default under such securities, the Portfolio may be required to
participate in various legal proceedings or take possession of and manage assets
securing the issuer's obligations on such securities. This could increase the
Portfolio's operating expenses and adversely affect the Portfolio's net asset
value.
To the extent the Portfolio invests in securities in the lower rating
categories, the achievement of the Portfolio's goals is more dependent on the
Sub-advisor's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories.
Zero Coupon Bonds and Payment-in-Kind Bonds. The Portfolio may invest
without limit in zero coupon and payment-in-kind bonds. Zero coupon bonds are
issued at a significant discount from their principal amount in lieu of paying
interest periodically. Payment-in-kind bonds allow the issuer, at its option, to
make current interest payments on the bonds either in cash or in additional
bonds. Because zero coupon and payment-in-kind bonds do not pay current interest
in cash, their value is subject to greater fluctuation in response to changes in
market interest rates than bonds that pay interest currently. Both zero coupon
and payment-in-kind bonds allow an issuer to avoid the need to generate cash to
meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds paying interest currently in cash. For an additional
discussion of zero coupon bonds and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may invest in restricted securities.
For a discussion of restricted securities and certain risks involved therein,
see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage Related Securities. The Portfolio may invest in
mortgage-backed securities, including collateralized mortgage obligations
("CMOs") and certain stripped mortgage-backed securities. CMOs and other
mortgage-backed securities represent a participation in, or are secured by,
mortgage loans.
Mortgage-backed securities have yield and maturity characteristics
corresponding to the underlying assets. Unlike traditional debt securities,
which may pay a fixed rate of interest until maturity, when the entire principal
amount comes due, payments on certain mortgage-backed securities include both
interest and a partial repayment of principal. Besides the scheduled repayment
of principal, repayments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. If property owners
make unscheduled prepayments of their mortgage loans, these prepayments will
result in early payment of the applicable mortgage-related securities. In that
event the Portfolio may be unable to invest the proceeds from the early payment
of the mortgage-related securities in an investment that provides as high a
yield as the mortgage-related securities. Consequently, early payment associated
with mortgage-related securities may cause these securities to experience
significantly greater price and yield volatility than that experienced by
traditional fixed-income securities. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. During periods of falling interest rates, the rate of
mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. During periods of rising interest rates, the rate
of mortgage prepayments usually decreases, thereby tending to increase the life
of mortgage-related securities. If the life of a mortgage-related security is
inaccurately predicted, the Portfolio may not be able to realize the rate of
return it expected.
Mortgage-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at lower rates. As
a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than other securities of comparable
maturities, although they may have a similar risk of decline in market value
during periods of rising interest rates.
CMOs may be issued by a U.S. government agency or instrumentality or by
a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by the
U.S. government or its agencies or instrumentalities, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
the U.S. government, its agencies or instrumentalities or any other person or
entity.
Prepayments could cause early retirement of CMOs. CMOs are designed to
reduce the risk of prepayment for investors by issuing multiple classes of
securities, each having different maturities, interest rates and payment
schedules, and with the principal and interest on the underlying mortgages
allocated among the several classes in various ways. Payment of interest or
principal on some classes or series of CMOs may be subject to contingencies or
some classes or series may bear some or all of the risk of default on the
underlying mortgages. CMOs of different classes or series are generally retired
in sequence as the underlying mortgage loans in the mortgage pool are repaid. If
enough mortgages are repaid ahead of schedule, the classes or series of a CMO
with the earliest maturities generally will be retired prior to their
maturities. Thus, the early retirement of particular classes or series of a CMO
held by the Portfolio would have the same effect as the prepayment of mortgages
underlying other mortgage-backed securities.
The secondary market for stripped mortgage-backed securities may be
more volatile and less liquid than that for other mortgage-backed securities,
potentially limiting the Portfolio's ability to buy or sell those securities at
any particular time. For an additional discussion of mortgage related securities
and certain risks involved therein, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may make secured loans of
its securities, on either a short-term or long-term basis, thereby realizing
additional income. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
As a matter of policy, securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by collateral
consisting of cash or short-term debt obligations at least equal at all times to
the value of the securities on loan, "marked-to-market" daily. The borrower pays
to the Portfolio an amount equal to any dividends or interest received on
securities lent. The Portfolio retains all or a portion of the interest received
on investment of the cash collateral or receives a fee from the borrower.
Although voting rights, or rights to consent, with respect to the loaned
securities may pass to the borrower, the Portfolio retains the right to call the
loans at any time on reasonable notice, and it will do so to enable the
Portfolio to exercise voting rights on any matters materially affecting the
investment. The Portfolio may also call such loans in order to sell the
securities.
Forward Commitments. The Portfolio may enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account, cash or liquid securities in an amount
sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Portfolio enters into a
contract, with the actual principal amount being within a specified range of the
estimate. Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price. Although the Portfolio will generally enter into
forward commitments with the intention of acquiring securities for the Portfolio
or for delivery pursuant to options contracts it has entered into, the Portfolio
may dispose of a commitment prior to settlement if the Sub-advisor deems it
appropriate to do so. The Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its
portfolio positions or to sell securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction. Unsettled TBA sale commitments are valued at
current market value of the underlying securities. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss on the commitment without regard to any
unrealized gain or loss on the underlying security. If the Portfolio delivers
securities under the commitment, the Portfolio realizes a gain or loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Portfolio's present intention to enter into repurchase agreements only
with commercial banks and registered broker-dealers and only with respect to
obligations of the U.S. government or its agencies or instrumentalities.
Repurchase agreements may also be viewed as loans made by the Portfolio which
are collateralized by the securities subject to repurchase. The Sub-advisor will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. For an additional discussion of
repurchase agreements and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options
and covered put options on optionable securities held in the portfolio, when in
the opinion of the Sub-advisor such transactions are consistent with the
Portfolio's investment objective and policies. Call options written by the
Portfolio give the purchaser the right to buy the underlying securities from the
Portfolio at a stated exercise price; put options give the purchaser the right
to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or comparable securities satisfying
the cover requirements of securities exchanges). In the case of put options, the
Portfolio will hold cash or other liquid assets equal to the price to be paid if
the option is exercised. In addition, the Portfolio will be considered to have
covered a put or call option if and to the extent that it holds an option that
offsets some or all of the risk of the option it has written. The Portfolio may
write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying
security, and when it writes a put option, the Portfolio may be required to
deposit cash or securities with its broker as "margin," or collateral, for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Portfolio may have to deposit additional margin
with the broker. Margin requirements are complex and are fixed by individual
brokers, subject to minimum requirements currently imposed by the Federal
Reserve Board and by stock exchanges and other self-regulatory organizations.
For an additional discussion of options transactions, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to
protect its holdings in an underlying security against a decline in market
value. Such protection is provided during the life of the put option since the
Portfolio, as holder of the option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs. By using put options in this manner,
the Portfolio will reduce any profit it might otherwise have realized from
appreciation of the underlying security by the premium paid for the put option
and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to
hedge against an increase in the price of securities that the Portfolio wants
ultimately to buy. Such hedge protection is provided during the life of the call
option since the Portfolio, as holder of the call option, is able to buy the
underlying security at the exercise price regardless of any increase in the
underlying security's market price. In order for a call option to be profitable,
the market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the
Portfolio's options strategies depends on the ability of the Sub-advisor to
forecast correctly interest rate and market movements. The effective use of
options also depends on the Portfolio's ability to terminate option positions at
times when the Sub-advisor deems it desirable to do so. There is no assurance
that the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price.
<PAGE>
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Portfolio as a holder of an option would be able to
realize profits or limit losses only by exercising the option, and the
Portfolio, as option writer, would remain obligated under the option until
expiration or exercise.
Disruptions in the markets for the securities underlying options
purchased or sold by the Portfolio could result in losses on the options. If
trading is interrupted in an underlying security, the trading of options on that
security is normally halted as well. As a result, the Portfolio as purchaser or
writer of an option will be unable to close out its positions until options
trading resumes, and it may be faced with considerable losses if trading in the
security reopens at a substantially different price. In addition, the Options
Clearing Corporation or other options markets may impose exercise restrictions.
If a prohibition on exercise is imposed at the time when trading in the option
has also been halted, the Portfolio as purchaser or writer of an option will be
locked into its position until one of the two restrictions has been lifted. If
the Options Clearing Corporation were to determine that the available supply of
an underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Portfolio, as holder of such a put option, could
lose its entire investment if the prohibition remained in effect until the put
option's expiration.
Foreign-traded options are subject to many of the same risks presented
by internationally-traded securities. In addition, because of time differences
between the United States and various foreign countries, and because different
holidays are observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are closed. As a
result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets
held to cover OTC options written by the Portfolio may, under certain
circumstances, be considered illiquid securities for purposes of any limitation
on the Portfolio's ability to invest in illiquid securities. For an additional
discussion of certain risks involved in options transactions, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the
Portfolio may invest without limit in the types of futures contracts and related
options identified in the Prospectus for hedging and non-hedging purposes. The
use of futures and options transactions for purposes other than hedging entails
greater risks. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until on or near that date. The determination
is made in accordance with the rules of the exchange on which the futures
contract sale or purchase was made. Futures contracts are traded in the United
States only on commodity exchanges or boards of trade -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions
at any time prior to their expiration in order to reduce or eliminate a hedge
position then currently held by the Portfolio. The Portfolio may close its
positions by taking opposite positions which will operate to terminate the
Portfolio's position in the futures contracts. Final determinations of variation
margin are then made, additional cash is required to be paid by or released to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs. For an additional discussion
of futures contracts and related options, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call
and put options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on future contracts give the purchaser the right in return for the
premium paid to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Portfolio may
use options on futures contracts in lieu of writing or buying options directly
on the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
securities, the Portfolio may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the
Portfolio may purchase call options or write put options on futures contracts as
a substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Portfolio expects to purchase.
Such options generally operate in the same manner as options purchased or
written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected. For an additional
discussion of options on futures contracts, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options.
Successful use of futures contracts by the Portfolio is subject to the
Sub-advisor's ability to predict movements in various factors affecting
securities markets, including interest rates. Compared to the purchase or sale
of futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Portfolio because the maximum amount at risk
is the premium paid for the options (plus transaction costs). However, there may
be circumstances when the purchase of a call or put option on a futures contract
would result in a loss to the Portfolio when the purchase or sale of a futures
contract would not, such as when there is no movement in the prices of the
hedged investments. The writing of an option on a futures contract involves
risks similar to those risks relating to the sale of futures contracts. For an
additional discussion of certain risks involved in futures contracts and related
options, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Index Futures Contracts. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Portfolio may enter into stock index
futures contracts, debt index futures contracts, or other index futures
contracts appropriate to its objective. The Portfolio may also purchase and sell
options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index
("S&P 500") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 assigns relative weightings to the
common stocks included in the Index, and the value fluctuates with changes in
the market values of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Portfolio enters into a futures contract to buy 500 units of
the S&P 500 at a specified future date at a contract price of $150 and the S&P
500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x
gain of $4). If the Portfolio enters into a futures contract to sell 500 units
of the stock index at a specified future date at a contract price of $150 and
the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500
units x loss of $2).
There are several risks in connection with the use by the Portfolio of
index futures. One risk arises because of the imperfect correlation between
movements in the prices of the index futures and movements in the prices of
securities which are the subject of the hedge. The Sub-advisor will, however,
attempt to reduce this risk by buying or selling, to the extent possible,
futures on indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the securities sought to
be hedged.
Successful use of index futures by the Portfolio is also subject to the
Sub-advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities. It is also
possible that, if the Portfolio has hedged against the possibility of a decline
in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit of the increased value of those securities it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the portion of the Portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Sub-advisor may still not result in a
profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
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
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
Options on Indices. As an alternative to purchasing call and put
options on index futures, the Portfolio may purchase and sell call and put
options on the underlying indices themselves. Such options would be used in a
manner identical to the use of options on index futures. For an additional
discussion of options on indices and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 20% of its total
assets in securities traded in foreign securities markets. American depositary
receipts and Eurodollar certificates of deposit are not included in this
limitation. For a discussion of certain risks involved in foreign investing, in
general, and the special risks involved in investing in developing countries or
"emerging markets," see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage without limit
in currency exchange transactions, including purchasing and selling foreign
currency, foreign currency options, foreign currency forward contracts and
foreign currency futures contracts and related options, to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Portfolio may write covered call and put options on foreign currencies for the
purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and
"position hedging." When it engages in transaction hedging, the Portfolio enters
into foreign currency transactions with respect to specific receivables or
payables, generally arising in connection with the purchase or sale of portfolio
securities. The Portfolio will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Portfolio will attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is earned, and the date on which such payments are
made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency. The
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until the expiration of the option. A put option on a currency gives the
Portfolio the right to sell the currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the
Portfolio the right to assume a long position in the futures contract until the
expiration of the option. A call option on a currency gives the Portfolio the
right to purchase the currency at the exercise price until the expiration of the
option.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which its portfolio securities are denominated (or an
increase in the value of currency for securities which the Portfolio expects to
purchase). In connection with position hedging, the Portfolio may purchase put
or call options on foreign currency and on foreign currency futures contracts
and buy or sell forward contracts and foreign currency futures contracts. The
Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some
of the costs of hedging against fluctuations in current exchange rates by
writing covered call options and covered put options on foreign currencies. The
Portfolio receives a premium from writing a call or put option, which increases
the Portfolio's current return if the option expires unexercised or is closed
out at a net profit. The Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency and may at
times not involve currencies in which its portfolio securities are then
denominated. The Sub-advisor will engage in such "cross hedging" activities when
it believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by the Portfolio involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign
currencies, may be affected by complex political and economic factors applicable
to the issuing country. In addition, the exchange rates of foreign currencies
(and therefore the values of foreign currency options, forward contracts and
futures contracts) may be affected significantly, fixed, or supported directly
or indirectly by U.S. and foreign government actions. Government intervention
may increase risks involved in purchasing or selling foreign currency options,
forward contracts and futures contracts, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures
contract reflects the value of an exchange rate, which in turn reflects relative
values of two currencies, the U.S. dollar and the foreign currency in question.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign currency options, forward contracts and futures contracts, investors may
be disadvantaged by having to deal in an odd-lot market for the underlying
foreign currencies in connection with options at prices that are less favorable
than for round lots. Foreign governmental restrictions or taxes could result in
adverse changes in the cost of acquiring or disposing of foreign currencies.
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.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (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 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. For an additional discussion of foreign currency
transactions and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either
may accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the foreign currency futures contracts may be closed out
only on an exchange or board of trade which provides a secondary market in such
contracts. Although the Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies
operate similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily in the
over-the-counter market, although options on foreign currencies are also listed
on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when
the Sub-advisor believes that a liquid secondary market exists for such options.
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
investments generally.
Settlement Procedures. Settlement procedures relating to the
Portfolio's investments in foreign securities and to the Portfolio's foreign
currency exchange transactions may be more complex than settlements with respect
to investments in debt or equity securities of U.S. issuers, and may involve
certain risks not present in the Portfolio's domestic investments. For example,
settlement of transactions involving foreign securities or foreign currencies
may occur within a foreign country, and the Portfolio may be required to accept
or make delivery of the underlying securities or currency in conformity with any
applicable U.S. or foreign restrictions or regulations, and may be required to
pay any fees, taxes or charges associated with such delivery. Such investments
may also involve the risk that an entity involved in the settlement may not meet
its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Putnam Value Growth & Income
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, excluding
securities determined by the Trustees of the Trust (or the person designated by
the Trustees of the Trust to make such determinations) to be readily marketable,
and (c) repurchase agreements maturing in more than seven days, if, as a result,
more than 15% of the Portfolio's net assets (taken at current value) would be
invested in securities described in (a), (b) and (c) above;
2. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
3. Make short sales of securities or maintain a short position for the
account of the Portfolio unless at all times when a short position is open it
owns an equal amount of such securities or owns securities which, without
payment of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the securities sold
short.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
AST Putnam International Equity Portfolio:
Investment Objective: The investment objective of the AST Putnam
International Equity Portfolio is to seek capital appreciation.
Investment Policies:
The Portfolio is designed for investors seeking capital appreciation
through a diversified portfolio of equity securities of companies located in a
country other than the United States.
Short-Term Trading. In seeking the Portfolio's objectives, the
Sub-advisor will buy or sell portfolio securities whenever the Sub-advisor
believes it appropriate to do so. In deciding whether to sell a portfolio
security, the Sub-advisor does not consider how long the Portfolio has owned the
security. From time to time the Sub-advisor will buy securities intending to
seek short-term trading profits. A change in the securities held by the
Portfolio is known as "portfolio turnover" and generally involves some expense
to the Portfolio. This expense may include brokerage commissions or dealer
markups and other transaction costs on both the sale of securities and the
reinvestment of the proceeds in other securities. As a result of the Portfolio's
investment policies, under certain market conditions the Portfolio turnover rate
may be higher than that of other mutual funds. Portfolio turnover rate for a
fiscal year is the ratio of the lesser of purchases or sales of portfolio
securities to the monthly average of the value of portfolio securities excluding
securities whose maturities at acquisition were one year or less. The Portfolio
turnover rate is not a limiting factor when the Sub-advisor considers a change
in the Portfolio.
Restricted Securities. The Portfolio may invest in restricted securities.
For a discussion of restricted securities and certain risks involved therein,
see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may make secured loans of
its securities, on either a short-term or long-term basis, thereby realizing
additional income. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
As a matter of policy, securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by collateral
consisting of cash or short-term debt obligations at least equal at all times to
the value of the securities on loan, "marked-to-market" daily. The borrower pays
to the Portfolio an amount equal to any dividends or interest received on
securities lent. The Portfolio retains all or a portion of the interest received
on investment of the cash collateral or receives a fee from the borrower.
Although voting rights, or rights to consent, with respect to the loaned
securities may pass to the borrower, the Portfolio retains the right to call the
loans at any time on reasonable notice, and it will do so to enable the
Portfolio to exercise voting rights on any matters materially affecting the
investment. The Portfolio may also call such loans in order to sell the
securities.
Forward Commitments. The Portfolio may enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account, cash or liquid securities in an amount
sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Portfolio enters into a
contract, with the actual principal amount being within a specified range of the
estimate. Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price. Although the Portfolio will generally enter into
forward commitments with the intention of acquiring securities for the Portfolio
or for delivery pursuant to options contracts it has entered into, the Portfolio
may dispose of a commitment prior to settlement if the Sub-advisor deems it
appropriate to do so. The Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its
portfolio positions or to sell securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction. Unsettled TBA sale commitments are valued at
current market value of the underlying securities. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss on the commitment without regard to any
unrealized gain or loss on the underlying security. If the Portfolio delivers
securities under the commitment, the Portfolio realizes a gain or loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Portfolio's present intention to enter into repurchase agreements only
with commercial banks and registered broker-dealers and only with respect to
obligations of the U.S. government or its agencies or instrumentalities.
Repurchase agreements may also be viewed as loans made by the Portfolio which
are collateralized by the securities subject to repurchase. The Sub-advisor will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. For an additional discussion of
repurchase agreements and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options
and covered put options on optionable securities held in the portfolio, when in
the opinion of the Sub-advisor such transactions are consistent with the
Portfolio's investment objective and policies. Call options written by the
Portfolio give the purchaser the right to buy the underlying securities from the
Portfolio at a stated exercise price; put options give the purchaser the right
to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or comparable securities satisfying
the cover requirements of securities exchanges). In the case of put options, the
Portfolio will hold cash or other liquid assets equal to the price to be paid if
the option is exercised. In addition, the Portfolio will be considered to have
covered a put or call option if and to the extent that it holds an option that
offsets some or all of the risk of the option it has written. The Portfolio may
write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying
security, and when it writes a put option, the Portfolio may be required to
deposit cash or securities with its broker as "margin," or collateral, for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Portfolio may have to deposit additional margin
with the broker. Margin requirements are complex and are fixed by individual
brokers, subject to minimum requirements currently imposed by the Federal
Reserve Board and by stock exchanges and other self-regulatory organizations.
For an additional discussion of options transactions, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to
protect its holdings in an underlying security against a decline in market
value. Such protection is provided during the life of the put option since the
Portfolio, as holder of the option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs. By using put options in this manner,
the Portfolio will reduce any profit it might otherwise have realized from
appreciation of the underlying security by the premium paid for the put option
and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to
hedge against an increase in the price of securities that the Portfolio wants
ultimately to buy. Such hedge protection is provided during the life of the call
option since the Portfolio, as holder of the call option, is able to buy the
underlying security at the exercise price regardless of any increase in the
underlying security's market price. In order for a call option to be profitable,
the market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the
Portfolio's options strategies depends on the ability of the Sub-advisor to
forecast correctly interest rate and market movements. The effective use of
options also depends on the Portfolio's ability to terminate option positions at
times when the Sub-advisor deems it desirable to do so. There is no assurance
that the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Portfolio as a holder of an option would be able to
realize profits or limit losses only by exercising the option, and the
Portfolio, as option writer, would remain obligated under the option until
expiration or exercise.
Disruptions in the markets for the securities underlying options
purchased or sold by the Portfolio could result in losses on the options. If
trading is interrupted in an underlying security, the trading of options on that
security is normally halted as well. As a result, the Portfolio as purchaser or
writer of an option will be unable to close out its positions until options
trading resumes, and it may be faced with considerable losses if trading in the
security reopens at a substantially different price. In addition, the Options
Clearing Corporation or other options markets may impose exercise restrictions.
If a prohibition on exercise is imposed at the time when trading in the option
has also been halted, the Portfolio as purchaser or writer of an option will be
locked into its position until one of the two restrictions has been lifted. If
the Options Clearing Corporation were to determine that the available supply of
an underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Portfolio, as holder of such a put option, could
lose its entire investment if the prohibition remained in effect until the put
option's expiration.
Foreign-traded options are subject to many of the same risks presented
by internationally-traded securities. In addition, because of time differences
between the United States and various foreign countries, and because different
holidays are observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are closed. As a
result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets
held to cover OTC options written by the Portfolio may, under certain
circumstances, be considered illiquid securities for purposes of any limitation
on the Portfolio's ability to invest in illiquid securities. For an additional
discussion of certain risks involved in options transactions, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the
Portfolio may invest without limit in the types of futures contracts and related
options identified in the Prospectus for hedging and non-hedging purposes. The
use of futures and options transactions for purposes other than hedging entails
greater risks. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until on or near that date. The determination
is made in accordance with the rules of the exchange on which the futures
contract sale or purchase was made. Futures contracts are traded in the United
States only on commodity exchanges or boards of trade -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions
at any time prior to their expiration in order to reduce or eliminate a position
then currently held by the Portfolio. The Portfolio may close its positions by
taking opposite positions which will operate to terminate the Portfolio's
position in the futures contracts. Final determinations of variation margin are
then made, additional cash is required to be paid by or released to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs. For an additional discussion
of futures contracts and related options, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call
and put options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on future contracts give the purchaser the right in return for the
premium paid to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Portfolio may
use options on futures contracts in lieu of writing or buying options directly
on the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
securities, the Portfolio may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the
Portfolio may purchase call options or write put options on futures contracts as
a substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Portfolio expects to purchase.
Such options generally operate in the same manner as options purchased or
written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected. For an additional
discussion of options on futures contracts, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options.
Successful use of futures contracts by the Portfolio is subject to the
Sub-advisor's ability to predict movements in various factors affecting
securities markets, including interest rates. Compared to the purchase or sale
of futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Portfolio because the maximum amount at risk
is the premium paid for the options (plus transaction costs). However, there may
be circumstances when the purchase of a call or put option on a futures contract
would result in a loss to the Portfolio when the purchase or sale of a futures
contract would not, such as when there is no movement in the prices of the
hedged investments. The writing of an option on a futures contract involves
risks similar to those risks relating to the sale of futures contracts. For an
additional discussion of certain risks involved in futures contracts and related
options, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Index Futures Contracts. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Portfolio may enter into stock index
futures contracts, debt index futures contracts, or other index futures
contracts appropriate to its objective. The Portfolio may also purchase and sell
options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index
("S&P 500") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 assigns relative weightings to the
common stocks included in the Index, and the value fluctuates with changes in
the market values of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Portfolio enters into a futures contract to buy 500 units of
the S&P 500 at a specified future date at a contract price of $150 and the S&P
500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x
gain of $4). If the Portfolio enters into a futures contract to sell 500 units
of the stock index at a specified future date at a contract price of $150 and
the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500
units x loss of $2).
There are several risks in connection with the use by the Portfolio of
index futures. One risk arises because of the imperfect correlation between
movements in the prices of the index futures and movements in the prices of
securities which are the subject of the hedge. The Sub-advisor will, however,
attempt to reduce this risk by buying or selling, to the extent possible,
futures on indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the securities sought to
be hedged.
Successful use of index futures by the Portfolio is also subject to the
Sub-advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities. It is also
possible that, if the Portfolio has hedged against the possibility of a decline
in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit of the increased value of those securities it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the portion of the Portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Sub-advisor may still not result in a
profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
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
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
Options on Indices. As an alternative to purchasing call and put
options on index futures, the Portfolio may purchase and sell call and put
options on the underlying indices themselves. Such options would be used in a
manner identical to the use of options on index futures. For an additional
discussion of options on indices and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Index Warrants. The Portfolio may purchase put warrants and call
warrants whose values vary depending on the change in the value of one or more
specified securities indices ("index warrants"). Index warrants are generally
issued by banks or other financial institutions and give the holder the right,
at any time during the term of the warrant, to receive upon exercise of the
warrant a cash payment from the issuer based on the value of the underlying
index at the time of exercise. In general, if the value of the underlying index
rises above the exercise price of the index warrant, the holder of a call
warrant will be entitled to receive a cash payment from the issuer upon exercise
based on the difference between the value of the index and the exercise price of
the warrant; if the value of the underlying index falls, the holder of a put
warrant will be entitled to receive a cash payment from the issuer upon exercise
based on the difference between the exercise price of the warrant and the value
of the index. The holder of a warrant would not be entitled to any payments from
the issuer at any time when, in the case of a call warrant, the exercise price
is greater than the value of the underlying index, or, in the case of a put
warrant, the exercise price is less than the value of the underlying index. If
the Portfolio were not to exercise an index warrant prior to its expiration,
then the Portfolio would lose the amount of the purchase price paid by it for
the warrant.
The Portfolio will normally use index warrants in a manner similar to
its use of options on securities indices. The risks of the Portfolio's use of
index warrants are generally similar to those relating to its use of index
options. Unlike most index options, however, index warrants are issued in
limited amounts and are not obligations of a regulated clearing agency, but are
backed only by the credit of the bank or other institution which issues the
warrant. Also, index warrants generally have longer terms than index options.
Although the Portfolio will normally invest only in exchange-listed warrants,
index warrants are not likely to be as liquid as certain index options backed by
a recognized clearing agency. In addition, the terms of index warrants may limit
the Portfolio's ability to exercise the warrants at such time, or in such
quantities, as the Portfolio would otherwise wish to do.
Foreign Securities. The Portfolio will, under normal circumstances,
invest at least 65% of its total assets in issuers located in at least three
different countries other than the United States. Eurodollar certificates of
deposit are excluded for purposes of this limitation. For a discussion of
certain risks involved in foreign investing, in general, and the special risks
involved in investing in developing countries or "emerging markets," see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. The Portfolio may engage without limit
in currency exchange transactions, including purchasing and selling foreign
currency, foreign currency options, foreign currency forward contracts and
foreign currency futures contracts and related options, to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Portfolio may write covered call and put options on foreign currencies for the
purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and
"position hedging." When it engages in transaction hedging, the Portfolio enters
into foreign currency transactions with respect to specific receivables or
payables, generally arising in connection with the purchase or sale of portfolio
securities. The Portfolio will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Portfolio will attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is earned, and the date on which such payments are
made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency. The
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until the expiration of the option. A put option on a currency gives the
Portfolio the right to sell the currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the
Portfolio the right to assume a long position in the futures contract until the
expiration of the option. A call option on a currency gives the Portfolio the
right to purchase the currency at the exercise price until the expiration of the
option.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which its portfolio securities are denominated (or an
increase in the value of currency for securities which the Portfolio expects to
purchase). In connection with position hedging, the Portfolio may purchase put
or call options on foreign currency and on foreign currency futures contracts
and buy or sell forward contracts and foreign currency futures contracts. The
Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some
of the costs of hedging against fluctuations in current exchange rates by
writing covered call options and covered put options on foreign currencies. The
Portfolio receives a premium from writing a call or put option, which increases
the Portfolio's current return if the option expires unexercised or is closed
out at a net profit. The Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency and may at
times not involve currencies in which its portfolio securities are then
denominated. The Sub-advisor will engage in such "cross hedging" activities when
it believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by the Portfolio involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign
currencies, may be affected by complex political and economic factors applicable
to the issuing country. In addition, the exchange rates of foreign currencies
(and therefore the values of foreign currency options, forward contracts and
futures contracts) may be affected significantly, fixed, or supported directly
or indirectly by U.S. and foreign government actions. Government intervention
may increase risks involved in purchasing or selling foreign currency options,
forward contracts and futures contracts, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures
contract reflects the value of an exchange rate, which in turn reflects relative
values of two currencies, the U.S. dollar and the foreign currency in question.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign currency options, forward contracts and futures contracts, investors may
be disadvantaged by having to deal in an odd-lot market for the underlying
foreign currencies in connection with options at prices that are less favorable
than for round lots. Foreign governmental restrictions or taxes could result in
adverse changes in the cost of acquiring or disposing of foreign currencies.
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.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (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 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. For an additional discussion of foreign currency
transactions and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either
may accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the foreign currency futures contracts may be closed out
only on an exchange or board of trade which provides a secondary market in such
contracts. Although the Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies
operate similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily in the
over-the-counter market, although options on foreign currencies are also listed
on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when
the Sub-advisor believes that a liquid secondary market exists for such options.
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
investments generally.
Settlement Procedures. Settlement procedures relating to the
Portfolio's investments in foreign securities and to the Portfolio's foreign
currency exchange transactions may be more complex than settlements with respect
to investments in debt or equity securities of U.S. issuers, and may involve
certain risks not present in the Portfolio's domestic investments. For example,
settlement of transactions involving foreign securities or foreign currencies
may occur within a foreign country, and the Portfolio may be required to accept
or make delivery of the underlying securities or currency in conformity with any
applicable U.S. or foreign restrictions or regulations, and may be required to
pay any fees, taxes or charges associated with such delivery. Such investments
may also involve the risk that an entity involved in the settlement may not meet
its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Putnam International Equity
Portfolio. These limitations are not "fundamental" restrictions, and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, excluding
securities determined by the Trustees of the Trust (or the person designated by
the Trustees of the Trust to make such determinations) to be readily marketable,
and (c) repurchase agreements maturing in more than seven days, if, as a result,
more than 15% of the Portfolio's net assets (taken at current value) would be
invested in securities described in (a), (b) and (c) above;
2. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities, and except
that it may make margin payments in connection with futures contracts and
options;
3, Make short sales of securities or maintain a short sale position for
the account of the Portfolio unless at all times when a short position is open
it owns an equal amount of such securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and at least equal in amount to, the securities sold short;
4. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
5. Make investments for the purpose of gaining control of a company's
management.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
AST Putnam Balanced Portfolio:
Investment Objective: The investment objective of the AST Putnam Balanced
Portfolio is to provide a balanced investment composed of a well-diversified
portfolio of stocks and bonds which will produce both capital growth and current
income.
Investment Policies:
Lower-Rated Fixed-Income Securities. The Portfolio may invest in
lower-rated fixed-income securities (commonly known as "junk bonds"). The lower
ratings of certain securities held by the Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, the Portfolio at times may be unable to establish the fair value of
such securities. For an additional discussion of certain risks involved in
lower-rated securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
The Portfolio will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase. However, the
Sub-advisor will monitor the investment to determine whether its retention will
assist in meeting the Portfolio's investment objective. At times, a substantial
portion of the Portfolio's assets may be invested in securities as to which the
Portfolio, by itself or together with other mutual funds and accounts managed by
the Sub-advisor and its affiliates, holds all or a major portion. Although the
Sub-advisor generally considers such securities to be liquid because of the
availability of an institutional market for such securities, it is possible
that, under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Portfolio could find it
more difficult to sell these securities when the Sub-advisor believes it
advisable to do so or may be able to sell the securities only at prices lower
than if they were more widely held. Under these circumstances, it may also be
more difficult to determine the fair value of such securities for purposes of
computing the Portfolio's net asset value. In order to enforce its rights in the
event of a default under such securities, the Portfolio may be required to
participate in various legal proceedings or take possession of and manage assets
securing the issuer's obligations on such securities. This could increase the
Portfolio's operating expenses and adversely affect the Portfolio's net asset
value.
To the extent the Portfolio invests in securities in the lower rating
categories, the achievement of the Portfolio's goals is more dependent on the
Sub-advisor's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories
Zero Coupon Bonds. The Portfolio may invest without limit in zero
coupon bonds. Zero coupon bonds are issued at a significant discount from their
principal amount in lieu of paying interest periodically. Because zero coupon
bonds do not pay current interest in cash, their value is subject to greater
fluctuation in response to changes in market interest rates than bonds that pay
interest currently. Zero coupon bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds paying interest currently in cash. For
an additional discussion of zero coupon bonds and certain risks involved
therein, see this Statement under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may invest in restricted securities.
For a discussion of restricted securities and certain risks involved therein,
see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage Related Securities. The Portfolio may invest in
mortgage-backed securities, including collateralized mortgage obligations
("CMOs") and certain stripped mortgage-backed securities. CMOs and other
mortgage-backed securities represent a participation in, or are secured by,
mortgage loans.
Mortgage-backed securities have yield and maturity characteristics
corresponding to the underlying assets. Unlike traditional debt securities,
which may pay a fixed rate of interest until maturity, when the entire principal
amount comes due, payments on certain mortgage-backed securities include both
interest and a partial repayment of principal. Besides the scheduled repayment
of principal, repayments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. If property owners
make unscheduled prepayments of their mortgage loans, these prepayments will
result in early payment of the applicable mortgage-related securities. In that
event the Portfolio may be unable to invest the proceeds from the early payment
of the mortgage-related securities in an investment that provides as high a
yield as the mortgage-related securities. Consequently, early payment associated
with mortgage-related securities may cause these securities to experience
significantly greater price and yield volatility than that experienced by
traditional fixed-income securities. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. During periods of falling interest rates, the rate of
mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. During periods of rising interest rates, the rate
of mortgage prepayments usually decreases, thereby tending to increase the life
of mortgage-related securities. If the life of a mortgage-related security is
inaccurately predicted, the Portfolio may not be able to realize the rate of
return it expected.
Mortgage-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at lower rates. As
a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than other securities of comparable
maturities, although they may have a similar risk of decline in market value
during periods of rising interest rates.
CMOs may be issued by a U.S. government agency or instrumentality or by
a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by the
U.S. government or its agencies or instrumentalities, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
the U.S. government, its agencies or instrumentalities or any other person or
entity.
Prepayments could cause early retirement of CMOs. CMOs are designed to
reduce the risk of prepayment for investors by issuing multiple classes of
securities, each having different maturities, interest rates and payment
schedules, and with the principal and interest on the underlying mortgages
allocated among the several classes in various ways. Payment of interest or
principal on some classes or series of CMOs may be subject to contingencies or
some classes or series may bear some or all of the risk of default on the
underlying mortgages. CMOs of different classes or series are generally retired
in sequence as the underlying mortgage loans in the mortgage pool are repaid. If
enough mortgages are repaid ahead of schedule, the classes or series of a CMO
with the earliest maturities generally will be retired prior to their
maturities. Thus, the early retirement of particular classes or series of a CMO
held by the Portfolio would have the same effect as the prepayment of mortgages
underlying other mortgage-backed securities.
The secondary market for stripped mortgage-backed securities may be
more volatile and less liquid than that for other mortgage-backed securities,
potentially limiting the Portfolio's ability to buy or sell those securities at
any particular time. For an additional discussion of mortgage related securities
and certain risks involved therein, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
<PAGE>
Lending Portfolio Securities. The Portfolio may make secured loans of
its securities, on either a short-term or long-term basis, thereby realizing
additional income. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
As a matter of policy, securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by collateral
consisting of cash or short-term debt obligations at least equal at all times to
the value of the securities on loan, "marked-to-market" daily. The borrower pays
to the Portfolio an amount equal to any dividends or interest received on
securities lent. The Portfolio retains all or a portion of the interest received
on investment of the cash collateral or receives a fee from the borrower.
Although voting rights, or rights to consent, with respect to the loaned
securities may pass to the borrower, the Portfolio retains the right to call the
loans at any time on reasonable notice, and it will do so to enable the
Portfolio to exercise voting rights on any matters materially affecting the
investment. The Portfolio may also call such loans in order to sell the
securities.
Forward Commitments. The Portfolio may enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account, cash or liquid securities in an amount
sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Portfolio enters into a
contract, with the actual principal amount being within a specified range of the
estimate. Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price. Although the Portfolio will generally enter into
forward commitments with the intention of acquiring securities for the Portfolio
or for delivery pursuant to options contracts it has entered into, the Portfolio
may dispose of a commitment prior to settlement if the Sub-advisor deems it
appropriate to do so. The Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its
portfolio positions or to sell securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction. Unsettled TBA sale commitments are valued at
current market value of the underlying securities. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss on the commitment without regard to any
unrealized gain or loss on the underlying security. If the Portfolio delivers
securities under the commitment, the Portfolio realizes a gain or loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Portfolio's present intention to enter into repurchase agreements only
with commercial banks and registered broker-dealers and only with respect to
obligations of the U.S. government or its agencies or instrumentalities.
Repurchase agreements may also be viewed as loans made by the Portfolio which
are collateralized by the securities subject to repurchase. The Sub-advisor will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. For an additional discussion of
repurchase agreements and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options
and covered put options on optionable securities held in its portfolio, when in
the opinion of the Sub-advisor such transactions are consistent with the
Portfolio's investment objective and policies. Call options written by the
Portfolio give the purchaser the right to buy the underlying securities from the
Portfolio at a stated exercise price; put options give the purchaser the right
to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or comparable securities satisfying
the cover requirements of securities exchanges). In the case of put options, the
Portfolio will hold cash or other liquid assets equal to the price to be paid if
the option is exercised. In addition, the Portfolio will be considered to have
covered a put or call option if and to the extent that it holds an option that
offsets some or all of the risk of the option it has written. The Portfolio may
write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying
security, and when it writes a put option, the Portfolio may be required to
deposit cash or securities with its broker as "margin," or collateral, for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Portfolio may have to deposit additional margin
with the broker. Margin requirements are complex and are fixed by individual
brokers, subject to minimum requirements currently imposed by the Federal
Reserve Board and by stock exchanges and other self-regulatory organizations.
For an additional discussion of options transactions, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to
protect its holdings in an underlying security against a decline in market
value. Such protection is provided during the life of the put option since the
Portfolio, as holder of the option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs. By using put options in this manner,
the Portfolio will reduce any profit it might otherwise have realized from
appreciation of the underlying security by the premium paid for the put option
and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to
hedge against an increase in the price of securities that the Portfolio wants
ultimately to buy. Such hedge protection is provided during the life of the call
option since the Portfolio, as holder of the call option, is able to buy the
underlying security at the exercise price regardless of any increase in the
underlying security's market price. In order for a call option to be profitable,
the market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the
Portfolio's options strategies depends on the ability of the Sub-advisor to
forecast correctly interest rate and market movements. The effective use of
options also depends on the Portfolio's ability to terminate option positions at
times when the Sub-advisor deems it desirable to do so. There is no assurance
that the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Portfolio as a holder of an option would be able to
realize profits or limit losses only by exercising the option, and the
Portfolio, as option writer, would remain obligated under the option until
expiration or exercise.
Disruptions in the markets for the securities underlying options
purchased or sold by the Portfolio could result in losses on the options. If
trading is interrupted in an underlying security, the trading of options on that
security is normally halted as well. As a result, the Portfolio as purchaser or
writer of an option will be unable to close out its positions until options
trading resumes, and it may be faced with considerable losses if trading in the
security reopens at a substantially different price. In addition, the Options
Clearing Corporation or other options markets may impose exercise restrictions.
If a prohibition on exercise is imposed at the time when trading in the option
has also been halted, the Portfolio as purchaser or writer of an option will be
locked into its position until one of the two restrictions has been lifted. If
the Options Clearing Corporation were to determine that the available supply of
an underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Portfolio, as holder of such a put option, could
lose its entire investment if the prohibition remained in effect until the put
option's expiration.
Foreign-traded options are subject to many of the same risks presented
by internationally-traded securities. In addition, because of time differences
between the United States and various foreign countries, and because different
holidays are observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are closed. As a
result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets
held to cover OTC options written by the Portfolio may, under certain
circumstances, be considered illiquid securities for purposes of any limitation
on the Portfolio's ability to invest in illiquid securities. For an additional
discussion of certain risks involved in options transactions, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the
Portfolio may invest without limit in the types of futures contracts and related
options identified in the Prospectus for hedging and non-hedging purposes. The
use of futures and options transactions for purposes other than hedging entails
greater risks. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until on or near that date. The determination
is made in accordance with the rules of the exchange on which the futures
contract sale or purchase was made. Futures contracts are traded in the United
States only on commodity exchanges or boards of trade -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions
at any time prior to their expiration in order to reduce or eliminate a hedge
position then currently held by the Portfolio. The Portfolio may close its
positions by taking opposite positions which will operate to terminate the
Portfolio's position in the futures contracts. Final determinations of variation
margin are then made, additional cash is required to be paid by or released to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs. For an additional discussion
of futures contracts and related options, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call
and put options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on future contracts give the purchaser the right in return for the
premium paid to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Portfolio may
use options on futures contracts in lieu of writing or buying options directly
on the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
securities, the Portfolio may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the
Portfolio may purchase call options or write put options on futures contracts as
a substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Portfolio expects to purchase.
Such options generally operate in the same manner as options purchased or
written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected. For an additional
discussion of options on futures contracts, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options.
Successful use of futures contracts by the Portfolio is subject to the
Sub-advisor's ability to predict movements in various factors affecting
securities markets, including interest rates. Compared to the purchase or sale
of futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Portfolio because the maximum amount at risk
is the premium paid for the options (plus transaction costs). However, there may
be circumstances when the purchase of a call or put option on a futures contract
would result in a loss to the Portfolio when the purchase or sale of a futures
contract would not, such as when there is no movement in the prices of the
hedged investments. The writing of an option on a futures contract involves
risks similar to those risks relating to the sale of futures contracts. For an
additional discussion of certain risks involved in futures contracts and related
options, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
U.S. Treasury Security Futures Contracts and Options. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right in return for the premium paid to assume
a position in a U.S. Treasury security futures contract at the specified option
exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the
Portfolio is subject to the Sub-advisor's ability to predict movements in the
direction of interest rates and other factors affecting markets for debt
securities. For example, if the Portfolio has sold U.S. Treasury security
futures contracts in order to hedge against the possibility of an increase in
interest rates which would adversely affect securities held by the Portfolio,
and the prices of the Portfolio's securities increase instead as a result of a
decline in interest rates, the Portfolio will lose part or all of the benefit of
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily maintenance margin requirements at a time when it may be disadvantageous
to do so. There is also a risk that price movements in U.S. Treasury security
futures contracts and related options will not correlate closely with price
movements in markets for particular securities.
Index Futures Contracts. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Portfolio may enter into stock index
futures contracts, debt index futures contracts, or other index futures
contracts appropriate to its objective. The Portfolio may also purchase and sell
options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index
("S&P 500") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 assigns relative weightings to the
common stocks included in the Index, and the value fluctuates with changes in
the market values of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Portfolio enters into a futures contract to buy 500 units of
the S&P 500 at a specified future date at a contract price of $150 and the S&P
500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x
gain of $4). If the Portfolio enters into a futures contract to sell 500 units
of the stock index at a specified future date at a contract price of $150 and
the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500
units x loss of $2).
There are several risks in connection with the use by the Portfolio of
index futures. One risk arises because of the imperfect correlation between
movements in the prices of the index futures and movements in the prices of
securities which are the subject of the hedge. The Sub-advisor will, however,
attempt to reduce this risk by buying or selling, to the extent possible,
futures on indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the securities sought to
be hedged.
Successful use of index futures by the Portfolio is also subject to the
Sub-advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities. It is also
possible that, if the Portfolio has hedged against the possibility of a decline
in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit of the increased value of those securities it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the portion of the Portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Sub-advisor may still not result in a
profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
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
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
Options on Indices. As an alternative to purchasing call and put
options on index futures, the Portfolio may purchase and sell call and put
options on the underlying indices themselves. Such options would be used in a
manner identical to the use of options on index futures. For an additional
discussion of options on indices and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 20% of its total
assets in securities traded in foreign securities markets. American depositary
receipts and Eurodollar certificates of deposit are not included in this
limitation. For a discussion of certain risks involved in foreign investing, in
general, and the special risks involved in investing in developing countries or
"emerging markets," see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage without limit
in currency exchange transactions, including purchasing and selling foreign
currency, foreign currency options, foreign currency forward contracts and
foreign currency futures contracts and related options, to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Portfolio may write covered call and put options on foreign currencies for the
purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and
"position hedging." When it engages in transaction hedging, the Portfolio enters
into foreign currency transactions with respect to specific receivables or
payables, generally arising in connection with the purchase or sale of portfolio
securities. The Portfolio will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Portfolio will attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is earned, and the date on which such payments are
made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency. The
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until the expiration of the option. A put option on a currency gives the
Portfolio the right to sell the currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the
Portfolio the right to assume a long position in the futures contract until the
expiration of the option. A call option on a currency gives the Portfolio the
right to purchase the currency at the exercise price until the expiration of the
option.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which its portfolio securities are denominated (or an
increase in the value of currency for securities which the Portfolio expects to
purchase). In connection with position hedging, the Portfolio may purchase put
or call options on foreign currency and on foreign currency futures contracts
and buy or sell forward contracts and foreign currency futures contracts. The
Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some
of the costs of hedging against fluctuations in current exchange rates by
writing covered call options and covered put options on foreign currencies. The
Portfolio receives a premium from writing a call or put option, which increases
the Portfolio's current return if the option expires unexercised or is closed
out at a net profit. The Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency and may at
times not involve currencies in which its portfolio securities are then
denominated. The Sub-advisor will engage in such "cross hedging" activities when
it believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by the Portfolio involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign
currencies, may be affected by complex political and economic factors applicable
to the issuing country. In addition, the exchange rates of foreign currencies
(and therefore the values of foreign currency options, forward contracts and
futures contracts) may be affected significantly, fixed, or supported directly
or indirectly by U.S. and foreign government actions. Government intervention
may increase risks involved in purchasing or selling foreign currency options,
forward contracts and futures contracts, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures
contract reflects the value of an exchange rate, which in turn reflects relative
values of two currencies, the U.S. dollar and the foreign currency in question.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign currency options, forward contracts and futures contracts, investors may
be disadvantaged by having to deal in an odd-lot market for the underlying
foreign currencies in connection with options at prices that are less favorable
than for round lots. Foreign governmental restrictions or taxes could result in
adverse changes in the cost of acquiring or disposing of foreign currencies.
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.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (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 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. For an additional discussion of foreign currency
transactions and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either
may accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the foreign currency futures contracts may be closed out
only on an exchange or board of trade which provides a secondary market in such
contracts. Although the Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies
operate similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily in the
over-the-counter market, although options on foreign currencies are also listed
on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when
the Sub-advisor believes that a liquid secondary market exists for such options.
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
investments generally.
Settlement Procedures. Settlement procedures relating to the
Portfolio's investments in foreign securities and to the Portfolio's foreign
currency exchange transactions may be more complex than settlements with respect
to investments in debt or equity securities of U.S. issuers, and may involve
certain risks not present in the Portfolio's domestic investments. For example,
settlement of transactions involving foreign securities or foreign currencies
may occur within a foreign country, and the Portfolio may be required to accept
or make delivery of the underlying securities or currency in conformity with any
applicable U.S. or foreign restrictions or regulations, and may be required to
pay any fees, taxes or charges associated with such delivery. Such investments
may also involve the risk that an entity involved in the settlement may not meet
its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Putnam Balanced Portfolio.
These limitations are not "fundamental" restrictions, and may be changed by the
Trustees without shareholder approval. The Portfolio will not:
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1. Invest for the purpose of exercising control or management;
2. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
3. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, excluding
securities determined by the Trustees of the Trust (or the person designated by
the Trustees of the Trust to make such determinations) to be readily marketable,
and (c) repurchase agreements maturing in more than seven days, if, as a result,
more than 15% of the Portfolio's net assets (taken at current value) would be
invested in securities described in (a), (b) and (c) above;
4. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities, and except
that it may make margin payments in connection with financial futures contracts
or options;
5. Make short sales of securities or maintain a short position for the
account of the Portfolio unless at all times when a short position is open it
owns an equal amount of such securities or owns securities which, without
payment of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the securities sold
short.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
Investment Objective and Policy Applicable to All Portfolios:
In order to permit the sale of shares of the Trust to separate accounts
of Participating Insurance Companies in certain states, the Trust may make
commitments more restrictive than the restrictions described in the section of
this Statement entitled "Investment Restrictions." Should the Trust determine
that any such commitment is no longer in the best interests of the Trust and its
shareholders it will revoke the commitment and terminate sales of its shares in
the state(s) involved.
The Board of Trustees of the Trust may, from time to time, promulgate
guidelines with respect to the investment policies of the Portfolios.
INVESTMENT RESTRICTIONS:
The investment restrictions set forth below are "fundamental" policies.
See the subsection of this Statement entitled "Investment Objectives and
Policies" for further discussion of "fundamental" policies of the Trust and the
requirements for changing such "fundamental" policies. Investment policies that
are not "fundamental" may be found in the general description of the Investment
Policies of each Portfolio, as described in the section of the Trust's
Prospectus entitled "Investment Objectives and Policies" and in the section of
this Statement entitled "Investment Objectives and Policies."
The investment restrictions below apply only to the Portfolio or
Portfolios described in the text preceding the restrictions.
Investment Restrictions Applicable to All of the Portfolios Except the AST Janus
Overseas Growth Portfolio, T. Rowe Price Asset Allocation Portfolio, the T. Rowe
Price International Equity Portfolio, the T. Rowe Price Natural Resources
Portfolio, the T. Rowe Price International Bond Portfolio, the T. Rowe Price
Small Company Value Portfolio, the Founders Passport Portfolio, the Robertson
Stephens Value + Growth Portfolio, the Twentieth Century International Growth
Portfolio, the Twentieth Century Strategic Balanced Portfolio, the AST Putnam
Value Growth & Income Portfolio, the AST Putnam International Equity Portfolio
and the AST Putnam Balanced Portfolio.
1. A Portfolio will not purchase securities of other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of securities of closed-end
investment companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved and only if immediately
thereafter not more than 10% of this Portfolio's total assets, at market value,
would be invested in such securities, or by investing no more than 5% of the
Portfolio's total assets in other open-end investment companies or by purchasing
no more than 3% of any one open-end investment company's securities.
2. A Portfolio will not buy any securities or other property on margin
(except for such short-term credits as are necessary for the clearance of
transactions).
3. A Portfolio will not invest in companies for the purpose of exercising
control or management.
4. A Portfolio will not underwrite securities issued by others except to the
extent that the Portfolio may be deemed an underwriter when purchasing or
selling securities.
5. A Portfolio will not purchase or retain securities of any issuer (other than
the shares of such Portfolio) if to the Trust's knowledge, the officers and
Trustees of the Trust and the officers and directors of the Investment Manager
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.
6. A Portfolio will not issue senior securities.
Investment Restrictions Applicable Only to the Lord Abbett Growth and
Income Portfolio:
1. The Portfolio will not purchase a security if as a result, that Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. The Portfolio will not lend money or securities to any person except through
entering into short-term repurchase agreements with sellers of securities the
Portfolio has purchased, and through lending Portfolio securities to registered
broker-dealers where the loan is 100% secured by cash or its equivalent as long
as the Portfolio complies with regulatory requirements and the Sub-advisor deems
such loans not to expose the Portfolio to significant risk or adversely affect
the Portfolio's qualification for pass-through tax treatment under the Internal
Revenue Code (investment in repurchase agreements exceeding 7 days and in other
illiquid investments is limited to a maximum of 10% of Portfolio net assets).
3. The Portfolio will not pledge, mortgage, or hypothecate its assets --
however, this provision does not apply to the grant of escrow receipts or the
entry into other similar escrow arrangements arising out of the writing of
covered call options.
4. The Portfolio will not purchase securities of any issuer unless it or its
predecessor has a record of three years' continuous operation, except that the
Portfolio may purchase securities of such issuers through subscription offers or
other rights it receives as a security holder of companies offering such
subscriptions or rights, and such purchases will then be limited in the
aggregate to 5% of the Portfolio's net assets at the time of investment.
5. The Portfolio will not concentrate its investments in any one industry (the
Portfolio's investment policy of keeping its assets in those securities which
are selling at the most reasonable prices in relation to value normally results
in diversification among many industries -- consistent with this, the Portfolio
does not intend to invest more than 25% of its assets in any one industry
classification used by the Sub-advisor for investment purposes, although such
concentration could, under unusual economic and market conditions, amount to 30%
or conceivably somewhat more).
6. The Portfolio will not borrow money except from banks and then in amounts not
in excess of 33 1/3% of its total assets. The Portfolio may borrow at prevailing
interest rates and invest the Portfolios in additional securities. The
Portfolio's borrowings are limited so that immediately after such borrowing the
value of the Portfolio's assets (including borrowings) less its liabilities (not
including borrowings) is at least three times the amount of the borrowings.
Should the Portfolio, for any reason, have borrowings that do not meet the above
test then, within three business days, the Portfolio must reduce such borrowings
so as to meet the necessary test. Under such a circumstance, the Portfolio have
to liquidate securities at a time when it is disadvantageous to do so.
7. The Portfolio will not make short sales except short sales made "against the
box" to defer recognition of taxable gains or losses.
<PAGE>
8. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or interests
therein).
9. The Portfolio will not invest directly in oil, gas, or other mineral
exploration or development programs; however, the Portfolio may purchase
securities of issuers whose principal business activities fall within such
areas.
10. The Portfolio will not purchase a security if as a result, more than 5% of
the value of that Portfolio's assets, at market value, would be invested in the
securities of issuers which, with their predecessors, have been in business less
than three years.
Investment Restrictions Applicable Only to the JanCap Growth Portfolio:
1. The Portfolio will not purchase a security if as a result, that Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest
more than 5% of its total assets, at market value, in the securities of any one
issuer (except cash items and securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
3. The Portfolio will not purchase a security if as a result, more than 25% of
its total assets, at market value, would be invested in the securities of
issuers principally engaged in the same industry (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities).
4. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or interests
therein).
5. The Portfolio will not purchase or sell physical commodities other than
foreign currencies unless acquired as a result of ownership of securities (but
this shall not prevent the Portfolio from purchasing or selling options,
futures, swaps and forward contracts or from investing in securities and other
instruments backed by physical commodities).
6. The Portfolio will not lend any security or make any other loan, if as a
result, more than 25% of its total assets would be lent to other parties (but
this limitation does not apply to purchases of commercial paper, debt securities
or to repurchase agreements).
Investment Restrictions Applicable Only to the AST Janus Overseas Growth
Portfolio:
1. The Portfolio may borrow money for temporary or emergency purposes (not for
leveraging or investment) in an amount not exceeding 33 1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). If borrowings exceed 33 1/3% of the value of the Portfolio's total
assets by reason of a decline in net assets, the Portfolio will reduce its
borrowings within three business days to the extent necessary to comply with the
33 1/3% limitation. This policy shall not prohibit reverse repurchase
agreements, deposits of assets to margin or guarantee positions in futures,
options, swaps or forward contracts, or the segregation of assets in connection
with such contracts.
2. The Portfolio will not, as to 75% of the value of its total assets, own more
than 10% of the outstanding voting securities of any one issuer, or purchase the
securities of any one issuer (except cash items and "government securities" as
defined under the 1940 Act as amended), if immediately after and as a result of
such purchase, the value of the holdings of the Portfolio in the securities of
such issuer exceeds 5% of the value of its total assets.
3. The Portfolio will not invest more than 25% of the value of its assets
in any particular industry (other than U.S. government securities).
4. The Portfolio will not invest directly in real estate or interests in real
estate; however, the Portfolio may own debt or equity securities issued by
companies engaged in those businesses.
5. The Portfolio will not purchase or sell physical commodities other than
foreign currencies unless acquired as a result of ownership of securities (but
this limitation shall not prevent the Portfolio from purchasing or selling
options, futures, swaps and forward contracts or from investing in securities or
other instruments backed by physical commodities).
6. The Portfolio will not lend any security or make any other loan if, as a
result, more than 25% of the Portfolio's total assets would be lent to other
parties (but this limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements).
7. The Portfolio will not act as an underwriter of securities issued by others,
except to the extent that the Portfolio may be deemed an underwriter in
connection with the disposition of its securities.
8. The Portfolio will not issue senior securities except in compliance with
the 1940 Act.
Investment Restrictions Applicable Only to the AST Money Market Portfolio:
1. The Portfolio will not purchase a security if as a result, the Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest
more than 5% of its total assets, at market value, in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
3. The Portfolio will not acquire any illiquid securities, such as repurchase
agreements with more than seven days to maturity or fixed time deposits with a
duration of over seven calendar days, if as a result thereof, more than 10% of
the market value of the Portfolio's total assets would be in investments which
are illiquid.
4. The Portfolio will not purchase a security if as a result, more than 25% of
its total assets, at market value, would be invested in the securities of
issuers principally engaged in the same industry (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, negotiable
certificates of deposit, time deposits, and bankers' acceptances of United
States branches of United States banks).
5. The Portfolio will not enter into reverse repurchase agreements exceeding in
the aggregate one-third of the market value of the Portfolio's total assets,
less liabilities other than obligations created by reverse repurchase
agreements.
6. The Portfolio will not borrow money, except from banks for extraordinary or
emergency purposes and then only in amounts not to exceed 10% of the value of
the Portfolio's total assets, taken at cost, at the time of such borrowing. The
Portfolio may not mortgage, pledge or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 10% of the value
of the Portfolio's net assets at the time of such borrowing. The Portfolio will
not purchase securities while borrowings exceed 5% of the Portfolio's total
assets. This borrowing provision is included to facilitate the orderly sale of
securities, for example, in the event of abnormally heavy redemption requests,
and is not for investment purposes and shall not apply to reverse repurchase
agreements.
7. The Portfolio will not make loans, except through purchasing or holding debt
obligations, or entering into repurchase agreements, or loans of Portfolio
securities in accordance with the Portfolio's investment objectives and
policies.
8. The Portfolio will not purchase securities on margin, make short sales of
securities, or maintain a short position, provided that this restriction shall
not be deemed to be applicable to the purchase or sale of when-issued securities
or of securities for delivery at a future date.
9. The Portfolio will not purchase or sell puts, calls, straddles, spreads, or
any combination thereof; real estate; commodities; or commodity contracts or
interests in oil, gas or mineral exploration or development programs. However,
the Portfolio may purchase bonds or commercial paper issued by companies which
invest in real estate or interests therein including real estate investment
trusts.
Investment Restrictions Applicable Only to the Federated Utility Income
Portfolio:
1. The Portfolio will invest at least 25% of its total assets in securities
of utility companies.
2. The Portfolio will not purchase or sell commodities. However, the
Portfolio may purchase options on Portfolio securities and on financial futures
contracts for hedging purposes only.
3. The Portfolio will not purchase or sell real estate, although it may invest
in securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
4. The Portfolio will not purchase any securities on margin, other than in
connection with the purchase of put options on financial futures contracts, but
may obtain such short-term credits as may be necessary for the clearance of
transactions.
5. The Portfolio will not sell securities short unless: (i) during the time the
short position is open, it owns an equal amount of securities sold or securities
readily and freely convertible into or exchangeable, without payment of
additional consideration, for securities of the same issue as, and equal in
amount to, the securities sold short; and (ii) not more than 10% of the current
value of the Portfolio's net assets is held as collateral for such sales at any
one time.
6. The Portfolio will not issue senior securities, except that the Portfolio may
borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its net assets, including the amounts borrowed.
7. The Portfolio will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary, extraordinary or
emergency measure to facilitate management of the Portfolio by enabling the
Portfolio to meet redemption requests when the liquidation of Portfolio
securities is deemed to be inconvenient or disadvantageous. The Portfolio will
not purchase any securities while any such borrowings are outstanding. However,
during the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Portfolio will restrict the purchase of portfolio investments to money
market instruments maturing on or before the expiration date of the reverse
repurchase agreements.
8. The Portfolio may lend Portfolio securities, as long as the value of the
loaned securities does not exceed one-third of the value of the Portfolio's
total assets. This shall not prevent the holding of corporate bonds, debentures,
notes, certificates of indebtedness or other debt securities of an issuer,
repurchase agreements, or other transactions which are permitted by the
Portfolio's Investment Objective and Policies.
9. The Portfolio will not invest more than 10% of its total assets in
restricted securities.
10. The Portfolio will not purchase interests in oil, gas or other mineral
exploration or development programs or leases, although it may purchase
securities of issuers which engage in whole or in part in such activities.
11. The Portfolio will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have been in
operation for less than three years.
12. The Portfolio will not purchase the securities of any issuer (other than the
U.S. government, its agencies, or instrumentalities or instruments secured by
the securities of such issuers, such as repurchase agreements or cash or cash
items) if, as a result, more than 5% of the value of its total assets would be
invested in the securities of such issuer, or acquire more than 10% of any class
of voting securities of any issuer. For these purposes, all common stock and
preferred stock of an issuer, taken together, will be deemed to be a single
class, regardless of priorities, series, designations, or other differences.
13. The Portfolio will not invest more than 5% of its net assets in warrants,
not more than 2% of which may be warrants not listed on the New York Stock
Exchange or American Stock Exchange.
Investment Restrictions Applicable Only to the Federated High Yield Portfolio:
1. The Portfolio will not purchase any securities on margin but may obtain
such short-term credits as may be necessary for the clearance of transactions.
2. The Portfolio will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only from banks and only in amounts
not in excess of 5% of the value of its net assets, taken at the lower of cost
or market. In addition, to meet redemption requests without immediately selling
portfolio securities, the Portfolio may borrow up to one-third of the value of
its total assets (including the amount borrowed) less its liabilities (not
including borrowings, but including the current fair market value of any
securities carried in open short positions). This practice is not for investment
leverage but solely to facilitate management of the portfolio by enabling the
Portfolio to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. If, due to market
fluctuations or other reasons, the value of the Portfolio's assets falls below
300% of its borrowings, it will reduce its borrowings within three business
days. No more than 10% of the value of the Portfolio's total assets at the time
of providing such security may be used to secure borrowings.
3. The Portfolio will not invest more than 5% of its total assets in the
securities of any one issuer (except cash and cash instruments, securities
issued or guaranteed by the U.S. government, its agencies, or instrumentalities,
or instruments secured by these money market instruments, such as repurchase
agreements).
4. The Portfolio will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have been in
operation for less than three years.
5. The Portfolio will not invest more than 5% of the value of its total
assets in foreign securities which are not publicly traded in the United States.
6. The Portfolio will not purchase or sell real estate, although it may invest
in marketable securities secured by real estate or interests in real estate, and
it may invest in the marketable securities of companies investing or dealing in
real estate.
7. The Portfolio will not purchase or sell commodities or commodity contracts or
oil, gas, or other mineral exploration or development programs. However, it may
invest in the marketable securities of companies investing in or sponsoring such
programs.
8. The Portfolio will not make loans, except through the purchase or holding of
securities in accordance with its investment objective, policies, and
limitations and through repurchase agreements. The Portfolio may invest up to 5%
of its total assets in repurchase agreements which mature more than seven days
from the time they are entered into. The Portfolio may lend portfolio securities
if the borrower provides 100% cash collateral in the form of cash or U.S.
government securities. This collateral must be valued daily and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral. The Portfolio retains the right to any dividends,
interest, or other distribution paid on the securities and any increase in their
market value. Loans will be subject to termination at the option of the
Portfolio or the borrower.
9. The Portfolio will not write, purchase, or sell puts, calls, or any
combination thereof.
10. The Portfolio will not make short sales of securities or maintain short
positions, unless: during the time the short position is open, it owns an equal
amount of the securities sold or securities readily and freely convertible into
or exchangeable, without payment of additional consideration, for securities of
the same issue as, and equal in amount to, the securities sold short; and not
more than 10% of the Portfolio's net assets (taken at current value) is held as
collateral for such sales at any one time.
11. The Portfolio will not purchase securities of a company for the purpose of
exercising control or management. However, the Portfolio may invest in up to 10%
of the voting securities of any one issuer and may exercise its voting powers
consistent with the best interests of the Portfolio. From time to time, the
Portfolio, together with other investment companies advised by subsidiaries or
affiliates of Federated Investors, may together buy and hold substantial amounts
of a company's voting stock. All such stock may be voted together. In some such
cases, the Portfolio and the other investment companies might collectively be
considered to be in control of the company in which they have invested. In some
cases, Directors, agents, employees, officers, or others affiliated with or
acting for the Portfolio, its Sub-advisor, or affiliated companies might
possibly become directors of companies in which the Portfolio holds stock.
12. The Portfolio will not invest more than 25% of the value of its total assets
in one industry. However, for temporary defensive purposes, the Portfolio may at
times invest more than that percentage in: cash and cash items; securities
issued or guaranteed by the U.S. government, its agencies, or instrumentalities;
or instruments secured by these money market instruments, such as repurchase
agreements.
<PAGE>
Investment Restrictions Only Applicable to the T. Rowe Price Asset
Allocation Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may or may be
deemed to involve a borrowing, in a manner consistent with the Portfolio's
investment objective and policies, provided that the combination of (i) and (ii)
shall not exceed 33 1/3% of the value of the Portfolio's total assets (including
the amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this amount
will be reduced in accordance with applicable law. The Portfolio may borrow from
banks, other Price Portfolios or other persons to the extent permitted by
applicable law;
2. Purchase or sell physical commodities; except that it may enter into
futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) purchase money market securities
and enter into repurchase agreements; (ii) acquire publicly- distributed or
privately placed debt securities and purchase debt; (iii) lend portfolio
securities; and (iv) participate in an interfund lending program with other
Price Portfolios provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's
total assets;
5. Purchase a security if, as a result, with respect to 75% of the value of
its total assets, more than 5% of the value of the Portfolio's total assets
would be invested in the securities of a single issuer, except securities issued
or guaranteed by the U.S. government, or any of its agencies or
instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of
the Portfolio's total assets, more than 10% of the outstanding voting securities
of any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above
described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow or lend to any other fund unless it applies for and receives an
exemptive order from the SEC, if so required, or the SEC issues rules permitting
such transactions. The Portfolio has no current intention of engaging in any
such activity and there is no assurance the SEC would grant any order requested
by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts on hybrid investments to be commodities.
For the purposes of investment restriction (3), United States federal,
state or local governments, or related agencies and instrumentalities, are not
considered an industry. Foreign governments are considered an industry.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Only Applicable to the T. Rowe Price International
Equity Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may or may be
deemed to involve a borrowing, in a manner consistent with the Portfolio's
investment objective and policies, provided that the combination of (i) and (ii)
shall not exceed 33 1/3% of the value of the Portfolio's total assets (including
the amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this amount
will be reduced in accordance with applicable law. The Portfolio may borrow from
banks, other Price Portfolios or other persons to the extent permitted by
applicable law;
2. Purchase or sell physical commodities; except that the Portfolio may
enter into futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) purchase money market securities
and enter into repurchase agreements; (ii) acquire publicly-distributed or
privately placed debt securities and purchase debt; (iii) lend portfolio
securities; and (iv) participate in an interfund lending program with other
Price Portfolios provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's
total assets;
5. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 5% of the value of its total assets would be
invested in the securities of any one issuer (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
6. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments back by real estate or securities
of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above
described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow or lend to any other fund unless it applies for and receives an
exemptive order from the SEC, if so required, or the SEC issues rules permitting
such transactions. The Portfolio has no current intention of engaging in any
such activity and there is no assurance the SEC would grant any order requested
by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts or hybrid investments to be commodities.
For the purposes of investment restriction (3), United States federal,
state or local governments, or related agencies and instrumentalities, are not
considered an industry. Foreign governments are considered an industry.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the T. Rowe Price Natural
Resources Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Portfolio's investment objective and
program, provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The Portfolio may borrow from banks, other Price
Portfolios or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that it may enter into
futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) lend portfolio securities and
participate in an interfund lending program with other Price Portfolio provided
that no such loan may be made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Portfolio's total assets; (ii) purchase money
market securities and enter into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities and purchase debt;
5. Purchase a security if, as a result, with respect to 75% of the value of its
total assets, more than 5% of the value of the Portfolio's total assets would be
invested in the securities of a single issuer, except securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or in
securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the
above-described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow from or lend to any other fund unless it applies for and receives an
exemptive order from the SEC, if so required, or the SEC issues rules permitting
such transactions. The Portfolio has no current intention of engaging in any
such activity and there is no assurance the SEC would grant any order requested
by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered an
industry. Industries are determined by reference to the classifications of
industries set forth in the Portfolio's semi-annual and annual reports.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the T. Rowe Price International
Bond Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Borrow money, except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase agreements
provided that the Portfolio maintains asset coverage of 300% for all borrowings;
2. Purchase or sell real estate (except that the Portfolio may invest in (i)
securities of companies which deal in real estate or mortgages, and (ii)
securities secured by real estate or interests therein, and that the Portfolio
reserves freedom of action to hold and to sell real estate acquired as a result
of the Portfolio's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities;
3. Act as underwriter of securities issued by others, except to the extent
that it may be deemed an underwriter in connection with the disposition of
portfolio securities of the Portfolio;
4. Make loans to other persons, except (a) loans of portfolio securities, and
(b) to the extent the entry into repurchase agreements and the purchase of debt
securities in accordance with its investment objectives and investment policies
may be deemed to be loans;
5. Issue senior securities except in compliance with the 1940 Act; or
6. Purchase any securities which would cause more than 25% of the market value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers having their principal business activities in
the same industry, provided that there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (for the purposes of this restriction, telephone
companies are considered to be in a separate industry from gas and electric
public utilities, and wholly-owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents).
Investment Restrictions Applicable Only to the T. Rowe Price Small Company
Value Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Portfolio's investment objective and
program, provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The Portfolio may borrow from banks, and other
funds or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that it may enter into
futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) lend portfolio securities and
participate in an interfund lending program to the extent permitted by
applicable law, provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's
total assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly-distributed or privately-placed debt
securities and purchase debt;
<PAGE>
5. Purchase a security if, as a result, with respect to 75% of the value of its
total assets, more than 5% of the value of the Portfolio's total assets would be
invested in the securities of a single issuer, except securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or in
securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the
above-described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow from or lend to any other fund unless it applies for and receives an
exemptive order from the SEC, if so required, or the SEC issues rules permitting
such transactions. The Portfolio has no current intention of engaging in any
such activity and there is no assurance the SEC would grant any order requested
by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered an
industry.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the Founders Capital
Appreciation Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions.
2. Sell securities short.
3. Make loans to other persons; the purchase of a portion of an issue of
publicly distributed bonds, debentures or other securities is not considered the
making of a loan by the Portfolio. The Portfolio may also enter into repurchase
agreements by purchasing U.S. Government securities with a simultaneous
agreement with the seller to repurchase them at the original purchase price plus
accrued interest.
4. Underwrite the securities of other issuers.
5. Invest in commodities, commodity futures contracts, real estate, real estate
mortgage loans or other illiquid interests in real estate, except that the
Portfolio may invest in securities of issuers which invest in commodities,
commodity futures, real estate, real estate mortgage loans or other illiquid
interests in real estate.
6. Make any investment which would concentrate 25% or more of the Portfolio's
total assets in the securities of issuers having their principal business
activities in the same industry, provided that this limitation does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
7. Issue any senior securities.
8. Borrow money, except for extraordinary or emergency purposes, and then only
from banks in amounts up to 10% of the Portfolio's net assets computed at the
lesser of cost or value.
In applying the above restriction regarding investments in a single
industry, the Portfolio uses industry classifications based, where applicable,
on Bridge Information Systems, Reuters, the S&P Stock Guide published by
Standard & Poor's, information obtained from Bloomberg L.P. and Moody's
International, and/or the prospectus of the issuing company. Selection of an
appropriate industry classification resource will be made by the Sub-advisor in
the exercise of its reasonable discretion. (This note is not a fundamental
policy.)
Investment Restrictions Applicable Only to the Founders Passport Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Make loans of money or securities other than (a) through the purchase of
securities in accordance with the Portfolio's investment objective, (b) through
repurchase agreements, and (c) by lending portfolio securities in an amount not
to exceed 33 1/3% of the Portfolio's total assets;
2. Underwrite securities issued by others except to the extent that the
Portfolio may be deemed an underwriter when purchasing or selling securities;
3. Issue senior securities;
4. Invest directly in physical commodities (other than foreign currencies), real
estate or interests in real estate; provided, that the Portfolio may invest in
securities of issuers which invest in physical commodities, real estate or
interests in real estate; and, provided further, that this restriction shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts, or from investing in securities or other instruments backed
by physical commodities, real estate or interests in real estate;
5. Make any investment which would concentrate 25% or more of the Portfolio's
total assets in the securities of issuers having their principal business
activities in the same industry, provided that this limitation does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
6. Borrow money except from banks in amounts up to 33 1/3% of the
Portfolio's total assets;
7. As to 75% of the value of its total assets, invest more than 5% of its
total assets, at market value, in the securities of any one issuer (except
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities); or
8. As to 75% of the value of its total assets, purchase more than 10% of any
class of securities of any single issuer or purchase more than 10% of the voting
securities of any single issuer.
In applying the above restriction regarding investments in a single
industry, the Portfolio uses industry classifications based, where applicable,
on Bridge Information Systems, Reuters, the S&P Stock Guide published by
Standard & Poor's, information obtained from Bloomberg L.P. and Moody's
International, and/or the prospectus of the issuing company. Selection of an
appropriate industry classification resource will be made by the Sub-advisor in
the exercise of its reasonable discretion. (This note is not a fundamental
policy.)
Investment Restrictions Applicable Only to the INVESCO Equity Income Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Issue preference shares or create any funded debt;
2. Sell short;
3. Borrow money except from banks in excess of 5% of the value of its total
net assets, and when borrowing, it is a temporary measure for emergency
purposes;
4. Buy or sell real estate, commodities, commodity contracts (however, the
Portfolio may purchase securities of companies investing in real estate);
5. Purchase any security or enter into a repurchase agreement, if as a result,
more than 15% of its net assets would be invested in repurchase agreements not
entitling the holder to payment of principal and interest within seven days and
in securities that are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market. The Trustees or the
Investment Manager or the Sub-advisor, acting pursuant to authority delegated by
the Trustees, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to that rule, and therefore that such securities are not
subject to the foregoing limitation;
6. Purchase securities if the purchase would cause the Portfolio, at the
time, to have more than 5% of its total assets invested in the securities of any
one company or to own more than 10% of the voting securities of any one company
(except obligations issued or guaranteed by the U.S. Government);
7. Make loans to any person, except through the purchase of debt securities in
accordance with the Portfolio's investment policies, or the lending of portfolio
securities to broker-dealers or other institutional investors, or the entering
into repurchase agreements with member banks of the Federal Reserve System,
registered broker-dealers and registered government securities dealers. The
aggregate value of all portfolio securities loaned may not exceed 33-1/3% of the
Portfolio's total net assets (taken at current value); or
8. Invest more than 25% of the value of the Portfolio's assets in one
particular industry.
Investment Restrictions Applicable Only to the PIMCO Total Return Bond
Portfolio:
1. The Portfolio will not invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market value at the time
of investment) would be invested in securities of issuers of a particular
industry, except that this restriction does not apply to securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities (or
repurchase agreements with respect thereto);
2. The Portfolio will not, with respect to 75% of its total assets, invest in a
security if, as a result of such investment, more than 5% of its total assets
(taken at market value at the time of investment) would be invested in the
securities of any one issuer, except that this restriction does not apply to
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities (or repurchase agreements with respect thereto);
3. The Portfolio will not, with respect to 75% of its assets, invest in a
security if, as a result of such investment, it would hold more than 10% (taken
at the time of investment) of the outstanding voting securities of any one
issuer;
4. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or securities issued by
companies which invest in real estate, or interests therein);
5. The Portfolio will not purchase or sell commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit the Portfolio, subject to
restrictions stated in the Trust's Prospectus and elsewhere in this Statement,
from purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or any
interest rate, securities related or foreign currency-related hedging
instrument, including swap agreements and other derivative instruments, subject
to compliance with any applicable provisions of the federal securities laws or
commodities laws;
6. The Portfolio will not borrow money, issue senior securities, pledge,
mortgage, hypothecate its assets, except that the Portfolio may (i) borrow from
banks or enter into reverse repurchase agreements, or employ similar investment
techniques, and pledge its assets in connection therewith, but only if
immediately after each borrowing there is an asset coverage of 300% and (ii)
enter into transactions in options, futures and options on futures and other
derivative instruments as described in the Trust's Prospectus and this Statement
(the deposit of assets in escrow in connection with the writing of covered put
and call options and the purchase of securities on a when-issued or delayed
delivery basis, collateral arrangements with respect to initial or variation
margin deposits for future contracts and commitments entered into under swap
agreements or other derivative instruments, will not be deemed to be pledges of
the Portfolio's assets);
7. The Portfolio will not lend funds or other assets, except that the Portfolio
may, consistent with its investment objective and policies: (a) invest in debt
obligations, including bonds, debentures or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of a loan, (b) enter into repurchase agreements,
and (c) lend its Portfolio securities in an amount not to exceed one-third the
value of its total assets, provided such loans are and in accordance with
applicable guidelines established by the SEC and the Trust's Board of Trustees;
or
8. The Portfolio will not maintain a short position, or purchase, write or sell
puts, calls, straddles, spreads or combinations thereof, except as set forth in
the Trust's Prospectus and this Statement for transactions in options, futures,
and options on futures transactions arising under swap agreements or other
derivative instruments.
Investment Restrictions Applicable Only to the PIMCO Limited Maturity Bond
Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Invest in a security if, as a result of such investment, more than 25% of its
total assets (taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
2. With respect to 75% of its assets, invest in a security if, as a result of
such investment, more than 5% of its total assets (taken at market value at the
time of such investment) would be invested in securities of any one issuer,
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities;
3. With respect to 75% of its assets, invest in a security if, as a result
of such investment, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one issuer;
4. Purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);
5. Purchase or sell commodities or commodities contracts or oil, gas or mineral
programs. This restriction shall not prohibit the Portfolio, subject to
restrictions described in the Prospectus and elsewhere in this Statement, from
purchasing, selling or entering into futures contracts, options, or any interest
rate, securities-related or foreign currency-related hedging instrument,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws;
6. Borrow money, issue senior securities, or pledge, mortgage or hypothecate its
assets, except that the Portfolio may (i) borrow from banks or enter into
reverse repurchase agreements, or employ similar investment techniques, and
pledge its assets in connection therewith, but only if immediately after each
borrowing there is asset coverage of 300% and (ii) enter into transactions in
options, futures and options on futures and other derivative instruments as
described in the Prospectus and in this Statement (the deposit of assets in
escrow in connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis, collateral
arrangements with respect to initial or variation margin deposits for futures
contracts and commitments entered into under swap agreements or other derivative
instruments, will not be deemed to be pledges of the Portfolio assets);
7. Lend any funds or other assets, except that a Portfolio may, consistent with
its investment objective and policies: (a) invest in debt obligations, including
bonds, debentures or other debt securities, banker' acceptance and commercial
paper, even though the purchase of such obligations may be deemed to be the
making of loans, (b) enter into repurchase agreements, and (c) lend its
portfolio securities in an amount not to exceed one-third of the value of its
total assets, provided such loans are made in accordance with applicable
guidelines established by the Securities and Exchange Commission and the Trust's
Board of Trustees; or
8. Maintain a short position, or purchase, write or sell puts, calls, straddles,
spreads or combinations thereof, except on such conditions as may be set forth
in the Prospectus and in this Statement.
Investment Restrictions Applicable Only to the Berger Capital Growth Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Purchase the securities of any one issuer (except U.S. Government securities)
if immediately after and as a result of such purchase (a) the value of the
holdings of the Portfolio in the securities of such issuer exceeds 5% of the
value of the Portfolio's total assets or (b) the Portfolio owns more than 10% of
the outstanding voting securities or of any class of securities of such issuer.
2. Purchase securities of any company with a record of less than three years'
continuous operation (including that of predecessors) if such purchase would
cause the Portfolio's investments in all such companies taken at cost to exceed
5% of the value of the Portfolio's total assets.
3. Invest in any one industry more than 25% of the value of its total
assets at the time of such investment.
4. Purchase securities on margin from a broker or dealer or make short
sales of securities.
5. Make loans, except that the Portfolio may enter into repurchase agreements in
accordance with the Trust's investment policies. The Portfolio does not, for
this purpose, consider the purchase of all or a portion of an issue of publicly
distributed bonds, bank loan participation agreements, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether or not
the purchase is made upon the original issuance of the securities, to be the
making of a loan.
6. Borrow in excess of 5% of the value of its total assets, or pledge, mortgage,
or hypothecate its assets taken at market value to an extent greater than 10% of
the Portfolio's total assets taken at cost (and no borrowing may be undertaken
except from banks as a temporary measure for extraordinary or emergency
purposes).
7. Act as a securities underwriter (except to the extent the Portfolio may be
deemed an underwriter under the Securities Act of 1933 in disposing of a
security), issue senior securities (except to the extent permitted under the
1940 Act), invest in real estate although it may purchase shares of a real
estate investment trust), or invest in commodities or commodity contracts.
8. Participate on a joint or joint and several basis in any securities
trading account.
Investment Restrictions Applicable Only to the Robertson Stephens Value +
Growth Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Issue any class of securities which is senior to the Portfolio's shares
of beneficial interest, except that the Portfolio may borrow money to the extent
contemplated by Restriction 3 below;
2. Purchase securities on margin (but the Portfolio may obtain such short-term
credits as may be necessary for the clearance of transactions). (Margin payments
or other arrangements in connection with transactions in short sales, futures
contracts, options, and other financial instruments are not considered to
constitute the purchase of securities on margin for this purpose.);
3. Borrow more than one-third of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not represented by
senior securities;
4. Act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities laws;
5. As to 75% of the Portfolio's total assets, purchase any security (other than
obligations of the U.S. Government, its agencies or instrumentalities) if as a
result: (i) more than 5% of the Portfolio's total assets (taken at current
value) would then be invested in securities of a single issuer, or (ii) more
than 25% of the Portfolio's total assets (taken at current value) would be
invested in a single industry;
6. Invest in securities of any issuer if any officer or Trustee of the Trust or
any officer or director of the Sub-advisor, as the case may be, owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers,
Trustees and directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer; or
7. Make loans, except by purchase of debt obligations or other financial
instruments in which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements, or through the lending of its
portfolio securities.
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
Investment Restrictions Applicable Only to the Twentieth Century
International Growth Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Lend its portfolio securities except to unaffiliated persons and subject to
the rules and regulations adopted under the 1940 Act. No such rules and
regulations have been issued, but it is Sub-advisor's policy that such loans
must be secured continuously by cash collateral maintained on a current basis in
an amount at least equal to the market value of the securities loaned, or by
irrevocable letters of credit. During the existence of the loan, the Portfolio
must continue to receive the equivalent of the interest and dividends paid by
the issuer on the securities loaned and interest on the investment of the
collateral; the Portfolio must have the right to call the loan and obtain the
securities loaned at any time on five days' notice, including the right to call
the loan to enable the Portfolio to vote the securities. To comply with the
regulations of certain state securities administrators, such loans may not
exceed one-third of the Portfolio's net assets taken at market;
2. With respect to 75% of the value of its total assets, purchase the security
of any one issuer if such purchase would cause more than 5% of the Portfolio's
assets at market to be invested in the securities of such issuer, except U.S.
government securities, or if the purchase would cause more than 10% of the
outstanding voting securities of any one issuer to be held in the Portfolio;
3. Invest more than 25% of the assets of the Portfolio, exclusive of cash
and U.S. government securities, in securities of any one industry;
4. Issue any senior security except in compliance with the 1940 Act;
5. Underwrite any securities except to the extent that the Portfolio may be
deemed an underwriter when purchasing or selling securities;
6. Purchase or sell real estate. (In the opinion of the Sub-advisor, this
restriction will not preclude the Portfolio from investing in securities of
corporations that deal in real estate);
7. Purchase or sell commodities or commodity contracts; except that the
Portfolio may, for non-speculative purposes, buy or sell interest rate futures
contracts on debt securities (debt futures and bond index futures) and related
options; or
8. Borrow any money, except in an amount not in excess of 33 1/3% of the total
assets of the Portfolio, and then only for emergency and extraordinary purposes;
this does not prohibit the escrow and collateral arrangements in connection with
investment in interest rate futures contracts and related options by the
Portfolio.
In determining industry groups for purposes of the above restriction
regarding investments in a single industry, the Securities and Exchange
Commission ordinarily uses the Standard Industry Classification codes developed
by the United States Office of Management and Budget. The Sub-advisor monitors
industry concentration using a more restrictive list of industry groups than
that recommended by the Securities and Exchange Commission. The Sub-advisor
believes that these classifications are reasonable and are not so broad that the
primary economic characteristics of the companies in a single class are
materially different. The use of these more restrictive industry classifications
may, however, cause the Portfolio to forego investment possibilities which may
otherwise be available to it under the 1940 Act. (This note is not a fundamental
policy.)
Investment Restrictions Applicable Only to the Twentieth Century Strategic
Balanced Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Lend its securities except to unaffiliated persons and subject to the rules
and regulations adopted under the 1940 Act. No such rules and regulations have
been promulgated, but it is the Sub-advisor's policy that such loans must be
secured continuously by cash collateral maintained on a current basis in an
amount at least equal to the market value of the securities loaned, or by
irrevocable letters of credit. During the existence of the loan, the Sub-advisor
must continue to receive the equivalent of the interest and dividends paid by
the issuer on the securities loaned and interest on the investment of the
collateral; the Portfolio must have the right to call the loan and obtain the
securities loaned at any time on five days' notice, including the right to call
the loan to enable the Portfolio to vote the securities. To comply with the
regulations of certain state securities administrators, such loans may not
exceed one-third of the Portfolio's net assets taken at market.
2. With respect to 75% of the value of its total assets, purchase the security
of any one issuer if such purchase would cause more than 5% of the Portfolio's
assets at market to be invested in the securities of such issuer, except United
States government securities, or if the purchase would cause more than 10% of
the outstanding voting securities of any one issuer to be held in the Portfolio;
3. Invest more than 25% of the assets of the Portfolio, exclusive of cash
and U.S. government securities, in securities of any one industry;
4. Issue any senior security except in compliance with the 1940 Act;
5. Underwrite any securities except to the extent that the Portfolio may be
deemed an underwriter when purchasing or selling securities;
6. Purchase or sell real estate. (In the opinion of the Sub-advisor, this
restriction will not preclude the Portfolio from investing in securities of
corporations that deal in real estate.);
7. Purchase or sell commodities or commodity contracts; except that the
Portfolio may, for non-speculative purposes, buy or sell interest rate futures
contracts on debt securities (debt futures and bond index futures) and related
options; or
8. Borrow any money, except in an amount not in excess of 33 1/3% of the total
assets of the Portfolio, and then only for emergency and extraordinary purposes;
this does not prohibit the escrow and collateral arrangements in connection with
investment in interest rate futures contracts and related options by the
Portfolio.
Investment Restrictions Applicable Only to the AST Putnam Value Growth & Income
Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Borrow money in excess of 33 1/3% of the value (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed) at the
time the borrowing is made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. Such borrowings will be repaid before any
additional investments are purchased;
2. Underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under certain federal securities laws;
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate, and securities which represent interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein;
4. Purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell financial futures contracts and options;
5. Make loans, except by purchase of debt obligations in which the
Portfolio may invest consistent with its investment policies, by entering into
repurchase agreements, or by lending its portfolio securities;
6. With respect to 75% of its total assets, invest in the securities of any
issuer if, immediately after such investment, more than 5% of the total assets
of the Portfolio (taken at current value) would be invested in the securities of
such issuer; provided that this limitation does not apply to obligations issued
or guaranteed as to interest or principal by the U.S. government or its agencies
or instrumentalities;
7. With respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer;
8. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than 25%
of the Portfolio's total assets would be invested in any one industry; or
9. Issue any class of securities which is senior to the Portfolio's shares
of beneficial interest.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
Investment Restrictions Applicable Only to the AST Putnam International
Equity Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Borrow money except from banks and then in amounts not in excess of 33 1/3%
of its total assets. The Portfolio may borrow at prevailing interest rates and
invest the funds in additional securities. The Portfolio's borrowings are
limited so that immediately after such borrowing the value of the Portfolio's
assets (including borrowings) less its liabilities (not including borrowings) is
at least three times the amount of the borrowings. Should the Portfolio, for any
reason, have borrowings that do not meet the above test then, within three
business days, the Portfolio must reduce such borrowings so as to meet the
necessary test. Under such a circumstance, the Portfolio may have to liquidate
securities at a time when it is disadvantageous to do so;
2. Underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under certain federal securities laws;
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate, and securities representing interests in real estate, and it may acquire
and dispose of real estate or interests in real estate acquired through the
exercise of its rights as a holder of debt obligations secured by real estate or
interests therein;
4. Purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell financial futures contracts and related options;
5. Make loans, except by purchase of debt obligations in which the
Portfolio may invest consistent with its investment policies, by entering into
repurchase agreements, or by lending its portfolio securities;
6. With respect to 75% of its total assets, invest in the securities of any
issuer if, immediately after such investment, more than 5% of the total assets
of the Portfolio (taken at current value) would be invested in the securities of
such issuer; provided that this limitation does not apply to obligations issued
or guaranteed as to interest or principal by the U.S. government or its agencies
or instrumentalities;
7. With respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer;
8. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if as a result of such purchase more than 25% of
the Portfolio's total assets would be invested in any one industry; or
9. Issue senior securities.
<PAGE>
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
Investment Restrictions Applicable Only to the AST Putnam Balanced Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. With respect to 75% of its total assets, invest in the securities of any
issuer if, immediately after such investment, more than 5% of the total assets
of the Portfolio (taken at current value) would be invested in the securities of
such issuer; provided that this limitation does not apply to obligations issued
or guaranteed as to interest or principal by the U.S. government or its agencies
or instrumentalities;
2. With respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer;
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate, and securities which represent interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein;
4. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than 25%
of the Portfolio's total assets would be invested in any one industry;
5. Invest in commodities or commodity contracts except that it may purchase
or sell financial futures contracts and options thereon;
6. Underwrite securities issued by others except to the extent that the
Portfolio may be deemed an underwriter when purchasing or selling securities;
7. Borrow money in excess of 10% of the value (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed) at the
time the borrowing is made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. Such borrowings will be repaid before any
additional investments are purchased;
8. Make loans, except by purchase of debt obligations in which the
Portfolio may invest consistent with its investment policies, by entering into
repurchase agreements, or by lending its portfolio securities; or
9. Issue senior securities.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
Some of the investment instruments, techniques and methods which may be
used by one or more of the Portfolios and the risks attendant thereto are
described below. Other risk factors and investment methods may be described in
the "Investment Objectives and Policies" and "Certain Risk Factors and
Investment Methods" section in the Trust's Prospectus and in the "Investment
Objectives and Policies" section of this Statement. The risks and investment
methods described below apply only to those Portfolios which may invest in such
instruments or use such techniques.
Debt Obligations:
Yields on short, intermediate, and long-term securities are dependent
on a variety of factors, including, the general conditions of the money and bond
markets, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. Debt securities with longer maturities tend to produce
higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and lower
yields. The market prices of debt securities usually vary, depending upon
available yields. An increase in interest rates will generally reduce the value
of portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of the Portfolio to
achieve its investment objectives is also dependent on the continuing ability of
the issuers of the debt securities in which the Portfolio invests to meet their
obligations for the payment of interest and principal when due.
Special Risks Associated with Low-Rated and Comparable Unrated Securities:
Low-rated and comparable unrated securities, while generally offering
higher yields than investment-grade securities with similar maturities, involve
greater risks, including the possibility of default or bankruptcy. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal. The special risk considerations in connection
with such investments are discussed below. See the Appendix of this Statement
for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated and
comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher-rated securities,
which react primarily to fluctuations in the general level of interest rates.
Low-rated and comparable unrated securities also tend to be more sensitive to
economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of low-rated and comparable unrated securities
may experience financial stress and may not have sufficient revenues to meet
their payment obligations. The issuer's ability to service its debt obligations
may also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, a Portfolio might
incur additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased volatility in the market prices
of low-rated and comparable unrated securities and thus in a Portfolio's net
asset value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will a Portfolio's net asset
value. If a Portfolio experiences unexpected net redemptions in such a market,
it may be forced to liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited liquidity of high-yield
securities (discussed below) a Portfolio may be forced to liquidate these
securities at a substantial discount. Any such liquidation would reduce a
Portfolio's asset base over which expenses could be allocated and could result
in a reduced rate of return for a Portfolio.
Payment Expectations. Low-rated and comparable unrated securities
typically contain redemption, call, or prepayment provisions which permit the
issuer of such securities containing such provisions to, at their discretion,
redeem the securities. During periods of falling interest rates, issuers of
high-yield securities are likely to redeem or prepay the securities and
refinance them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, a
Portfolio may have to replace the securities with a lower-yielding security,
which would result in a lower return for a Portfolio.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. Such issuers
may not have more traditional methods of financing available to them and may be
unable to repay outstanding obligations at maturity by refinancing. The risk of
loss due to default in payment of interest or repayment of principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of low-rated and comparable
unrated securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit-rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in low-rated and comparable unrated securities will be more
dependent on the Sub-advisor's credit analysis than would be the case with
investments in investment-grade debt securities. The Sub-advisor may employ its
own credit research and analysis, which could include a study of existing debt,
capital structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history, and the current trend
of earnings. The Sub-advisor continually monitors the investments in a Portfolio
and evaluates whether to dispose of or to retain low-rated and comparable
unrated securities whose credit ratings or credit quality may have changed.
Liquidity and Valuation. A Portfolio may have difficulty disposing of
certain low-rated and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all low-rated and comparable unrated securities, there is no established retail
secondary market for many of these securities. A Portfolio anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of the
security. As a result, a Portfolio's asset value and a Portfolio's ability to
dispose of particular securities, when necessary to meet a Portfolio's liquidity
needs or in response to a specific economic event, may be impacted. The lack of
a liquid secondary market for certain securities may also make it more difficult
for the Portfolio to obtain accurate market quotations for purposes of valuing a
Portfolio. Market quotations are generally available on many low-rated and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of low-rated and comparable unrated securities, especially
in a thinly-traded market.
Put and Call Options:
Writing (Selling) Call Options. A call option gives the holder (buyer)
the "right to purchase" a security or currency at a specified price (the
exercise price), at expiration of the option (European style) or at any time
until a certain date (the expiration date) (American style). So long as the
obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing an option identical to that previously sold.
When writing a call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, a Portfolio will realize a gain or loss from the sale of the
underlying security or currency.
Writing (Selling) Put Options. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the obligation to buy, the
underlying security or currency at the exercise price during the option period
(American style) or at the expiration of the option (European style). So long as
the obligation of the writer continues, he may be assigned an exercise notice by
the broker-dealer through whom such option was sold, requiring him to make
payment of the exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
Premium Received from Writing Call or Put Options. A Portfolio will
receive a premium from writing a put or call option, which increases such
Portfolio's return in the event the option expires unexercised or is closed out
at a profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option and the volatility of the market
price of the underlying security. By writing a call option, a Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, a Portfolio assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
Closing Transactions. Closing transactions may be effected in order to
realize a profit on an outstanding call option, to prevent an underlying
security or currency from being called, or, to permit the sale of the underlying
security or currency. A Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written. A Portfolio
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by such Portfolio.
Furthermore, effecting a closing transaction will permit the Portfolio
to write another call option on the underlying security or currency with either
a different exercise price or expiration date or both. If the Portfolio desires
to sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Portfolio will be able to
effect such closing transactions at a favorable price. If the Portfolio cannot
enter into such a transaction, it may be required to hold a security or currency
that it might otherwise have sold. When the Portfolio writes a covered call
option, it runs the risk of not being able to participate in the appreciation of
the underlying securities or currencies above the exercise price, as well as the
risk of being required to hold on to securities or currencies that are
depreciating in value. This could result in higher transaction costs. The
Portfolio will pay transaction costs in connection with the writing of options
to close out previously written options. Such transaction costs are normally
higher than those applicable to purchases and sales of portfolio securities.
Purchasing Call Options. Call options may be purchased by a Portfolio
for the purpose of acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call options enables the
Portfolio to acquire the securities or currencies at the exercise price of the
call option plus the premium paid. At times the net cost of acquiring securities
or currencies in this manner may be less than the cost of acquiring the
securities or currencies directly. This technique may also be useful to a
Portfolio in purchasing a large block of securities or currencies that would be
more difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the
Portfolio is partially protected from any unexpected decline in the market price
of the underlying security or currency and in such event could allow the call
option to expire, incurring a loss only to the extent of the premium paid for
the option.
Purchasing Put Options. A Portfolio may purchase a put option on an
underlying security or currency (a "protective put") owned by the Portfolio as a
defensive technique in order to protect against an anticipated decline in the
value of the security or currency. Such hedge protection is provided only during
the life of the put option when the Portfolio, as the holder of the put option,
is able to sell the underlying security or currency at the put exercise price
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security or currency where a Sub-advisor
deems it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
If a Portfolio purchases put options at a time when the Portfolio does
not own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the Portfolio seeks to benefit from a
decline in the market price of the underlying security or currency. If the put
option is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, the Portfolio will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.
Dealer Options. Exchange-traded options generally have a continuous
liquid market while dealer options have none. Consequently, the Portfolio will
generally be able to realize the value of a dealer option it has purchased only
by exercising it or reselling it to the dealer who issued it. Similarly, when
the Portfolio writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the option.
While the Portfolio will seek to enter into dealer options only with dealers who
will agree to and which are expected to be capable of entering into closing
transactions with the Portfolio, there can be no assurance that the Portfolio
will be able to liquidate a dealer option at a favorable price at any time prior
to expiration. Until the Portfolio, as a covered dealer call option writer, is
able to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the Portfolio may be
unable to liquidate a dealer option. With respect to options written by the
Portfolio, the inability to enter into a closing transaction may result in
material losses to the Portfolio. For example, since the Portfolio must maintain
a secured position with respect to any call option on a security it writes, the
Portfolio may not sell the assets which it has segregated to secure the position
while it is obligated under the option. This requirement may impair the
Portfolio's ability to sell portfolio securities at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Portfolio may treat the cover used for written OTC options as
liquid if the dealer agrees that the Portfolio may repurchase the OTC option it
has written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. To this extent, the Portfolio will treat dealer options as subject to
the Portfolio's limitation on unmarketable securities. If the SEC changes its
position on the liquidity of dealer options, the Portfolio will change its
treatment of such instrument accordingly.
Certain Risk Factors in Writing Call Options and in Purchasing Call and
Put Options: During the option period, a Portfolio, as writer of a call option
has, in return for the premium received on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that the Portfolio may lose the premium it
paid plus transaction costs. If the Portfolio does not exercise the option and
is unable to close out the position prior to expiration of the option, it will
lose its entire investment.
An option position may be closed out only on an exchange which provides
a secondary market. There can be no assurance that a liquid secondary market
will exist for a particular option at a particular time and that the Portfolio,
can close out its position by effecting a closing transaction. If the Portfolio
is unable to effect a closing purchase transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Accordingly, the Portfolio may not be able to sell the underlying security at a
time when it might otherwise be advantageous to do so. Possible reasons for the
absence of a liquid secondary market include the following: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) inadequacy of the facilities of an exchange or the clearing
corporation to handle trading volume; and (v) a decision by one or more
exchanges to discontinue the trading of options or impose restrictions on
orders. In addition, the hours of trading for options may not conform to the
hours during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Each exchange has established limitations governing the maximum number
of call options, whether or not covered, which may be written by a single
investor acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or 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 these limits and it may
impose other sanctions or restrictions.
Options on Stock Indices:
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
Risk Factors in Options on Indices. Because the value of an index
option depends upon the movements in the level of the index rather than upon
movements in the price of a particular security, whether the Portfolio will
realize a gain or a loss on the purchase or sale of an option on an index
depends upon the movements in the level of prices in the market generally or in
an industry or market segment rather than upon movements in the price of the
individual security. Accordingly, successful use of positions will depend upon a
Sub-advisor's ability to predict correctly movements in the direction of the
market generally or in the direction of a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Portfolio would not be able to
close out options which it had written or purchased and, if restrictions on
exercise were imposed, might be unable to exercise an option it purchased, which
would result in substantial losses.
Price movements in Portfolio securities will not correlate perfectly
with movements in the level of the index and therefore, a Portfolio bears the
risk that the price of the securities may not increase as much as the level of
the index. In this event, the Portfolio would bear a loss on the call which
would not be completely offset by movements in the prices of the securities. It
is also possible that the index may rise when the value of the Portfolio's
securities does not. If this occurred, a Portfolio would experience a loss on
the call which would not be offset by an increase in the value of its securities
and might also experience a loss in the market value of its securities.
Unless a Portfolio has other liquid assets which are sufficient to
satisfy the exercise of a call on the index, the Portfolio will be required to
liquidate securities in order to satisfy the exercise.
When a Portfolio has written a call on an index, there is also the risk
that the market may decline between the time the Portfolio has the call
exercised against it, at a price which is fixed as of the closing level of the
index on the date of exercise, and the time the Portfolio is able to sell
securities. As with options on securities, the Sub-advisor will not learn that a
call has been exercised until the day following the exercise date, but, unlike a
call on securities where the Portfolio would be able to deliver the underlying
security in settlement, the Portfolio may have to sell part of its securities in
order to make settlement in cash, and the price of such securities might decline
before they could be sold.
If a Portfolio exercises a put option on an index which it has
purchased before final determination of the closing index value for the day, it
runs the risk that the level of the underlying index may change before closing.
If this change causes the exercised option to fall "out-of-the-money" the
Portfolio will be required to pay the difference between the closing index value
and the exercise price of the option (multiplied by the applicable multiplier)
to the assigned writer. Although the Portfolio may be able to minimize this risk
by withholding exercise instructions until just before the daily cutoff time or
by selling rather than exercising an option when the index level is close to the
exercise price, it may not be possible to eliminate this risk entirely because
the cutoff time for index options may be earlier than those fixed for other
types of options and may occur before definitive closing index values are
announced.
Trading in Futures:
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time and
place designated at the time the contract is made. Brokerage fees are incurred
when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short position.
Unlike when the Portfolio purchases or sells a security, no price
would be paid or received by the Portfolio upon the purchase or sale of a
futures contract. Upon entering into a futures contract, and to maintain the
Portfolio's open positions in futures contracts, the Portfolio would be required
to deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash, U.S. government securities, suitable money market
instruments, or other liquid securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Portfolio.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Portfolio expects
to earn interest income on its margin deposits. Although certain futures
contracts, by their terms, require actual future delivery of and payment for the
underlying instruments, in practice most futures contracts are usually closed
out before the delivery date. Closing out an open futures contract purchase or
sale is effected by entering into an offsetting futures contract purchase or
sale, respectively, for the same aggregate amount of the identical securities
and the same delivery date. If the offsetting purchase price is less than the
original sale price, the Portfolio realizes a gain; if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Portfolio realizes a gain; if it is less, the
Portfolio realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Portfolio will be
able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Portfolio is not able to enter
into an offsetting transaction, the Portfolio will continue to be required to
maintain the margin deposits on the futures contract.
For example, one contract in the Financial Times Stock Exchange 100
Index future is a contract to buy 25 pounds sterling multiplied by the level of
the UK Financial Times 100 Share Index on a given future date. Settlement of a
stock index futures contract may or may not be in the underlying security. If
not in the underlying security, then settlement will be made in cash, equivalent
over time to the difference between the contract price and the actual price of
the underlying asset at the time the stock index futures contract expires.
Options on futures are similar to options on underlying instruments
except that options on futures give 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), rather than to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing out
is accomplished by effecting an offsetting transaction. A futures contract sale
is closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller immediately would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would immediately pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same securities and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize a
gain, whereas if the purchase price exceeds the offsetting sale price, the
purchaser would realize a loss.
Commissions on financial futures contracts and related options
transactions may be higher than those which would apply to purchases and sales
of securities directly.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that Futures contracts trading in additional financial
instruments will be authorized. The standard contract size is generally $100,000
for Futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA
pass-through securities and $1,000,000 for the other designated Futures
contracts. A public market exists in Futures contracts covering a number of
indexes, including, but not limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index.
Regulatory Matters. The Staff of Securities and Exchange Commission
("SEC") has taken the position that the purchase and sale of futures contracts
and the writing of related options may give rise to "senior securities" for the
purposes of the restrictions contained in Section 18 of the 1940 Act on
investment companies' issuing senior securities. However, the Staff has taken
the position that no senior security will be created if a Portfolio maintains in
a segregated account an amount of cash or other liquid assets at least equal to
the amount of the Portfolio's obligation under the futures contract or option.
Similarly, no senior security will be created if a Portfolio "covers" its
futures and options positions by owning corresponding positions or securities
underlying the positions that enable the Portfolio to close out its futures and
options positions without paying additional cash consideration. Each Portfolio
will conduct its purchases and sales of any futures contracts and writing of
related options transactions in accordance with these requirements.
Certain Risks Relating to Futures Contracts and Related Options. There are
special risks involved in futures transactions.
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international policies and economic
events.
Most United States 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.
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 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. However, the Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be certain
that the Portfolio has sufficient assets to satisfy its obligations under a
futures contract, the Portfolio earmarks to the futures contract money market
instruments equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Portfolio may elect to close some or all of
its futures positions at any time prior to their expiration. The Portfolio would
do so to reduce exposure represented by long futures positions or increase
exposure represented by short futures positions. The Portfolio may close its
positions by taking opposite positions which would operate to terminate the
Portfolio's position in the futures contracts. Final determinations of variation
margin would then be made, additional cash would be required to be paid by or
released to the Portfolio, and the Portfolio would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Portfolio intends
to purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract at any
particular time. In such event, it might not be possible to close a futures
contract, and in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Portfolio would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. 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, market or interest rate
trends. There are several risks in connection with the use by the Portfolio of
futures contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. Sub-advisor will, however, attempt to reduce this risk by entering
into futures contracts whose movements, in its judgment, will have a significant
correlation with movements in the prices of the Portfolio's underlying
instruments sought to be hedged.
Successful use of futures contracts by the Portfolio for hedging
purposes is also subject to a Sub-advisor's ability to correctly predict
movements in the direction of the market. It is possible that, when the
Portfolio has sold futures to hedge its portfolio against a decline in the
market, the index, indices, or underlying instruments on which the futures are
written might advance and the value of the underlying instruments held in the
Portfolio's portfolio might decline. If this were to occur, the Portfolio would
lose money on the futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a certain degree,
Sub-advisor may believe that over time the value of the Portfolio's portfolio
will tend to move in the same direction as the market indices which are intended
to correlate to the price movements of the underlying instruments sought to be
hedged. It is also possible that if the Portfolio were to hedge against the
possibility of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased, the Portfolio
would lose part or all of the benefit of increased value of those underlying
instruments that it has hedged, because it would have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio had
insufficient cash, it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying instruments might be,
but would not necessarily be, at increased prices (which would reflect the
rising market). The Portfolio might have to sell underlying instruments at a
time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors might close futures contracts through offsetting transactions which
could distort the normal relationship between the underlying instruments and
futures markets. Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets, and as a result the
futures market might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market might also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and also because of the imperfect correlation between price
movements in the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by Sub-advisor might
not result in a successful hedging transaction over a very short time period.
Certain Risks of Options on Futures Contracts. The Portfolio may seek
to close out an option position by writing or buying an offsetting option
covering the same index, underlying instruments, or contract and having the same
exercise price and expiration date. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
Foreign Futures and Options:
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, customers who trade foreign futures or foreign
options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations and the rules of
the National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the Commission and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
In particular, funds received from customers for foreign futures or foreign
options transactions may not be provided the same protections as funds received
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time your order is placed and the time it is
liquidated, offset or exercised.
Foreign Currency Futures Contracts and Related Options. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the interbank market
conducted directly between currency traders (usually large, commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades.
Depending on the applicable investment policies and restrictions
applicable to a Portfolio, a Portfolio may generally enter into forward foreign
currency exchange contracts under two circumstances. First, when a Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency involved in the
underlying security transactions, the Portfolio may be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date on which payment
is made or received.
Second, when a Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currencies or currency act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities, denominated in any currency, to cover
the amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
Purchase and Sale of Currency Futures Contracts and Related Options. As
noted above, a currency futures contract sale creates an obligation by a
Portfolio, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a special price. A currency futures
contract purchase creates an obligation by a Portfolio, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. Although the terms of currency futures contracts specify actual delivery
or receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. Unlike a currency futures contract, which requires the parties
to buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
Interest Rate Swaps and Interest Rate Caps and Floors:
Interest rate swaps involve the exchange by the Portfolio 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 exchange
commitments can involve payments to be made in the same currency or in different
currencies. 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 contractually based principal amount from the party
selling the 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 contractually based
principal amount from the party selling the interest rate floor.
Hybrid Instruments:
Hybrid instruments combine the elements of futures contracts or options
with those of debt, preferred equity or a depository instrument ("Hybrid
Instruments"). The risks of investing in Hybrid Instruments reflect a
combination of the risks from investing in securities, futures and currencies,
including volatility and lack of liquidity. Reference is made to the discussion
of futures and forward contracts in this Statement for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Portfolio and the seller of the Hybrid
Instrument, the creditworthiness of the contra party to the transaction would be
a risk factor which the Portfolio would have to consider. Hybrid Instruments
also may not be subject to regulation of the CFTC, which generally regulates the
trading of commodity futures by U.S. persons, the SEC, which regulates the offer
and sale of securities by and to U.S. persons, or any other governmental
regulatory authority.
Foreign Currency Exchange-Related Securities:
Certain Portfolios may invest in foreign currency warrants and
performance indexed paper.
Foreign Currency Warrants. Foreign currency warrants are warrants which
entitle the holder to receive from their issuer an amount of cash (generally,
for warrants issued in the United States, in U.S. dollars) which is calculated
pursuant to a predetermined formula and based on the exchange rate between a
specified foreign currency and the U.S. dollar as of the exercise date of the
warrant. Foreign currency warrants generally are exercisable upon their issuance
and expire as of a specified date and time. Foreign currency warrants have been
issued in connection with U.S. dollar-denominated debt offerings by major
corporate issuers in an attempt to reduce the foreign currency exchange risk
which, from the point of view of prospective purchasers of the securities, is
inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate
linked securities are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar,
and is adversely affected by increases in the foreign exchange value of the U.S.
dollar. "Reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
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Performance Indexed Paper. Performance indexed paper is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Zero-Coupon Securities:
Zero-coupon securities pay no cash income and are sold at substantial
discounts from their value at maturity. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. Zero-coupon securities are
subject to greater market value fluctuations from changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest (cash). Zero-coupon securities which are convertible into common stock
offer the opportunity for capital appreciation as increases (or decreases) in
market value of such securities closely follows the movements in the market
value of the underlying common stock. Zero-coupon convertible securities
generally are expected to be less volatile than the underlying common stocks, as
they usually are issued with maturities of 15 years or less and are issued with
options and/or redemption features exercisable by the holder of the obligation
entitling the holder to redeem the obligation and receive a defined cash
payment.
Zero-coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" (TIGRSTM) and Certificate of Accrual on Treasuries
(CATSTM). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Portfolio, most
likely will be deemed the beneficial holder of the underlying U.S.
Government securities.
The U.S. Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero-coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero-coupon securities that the Treasury sells
itself.
When-Issued Securities:
The price of when-issued securities, which may be expressed in yield
terms, is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally, the
settlement date occurs within 90 days of the purchase. During the period between
purchase and settlement, no payment is made by the Portfolio to the issuer and
no interest accrues to the Portfolio. Forward commitments involve a risk of loss
if the value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in value of the
Portfolio's other assets. While when-issued securities may be sold prior to the
settlement date, the Portfolio intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
Mortgage-Backed Securities:
Principal and interest payments made on the mortgages in an underlying
mortgage pool are passed through to the Portfolio. Unscheduled prepayments of
principal shorten the securities' weighted average life and may lower their
total return. (When a mortgage in the underlying mortgage pool is prepaid, an
unscheduled principal prepayment is passed through to the Portfolio. This
principal is returned to the Portfolio at par. As a result, if a mortgage
security were trading at a premium, its total return would be lowered by
prepayments, and if a mortgage securities were trading at a discount, its total
return would be increased by prepayments.) The value of these securities also
may change because of changes in the market's perception of the creditworthiness
of the federal agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
Asset-Backed Securities:
Asset-backed securities directly or indirectly represent a
participation interest in, or are secured by and payable from, a stream of
payments generated by particular assets such as motor vehicle or credit card
receivables. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities.
Asset-backed securities may be classified as pass-through certificates or
collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support."
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support
(see "Types of Credit Support"), the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
Methods of Allocating Cash Flows. While many asset-backed securities
are issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple class
asset-backed securities are issued for two main reasons. First, multiple classes
may be used as a method of providing credit support. This is accomplished
typically through creation of one or more classes whose right to payments on the
asset-backed security is made subordinate to the right to such payments of the
remaining class or classes. See "Types of Credit Support." Second, multiple
classes may permit the issuance of securities with payment terms, interest rates
or other characteristics differing both from those of each other and from those
of the underlying assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests with respect to
the allocation of interest and principal of the assets backing the security),
and securities with a class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Portfolio may invest in such asset-backed securities
if such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Portfolio.
<PAGE>
Types of Credit Support. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that scheduled payments on the underlying pool are made in a
timely fashion. Protection against ultimate default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve portfolios" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have been
"over collateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security. Additionally, if the letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized.
Automobile Receivable Securities. Asset-backed securities may be backed
by receivables from motor vehicle installment sales contracts or installment
loans secured by motor vehicles ("Automobile Receivable Securities"). Since
installment sales contracts for motor vehicles or installment loans related
thereto ("Automobile Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts were
to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts grant
a security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, usually is not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be available
to support payments on the securities. In addition, various state and federal
securities laws give the motor vehicle owner the right to assert against the
holder of the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. Asset-backed securities may be
backed by receivables from revolving credit card agreements ("Credit Card
Receivable Securities"). Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used to
fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account. The
initial fixed period usually may be shortened upon the occurrence of specified
events which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and yield of the Credit Card Receivable Security.
Credit card holders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
Warrants:
Investments in warrants is speculative in that warrants have no voting
rights, pay no dividends, and have no rights with respect to the assets of the
corporation issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of time. They do not
represent ownership of the securities but only the right to buy them. Warrants
differ from call options in that warrants are issued by the issuer of the
security which may be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not necessarily move
parallel to the prices of the underlying securities.
Certain Risks of Foreign Investing:
Currency Fluctuations. Investment in securities denominated in foreign
currencies involves certain risks. A change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of a Portfolio's assets denominated in that currency. Such changes will
also affect a Portfolio's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of a Portfolio's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens). The value of a Portfolio's
securities denominated in that currency would be expected to decline.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may at times limit or preclude investment in
certain of such countries and may increase the cost and expenses of a Portfolio.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may invest.
Additional or different restrictions may be imposed at any time by these or
other countries in which a Portfolio invests. In addition, the repatriation of
both investment income and capital from several foreign countries is restricted
and controlled under certain regulations, including in some cases the need for
certain government consents. Although these restrictions may in the future make
it undesirable to invest in these countries, Sub-advisor does not believe that
any current repatriation restrictions would affect its decision to invest in
these countries.
Market Characteristics. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and a Portfolio's securities may be less liquid
and more volatile than securities of comparable U.S. companies. Equity
securities may trade at price/earnings multiples higher than comparable U.S.
securities and such levels may not be sustainable. Fixed commissions on foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a Portfolio will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets, and may
include delays beyond periods customary in the United States.
Political and Economic Factors. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as stable
as in the United States.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies of
many foreign countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and economic conditions of
their trading partners. The enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and ratings
that are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies.
Taxes. The dividends and interest payable on certain of a Portfolio's
foreign securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolio's
shareholders. A shareholder otherwise subject to U.S. federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Portfolio.
Costs. Investors should understand that the expense ratio of the
Portfolio can be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of foreign
securities and the rate of advisory fees paid by the Portfolio are higher.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of the Portfolio,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe. Changes occurring in Eastern Europe and Russia today
could have long-term potential consequences. As restrictions fall, this could
result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend away
from centrally-planned economies and state owned industries. In many of the
countries of Eastern Europe and Russia, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking and
securities infrastructure to handle such trading, and a legal tradition which
does not recognize rights in private property. In addition, these countries may
have national policies which restrict investments in companies deemed sensitive
to the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as custodian
of the Portfolio's assets invested in such countries and these authorities may
not qualify as a foreign custodian under the 1940 Act and exemptive relief from
such Act may be required. All of these considerations are among the factors
which could cause significant risks and uncertainties to investment in Eastern
Europe and Russia.
Latin America. The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade barriers and
result in significant disruption in securities markets. Persistent levels of
inflation or in some cases, hyperinflation, have led to high interest rates,
extreme measures by governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in many countries has
lessened, there is no guarantee it will remain at lower levels. In addition, a
number of Latin American countries are also among the largest debtors of
developing countries. There have been moratoria on, and reschedulings of,
repayment with respect to these debts. Such events can restrict the flexibility
of these debtor nations in the international markets and result in the
imposition of onerous conditions on their economics.
Certain Latin American countries may have managed currencies which are
maintained at artificial levels to the U.S. dollar rather than at levels
determined by the market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a disruptive and negative
effect on foreign investors. Certain Latin American countries also may restrict
the free conversion of their currency into foreign currencies, including the
U.S. dollar. There is no significant foreign exchange market for certain
currencies and it would, as a result, be difficult for the Portfolio to engage
in foreign currency transactions designed to protect the value of the
Portfolio's interests in securities denominated in such currencies.
PORTFOLIO TURNOVER: High turnover involves correspondingly greater
brokerage commissions and other transaction costs. Portfolio turnover
information can be found in the Trust's Prospectus under "Financial Highlights"
and "Portfolio Turnover."
Over the past two fiscal years the following Portfolios experienced
significant variation in their portfolio turnover rates. The turnover rate for
the T. Rowe Price International Bond Portfolio (formerly, the AST Scudder
International Bond Portfolio) for the year ended December 31, 1995 was 325% and
the year ended December 31, 1996 was 241%. Rowe Price-Fleming International,
Inc. became the Portfolio's Sub-advisor on May 1, 1996, and manages the
Portfolio with an anticipated annual rate of turnover not to exceed 350%. The
turnover rate for the Founders Passport Portfolio (formerly, the Seligman
Henderson International Small Cap Portfolio) from May 2, 1995 (commencement of
operations) to December 31, 1995 was 4% and for the year ended December 31, 1996
was 133%. Founders Asset Management, Inc. became the Portfolio's Sub-advisor on
October 15, 1996, and manages the Portfolio with an anticipated annual rate of
turnover not to exceed 150%. The turnover rate for the PIMCO Total Return Bond
Portfolio for the year ended December 31, 1995 was 124% and the year ended
December 31, 1996 was 403%. The portfolio turnover rate in 1996 resulted
primarily from the Sub-advisor's use of mortgage dollar rolls, which involve
monthly buy and sell transactions of mortgage-backed securities, and thereby
tend to generate high turnover. The turnover rate for the Berger Capital Growth
Portfolio for the year ended December 31, 1995 was 84% and for the year ended
December 31, 1996 was 156%. During 1996, the Sub-advisor used a more aggresive
trading strategy, which involved changing the Portfolio's emphasis on various
industries due to the respective valuations of the securities of issuers within
those industries. The turnover rate for the AST Putnam International Equity
Portfolio (formerly, the Seligman Henderson International Equity Portfolio) for
the years ended December 31, 1995 and 1996 were 59% and 124% respectively.
Putnam Investment Management, Inc. became the Portfolio's Sub-advisor on October
15, 1996, and manages the Portfolio with an anticipated annual rate of turnover
not to exceed 100%. The turnover rate for the AST Putnam Balanced Portfolio
(formerly, the AST Phoenix Balanced Asset Portfolio) for the years ended
December 31, 1995 and 1996 were 161% and 276% respectively. Putnam Investment
Management, Inc. became the Portfolio's Sub-advisor on October 15, 1996, and
manages the Portfolio with an anticipated annual rate of turnover not to exceed
200%.
The rate of turnover for the Robertson Stephens Value + Growth
Portfolio was 77% for the period from commencement of operations (May 2, 1996)
to December 31, 1996, and is not anticipated to exceed an annual rate of 250%
under normal market conditions. The annual rates of turnover for the AST Janus
Overseas Growth Portfolio, the T. Rowe Price Small Company Value Portfolio, the
Twentieth Century International Growth Portfolio, the Twentieth Century
Strategic Balanced Portfolio and the AST Putnam Value Growth & Income Portfolio,
all of which were first publicly offered in January 1997, are not anticipated to
exceed 200%, 100%, 150%, 150% and 100%, respectively, under normal market
conditions. The policy of the AST Money Market Portfolio of investing only in
securities maturing 397 days or less from the date of acquisition or purchased
pursuant to repurchase agreements that provide for repurchase by the seller
within 397 days from the date of acquisition will result in a high portfolio
turnover rate.
MANAGEMENT: The overall management of the business and affairs of the Trust is
vested with the Board of Trustees. The Board of Trustees approves all
significant agreements between the Trust and persons or companies furnishing
services to the Trust, including the Trust's agreements with the Investment
Manager, Administrator, Custodian and Transfer and Shareholder Servicing Agent
and the agreements between the Investment Manager and each Sub-advisor. The
day-to-day operations of the Trust are delegated to the Trust's officers subject
always to the investment objectives and policies of the Trust and to the general
supervision of the Board of Trustees.
The Trustees and officers of the Trust and their principal occupations
are listed below. Unless otherwise indicated, the address of each Trustee and
executive officer is One Corporate Drive, Shelton, Connecticut 06484:
<TABLE>
<CAPTION>
Name, Office and Age Principal Occupation
<S> <C>
Gordon C. Boronow*+ President and Chief Operating Officer:
Vice President and Trustee (44) American Skandia Life Assurance Corporation
June 1989 to present
<PAGE>
Jan R. Carendi*+ Senior Executive Vice President and
President, Principal Executive Officer Member of Corporate Management Group:
and Trustee (52) Skandia Insurance Company Ltd.
September 1986 to present
David E. A. Carson President, Chairman and Chief Executive Officer:
Trustee (62) People's Bank
850 Main Street
Bridgeport, Connecticut 06604
1983 to present
Richard G. Davy, Jr.*+ Controller:
Controller (48) American Skandia Investment
Services, Incorporated
September 1994 to present;
Self-employed Consultant
December 1991 to September 1994
Eric. C. Freed* Securities Counsel
Secretary (34) American Skandia Investment Holding Corporation
December 1996 to present;
Attorney, Senior Attorney and Special Counsel,
U.S. Securities and Exchange Commission
March 1991 to November 1996
Julian A. Lerner Semi-retired since 1995; Senior Vice President
Trustee (72) and Portfolio Manager of AIM Charter Fund
and AIM Summit Fund from 1986 to 1995:
12850 Spurling Road -- Suite 208
Dallas, Texas 75230
Thomas M. Mazzaferro*+ Executive Vice President and
Treasurer (44) Chief Financial Officer:
American Skandia Life Assurance Corporation
April 1988 to present
Thomas M. O'Brien Vice Chairman
Trustee (46) North Fork Bank
275 Broad Hollow Road
Melville, NY 11747;
January 1997 to present
President and Chief Executive Officer:
North Side Savings Bank
170 Tulip Avenue
Floral Park, New York 11001
December 1984 to December 1996
F. Don Schwartz Management Consultant:
Trustee (61) 1101 Penn Grant Road
Lancaster, PA 17602
April 1985 to present
</TABLE>
* Interested person as defined in the 1940 Act.
+ Individuals are officers and/or directors of one or more of the following
companies: American Skandia Investment Services, Incorporated (the Investment
Manager), American Skandia Life Assurance Corporation, American Skandia
Marketing, Incorporated (the principal underwriter for various annuities deemed
to be securities for American Skandia Life Assurance Corporation) and the
immediate parent of each these companies, American Skandia Investment Holding
Corporation.
The interested Trustees and officers of the Trust do not receive
compensation directly from the Trust for serving in such capacities. However,
those officers and Trustees of the Trust who are affiliated with the Investment
Manager may receive remuneration indirectly, as the Investment Manager will
receive fees from the Trust for the services it provides. Each of the other
Trustees receives an annual fee paid by the Trust plus expenses for each meeting
of the Board and of shareholders which he attends. Compensation received during
the year ended December 31, 1996 by the Trustees who are not interested persons
was as follows:
<TABLE>
<CAPTION>
Aggregate Compensation from Total Compensation from Registrant and
Name of Trustee ---------------------------------------- Fund Complex Paid to Trustee
Registrant
- ------------------------------------------ -----------------------------------------
<S> <C> <C>
David E. A. Carson $39,500 $39,500
Julian A. Lerner* 7,500 7,500
Thomas M. O'Brien 39,500 39,500
F. Don Schwartz 39,500 39,500
</TABLE>
*became Trustee in November, 1996
The Trust does not offer pension or retirement benefits to its
Trustees.
Under the terms of the Massachusetts General Corporation Law, the Trust
may indemnify any person who was or is a Trustee, officer or employee of the
Trust to the maximum extent permitted by the Massachusetts General Corporation
Law; provided, however, that any such indemnification (unless ordered by a
court) shall be made by the Trust only as authorized in the specific case upon a
determination that indemnification of such persons is proper in the
circumstances. Such determination shall be made (i) by the Board of Trustees, by
a majority vote of a quorum which consists of Trustees who are neither
"interested persons" of the Trust as defined in Section 2(a)(19) of the 1940 Act
(the "1940 Act"), nor parties to the proceeding, or (ii) if the required quorum
is not obtainable or if a quorum of such Trustees so directs by independent
legal counsel in a written opinion. No indemnification will be provided by the
Trust to any Trustee or officer of the Trust for any liability to the Trust or
its shareholders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
MANAGEMENT OF THE TRUST:
Investment Management Agreements: The Trust has entered into Investment
Management Agreements with the Investment Manager (the "Management Agreements").
The Investment Manager furnishes each Portfolio with investment advice and
certain administrative services with respect to the applicable Portfolio's
assets subject to the supervision of the Board of Trustees and in conformity
with the stated policies of the applicable Portfolio. The Investment Manager has
engaged the Sub-advisors noted below to conduct the investment programs of each
Portfolio. Under the terms of the Management Agreements, the Investment Manager
furnishes, at its expense, such personnel as is required by each Portfolio for
the proper conduct of its affairs and engages the Sub-advisors to conduct the
investment programs pursuant to the Investment Manager's obligations under the
Management Agreements. The Investment Manager, not the Trust, is responsible for
the expenses of conducting the investment programs. The Sub-advisor is
responsible for the expenses of conducting the investment programs in relation
to the applicable Portfolio pursuant to agreements between the Investment
Manager and each Sub-advisor. Each Portfolio pays all of its other expenses,
including but not limited to, brokerage commissions, legal, auditing, taxes or
governmental fees, the cost of preparing share certificates, custodian,
depository, transfer and shareholder servicing agent costs, expenses of issue,
sale, redemption and repurchase of shares, expenses of registering and
qualifying shares for sale, insurance premiums on property or personnel
(including officers and Trustees if available) of the Trust which inure to its
benefit, expenses relating to Trustee and shareholder meetings, the cost of
preparing and distributing reports and notices to shareholders, the fees and
other expenses incurred by the Trust in connection with membership in investment
company organizations and the cost of printing copies of prospectuses and
statements of additional information distributed to shareholders. Expenses
incurred by the Trust not directly attributable to any specific Portfolio or
Portfolios are allocated on the basis of the net assets of the respective
Portfolios.
Under the terms of the Management Agreements, the Investment Manager is
permitted to render services to others. The Management Agreements provide that
neither the Investment Manager nor its personnel shall be liable for any error
of judgment or mistake of law or for any act or omission in the administration
or management of the applicable Portfolios, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the
Management Agreements.
The investment management fee paid for each of the past three fiscal
years by each Portfolio that was publicly offered prior to January 1997 was as
follows:
<TABLE>
<CAPTION>
Investment Management Fees
--------------------------- --------------------------- ----------------------------
1994 1995 1996
--------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Lord Abbett Growth and Income 0 1,059,567 2,881,119
JanCap Growth 0 2,977,217 5,726,567
AST Money Market 0 1,503,661 2,092,880
Federated Utility Income 0 601,598 764,844
Federated High Yield 0 346,448 991,953
T. Rowe Price Asset Allocation 0 314,161 727,787
T. Rowe Price International Equity 601,032 1,412,350 3,011,378
T. Rowe Price Natural Resources 0 20,950 351,569
T. Rowe Price International Bond 59,968 276,299 595,953
Founders Capital Appreciation 100,689 486,749 1,240,016
Founders Passport 0 76,285 778,018
INVESCO Equity Income 232,348 821,220 1,883,792
PIMCO Total Return Bond 0 652,311 1,895,849
PIMCO Limited Maturity Bond 0 100,949 1,249,854
Berger Capital Growth 0 160,794 683,999
AST Putnam International Equity 0 2,198,484 2,771,876
AST Putnam Balanced 0 1,107,736 1,828,306
Robertson Stephens Value + Growth 0 0 117,917
</TABLE>
The sub-advisory fee paid by the Investment Manager to the Sub-advisors for each
such Portfolio for each of the past three fiscal years was as follows:
<TABLE>
<CAPTION>
Sub-Advisory Fees
--------------------------- --------------------------- ----------------------------
1994 1995 1996
--------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Lord Abbett Growth and Income 0 705,288 1,736,325
JanCap Growth 0 1,869,411 3,451,651
AST Money Market 0 501,220 697,446
Federated Utility Income 0 306,916 374,935
Federated High Yield 0 210,529 448,151
T. Rowe Price Asset Allocation 0 166,105 301,555
T. Rowe Price International Equity 368,381 786,175 1,532,137
T. Rowe Price Natural Resources 0 13,967 208,022
T. Rowe Price International Bond(1) 35,381 165,779 315,293
Founders Capital Appreciation 72,720 350,949 859,376
Founders Passport(2) 0 45,904 463,898
INVESCO Equity Income 148,729 482,833 979,103
PIMCO Total Return Bond 0 299,969 804,173
PIMCO Limited Maturity Bond 0 47,155 551,613
Berger Capital Growth 0 116,002 427,236
AST Putnam International Equity(3) 0 1,389,549 1,752,761
AST Putnam Balanced(4) 0 576,648 942,912
Robertson Stephens Value + Growth 0 0 70,750
</TABLE>
(1) T. Rowe Price International Bond -- Entire fee for 1994 and 1995 was paid to
Scudder, Stevens & Clark, Inc.; in 1996, $103,905 was paid to Scudder Stevens &
Clark, Inc. and $211,388 was paid to Rowe Price-Fleming International, Inc. (2)
Founders Passport -- Entire fee for 1994 and 1995 was paid to Seligman Henderson
Co.; in 1996, $325,763 was paid to Seligman Henderson Co. and $138,135 was paid
to Founders Asset Management, Inc. (3) AST Putnam International Equity -- Entire
fee for 1994 and 1995 was paid to Seligman Henderson Co.; in 1996, $1,338,724
was paid to Seligman Henderson Co. and $414,037 was paid to Putnam Investment
Management, Inc. (4) AST Putnam Balanced -- Entire fee for 1994 and 1995 was
paid to Phoenix Investment Counsel, Inc.; in 1996, $691,855 was paid to Phoenix
Investment Counsel, Inc. and $251,057 was paid to Putnam Investment Management,
Inc.
<PAGE>
The Investment Manager has agreed by the terms of the Management
Agreements for the following Portfolios of the Trust to reimburse the Portfolio
for any fiscal year in order to prevent Portfolio expenses (exclusive of taxes,
interest, brokerage commissions and extraordinary expenses, determined by the
Trust or the Investment Manager, but inclusive of the management fee) from
exceeding a specified percentage of the Portfolio's average daily net assets:
Lord Abbett Growth and Income Portfolio: 1.25%
JanCap Growth Portfolio: 1.35%. Commencing September 4, 1996, the
Investment Manager has voluntarily agreed to reimburse certain operating
expenses in excess of 1.33% for the JanCap Growth Portfolio. This voluntary
agreement may be terminated by the Investment Manager at any time.
AST Money Market Portfolio: .65%. The Investment Manager has voluntarily
agreed to reimburse certain operating expenses in excess of .60% for the AST
Money Market Portfolio. This voluntary agreement may be terminated by the
Investment Manager at any time.
Federated Utility Income Portfolio: 1.25%
Federated High Yield Portfolio: 1.15%
T. Rowe Price Asset Allocation Portfolio: 1.25%
T. Rowe Price International Equity Portfolio: 1.75%. Commencing May 1,
1996, the Investment Manager has voluntarily agreed to reimburse certain
operating expenses in excess of 1.71% for the T. Rowe Price International Equity
Portfolio. This voluntary agreement may be terminated by the Investment Manager
at any time.
T. Rowe Price Natural Resources Portfolio: 1.35%
T. Rowe Price International Bond Portfolio: 1.75%
Founders Capital Appreciation Portfolio: 1.30%
Founders Passport Portfolio: 1.75%
INVESCO Equity Income Portfolio: 1.20%
PIMCO Total Return Bond Portfolio: 1.05%
PIMCO Limited Maturity Bond Portfolio: 1.05%
Berger Capital Growth Portfolio: 1.25%
Robertson Stephens Value + Growth Portfolio: 1.45%
AST Putnam International Equity Portfolio: 1.75%
AST Putnam Balanced Portfolio: 1.25%
The Investment Manager has also voluntarily agreed to reimburse the
other Portfolios of the Trust for any fiscal year in order to prevent Portfolio
expenses (exclusive of taxes, interest, brokerage commissions and extraordinary
expenses, determined by the Trust or the Investment Manager, but inclusive of
the management fee) from exceeding a specified percentage of each Portfolio's
average daily net assets, as follows:
AST Janus Overseas Growth Portfolio: 1.75%
T. Rowe Price Small Company Value Portfolio: 1.30%
Twentieth Century International Growth Portfolio: 1.75%
Twentieth Century Strategic Balanced Portfolio: 1.25%
AST Putnam Value Growth & Income Portfolio: 1.25%
The Investment Manager may terminate the above voluntary agreements at
any time. Voluntary payments of Portfolio expenses by the Investment Manager are
subject to reimbursement by the Portfolio at the Investment Manager's discretion
within the two year period following such payment to the extent permissible
under applicable law and provided that the Portfolio is able to effect such
reimbursement and remain in compliance with applicable expense limitations.
Each Management Agreement will continue in effect from year to year,
provided it is approved, at least annually, in the manner stipulated in the 1940
Act. This requires that each Management Agreement and any renewal be approved by
a vote of the majority of the Trustees who are not parties thereto or interested
persons of any such party, cast in person at a meeting specifically called for
the purpose of voting on such approval. Each Management Agreement may be
terminated without penalty on sixty days' written notice by vote of a majority
of the Board of Trustees or by the Investment Manager, or by holders of a
majority of the applicable Portfolio's outstanding shares, and will
automatically terminate in the event of its "assignment" as that term is defined
in the 1940 Act.
The Administrator and Transfer and Shareholder Servicing Agent: PFPC
Inc., 103 Bellevue Parkway, Wilmington, Delaware 19809, a Delaware corporation
which is an indirect wholly-owned subsidiary of PNC Financial Corp., currently
serves as the Trust's Administrator and as the Trust's Transfer and Shareholder
Servicing Agent. Under a Trust Accounting and Administration Agreement (the
"Administration Agreement") dated May 1, 1992, PFPC Inc. (the "Administrator")
provides certain fund accounting and administrative services to the Trust, as
described in the Prospectus.
Pursuant to the terms of the Administration Agreement, the
Administrator shall not be liable for any error of judgment or mistake of law or
for any loss or expense suffered by the Trust, in connection with the matters to
which the Administration Agreement relates, except for a loss or expense
resulting from willful misfeasance, bad faith, or gross negligence on its part
in the performance of its duties or from reckless disregard by it of its
obligations and duties under the Agreement. Any person, even though also an
officer, director, partner, employee or agent of the Administrator, who may be
or become an officer, Trustee, employee or agent of the Trust, shall be deemed
when rendering services to the Trust or acting on any business of the Trust
(other than services or business in connection with the Administrator's duties
under the Administration Agreement) to be rendering such services to or acting
solely for the Trust and not as an officer, director, partner, employee or agent
or one under the control or direction of the Administrator even though paid by
them.
Compensation for the services and facilities provided by the
Administrator under the Administration Agreement includes payment of the
Administrator's out-of pocket expenses. "Out-of-pocket" expenses of the
Administrator include, but are not limited to: postage and mailing, forms,
envelopes, checks, toll-free lines (if requested by the Trust), telephone,
hardware and telephone lines for remote terminals (if required by the Trust),
wire fees, certificate issuance fees, microfiche and microfilm, telex, federal
express, outside independent pricing service charges, record retention/storage
and proxy solicitation, mailing and tabulation expenses (if required by the
Trust).
For the period from January 1, 1996 to December 31, 1996, the Trust
paid the Administrator $3,330,687 for administrative services rendered. For the
period from January 1, 1995 to December 31, 1995, the Trust paid the
Administrator $2,080,598. For the period from January 1, 1994 to December 31,
1994, the Trust paid the Administrator $1,114,940.
The Administration Agreement provides that it will continue in effect
from year to year. The Administration Agreement is terminable, without penalty,
by the Board of Trustees, by vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities, or by the Administrator, on not less than
sixty days' notice. The Administration Agreement shall automatically terminate
upon its assignment by the Administrator without the prior written consent of
the Trust, provided, however, that no such assignment shall release
Administrator from its obligations under the Agreement.
BROKERAGE ALLOCATION: Subject to the supervision of the Board of Trustees,
decisions to buy and sell securities for the Trust are made for each Portfolio
by its Sub-advisor. Each Sub-advisor is authorized to allocate the orders placed
by it on behalf of the applicable Portfolio to brokers who also provide research
or statistical material, or other services to the Portfolio or the Sub-advisor
for the use of the applicable Portfolio or the Sub-advisor's other accounts.
Such allocation shall be in such amounts and proportions as the Sub-advisor
shall determine and the Sub-advisor will report on said allocations either to
the Investment Manager, which will report on such allocations to the Board of
Trustees, or, if requested, directly to the Board of Trustees. Such reports will
indicate the brokers to whom such allocations have been made and the basis
therefor. The Sub-advisor may consider sale of shares of the Portfolios or
variable insurance products that use the Portfolios as investment vehicles, or
may consider or follow recommendations of the Investment Manager that take such
sales into account, as factors in the selection of brokers to effect portfolio
transactions for a Portfolio, subject to the requirements of best net price
available and most favorable execution. In this regard, the Investment Manager
has directed certain of the Sub-advisors to try to effect a portion of their
Portfolios' transactions through broker-dealers that give prominence to variable
insurance products using the Portfolios as investment vehicles, to the extent
consistent with best net price available and most favorable execution.
Subject to the rules promulgated by the SEC, as well as other
regulatory requirements, a Sub-advisor also may allocate orders to brokers or
dealers affiliated with the Sub-advisor or the Investment Manager. Such
allocation shall be in such amounts and proportions as the Sub-advisor shall
determine and the Sub-advisor will report on said allocations either to the
Investment Manager, which will report on such allocations to the Board of
Trustees, or, if requested, directly to the Board of Trustees.
In selecting a broker to execute each particular transaction, each
Sub-advisor will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Portfolio on a
continuing basis. Accordingly, the cost of the brokerage commissions in any
transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the brokerage services
offered. Subject to such policies and procedures as the Board of Trustees may
determine, a Sub-advisor shall not be deemed to have acted unlawfully or to have
breached any duty solely by reason of its having caused a Portfolio to pay a
broker that provides research services to the Sub-advisor an amount of
commission for effecting an investment transaction in excess of the amount of
commission another broker would have charged for effecting that transaction, if
the Sub-advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the research service provided by such
broker viewed in terms of either that particular transaction or the
Sub-advisor's ongoing responsibilities with respect to a Portfolio or its
managed accounts generally. For the years ended December 31, 1994, 1995 and
1996, aggregate brokerage commissions of $2,244,147, $3,220,077 and $7,096,640,
respectively, were paid in relation to brokerage transactions for the Trust. The
increase in commissions paid corresponds roughly to the increase in the Trust's
net assets during those periods.
During the year ended December 31, 1996, brokerage commissions were
paid to affiliates of certain of the Sub-advisors. Specifically, during the year
ended December 31, 1996 brokerage commissions were paid to certain affiliates of
Rowe Price-Fleming International, Inc. by the T. Rowe Price International Equity
Portfolio in the amount of $17,032. For that year, 2.4% of the total brokerage
commissions paid by this Portfolio were paid to the affiliated brokers, with
respect to transactions representing 3.2% of the Portfolio's total dollar amount
of transactions involving the payment of commissions. Similarly, brokerage
commissions were paid to Robertson Stephens & Co., an affiliate of Robertson,
Stephens & Company Investment Management L.P., by the Robertson Stephens Value +
Growth Portfolio in the aggregate amount of $31,999 for the year ended December
31, 1996. For the year ended December 31, 1996, 66.7% of the total brokerage
commissions paid by these Portfolios were paid to Robertson Stephens & Co., with
respect to transactions representing 65.3% of the total amount of the
Portfolio's transactions involving the payment of commissions.
ALLOCATION OF INVESTMENTS: The Sub-advisors have other advisory clients, some of
which have similar investment objectives to one or more Portfolios for which
advisory services are being provided. In addition, a Sub-advisor may be engaged
to provide advisory services for more than one of the Trust's Portfolios. There
will be times when a Sub-advisor may recommend purchases and/or sales of the
same securities for a Portfolio and such Sub-advisor's other clients. In such
circumstances, it will be the policy of each Sub-advisor to allocate purchases
and sales among a Portfolio and its other clients, including other Trust
Portfolios for which it provides advisory services, in a manner which the
Sub-advisor deems equitable, taking into consideration such factors as size of
account, concentration of holdings, investment objectives, tax status, cash
availability, purchase costs, holding period and other pertinent factors
relative to each account.
<PAGE>
COMPUTATION OF NET ASSET VALUES: The Trust determines the net asset values of a
Portfolio's shares at the close of the New York Stock Exchange (the "Exchange"),
currently 4:00 p.m. Eastern time, on each day that the Exchange is open for
business. Currently, the Exchange is closed on Saturdays and Sundays and on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
All Portfolios with the exception of the AST Money Market Portfolio:
The net asset value per share of all of the Portfolios with the exception of the
AST Money Market Portfolio is determined by dividing the market value of its
securities as of the close of trading plus any cash or other assets (including
dividends and accrued interest receivable) less all liabilities (including
accrued expenses), by the number of shares outstanding. Portfolio securities,
including open short positions and options written, are valued at the last sale
price on the securities exchange or securities market on which such securities
primarily are traded. Securities not listed on an exchange or securities market,
or securities in which there were not transactions on that day, are valued at
the average of the most recent bid and asked prices, except in the case of open
short positions where the asked price is available. Any securities or other
assets for which recent market quotations are not readily available are valued
at fair market value as determined in good faith by the Board of Trustees.
Short-term obligations with sixty days or less remaining to maturity are valued
on an amortized cost basis unless the Trustees determine that this amortized
cost value does not represent fair market value. Expenses and fees, including
the investment management fees, are accrued daily and taken into account for the
purpose of determining net asset value of shares.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the Exchange. The
values of such securities used in computing the net asset value of the shares of
a Portfolio generally are determined as of such earlier times. Foreign currency
exchange rates are also generally determined prior to the close of the Exchange.
Occasionally, events affecting the value of such securities and such exchange
rates may occur between the times at which they usually are determined and the
close of the Exchange. If such extraordinary events occur, the securities will
be valued at their fair market value as determined in good faith by the
Trustees.
For purposes of determining the net asset value per share of each
Portfolio all assets and liabilities initially expressed in foreign currencies
will be converted into U.S. dollars at an exchange rate quoted by a major bank
that is a regular participant in the foreign exchange market or on the basis of
a pricing service that takes into account the quotes provided by a number of
such major banks.
AST Money Market Portfolio: For the AST Money Market Portfolio, all
securities are valued by the amortized cost method. The amortized cost method of
valuation values a security at its cost at the time of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. The purpose of this method of calculation is to attempt to
maintain a constant net asset value per share of $1.00. No assurance can be
given that this goal can be attained. If a difference of more than 1/2 of 1%
occurs between valuation based on the amortized cost method and valuation based
on market value, the Trustees will take steps necessary to reduce such
deviation, such as changing dividend policy, shortening the average maturity of
the investments in the Portfolio or realizing gains or losses.
PURCHASE AND REDEMPTION OF SHARES: A complete description of the manner by
which the Trust's shares may be purchased and redeemed appears in the Prospectus
under the heading "Purchase and Redemption of Shares."
TAX MATTERS: A description of some of the tax considerations generally affecting
the Trust and its shareholders is found in the section of the Prospectus
entitled "Tax Matters." No attempt is made to present a detailed explanation of
the tax treatment of the Trust or its shareholders. The discussion in the
Prospectus is not intended as a substitute for careful tax planning.
UNDERWRITER: The Trust is presently used for funding variable annuities, and may
also be used for funding variable life insurance. Pursuant to an exemptive order
of the Securities and Exchange Commission, the Trust may also sell its shares
directly to qualified plans. If the Trust does so, it intends to use American
Skandia Marketing, Incorporated ("ASM, Inc.") or another affiliated
broker-dealer as underwriter, if so required by applicable law. ASM, Inc. is
registered as a broker-dealer with the Securities and Exchange Commission and
the National Association of Securities Dealers. It is an affiliate of American
Skandia Life Assurance Corporation and the Investment Manager, being a
wholly-owned subsidiary of American Skandia Investment Holding Corporation. As
of the date of this Statement, ASM, Inc. has not received payments from the
Trust in connection with any brokerage or underwriting services provided to the
Trust.
PERFORMANCE: The Prospectus contains a brief description of how performance is
calculated. Quotations of average annual return for a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in such Portfolio over periods of 1, 5, and 10 years (up
to the life of the Portfolio) and for such other periods as deemed appropriate
by the Investment Manager. These are the annual total rates of return that would
equate the initial amount invested to the ending redeemable value. These rates
of return are calculated pursuant to the following formula: P(1+T)n = ERV (where
P = a hypothetical initial payment of $1,000, T = the average annual total
return, n = the number of years and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Portfolio
expenses on an annual basis, and assume that all dividends and distributions are
reinvested when paid. The total return of each Portfolio, computed as of
December 31, 1996, is shown in the table below. Such performance information is
historical and is not intended to indicate future performance of the Portfolio.
<TABLE>
<CAPTION>
Total Return
Date Available One Year Three Years Five Years Since
for Sale Inception
- --------------------------------------------- ------------------- --------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
AST Putnam Int'l Equity Portfolio(1) 05/17/89 9.65% 7.37% 9.08% 10.80%
Founders Passport Portfolio(2) 05/02/95 12.91% N/A N/A 9.65%
Lord Abbett Growth and Income Portfolio 05/01/92 18.56% 16.03% N/A 14.72%
JanCap Growth Portfolio 11/06/92 28.36% 19.14% N/A 18.04%
Federated Utility Income Portfolio 05/04/93 11.53% 9.39% N/A 9.88%
Federated High Yield Portfolio 01/04/94 13.58% N/A N/A 9.61%
AST Putnam Balanced Portfolio(3) 05/04/93 11.23% 10.93% N/A 10.51%
T. Rowe Price Asset Allocation Portfolio 01/04/94 13.14% N/A N/A 11.55%
T. Rowe Price International Equity Portfolio 01/04/94 14.17% N/A N/A 6.87%
T. Rowe Price Natural Resources Portfolio 05/02/95 30.74% N/A N/A 25.03%
T. Rowe Price International Bond 05/03/94 5.98% N/A N/A 5.03%
Portfolio(4)
Founders Capital Appreciation Portfolio 01/04/94 20.05% N/A N/A 19.97%
INVESCO Equity Income Portfolio 01/04/94 17.09% N/A N/A 14.11%
PIMCO Total Return Bond Portfolio 01/04/94 3.42% N/A N/A 6.21%
PIMCO Limited Maturity Bond Portfolio 05/02/95 3.90% N/A N/A 5.16%
Berger Capital Growth Portfolio 10/20/94 16.34% N/A N/A 18.12%
Robertson Stevens Value + Growth Portfolio 05/02/96 N/A N/A N/A 9.90%(5)
</TABLE>
(1) Prior to October 15, 1996, Seligman Henderson Co. served as Sub-advisor
to the Portfolio. The performance information provided in the above chart
reflects that of the Portfolio for periods during part of which the Portfolio
was sub-advised by the prior Sub-advisor.
(2) Prior to October 15, 1996, Seligman Henderson Co. served as Sub-advisor
to the Portfolio. The performance information provided in the above chart
reflects that of the Portfolio for periods during part of which the Portfolio
was sub-advised by the prior Sub-advisor.
(3) Prior to October 15, 1996, Phoenix Investment Counsel, Inc. served as
Sub-advisor to the Portfolio. The performance information provided in the above
chart reflects that of the Portfolio for periods during part of which the
Portfolio was sub-advised by the prior Sub-advisor.
(4) Prior to May 1, 1996, Scudder, Stevens & Clark, Inc. served as
Sub-advisor to the Portfolio. The performance information provided in the above
chart reflects that of the Portfolio for periods during part of which the
Portfolio was sub-advised by the prior Sub-advisor.
(5) Not annualized.
Quotations of a Portfolio's yield (other than the AST Money Market
Portfolio) are based on the investment income per share earned during a
particular 30-day period (including dividends, if any, and interest), less
expenses accrued during the period ("net investment income"), and are computed
by dividing net investment income by the net asset value per share on the last
day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6 -1]
cd
where: a = dividend and interest income
b = expenses accrued for the period
c = average daily number of shares outstanding during the period that
were entitled to receive dividends d = maximum net asset value per
share on the last day of the period
The AST Money Market Portfolio yield refers to the income generated by
an investment in the Portfolio over a seven-day period expressed as an annual
percentage rate. Such Portfolio also may calculate an effective yield by
compounding the base period return over a one-year period. The effective yield
will be slightly higher than the yield because of the compounding effect on this
assumed reinvestment.
The current yield and effective yield calculations for shares of the
AST Money Market Portfolio are illustrated for the seven-day period ended
December 31, 1996:
Current Yield Effective Yield
4.99% 5.11%
Such Portfolio's total return is based on the overall dollar or
percentage change in value of a hypothetical investment in the Portfolio
assuming dividend distributions are reinvested. A cumulative total return
reflects the hypothetical annual compounded rate that would have produced the
same cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in a
Portfolio's performance, investors should recognize that they are not the same
as actual year-by-year results.
OTHER INFORMATION:
Principal Holders: As of April 1, 1997, more than 99% of each Portfolio
was owned of record by American Skandia Life Assurance Corporation ("ASLAC") on
behalf of the owners of variable annuity contracts issued by ASLAC. To the
knowledge of the Trust, no person beneficially owned more than 5% of any
Portfolio as of that date. As of April 15, 1997, the amount of shares of the
Trust owned by the ten persons who were the officers and directors of the Trust
at that time, and are expected to be the officers and directors as of the date
of this Statement, and who are shown as such in the section of this Statement
entitled "Management," was less than one percent of the shares.
The Participating Insurance Companies and Qualified Plans are not
obligated to continue to invest in shares of any Portfolio under all
circumstances. Variable annuity and variable life insurance policy holders
should refer to the prospectuses for such products for a description of the
circumstances in which such a change might occur.
Reports to Holders: Holders of variable annuity contracts or variable
life insurance policies issued by Participating Insurance Companies and
Qualified Plans for which shares of the Trust are the investment vehicle will
receive from the Participating Insurance Companies or Qualified Plans, as
applicable, unaudited semi-annual financial statements and audited year-end
financial statements. Participants in Qualified Plans will receive from trustees
of the Qualified Plans, or directly from the Trust as applicable, unaudited
semi-annual financial statements and audited year-end financial statements. Each
report will show the investments owned by the Trust and the market values of the
investments and will provide other information about the Trust and its
operations.
FINANCIAL STATEMENTS: Included in this Statement of Additional Information are
Audited Financial Statements for the Trust for the year ended December 31, 1996.
To the extent and only to the extent that any statement in a document
incorporated by reference into this Statement is modified or superseded by a
statement in this Statement or in a later-filed document, such statement is
hereby deemed so modified or superseded and not part of this Statement.
You may obtain, without charge, a copy of any or all the documents
incorporated by reference in this Statement, including any exhibits to such
documents which have been specifically incorporated by reference. We send such
documents upon receipt of your written or oral request. Please address your
request to American Skandia Trust, P.O. Box 883, Shelton, Connecticut, 06484 or
call (203) 926-1888.
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
AMERICAN SKANDIA TRUST:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of AST Putnam International Equity Portfolio
(formerly Seligman Henderson International Equity Portfolio), Lord Abbett Growth
and Income Portfolio, JanCap Growth Portfolio, AST Money Market Portfolio,
Federated Utility Income Portfolio, AST Putnam Balanced Portfolio (formerly AST
Phoenix Balanced Asset Portfolio), Federated High Yield Portfolio, T. Rowe Price
Asset Allocation Portfolio, PIMCO Total Return Bond Portfolio, INVESCO Equity
Income Portfolio, Founders Capital Appreciation Portfolio, T. Rowe Price
International Equity Portfolio, T. Rowe Price International Bond Portfolio
(formerly AST Scudder International Bond Portfolio), Berger Capital Growth
Portfolio, Founders Passport Portfolio (formerly Seligman Henderson
International Small Cap Portfolio), T. Rowe Price Natural Resources Portfolio,
PIMCO Limited Maturity Bond Portfolio, and Robertson Stephens Value + Growth
Portfolio of American Skandia Trust ("the Trust") as of December 31, 1996, the
related statements of operations and changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1996 by correspondence with the custodians and brokers and where replies
were not received, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of AST Putnam
International Equity Portfolio, Lord Abbett Growth and Income Portfolio, JanCap
Growth Portfolio, AST Money Market Portfolio, Federated Utility Income
Portfolio, AST Putnam Balanced Portfolio, Federated High Yield Portfolio, T.
Rowe Price Asset Allocation Portfolio, PIMCO Total Return Bond Portfolio,
INVESCO Equity Income Portfolio, Founders Capital Appreciation Portfolio, T.
Rowe Price International Equity Portfolio, T. Rowe Price International Bond
Portfolio, Berger Capital Growth Portfolio, Founders Passport Portfolio, T. Rowe
Price Natural Resources Portfolio, PIMCO Limited Maturity Bond Portfolio, and
Robertson Stephens Value + Growth Portfolio of American Skandia Trust as of
December 31, 1996, the results of their operations, the changes in their net
assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 7, 1997
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
FOREIGN STOCK -- 97.0%
AUSTRALIA -- 2.4%
Commonwealth Bank of Australia... 217,100 $ 2,079,297
Goodman Fielder Ltd.............. 1,624,400 2,015,801
QBE Insurance Group Ltd.......... 364,500 1,922,389
Westpac Banking Corp. Ltd........ 398,100 2,267,438
------------
8,284,925
------------
AUSTRIA -- 1.2%
VA Technologie AG................ 26,600 4,183,869
------------
BELGIUM -- 0.1%
Solvay SA........................ 800 490,763
------------
BRAZIL -- 1.0%
Telebras SA [ADR]................ 45,500 3,480,750
------------
CANADA -- 0.8%
Magna International, Inc. Cl-A... 47,100 2,602,275
------------
DENMARK -- 0.5%
Danisco AS....................... 28,900 1,760,935
------------
FRANCE -- 11.2%
Cetelem Group SA................. 18,400 2,131,151
Chargeurs International SA*...... 39,100 1,939,791
Credit Local de France........... 45,400 3,961,315
Dassault Systems SA*............. 56,000 2,586,877
Lafarge SA....................... 53,600 3,220,987
Michelin C.G.D.E. Cl-B........... 73,600 3,979,569
Peugeot Citroen SA............... 19,700 2,220,875
SGS-Thomson Microelectronics*.... 87,300 6,184,796
Societe Nationale Elf Aquitaine
SA............................. 50,376 4,592,897
Sommer-Allibert.................. 34,080 1,019,709
Total SA Cl-B.................... 66,500 5,417,254
Zodiac SA........................ 4,900 1,500,184
------------
38,755,405
------------
GERMANY -- 7.9%
Adidas AG........................ 24,200 2,094,079
Altana AG........................ 3,600 2,808,328
Bayer AG......................... 161,200 6,549,733
Bayerische Motoren Werke AG...... 7,300 5,043,982
Deutsche Telekom AG*............. 160,000 3,341,575
Preussag AG...................... 8,100 1,833,962
Tarkett AG....................... 47,000 954,066
Veba AG.......................... 84,900 4,888,517
------------
27,514,242
------------
HONG KONG -- 9.0%
Amoy Properties Ltd. ............ 1,874,000 2,701,545
Cheung Kong Holdings Ltd. ....... 576,000 5,119,917
Dao Heng Bank Group Ltd. ........ 280,500 1,345,472
Guoco Group Ltd. ................ 410,000 2,295,300
Hong Kong Electric Holdings
Ltd. .......................... 208,000 691,137
Hong Kong Land Holdings Ltd. .... 741,000 2,059,980
HSBC Holdings PLC................ 336,800 7,206,723
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
Hutchison Whampoa Ltd. .......... 402,000 3,157,476
Sun Hung Kai Properties Ltd. .... 272,000 3,332,084
Swire Pacific Ltd. Cl-A.......... 339,000 3,232,433
------------
31,142,067
------------
INDIA -- 0.8%
Hindalco Industries Ltd. [GDR]... 112,500 2,756,250
------------
IRELAND -- 4.3%
Allied Irish Banks PLC........... 661,000 $ 4,390,220
Bank of Ireland PLC.............. 406,600 3,680,059
CRH PLC.......................... 481,100 4,925,674
Greencore Group PLC.............. 299,300 1,878,717
------------
14,874,670
------------
ITALY -- 1.0%
Ente Nazionale Idrocarburi SPA... 655,700 3,349,491
------------
JAPAN -- 16.4%
Bridgestone Corp. ............... 170,000 3,233,895
Canon, Inc. ..................... 208,000 4,604,237
Dai Nippon Printing Co. Ltd. .... 161,000 2,826,027
Daikin Industries Ltd. .......... 135,000 1,202,335
Denso Corp. ..................... 153,000 3,691,051
East Japan Railway Co. Ltd. ..... 430 1,937,138
Hirose Electric Ltd. ............ 32,000 1,856,636
Ito-Yokado Co. Ltd. ............. 62,000 2,701,945
Kao Corp. ....................... 244,000 2,848,249
Komori Corp. .................... 29,000 616,861
Kurita Water Industries Ltd. .... 95,000 1,922,179
Kyushu Electric Power Ltd. ...... 63,000 1,225,681
Mauri Co. Ltd. .................. 153,000 2,764,981
Mitsubishi Motors Corp. ......... 195,000 1,424,773
Mitsui & Co. Ltd. ............... 267,000 2,170,169
Murata Manufacturing Co. Ltd. ... 47,000 1,564,635
Nippon Telegraph & Telephone
Corp. ......................... 231 1,753,722
Obayashi Corp. .................. 276,000 1,866,252
Omron Corp. ..................... 100,000 1,884,998
Onward Kashiyama Co. Ltd. ....... 95,000 1,338,954
Santen Phamaceutical Ltd. ....... 61,000 1,265,888
Sekisui Chemical Co. Ltd. ....... 112,000 1,133,074
Sharp Corp. ..................... 159,000 2,268,482
TDK Corp. ....................... 60,000 3,916,991
Tokio Marine & Fire Insurance
Co. ........................... 146,000 1,376,048
Tostem Corp. .................... 34,000 940,770
Yamanouchi Pharmaceutical Co.
Ltd. .......................... 79,000 1,625,767
Yamato Transport Co. Ltd. ....... 93,000 964,980
------------
56,926,718
------------
MALAYSIA -- 0.8%
Malayan Banking BHD.............. 100,000 1,108,779
Malaysian Assurance Alliance
BHD............................ 326,000 1,587,851
------------
2,696,630
------------
</TABLE>
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
MEXICO -- 0.6%
Panamerican Beverages, Inc.
Cl-A........................... 41,200 $ 1,936,400
------------
NETHERLANDS -- 12.0%
ABN AMRO Holding NV.............. 78,600 5,122,124
Aegon NV......................... 53,700 3,427,858
AKZO Nobel NV.................... 24,300 3,324,907
DSM NV........................... 16,900 1,669,620
Getronics NV..................... 76,100 2,069,278
Gucci Group NV................... 16,300 1,039,125
IHC Caland NV.................... 54,700 3,130,154
ING Groep NV..................... 135,000 4,868,391
KLM Royal Dutch Airlines NV...... 69,000 1,944,226
New Holland NV*.................. 105,000 2,191,875
Philips Electronics NV........... 96,300 3,908,279
Royal PTT Nederland [ADR]........ 103,900 3,948,200
Unilever NV...................... 16,300 2,888,033
Vendex International NV.......... 48,700 2,086,578
------------
41,618,648
------------
PORTUGAL -- 1.0%
Portugal Telecom SA.............. 125,400 3,576,384
------------
SINGAPORE -- 1.1%
Far East Levingston Shipbuilding
Ltd. .......................... 285,000 1,487,559
Overseas Union Bank Ltd. Cl-F.... 149,000 1,150,579
United Overseas Bank Ltd......... 105,000 1,171,171
------------
3,809,309
------------
SPAIN -- 1.0%
Banco Bilbao Vizcaya SA.......... 36,500 1,976,707
Mapfre Vida SA................... 10,400 723,115
Tabacalera SA Cl-A............... 20,800 898,270
------------
3,598,092
------------
SWEDEN -- 6.7%
Astra AB Cl-A.................... 93,300 4,629,353
Autoliv AB....................... 23,500 1,034,541
Electrolux AB Cl-B............... 40,800 2,378,834
Ericsson, (L.M.) Telephone Co.
Cl-B........................... 124,900 3,880,196
Pharmacia & Upjohn, Inc. ........ 107,900 4,440,296
Sandvik AB Cl-B.................. 139,200 3,791,575
Svenska Cellulosa AB Cl-B........ 141,500 2,885,459
------------
23,040,254
------------
SWITZERLAND -- 5.7%
ABB AG........................... 2,430 3,023,201
Julius Baer Holdings AG Cl-B..... 1,570 1,645,901
Nestle SA........................ 3,990 4,284,264
Novartis AG*..................... 3,360 3,848,823
Rieter Holdings AG............... 4,600 1,271,763
Schweizerische Rueckversicerungs-
Gesellschaft................... 3,100 3,310,095
Societe Generale de Surveillance
Holding SA..................... 1,000 2,458,343
------------
19,842,390
------------
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
UNITED KINGDOM -- 11.5%
BAT Industries PLC............... 562,000 $ 4,663,920
Barclays PLC..................... 214,000 3,667,346
British Petroleum Co. PLC........ 247,700 2,972,044
Burmah Castrol PLC............... 170,100 3,207,840
General Electric Co. PLC......... 594,000 3,886,609
Guinness PLC..................... 88,500 693,514
Molins PLC....................... 44,400 682,556
RTZ Corp. PLC.................... 203,300 3,261,116
Scottish Power PLC............... 611,900 3,689,301
Securicor PLC.................... 288,700 1,382,132
Shell Transport & Trading Co.
PLC............................ 203,300 3,522,283
United Utilities PLC............. 182,000 1,935,905
Vodafone Group PLC............... 955,400 4,033,882
Weir Group PLC................... 471,700 2,120,881
------------
39,719,329
------------
TOTAL FOREIGN STOCK
(COST $312,082,358)................ 335,959,796
------------
<CAPTION>
PAR
MATURITY (000)
---------- --------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 2.9%
UBS Securities Funding,
Inc. 6.75% dated
12/31/96, repurchase
price $9,924,720
(Collateralized by
U.S. Treasury Note,
par value $10,406,000,
market value
$10,137,364 due
11/15/05)
(COST $9,921,000)..... 01/02/97 $9,921 9,921,000
------------
TOTAL INVESTMENTS -- 99.9%
(COST $322,003,358).................. 345,880,796
------------
OTHER ASSETS LESS
LIABILITIES -- 0.1%.................. 330,585
------------
NET ASSETS -- 100.0%................... $346,211,381
============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy DEM $ 861,223 1.5548 01/97 $ 10,093
Buy GBP 13,435 0.5952 01/97 260
Buy GBP 6,583,201 0.5996 05/97 154,018
Buy JPY 26,257,749 111.6242 01/97 (889,472)
----------
$(725,101)
==========
</TABLE>
20
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell BEF $ 60,778 31.9902 01/97 $ (627)
Sell DEM 11,065,956 1.5010 05/97 163,858
Sell FRF 24,309,261 5.1201 05/97 89,751
Sell GBP 218,333 0.5854 01/97 (563)
Sell GBP 6,438,840 0.6130 05/97 (298,380)
Sell JPY 39,687,235 112.7929 01/97 942,956
Sell NLG 15,396,465 1.6976 05/97 106,752
--------
$1,003,747
==========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 85.9%
AEROSPACE -- 0.6%
Boeing Co. .................... 30,000 $ 3,191,250
------------
AUTOMOBILE MANUFACTURERS -- 1.8%
General Motors Corp............ 175,000 9,756,250
------------
CHEMICALS -- 1.9%
Dow Chemical Co................ 70,000 5,486,250
Hanna, (M.A.) Co............... 200,000 4,375,000
------------
9,861,250
------------
CLOTHING & APPAREL -- 1.5%
Liz Claiborne, Inc. ........... 100,000 3,862,500
VF Corp........................ 60,000 4,050,000
------------
7,912,500
------------
COMPUTER HARDWARE -- 6.6%
Digital Equipment Corp.*....... 130,000 4,728,750
EMC Corp.*..................... 150,000 4,968,750
Hewlett-Packard Co............. 225,000 11,306,250
International Business Machines
Corp......................... 50,000 7,550,000
Seagate Technology, Inc.*...... 160,000 6,320,000
------------
34,873,750
------------
CONGLOMERATES -- 1.2%
Minnesota Mining &
Manufacturing Co. ........... 80,000 6,630,000
------------
CONSUMER PRODUCTS &
SERVICES -- 2.2%
American Brands, Inc. ......... 170,000 8,436,250
Whirlpool Corp................. 70,000 3,263,750
------------
11,700,000
------------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 3.4%
Emerson Electric Co. .......... 120,000 11,610,000
National Service Industries,
Inc. ........................ 170,000 6,353,750
------------
17,963,750
------------
ENVIRONMENTAL SERVICES -- 1.6%
WMX Technologies, Inc. ........ 260,000 8,482,500
------------
FINANCIAL-BANK & TRUST -- 8.5%
Bank of Boston Corp............ 200,000 12,850,000
BankAmerica Corp. ............. 60,000 5,985,000
Chase Manhattan Corp. ......... 100,000 8,925,000
Comerica, Inc. ................ 90,000 4,713,750
Great Western Financial
Corp. ....................... 210,000 6,090,000
Keycorp........................ 130,000 6,565,000
------------
45,128,750
------------
FINANCIAL SERVICES -- 1.3%
Dean Witter Discover & Co. .... 30,900 2,047,125
Providian Corp. ............... 100,000 5,137,500
------------
7,184,625
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FOOD -- 8.1%
Conagra, Inc. ................. 200,000 9,950,000
CPC International, Inc. ....... 85,000 6,587,500
Heinz, (H.J.) Co. ............. 170,000 6,077,500
Hershey Foods Corp. ........... 75,000 3,281,250
Pioneer Hi-Bred International,
Inc. ........................ 100,000 7,000,000
Sara Lee Corp. ................ 170,000 6,332,500
Supervalu, Inc. ............... 140,000 3,972,500
------------
43,201,250
------------
HEALTHCARE SERVICES -- 1.1%
United Healthcare Corp. ....... 125,000 $ 5,625,000
------------
INDUSTRIAL PRODUCTS -- 2.4%
Cooper Tire & Rubber Co. ...... 79,400 1,568,150
Corning, Inc. ................. 240,000 11,100,000
------------
12,668,150
------------
INSURANCE -- 5.8%
American General Corp. ........ 38,000 1,553,250
Chubb Corp. ................... 225,000 12,093,750
CIGNA Corp. ................... 30,000 4,098,750
Safeco Corp. .................. 175,000 6,901,563
Transamerica Corp. ............ 80,000 6,320,000
------------
30,967,313
------------
MACHINERY & EQUIPMENT -- 4.4%
Deere & Co. ................... 275,000 11,171,875
Goulds Pumps, Inc. ............ 210,000 4,816,875
Snap-On, Inc. ................. 200,000 7,125,000
------------
23,113,750
------------
MEDICAL SUPPLIES &
EQUIPMENT -- 1.7%
Mallinckrodt Group, Inc. ...... 200,000 8,825,000
------------
OFFICE EQUIPMENT -- 0.8%
Harris Corp. .................. 65,000 4,460,625
------------
OIL & GAS -- 7.7%
Chevron Corp. ................. 80,000 5,200,000
Coastal Corp. ................. 70,000 3,421,250
Consolidated Natural Gas
Co. ......................... 75,000 4,143,750
Mobil Corp. ................... 100,000 12,225,000
Schlumberger Ltd. ............. 45,000 4,494,375
Sonat, Inc. ................... 100,000 5,150,000
Total SA [ADR]................. 160,000 6,440,000
------------
41,074,375
------------
PAPER & FOREST PRODUCTS -- 4.4%
International Paper Co. ....... 225,000 9,084,375
James River Corp. of
Virginia..................... 270,000 8,943,750
Kimberly-Clark Corp. .......... 55,000 5,238,750
------------
23,266,875
------------
PHARMACEUTICALS -- 3.4%
Smithkline Beecham PLC [ADR]... 120,000 8,160,000
Warner-Lambert Co. ............ 130,000 9,750,000
------------
17,910,000
------------
</TABLE>
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PRINTING & PUBLISHING -- 0.6%
Deluxe Corp. .................. 100,000 $ 3,275,000
------------
RESTAURANTS -- 1.1%
Brinker International, Inc.*... 350,000 5,600,000
------------
RETAIL & MERCHANDISING -- 5.1%
Dillard Department Stores, Inc.
Cl-A......................... 200,000 6,175,000
May Department Stores Co. ..... 85,000 3,973,750
Payless Shoesource, Inc.*...... 170,000 6,375,000
Toys 'R' Us, Inc.*............. 350,000 10,500,000
------------
27,023,750
------------
TELECOMMUNICATIONS -- 3.2%
AT&T Corp. .................... 140,000 6,090,000
Lucent Technologies, Inc. ..... 65,000 3,006,250
MCI Communications Corp. ...... 240,000 7,845,000
------------
16,941,250
------------
UTILITIES -- 5.5%
Baltimore Gas & Electric
Co. ......................... 260,000 6,955,000
Carolina Power & Light Co. .... 200,000 7,300,000
Central & South West Corp. .... 280,000 7,175,000
Cinergy Corp. ................. 230,000 7,676,250
------------
29,106,250
------------
TOTAL COMMON STOCK
(COST $384,990,810).............. 455,743,213
------------
PREFERRED STOCK -- 4.1%
CONTAINERS & PACKAGING -- 0.8%
Sonoco Products Co. $2.25
[CVT]........................ 75,000 4,115,625
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
INSURANCE -- 0.7%
Aetna, Inc. Cl-C 6.25% [CVT]... 50,000 $ 3,968,750
------------
OIL & GAS -- 2.6%
Atlantic Richfield Co. 9.01%
[CVT]........................ 250,000 5,375,000
Occidental Petroleum Corp.
$3.875 [CVT] 144A............ 140,000 8,223,040
------------
13,598,040
------------
TOTAL PREFERRED STOCK
(COST $21,967,527)............... 21,682,415
------------
SHORT TERM INVESTMENTS -- 7.1%
Temporary Investment Cash
Fund......................... 18,939,511 18,939,511
Temporary Investment Fund...... 18,939,511 18,939,511
------------
(COST $37,879,022)............. 37,879,022
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- -------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 2.5%
U.S. Treasury Bonds
6.875%
(COST $12,755,062)... 08/15/25 $13,000 13,253,240
------------
TOTAL INVESTMENTS -- 99.6%
(COST $457,592,421)................. 528,557,890
OTHER ASSETS LESS
LIABILITIES -- 0.4%................. 1,939,559
------------
NET ASSETS -- 100.0%.................. $530,497,449
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 1.6% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 92.1%
AEROSPACE -- 3.9%
Boeing Co. ...................... 268,800 $ 28,593,600
Gulfstream Aerospace Corp.* ..... 35,425 859,056
Textron, Inc. ................... 56,850 5,358,113
------------
34,810,769
------------
AIRLINES -- 3.8%
UAL Corp.* ...................... 538,025 33,626,563
------------
BEVERAGES -- 6.1%
Coca-Cola Co. ................... 297,200 15,640,150
Coca-Cola Enterprises, Inc. ..... 185,250 8,984,625
Pepsico, Inc. ................... 1,021,550 29,880,338
------------
54,505,113
------------
CHEMICALS -- 7.5%
Cytec Industries, Inc.* ......... 743,950 30,222,969
Monsanto Co. .................... 694,650 27,004,519
Praxair, Inc. ................... 206,900 9,543,263
------------
66,770,751
------------
CLOTHING & APPAREL -- 4.5%
Gucci Group NV [ADR] ............ 210,950 13,474,431
Nike, Inc. Cl-B ................. 442,825 26,458,794
St. John Knits, Inc. ............ 7,375 320,813
------------
40,254,038
------------
COMPUTER HARDWARE -- 5.8%
Dell Computer Corp.* ............ 264,925 14,074,141
International Business Machines
Corp. ......................... 246,850 37,274,350
------------
51,348,491
------------
COMPUTER SERVICES & SOFTWARE -- 13.8%
Cadence Design Systems, Inc.* ... 100,000 3,975,000
Cisco Systems, Inc.* ............ 469,525 29,873,528
Clarify, Inc.* .................. 46,100 2,212,800
Computer Sciences Corp.* ........ 134,425 11,039,653
First Data Corp. ................ 563,878 20,581,547
Gartner Group, Inc. Cl-A* ....... 289,800 11,284,087
HBO & Co. ....................... 161,875 9,611,328
Microsoft Corp.* ................ 306,575 25,330,759
Oracle Corp.* ................... 36,750 1,534,313
Parametric Technology Corp.* .... 71,025 3,648,909
Sapient Corp.* .................. 84,000 3,538,500
Transactions Systems Architects,
Inc.* ......................... 12,100 402,325
------------
123,032,749
------------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 3.1%
Applied Materials, Inc.* ........ 150,000 5,390,625
Diebold, Inc. ................... 65,825 4,138,747
Etec Systems, Inc.* ............. 28,450 1,088,212
General Electric Co. ............ 151,225 14,952,372
KLA Instruments Corp.* .......... 45,000 1,597,500
Raychem Corp. ................... 12,400 993,550
------------
28,161,006
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 1.4%
Mirage Resorts, Inc.* ........... 578,800 $ 12,516,550
------------
FINANCIAL-BANK & TRUST -- 13.0%
Bank Plus Corp.* ................ 670,609 7,712,003
Chase Manhattan Corp. ........... 281,450 25,119,412
Citicorp ........................ 403,445 41,554,835
Mercantile Bancorporation,
Inc. .......................... 111,200 5,712,900
Wells Fargo & Co. ............... 134,083 36,168,889
------------
116,268,039
------------
FINANCIAL SERVICES -- 8.1%
Associates First Capital
Corp. ......................... 187,975 8,294,397
Federal Home Loan Mtge. Corp. ... 135,175 14,886,147
Federal National Mtge. Assoc. ... 352,085 13,115,166
First USA Paymentech, Inc.* ..... 137,400 4,654,425
Hambrecht & Quist Group* ........ 258,775 5,596,009
Merrill Lynch & Co., Inc. ....... 312,925 25,503,387
------------
72,049,531
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.5%
Fresenius Medical Care AG
[ADR]*......................... 171,325 4,818,516
------------
METALS & MINING -- 1.5%
Potash Corp. of Saskatchewan,
Inc............................ 154,175 13,104,875
------------
OFFICE EQUIPMENT -- 1.8%
Alco Standard Corp. ............. 63,200 3,262,700
Danka Business Systems PLC
[ADR].......................... 370,450 13,104,669
------------
16,367,369
------------
PHARMACEUTICALS -- 8.6%
Biochem Pharma, Inc.* ........... 84,450 4,243,612
Bristol-Meyers Squibb Co. ....... 6,475 704,156
Lilly, (Eli) & Co. .............. 300,275 21,920,075
Pfizer, Inc. .................... 374,975 31,076,053
Warner Lambert Co. .............. 250,000 18,750,000
------------
76,693,896
------------
RETAIL & MERCHANDISING -- 0.9%
Cross-Continent Auto Retailers,
Inc.*.......................... 31,675 661,216
Finish Line, Inc.* .............. 72,500 1,531,562
Vons Companies, Inc.* ........... 94,375 5,650,703
------------
7,843,481
------------
SEMI-CONDUCTORS -- 1.7%
Intel Corp. ..................... 116,350 15,234,578
------------
TELECOMMUNICATIONS -- 5.5%
Ascend Communications, Inc.* .... 114,550 7,116,419
Cincinnati Bell, Inc. ........... 130,625 8,049,766
Lucent Technologies, Inc. ....... 733,100 33,905,875
------------
49,072,060
------------
UTILITIES -- 0.6%
PECO Energy Co. ................. 206,325 5,209,706
------------
TOTAL COMMON STOCK
(COST $644,897,492) ............... 821,688,081
------------
</TABLE>
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FOREIGN STOCK -- 1.3%
AUTOMOBILE MANUFACTURERS
Porsche AG Pfd. -- (DEM)
(COST $8,294,264) ............... 13,419 $ 12,004,636
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- --------
<S> <C> <C>
COMMERCIAL PAPER -- 4.4%
American Express Credit
Corp. 6.55%
(COST $39,292,850) .... 01/02/97 $39,300 39,292,850
------------
<CAPTION>
VALUE
-----
<S> <C>
TOTAL INVESTMENTS -- 97.8%
(COST $692,484,606) ............... $872,985,567
OTHER ASSETS LESS
LIABILITIES -- 2.2% ............... 19,338,822
------------
NET ASSETS -- 100.0% ................ $892,324,389
============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED
COVERED EXCHANGE EXPIRATION UNREALIZED
TYPE BY CONTRACT RATE MONTH APPRECIATION
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell DEM $6,388,155 1.4757 01/97 $247,747
========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 12.7%
FINANCIAL-BANK & TRUST
Abbey National
Treasury [VR]
5.375%.............. 01/15/97 $15,000 $ 14,995,855
Bayerische Landesbank [VR]
5.37%............... 01/15/97 5,000 4,999,879
First Union National
Bank NC
5.595% [VR]......... 01/20/97 5,000 5,000,000
5.36%............... 02/18/97 20,000 20,000,000
PNC Bank N.A. [VR]
5.5037%............. 01/11/97 15,000 14,989,511
Society National Bank
of Cleveland [VR]
4.85%............... 01/01/97 10,000 9,996,492
------------
TOTAL CORPORATE OBLIGATIONS
(COST $69,981,737)................ 69,981,737
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 15.8%
Federal Home Loan Bank
6.50%............... 01/02/97 76,630 76,616,164
Federal National Mtge.
Assoc. [VR]
5.42%............... 01/07/97 10,000 9,996,583
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $86,612,747)................ 86,612,747
------------
U.S. TREASURY OBLIGATIONS -- 1.8%
U.S. Treasury Notes
5.25%
(COST $9,967,357)..... 12/31/97 10,000 9,967,357
------------
CERTIFICATES OF DEPOSIT -- 39.9%
Bank of New York
Co., Inc.
5.55%............... 04/01/97 5,000 4,999,141
Bank of Tokyo N.A.
5.58%............... 03/17/97 25,000 25,000,000
Banque National de
Paris NY
5.38%............... 03/03/97 20,000 19,999,558
Banque National de
Paris SF
5.80%............... 01/09/97 7,000 6,999,274
Bayerische Landesbank
NY
5.50%............... 11/21/97 7,500 7,494,208
Canadian Imperial Bank
of Commerce
5.39%............... 01/30/97 17,225 17,225,000
5.46%............... 02/19/97 7,500 7,500,101
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
Deutsche Bank
5.55%............... 11/10/97 $20,000 $ 19,991,058
Landesbank Hess
6.01%............... 07/18/97 5,000 5,007,710
National Westminster
Bank NY
5.39%............... 02/14/97 21,000 20,999,979
NationsBank Corp.
4.90%............... 02/05/97 12,000 11,999,445
Royal Bank of Canada
5.745%.............. 05/15/97 22,000 22,003,372
Sanwa Bank Ltd.
5.68%............... 01/13/97 25,000 25,000,083
Societe Generale NY
5.65%............... 04/01/97 15,000 15,000,971
Sumitomo Bank Ltd. NY
5.61%............... 01/31/97 10,000 10,000,083
------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $219,219,983)............... 219,219,983
------------
COMMERCIAL PAPER -- 29.6%
BEVERAGES -- 0.9%
Coca-Cola Co.
5.92%............... 01/09/97 5,000 4,993,422
FINANCIAL-BANK & TRUST -- 9.8%
ABN AMRO Bank
5.34%............... 06/19/97 10,000 9,749,317
Barclays U.S. Funding
Corp.
5.72%............... 01/03/97 25,000 24,992,056
Caisse D'Amortissement
5.33%............... 02/06/97 19,000 18,898,730
------------
53,640,103
------------
FINANCIAL SERVICES -- 8.9%
Deutsche Bank
Financial, Inc.
5.70%............... 01/02/97 5,000 4,999,208
Ford Motor Credit
Corp.
7.00%............... 01/02/97 25,000 24,995,139
Korea Development Bank
5.32%............... 03/05/97 19,000 18,823,110
------------
48,817,457
------------
INSURANCE -- 0.9%
AIG Funding Corp.
5.95%............... 01/02/97 5,000 4,999,174
------------
OIL & GAS -- 4.6%
Koch Industries, Inc.
7.10%............... 01/02/97 25,000 24,995,069
------------
</TABLE>
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
PHARMACEUTICALS -- 4.5%
Warner-Lambert Co.
6.10%............... 01/06/97 $25,000 $ 24,978,819
------------
TOTAL COMMERCIAL PAPER
(COST $162,424,044)............... 162,424,044
------------
TOTAL INVESTMENTS -- 99.8%
(COST $548,205,868)............... 548,205,868
OTHER ASSETS LESS
LIABILITIES -- 0.2%............... 1,263,717
------------
NET ASSETS -- 100.0%................ $549,469,585
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FEDERATED UTILITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 74.6%
AUTOMOBILE MANUFACTURERS -- 1.1%
Ford Motor Co. .................... 44,000 $ 1,402,500
------------
CONGLOMERATES -- 1.9%
Philip Morris Companies, Inc. ..... 20,200 2,275,025
------------
FINANCIAL-BANK & TRUST -- 1.0%
Mellon Bank Corp. ................. 16,600 1,178,600
------------
OIL & GAS -- 2.9%
Exxon Corp......................... 6,000 588,000
New Jersey Resources Corp. ........ 8,700 254,475
Panenergy Corp. ................... 29,900 1,345,500
Williams Companies, Inc. .......... 37,950 1,423,125
------------
3,611,100
------------
REAL ESTATE -- 2.9%
Meditrust Corp. [REIT]............. 90,700 3,628,000
------------
TELECOMMUNICATIONS -- 19.2%
Ameritech Corp. ................... 58,400 3,540,500
AT&T Corp. ........................ 24,000 1,044,000
BellSouth Corp. ................... 87,300 3,524,737
Frontier Corp. .................... 26,500 599,562
GTE Corp. ......................... 77,700 3,535,350
MCI Communications Corp. .......... 111,600 3,647,925
Pacific Telesis Group.............. 69,200 2,543,100
SBC Communications, Inc. .......... 13,100 677,925
Sprint Corp. ...................... 61,600 2,456,300
Telebras SA [ADR].................. 18,400 1,407,600
Telefonica del Peru SA Cl-B
[ADR]............................ 32,400 611,550
------------
23,588,549
------------
UTILITIES -- 0.2%
American Water Works Co., Inc. .... 13,900 286,687
------------
UTILITIES -- ELECTRIC -- 41.0%
Cinergy Corp. ..................... 43,800 1,461,825
CMS Energy Corp. .................. 114,200 3,839,975
DPL, Inc. ......................... 132,200 3,238,900
DQE, Inc. ......................... 99,850 2,895,650
Duke Power Co. .................... 98,300 4,546,375
FPL Group, Inc. ................... 106,900 4,917,400
GPU, Inc........................... 54,600 1,835,925
Illinova Corp...................... 109,000 2,997,500
Korea Electric Power Corp. [ADR]... 41,600 852,800
National Power PLC [ADR]........... 78,300 2,652,413
NIPSCO Industries, Inc............. 72,800 2,884,700
Pacificorp......................... 91,400 1,873,700
PECO Energy Co..................... 90,100 2,275,025
Pinnacle West Capital Co........... 116,700 3,705,225
Portland General Corp.............. 63,900 2,683,800
Southern Co........................ 122,700 2,776,087
Teco Energy, Inc................... 108,400 2,615,150
Texas Utilities Co................. 59,000 2,404,250
------------
50,456,700
------------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
UTILITIES -- GAS -- 4.4%
MCN Corp........................... 102,900 $ 2,971,238
Pacific Enterprises................ 81,500 2,475,563
------------
5,446,801
------------
TOTAL COMMON STOCK
(COST $81,880,351)................. 91,873,962
------------
PREFERRED STOCK -- 15.7%
COMPUTER SERVICES & SOFTWARE -- 1.7%
Microsoft Corp. 2.75% [CVT]........ 25,700 2,059,213
------------
CONTAINERS & PACKAGING -- 0.5%
Amcor Ltd. 7.25% [CVT]............. 12,700 647,700
------------
ENVIRONMENTAL SERVICES -- 1.0%
Browning-Ferris Industries, Inc.
7.25% [CVT]...................... 45,300 1,291,050
------------
FINANCIAL SERVICES -- 5.8%
Merrill Lynch & Co., Inc. [CVT]
6.00%............................ 33,300 740,925
6.25%............................ 15,200 609,900
6.50%............................ 31,300 2,104,925
7.25%............................ 11,600 771,400
Salomon, Inc. [CVT]
6.25%............................ 22,200 1,337,550
7.625%........................... 22,000 673,750
SunAmerica, Inc. $3.10 [CVT]....... 20,000 845,000
------------
7,083,450
------------
INSURANCE -- 1.0%
Aetna, Inc. 6.25% [CVT]............ 15,500 1,230,312
------------
METALS & MINING -- 1.0%
Coeur D'arlene Mines Corp. 7.00%
[CVT]............................ 68,700 1,202,250
------------
OFFICE EQUIPMENT -- 0.5%
Alco Standard Corp. $5.04 [CVT].... 6,600 630,300
------------
OIL & GAS -- 2.5%
Tosco Corp. [CVT] 144A*............ 23,800 1,228,675
Williams Companies, Inc. $3.50
[CVT]............................ 20,500 1,783,500
------------
3,012,175
------------
PAPER & FOREST PRODUCTS -- 0.3%
International Paper Co. 5.25%
[CVT]............................ 7,800 354,900
------------
PRINTING & PUBLISHING -- 0.5%
Hollinger International Publishing
Co. 9.75% [CVT].................. 58,600 673,900
------------
TELECOMMUNICATIONS -- 0.9%
Airtouch Communications, Inc. 6.00%
Cl-B [CVT]....................... 41,100 1,119,975
------------
TOTAL PREFERRED STOCK
(COST $18,081,464)................... 19,305,225
------------
</TABLE>
<PAGE>
FEDERATED UTILITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
FOREIGN STOCK -- 2.0%
TELECOMMUNICATIONS -- 1.3%
Stet di Risp SPA -- (ITL).......... 475,600 $ 1,599,377
------------
UTILITIES -- ELECTRIC -- 0.7%
Iberdrola SA -- (ESP).............. 59,000 838,690
------------
TOTAL FOREIGN STOCK
(COST $1,809,986).................... 2,438,067
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- --------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 4.0%
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.9%
Solectron Corp. Notes
[CVT] 144A
6.00%.................. 03/01/06 $1,050 1,136,625
------------
FINANCIAL SERVICES -- 1.0%
New World Infrastructure
Bonds [CVT] 144A
5.00%.................. 07/15/01 1,000 1,183,750
------------
HEALTHCARE SERVICES -- 0.5%
Tenet Healthcare Corp.
Sub. Notes [CVT]
6.00%.................. 12/01/05 560 594,300
------------
PHARMACEUTICALS -- 0.8%
Alza Corp. Sub. Debs.
[CVT]
5.00%.................. 05/01/06 1,100 1,061,500
------------
RETAIL &
MERCHANDISING -- 0.4%
Saks Holdings, Inc. Sub.
Notes [CVT]
5.50%.................. 09/15/06 500 455,625
------------
UTILITIES -- ELECTRIC -- 0.4%
Korea Electric Power
Debs. [CVT]
5.00%.................. 08/01/01 470 490,562
------------
TOTAL CORPORATE OBLIGATIONS
(COST $4,672,101)................... 4,922,362
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 3.3%
HSBC Securities, Inc.
5.50% dated 12/31/96,
repurchase price
$4,102,253
(Collateralized
by U.S. Treasury Note,
par value $4,030,000,
market value $4,202,292
due 04/15/98)
(COST $4,101,000)...... 01/02/97 $4,101 $ 4,101,000
------------
<CAPTION>
SHARES
--------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund..... 5,138 5,138
Temporary Investment Fund.......... 5,138 5,138
------------
(COST $10,276)..................... 10,276
------------
TOTAL INVESTMENTS -- 99.6%
(COST $110,555,178).................. 122,650,892
OTHER ASSETS LESS
LIABILITIES -- 0.4%.................. 487,196
------------
NET ASSETS -- 100.0%................... $123,138,088
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 2.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 50.0%
ADVERTISING -- 0.2%
Omnicom Group, Inc. ............... 10,100 $ 462,075
----------
AEROSPACE -- 1.6%
General Motors Corp. Cl-H.......... 21,900 1,231,875
Gulfstream Aerospace Corp.*........ 2,800 67,900
Northrop Grumman Corp. ............ 15,150 1,253,662
Precision Castparts Corp. ......... 5,800 287,825
Rockwell International Corp.*...... 9,470 576,486
United Technologies Corp. ......... 17,580 1,160,280
----------
4,578,028
----------
AIRLINES -- 0.3%
Delta Air Lines, Inc. ............. 10,500 744,187
----------
AUTOMOBILE MANUFACTURERS -- 1.5%
Chrysler Corp. .................... 23,000 759,000
Ford Motor Co. .................... 43,090 1,373,494
General Motors Corp. .............. 37,300 2,079,475
----------
4,211,969
----------
AUTOMOTIVE PARTS -- 2.2%
Eaton Corp. ....................... 20,940 1,460,565
Echlin, Inc. ...................... 35,540 1,123,952
Goodyear Tire & Rubber Co. ........ 11,400 585,675
ITT Industries, Inc. .............. 39,320 963,340
Magna International, Inc. Cl-A..... 5,000 278,750
TRW, Inc. ......................... 38,100 1,885,950
----------
6,298,232
----------
BEVERAGES -- 0.3%
Anheuser-Busch Companies, Inc. .... 9,200 368,000
Coca-Cola Enterprises, Inc. ....... 5,700 276,450
Panamerican Beverages, Inc. Cl-A... 5,500 257,812
----------
902,262
----------
BROADCASTING -- 0.1%
Evergreen Media Corp. Cl-A......... 6,900 172,500
----------
BUILDING MATERIALS -- 0.4%
Armstrong World Industries,
Inc. ............................ 11,730 815,235
Sherwin-Williams Co. .............. 5,400 302,400
Terex Corp. Appreciation Rights*... 600 1,200
----------
1,118,835
----------
BUSINESS SERVICES -- 0.6%
Accustaff*......................... 10,100 213,362
Equifax, Inc. ..................... 14,200 434,875
Norrell Corp. ..................... 13,500 367,875
Primark Corp.*..................... 7,800 193,050
Quintiles Transnational Corp.*..... 3,400 225,250
Telespectrum Worldwide, Inc.*...... 14,100 223,838
----------
1,658,250
----------
CHEMICALS -- 1.6%
Dupont, (E.I.) de Nemours & Co. ... 13,700 1,292,938
Eastman Chemical Co. .............. 21,010 1,160,802
Praxair, Inc. ..................... 7,400 341,325
Witco Corp. ....................... 53,530 1,632,665
----------
4,427,730
----------
SHARES VALUE
------- ------------
CLOTHING & APPAREL -- 0.3%
Hilfiger, (Tommy) Corp.*........... 4,200 $ 201,600
Jones Apparel Group, Inc.*......... 7,600 284,050
Nine West Group, Inc.*............. 4,900 227,238
St. John Knits, Inc. .............. 3,900 169,650
----------
882,538
----------
COMPUTER HARDWARE -- 1.1%
Gateway 2000, Inc.*................ 2,600 139,262
Hewlett-Packard Co. ............... 18,300 919,575
International Business Machines
Corp. ........................... 13,630 2,058,130
----------
3,116,967
----------
COMPUTER SERVICES & SOFTWARE -- 1.3%
BMC Software, Inc.*................ 2,000 82,750
CDW Computers Centers, Inc.*....... 5,200 308,425
Citrix Systems, Inc.*.............. 4,600 179,687
DST Systems, Inc.*................. 6,200 194,525
Learning Co., Inc.*................ 10,100 145,188
McAfee Associates, Inc.*........... 7,500 330,000
NCR Corp.*......................... 18,720 624,780
Parametric Technology Corp.*....... 4,900 251,737
Paychex, Inc. ..................... 4,400 226,325
Peoplesoft, Inc.*.................. 6,800 325,975
Reynolds & Reynolds Co. Cl-A....... 21,300 553,800
Sterling Commerce, Inc.*........... 5,800 204,450
Viasoft, Inc.*..................... 3,500 165,375
Western Digital Corp.*............. 3,100 176,312
----------
3,769,329
----------
CONGLOMERATES -- 1.2%
Minnesota Mining & Manufacturing
Co. ............................. 23,040 1,909,440
Philip Morris Companies, Inc. ..... 12,360 1,392,045
----------
3,301,485
----------
CONSUMER PRODUCTS & SERVICES -- 2.8%
American Brands, Inc. ............. 25,800 1,280,325
Apollo Group, Inc. Cl-A*........... 8,200 274,187
Avon Products, Inc. ............... 18,400 1,051,100
Colgate-Palmolive Co. ............. 8,500 784,125
Eastman Kodak Co. ................. 25,720 2,064,030
Estee Lauder Co. Cl-A.............. 8,700 442,612
Tupperware Corp. .................. 4,600 246,675
Whirlpool Corp. ................... 21,840 1,018,290
Whitman Corp. ..................... 42,550 973,331
----------
8,134,675
----------
CONTAINERS & PACKAGING -- 0.5%
Crown Cork & Seal Co., Inc. ....... 17,585 956,184
Temple-Inland, Inc. ............... 10,950 592,669
----------
1,548,853
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.6%
ADT Ltd.*.......................... 9,400 215,025
BMC Industries, Inc. .............. 4,100 129,150
C-Cube Microsystems, Inc.*......... 3,200 118,200
Diebold, Inc. ..................... 5,000 314,375
Electronics For Imaging, Inc.*..... 2,900 238,525
General Signal Corp. .............. 19,870 849,442
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Honeywell, Inc. ................... 16,900 $ 1,111,175
International Game Technology...... 9,600 175,200
LSI Logic Corp.*................... 4,600 123,050
Perkin-Elmer Corp. ................ 3,500 206,063
Polaroid Corp. .................... 26,460 1,151,010
SCI Systems, Inc.*................. 4,800 214,200
Symbol Technologies, Inc.*......... 5,900 261,075
Texas Instruments, Inc. ........... 33,750 2,151,562
Waters Corp.*...................... 6,800 206,550
----------
7,464,602
----------
ENTERTAINMENT & LEISURE -- 0.1%
Callaway Golf Co. ................. 6,100 175,375
Harley-Davidson, Inc. ............. 4,100 192,700
----------
368,075
----------
ENVIRONMENTAL SERVICES -- 0.8%
United Waste Systems, Inc.*........ 7,600 261,250
U.S. Filter Corp.*................. 15,300 485,775
USA Waste Services, Inc.*.......... 8,900 283,688
WMX Technologies, Inc. ............ 34,730 1,133,066
----------
2,163,779
----------
FINANCIAL-BANK & TRUST -- 5.6%
Banc One Corp. .................... 26,190 1,126,170
BankAmerica Corp. ................. 12,170 1,213,957
Bankers Trust New York Corp. ...... 14,480 1,248,900
Charter One Financial, Inc. ....... 9,600 403,200
CoreStates Financial Corp. ........ 19,130 993,564
First of America Bank Corp. ....... 3,600 216,450
Fleet Financial Group, Inc. ....... 29,750 1,483,781
Great Western Financial Corp. ..... 19,330 560,570
Keycorp............................ 26,300 1,328,150
Mellon Bank Corp. ................. 8,210 582,910
Morgan, (J.P.) & Co., Inc. ........ 23,800 2,323,475
NationsBank Corp. ................. 9,020 881,705
Northern Trust Corp. .............. 8,800 319,000
PNC Bank Corp. .................... 63,610 2,393,326
State Street Boston Corp. ......... 5,600 361,200
TCF Financial Corp. ............... 7,900 343,650
Washington Mutual, Inc. ........... 8,600 372,488
----------
16,152,496
----------
FINANCIAL SERVICES -- 1.0%
Ahmanson, (H.F.) & Co. ............ 36,000 1,170,000
Beneficial Corp. .................. 15,820 1,002,592
Finova Group, Inc. ................ 6,600 424,050
SunAmerica, Inc. .................. 5,000 221,875
----------
2,818,517
----------
FOOD -- 0.4%
General Mills, Inc. ............... 19,340 1,225,673
----------
SHARES VALUE
------- ------------
HEALTHCARE SERVICES -- 0.6%
American Medical Response, Inc.*... 7,500 $ 243,750
Genesis Health Ventures, Inc.*..... 6,000 186,750
Health Care & Retirement Corp.*.... 7,400 211,825
Health Management Associates,
Inc.*............................ 11,000 247,500
Healthsouth Corp.*................. 5,600 216,300
Omnicare, Inc. .................... 12,800 411,200
Oxford Health Plans, Inc.*......... 4,700 275,244
----------
1,792,569
----------
HOTELS & MOTELS -- 0.1%
HFS, Inc.*......................... 3,600 215,100
----------
INDUSTRIAL PRODUCTS -- 0.4%
Corning, Inc. ..................... 27,700 1,281,125
----------
INSURANCE -- 1.7%
American General Corp. ............ 35,700 1,459,237
AON Corp. ......................... 20,070 1,246,849
Capmac Holdings, Inc. ............. 5,600 185,500
CIGNA Corp. ....................... 5,030 687,224
USF&G Corp. ....................... 68,440 1,428,685
----------
5,007,495
----------
MACHINERY & EQUIPMENT -- 0.5%
New Holland NV*.................... 66,600 1,390,275
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.7%
Baxter International, Inc. ........ 31,390 1,286,990
IDEXX Laboratories, Inc.*.......... 5,700 205,200
Stryker Corp. ..................... 10,600 316,675
U.S. Surgical Corp. ............... 5,700 224,438
----------
2,033,303
----------
METALS & MINING -- 0.4%
Freeport-McMoran Copper & Gold,
Inc. Cl-A........................ 37,530 1,055,531
----------
OFFICE EQUIPMENT -- 0.8%
Staples, Inc.*..................... 19,200 346,800
Xerox Corp. ....................... 39,020 2,053,428
----------
2,400,228
----------
OIL & GAS -- 3.8%
Amoco Corp. ....................... 22,180 1,785,490
British Petroleum Co. PLC [ADR].... 8,600 1,215,825
Camco International, Inc. ......... 6,800 313,650
Coastal Corp. ..................... 24,400 1,192,550
Global Marine, Inc.*............... 9,500 195,938
Halliburton Co. ................... 5,600 337,400
Mobil Corp. ....................... 9,450 1,155,263
Occidental Petroleum Corp. ........ 49,670 1,161,036
Panenergy Corp. ................... 22,010 990,450
Phillips Petroleum Co. ............ 26,930 1,191,653
Total SA [ADR]..................... 31,500 1,267,875
Western Atlas, Inc.*............... 2,800 198,450
----------
11,005,580
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
PAPER & FOREST PRODUCTS -- 1.6%
Kimberly-Clark Corp. .............. 24,250 $ 2,309,813
Rayonier, Inc. .................... 18,860 723,753
Weyerhaeuser Co. .................. 33,150 1,570,481
----------
4,604,047
----------
PHARMACEUTICALS -- 2.8%
American Home Products Corp. ...... 17,600 1,031,800
Biochem Pharma, Inc.*.............. 3,900 195,975
Bristol-Meyers Squibb Co. ......... 8,920 970,050
Cardinal Health, Inc. ............. 7,050 410,662
Dura Pharmaceutical, Inc.*......... 5,400 257,850
Elan Corp. PLC [ADR]*.............. 10,900 362,425
Interneuron Pharmaceuticals,
Inc.*............................ 7,900 205,400
Pharmacia & Upjohn, Inc. .......... 64,050 2,537,981
Warner-Lambert Co. ................ 27,020 2,026,500
----------
7,998,643
----------
PRINTING & PUBLISHING -- 0.6%
Belo, (A.H.) Corp. Cl-A............ 8,100 282,487
Gartner Group, Inc. Cl-A*.......... 6,900 268,669
Times Mirror Co. Cl-A.............. 21,040 1,046,740
----------
1,597,896
----------
RAILROADS -- 0.9%
Canadian National Railway Co. ..... 15,700 596,600
Norfolk Southern Corp. ............ 12,870 1,126,125
Union Pacific Corp. ............... 14,800 889,850
----------
2,612,575
----------
RETAIL & MERCHANDISING -- 3.1%
Borders Group, Inc.*............... 8,600 308,525
CompUSA, Inc.*..................... 6,600 136,125
Consolidated Stores Corp.*......... 12,325 395,941
Dayton-Hudson Corp. ............... 31,440 1,234,020
Harcourt General, Inc. ............ 6,400 295,200
J.C. Penney Co., Inc. ............. 22,280 1,086,150
Kmart Corp.*....................... 120,060 1,245,623
May Department Stores Co. ......... 21,700 1,014,475
Pier 1 Imports, Inc. .............. 9,900 174,488
Revco D.S., Inc.*.................. 9,200 340,400
Rite Aid Corp. .................... 32,060 1,274,385
Sears Roebuck & Co. ............... 13,200 608,850
Starbucks Corp.*................... 6,700 191,788
TJX Companies, Inc. ............... 11,300 535,338
----------
8,841,308
----------
SEMI-CONDUCTORS -- 0.6%
Analog Devices, Inc.*.............. 5,900 199,862
Microchip Technology, Inc.*........ 3,700 188,238
Motorola, Inc. .................... 21,980 1,349,023
----------
1,737,123
----------
SHARES VALUE
------- ------------
TELECOMMUNICATIONS -- 3.8%
ADC Telecommunications, Inc.*...... 6,000 $ 186,750
Ameritech Corp. ................... 11,900 721,437
BellSouth Corp. ................... 34,980 1,412,317
Cascade Communications Corp.*...... 5,300 292,162
Cincinnati Bell, Inc. ............. 2,500 154,062
Clear Channel Communications,
Inc.*............................ 10,300 372,087
Deutsche Telekom AG [ADR]*......... 31,000 633,563
GTE Corp. ......................... 43,550 1,981,525
LCI International, Inc.*........... 7,300 156,950
Pacific Telesis Group.............. 35,940 1,320,795
Pairgain Technologies, Inc.*....... 4,900 149,144
Picturetel Corp.*.................. 6,800 176,800
Sprint Corp. ...................... 48,340 1,927,558
Telebras SA [ADR].................. 7,300 558,450
Teleport Communications Group, Inc.
Cl-A*............................ 10,100 308,050
Tellabs, Inc.*..................... 9,600 361,200
360 Communications Co.*............ 10,100 233,563
----------
10,946,413
----------
TRANSPORTATION -- 0.4%
Ryder Systems, Inc. ............... 36,100 1,015,313
Wisconsin Central Transportation
Corp.*........................... 6,100 241,713
----------
1,257,026
----------
UTILITIES -- 0.7%
California Energy Co., Inc.*....... 13,000 437,125
Northeast Utilities System......... 25,800 341,850
Union Electric Co. ................ 28,900 1,112,650
----------
1,891,625
----------
TOTAL COMMON STOCK
(COST $138,113,610).................. 143,188,919
----------
PREFERRED STOCK -- 0.4%
FINANCIAL-BANK & TRUST -- 0.0%
Chevy Chase Capital Corp. Cl-A
10.375%.......................... 1,140 57,855
----------
FOOD -- 0.0%
AmeriKing, Inc. 13.00% [PIK]....... 25 27,500
----------
MACHINERY & EQUIPMENT -- 0.3%
Case Corp. Cl-A $4.50 [CVT]........ 6,160 819,144
----------
TELECOMMUNICATIONS -- 0.1%
Cablevision Systems Corp. Cl-M
11.125% [PIK].................... 1,542 138,767
----------
TOTAL PREFERRED STOCK
(COST $1,022,357).................... 1,043,266
----------
FOREIGN STOCK -- 14.2%
AIRLINES -- 0.2%
KLM Royal Dutch Airlines NV --
(NLG)............................ 7,000 197,240
Swire Pacific Ltd. Cl-A -- (HKD)... 40,000 381,408
----------
578,648
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
AUTOMOBILE MANUFACTURERS -- 0.3%
Bayerische Motoren Werke AG --
(DEM)............................ 900 $ 621,861
Edaran Otomobil Nasional BHD --
(MYR)............................ 8,000 79,991
Peugeot Citroen SA -- (FRF)........ 2,450 276,200
----------
978,052
----------
AUTOMOTIVE PARTS -- 0.6%
Autoliv AB -- (SEK)................ 3,300 145,276
Bridgestone Corp. -- (JPY)......... 26,000 494,596
Denso Corp. -- (JPY)............... 20,000 482,490
Michelin CGDE Cl-B -- (FRF)........ 10,600 573,144
----------
1,695,506
----------
BEVERAGES -- 0.0%
Guinness PLC -- (GBP).............. 7,400 57,989
----------
BUILDING MATERIALS -- 0.4%
CRH PLC -- (IEP)................... 60,800 622,492
Lafarge SA -- (FRF)................ 6,900 414,642
----------
1,037,134
----------
BUSINESS SERVICES -- 0.1%
SGS Holdings SA -- (CHF)........... 125 307,293
----------
CHEMICALS -- 0.6%
Akzo-Nobel NV -- (NLG)............. 3,300 451,531
Bayer AG -- (DEM).................. 20,300 824,811
DSM NV -- (NLG).................... 2,000 197,588
Sekisui Chemical Co.
Ltd. -- (JPY).................... 29,000 293,385
Solvay SA -- (BEF)................. 75 46,009
----------
1,813,324
----------
CLOTHING & APPAREL -- 0.1%
Onward Kashiyama Co.
Ltd. -- (JPY).................... 15,000 211,414
----------
COMPUTER SERVICES & SOFTWARE -- 0.1%
Getronics NV -- (NLG).............. 13,800 375,244
----------
CONGLOMERATES -- 0.9%
BAT Industries PLC -- (GBP)........ 73,200 607,472
Cycle & Carriage Ltd. -- (SGD)..... 19,000 232,304
Hutchison Whampoa Ltd. -- (HKD).... 56,000 439,847
Mitsui & Co. Ltd. -- (JPY)......... 48,000 390,143
Securicor PLC -- (GBP)............. 45,300 216,871
Sungei Way Holdings BHD -- (MYR)... 34,000 100,978
Sungei Way Holdings BHD Rights --
(MYR)*........................... 3,400 4,039
Tabacalera SA Cl-A -- (ESP)........ 2,600 112,284
Unilever NV -- (NLG)............... 2,000 354,360
----------
2,458,298
----------
CONSTRUCTION -- 0.0%
Toda Construction Co. -- (JPY)..... 16,000 121,747
----------
CONSUMER PRODUCTS & SERVICES -- 0.4%
Electrolux AB Cl-B -- (SEK)........ 5,500 320,676
Kao Corp. -- (JPY)................. 34,000 396,887
Zodiac SA -- (FRF)................. 1,200 367,392
----------
1,084,955
----------
SHARES VALUE
------- ------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.2%
General Electric Co.
PLC -- (GBP)..................... 71,000 $ 464,561
Hirose Electric Ltd. -- (JPY)...... 5,000 290,099
Murata Manufacturing Co. Ltd. --
(JPY)............................ 6,000 199,741
Omron Corp. -- (JPY)............... 15,000 282,750
Philips Electronics NV -- (NLG).... 12,300 499,188
SGS-Thomson Microelectronics --
(FRF)*........................... 13,000 920,989
Sharp Corp. -- (JPY)............... 20,000 285,344
TDK Corp. -- (JPY)................. 8,000 522,265
----------
3,464,937
----------
FINANCIAL-BANK & TRUST -- 1.8%
ABN AMRO Holding NV -- (NLG)....... 9,670 630,165
Allied Irish Banks PLC -- (IEP).... 70,800 470,238
Banco Bilbao Vizcaya SA -- (ESP)... 5,800 314,107
Barclays Bank PLC -- (GBP)......... 24,000 411,291
Certificados de la
Tesoreria -- (MXP)............... 390,540 419,554
Commonwealth Bank of Australia --
(AUD)............................ 21,000 201,130
Dao Heng Bank Group
Ltd. -- (HKD).................... 36,000 172,681
Developmental Bank of Singapore
Ltd. Cl-F -- (SGD)............... 12,000 162,162
HSBC Holdings PLC -- (HKD)......... 31,600 676,165
ING Groep NV -- (NLG).............. 17,400 627,481
Julius Baer Holdings AG Cl-B --
(CHF)............................ 300 314,503
Malayan Banking BHD -- (MYR)....... 7,000 77,615
United Overseas Bank
Ltd. -- (SGD).................... 18,000 200,772
Westpac Banking Corp.
Ltd. -- (AUD).................... 87,000 495,521
----------
5,173,385
----------
FINANCIAL SERVICES -- 0.5%
Bank of Ireland -- (IEP)........... 52,500 475,168
Cetelem Group SA -- (FRF).......... 2,200 254,812
CLF Dexia France -- (FRF).......... 5,500 479,895
Gucco Group Ltd. -- (HKD).......... 48,000 268,718
----------
1,478,593
----------
FOOD -- 0.6%
Danisco AS -- (DKK)................ 3,600 219,355
Goodman Fielder Ltd. -- (AUD)...... 169,000 209,721
Greencore Group PLC -- (IEP)....... 57,000 357,791
Ito-Yokado Co. Ltd. -- (JPY)....... 8,000 348,638
Nestle SA -- (CHF)................. 495 531,506
----------
1,667,011
----------
INDUSTRIAL PRODUCTS -- 0.0%
Daikin Industries Ltd. -- (JPY).... 15,000 133,593
----------
INSURANCE -- 0.5%
Aegon NV -- (NLG).................. 7,400 472,368
Mapfre Vida -- (ESP)............... 3,100 215,544
Swiss Reinsurance Co. -- (CHF)..... 430 459,142
Tokio Marine & Fire Insurance Co.
-- (JPY)......................... 19,000 179,075
----------
1,326,129
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
MACHINERY & EQUIPMENT -- 0.6%
ABB AG -- (CHF).................... 308 $ 383,188
Komori Corp. -- (JPY).............. 5,000 106,355
Kurita Water Industries
Ltd. -- (JPY).................... 13,000 263,035
Rieter Holdings AG -- (CHF)........ 450 124,412
Sandvik AB Cl-B -- (SEK)........... 18,400 501,185
Weir Group PLC -- (GBP)............ 46,000 206,827
------------
1,585,002
------------
METALS & MINING -- 0.3%
Preussag AG -- (DEM)............... 1,800 407,547
RTZ Corp. PLC -- (GBP)............. 28,000 449,145
------------
856,692
------------
MISCELLANEOUS -- 0.2%
VA Technologie AG -- (ATS)......... 3,100 487,594
------------
OFFICE EQUIPMENT -- 0.2%
Canon, Inc. -- (JPY)............... 24,000 531,258
------------
OIL & GAS -- 1.1%
British Petroleum Co.
PLC -- (GBP)..................... 29,700 356,357
Burmah Castrol PLC -- (GBP)........ 23,000 433,747
Ente Nazionale Idrocarburi SPA --
(ITL)............................ 91,100 465,363
Far East Levingston Shipbuilding
Ltd. -- (SGD).................... 39,000 203,561
Shell Transport & Trading Co.
PLC -- (GBP)..................... 25,600 443,534
Societe Nationale Elf Aquitaine
SA -- (FRF)...................... 6,650 606,296
Total SA Cl-B -- (FRF)............. 8,400 684,285
------------
3,193,143
------------
PAPER & FOREST PRODUCTS -- 0.1%
Svenska Cellulosa AB
Cl-B -- (SEK).................... 17,500 356,859
------------
PHARMACEUTICALS -- 0.7%
Astra AB Cl-A -- (SEK)............. 11,000 545,797
Novartis AG -- (CHF)*.............. 555 635,363
Pharmacia & Upjohn,
Inc. -- (SEK).................... 13,400 551,436
Santen Pharmaceutical
Ltd. -- (JPY).................... 10,000 207,523
Yamanouchi Pharmaceutical Co.
Ltd. -- (JPY).................... 10,000 205,793
------------
2,145,912
------------
PRINTING & PUBLISHING -- 0.1%
Dai Nippon Printing Co.
Ltd. -- (JPY).................... 24,000 421,271
------------
RAILROADS -- 0.1%
East Japan Railway Co.
Ltd. -- (JPY).................... 85 382,923
------------
REAL ESTATE -- 0.6%
Amoy Properties Ltd. -- (HKD)...... 190,000 273,903
Cheung Kong Holdings
Ltd. -- (HKD).................... 72,000 639,990
Hong Kong Land Holdings Ltd. --
(HKD)............................ 93,000 258,540
Sung Hung Kai Properties Ltd. --
(HKD)............................ 34,000 416,510
------------
1,588,943
------------
SHARES VALUE
------- ------------
RETAIL & MERCHANDISING -- 0.3%
Marui Co. Ltd. -- (JPY)............ 22,000 $ 397,579
Vendex International NV -- (NLG)... 9,200 394,179
------------
791,758
------------
TELECOMMUNICATIONS -- 0.8%
Deutsche Telekom AG -- (DEM)....... 19,900 415,608
Nippon Telegraph & Telephone
Corp. -- (JPY)................... 60 455,512
Portugal Telecom SA -- (PTE)....... 15,600 444,909
Royal PTT NV -- (NLG).............. 8,900 340,045
Vodafone Group PLC -- (GBP)........ 138,900 586,462
------------
2,242,536
------------
TRANSPORTATION -- 0.2%
IHC Caland NV -- (NLG)............. 6,300 360,511
Yamato Transport Co.
Ltd. -- (JPY).................... 12,000 124,514
------------
485,025
------------
UTILITIES -- 0.6%
Chubu Electric Power
Ltd. -- (JPY).................... 9,000 178,988
Hong Kong Electric Holdings Ltd. --
(HKD)............................ 25,000 83,069
Kyushu Electric Power
Ltd. -- (JPY).................... 8,000 155,642
Scottish Power PLC -- (GBP)........ 78,000 470,282
United Utilities PLC -- (GBP)...... 19,300 205,291
Veba AG -- (DEM)................... 10,200 587,313
------------
1,680,585
------------
TOTAL FOREIGN STOCK
(COST $38,817,523)................... 40,712,753
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- --------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 11.3%
ADVERTISING -- 0.1%
Larmar Advertising Co. Sr.
Sub. Notes
9.625%.................. 12/01/06 $ 35 36,137
Universal Outdoor, Inc.
Sr. Sub. Notes
9.75%................... 10/15/06 200 207,000
-------------
243,137
-------------
AEROSPACE -- 0.4%
BE Aerospace, Inc.
Sr. Sub. Notes
9.875%.................. 02/01/06 200 209,250
Howmet Corp.
Sr. Sub. Notes
10.00%.................. 12/01/03 150 163,500
Lockheed Martin Corp.
Notes
7.25%................... 05/15/06 400 408,500
Northrop Grumman Corp.
Notes
7.00%................... 03/01/06 155 152,869
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
UNC, Inc. Sr. Sub. Notes
11.00%.................. 06/01/06 $ 200 $ 214,000
-------------
1,148,119
-------------
AUTOMOBILE MANUFACTURERS -- 0.0%
Daimler-Benz North America
Notes
7.375%.................. 09/15/06 120 123,600
-------------
AUTOMOTIVE PARTS -- 0.3%
Aftermarket Technology,
Inc. Sr. Sub. Notes
12.00%.................. 08/01/04 200 223,500
APS, Inc. Notes
11.875%................. 01/15/06 100 107,875
CSK Auto, Inc.
Sr. Sub. Notes 144A
11.00%.................. 11/01/06 35 36,225
Exide Corp. Sr. Notes
10.75%.................. 12/15/02 200 210,500
Lear Corp. Sub. Notes
9.50%................... 07/15/06 200 216,250
Safelite Glass Corp.
Sr. Sub. Notes 144A
9.875%.................. 12/15/06 5 5,150
-------------
799,500
-------------
BEVERAGES -- 0.0%
Canandaigua Wine
Sr. Sub. Notes 144A
8.75%................... 12/15/03 45 43,987
-------------
BROADCASTING -- 0.5%
American Radio Systems
Notes
9.00%................... 02/01/06 100 98,500
Argyle Television, Inc.
Sr. Sub. Notes
9.75%................... 11/01/05 200 203,500
Benedek Broadcasting Corp.
Sr. Notes
11.875%................. 03/01/05 200 208,750
Granite Broadcasting Corp.
Sr. Sub. Debs.
10.375%................. 05/15/05 150 154,875
News America Holdings
Debs.
7.70%................... 10/30/25 435 412,162
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%.................. 05/15/06 150 158,625
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%.................. 09/30/05 200 205,000
-------------
1,441,412
-------------
BUILDING MATERIALS -- 0.2%
Atrium Companies, Inc.
Sr. Sub. Notes 144A
10.50%.................. 11/15/06 30 30,450
PAR
MATURITY (000) VALUE
--------- -------- -------------
Building Materials Corp.
Sr. Notes 144A
8.625%.................. 12/15/06 $ 10 $ 10,000
Cemex SA 144A
12.75%.................. 07/15/06 75 84,000
Inter-City Products Corp.
USA Sr. Notes
9.75%................... 03/01/00 200 205,000
Southdown, Inc.
Sr. Sub. Notes
10.00%.................. 03/01/06 150 159,000
Terex Corp. Sr. Notes
13.25%.................. 05/15/02 150 162,000
-------------
650,450
-------------
BUSINESS SERVICES -- 0.1%
Outsourcing Solutions
Corp. Sr. Sub. Notes
144A
11.00%.................. 11/01/06 20 21,050
Primark Corp. Sr. Notes
8.75%................... 10/15/00 200 201,500
-------------
222,550
-------------
CHEMICALS -- 0.0%
Arcadian Partners L.P. Sr.
Notes Cl-B
10.75%.................. 05/01/05 50 55,500
-------------
COMPUTER SERVICES & SOFTWARE -- 0.1%
Unisys Corp. Sr. Notes
11.75%.................. 10/15/04 200 213,000
-------------
CONSTRUCTION -- 0.0%
Newport News Shipbuilding,
Inc. Sr. Notes 144A
8.625%.................. 12/01/06 20 20,500
9.25%................... 12/01/06 15 15,487
-------------
35,987
-------------
CONSUMER PRODUCTS & SERVICES -- 0.3%
Herff Jones, Inc.
Sr. Sub. Notes
11.00%.................. 08/15/05 200 216,000
Imed Corp.
Sr. Sub. Notes 144A
9.75%................... 12/01/06 50 51,125
Pierce Leahy Corp.
Sr. Sub. Notes
11.125%................. 07/15/06 200 219,000
Rose Hills Acquisition Sr.
Sub. Notes 144A
9.50%................... 11/15/04 15 15,337
Scotsman Group Sr. Notes
9.50%................... 12/15/00 200 204,250
-------------
705,712
-------------
CONTAINERS & PACKAGING -- 0.3%
Amtrol Acquisition, Inc.
Sr. Sub. Notes 144A
10.625%................. 12/31/06 15 15,261
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Gaylord Container Corp.
Sr. Notes
11.50%.................. 05/15/01 $ 50 $ 53,375
Ivex Packaging Corp.
Sr. Sub. Notes
12.50%.................. 12/15/02 150 162,375
8.51% [STEP]............ 03/15/05 170 131,750
Owens Illinois, Inc. Debs.
11.00%.................. 12/01/03 150 167,625
Riverwood International
Co. Notes
10.875%................. 04/01/08 200 185,000
Stone Container Corp.
First Mtge.
10.75%.................. 10/01/02 200 211,000
-------------
926,386
-------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.1%
Amphenol Corp.
Sr. Sub. Notes
12.75%.................. 12/15/02 200 221,000
Celestica International
Sr. Sub. Notes 144A
10.50%.................. 12/31/06 20 21,075
-------------
242,075
-------------
ENTERTAINMENT & LEISURE -- 1.0%
ACT III Theaters
Sr. Sub. Notes
11.875%................. 02/01/03 200 217,750
Argosy Gaming Co.
First Mtge.
13.25%.................. 06/01/04 150 141,375
Casino America, Inc. Sr.
Notes
12.50%.................. 08/01/03 150 142,500
Cinemark USA, Inc.
Sr. Sub. Notes
9.625%.................. 08/01/08 200 202,000
Coast Hotels & Casino
Notes Cl-B
13.00%.................. 12/15/02 200 220,750
Colorado Gaming &
Entertainment Corp.
[PIK]
12.00%.................. 06/01/03 150 141,750
Players International Sr.
Notes
10.875%................. 04/15/05 150 148,875
Showboat Marina Casinos
First Mtge.
13.50%.................. 03/15/03 150 165,750
Six Flags Theme Parks Sr.
Sub. Notes Cl-A [STEP]
5.79%................... 06/15/05 200 188,250
PAR
MATURITY (000) VALUE
--------- -------- -------------
Time Warner Entertainment
Debs.
7.25%................... 09/01/08 $ 450 $ 434,250
8.875%.................. 10/01/12 225 244,406
Time Warner, Inc. Cl-K
[PIK]
10.25%.................. 07/01/16 200 218,000
Trump Atlantic City
Assoc., Inc. Notes
11.25%.................. 05/01/06 150 148,500
Trump Holdings & Funding
Assoc. Sr. Notes
15.50%.................. 06/15/05 100 114,500
-------------
2,728,656
-------------
ENVIRONMENTAL SERVICES -- 0.1%
Allied Waste North America
Sr. Sub. Notes 144A
10.25%.................. 12/01/06 35 36,925
WMX Technologies, Inc.
Notes
7.10%................... 08/01/26 235 242,637
-------------
279,562
-------------
EQUIPMENT SERVICES -- 0.1%
Coinmach Corp. Sr. Notes
11.75%.................. 11/15/05 200 215,500
-------------
FINANCIAL-BANK & TRUST -- 1.7%
ABN AMRO Bank NV
7.55%................... 06/28/06 320 332,400
BankAmerica Corp.
Sub. Notes
8.125%.................. 02/01/02 238 252,577
8.375%.................. 03/15/02 130 139,587
Capital One Bank Notes
8.125%.................. 03/01/00 720 746,100
Consorcio Groupo Dina SA
Disc. Notes
12.00%.................. 11/15/02 200 165,500
First Nationwide Escrow
Sr. Sub. Notes 144A
10.625%................. 10/01/03 150 162,000
First Nationwide Holdings
Sr. Notes
12.50%.................. 04/15/03 200 222,500
Merita Bank Ltd. Sub.
Notes
6.50%................... 01/15/06 500 477,500
NationsBank Corp.
Sub. Notes
7.80%................... 09/15/16 410 424,862
7.25%................... 10/15/25 85 82,131
North Fork Bancorp 144A
8.70%................... 12/15/26 25 25,063
Peoples Bank-Bridgeport
Sub. Notes
7.20%................... 12/01/06 305 298,137
Provident Capital Trust
144A
8.60%................... 12/01/26 60 60,600
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Riggs Capital Trust 144A
8.625%.................. 12/31/26 $ 15 $ 15,037
Standard Credit Card
Master Trust 1991-3 C1-A
8.875%.................. 07/07/98 1,310 1,361,436
-------------
4,765,430
-------------
FINANCIAL SERVICES -- 0.9%
Aames Financial Corp. Sr.
Notes
9.125%.................. 11/01/03 200 204,500
American Life Holding Co.
Sr. Sub. Notes
11.25%.................. 09/15/04 200 230,750
BanPonce Financial Corp.
Notes
6.75%................... 08/09/01 305 305,000
Commercial Credit Co.
Notes
5.875%.................. 01/15/03 200 192,500
7.875%.................. 02/01/25 335 362,219
Contifinancial Corp. Sr.
Notes
8.375%.................. 08/15/03 200 204,000
Dollar Financial Group Sr.
Notes 144A
10.875%................. 11/15/06 15 15,488
Ford Motor Credit Co. Sr.
Notes
7.00%................... 09/25/01 120 122,250
Intertek Finance PLC Sr.
Sub. Notes 144A
10.25%.................. 11/01/06 25 25,938
Lehman Brothers Holdings
Notes
6.40%................... 12/27/99 465 462,303
Southern Investments UK
Sr. Notes
6.80%................... 12/01/06 245 239,794
Van Kampen Merrit Sr.
Notes
9.75%................... 02/15/03 200 214,750
-------------
2,579,492
-------------
FOOD -- 0.1%
AmeriKing, Inc. Sr. Notes
10.75%.................. 12/01/06 15 15,488
Chiquita Brands Sr. Notes
9.625%.................. 01/15/04 100 103,500
RJR Nabisco, Inc. Notes
8.75%................... 08/15/05 185 185,000
-------------
303,988
-------------
HEALTHCARE SERVICES -- 0.1%
Genesis Health Ventures,
Inc. Sr. Sub. Notes 144A
9.25%................... 10/01/06 200 205,000
PAR
MATURITY (000) VALUE
--------- -------- -------------
Merit Behavioral Care Sr.
Sub. Notes
11.50%.................. 11/15/05 $ 100 $ 106,000
-------------
311,000
-------------
HOTELS & MOTELS -- 0.1%
Hammons, (J.Q.) Hotel
Group First Mtge.
8.875%.................. 02/15/04 100 99,000
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%................... 05/15/05 200 209,000
Prime Hospitality Corp.
First Mtge.
9.25%................... 01/15/06 50 51,000
-------------
359,000
-------------
INSURANCE -- 0.4%
Aegon NV Sub. Notes
8.00%................... 08/15/06 350 372,750
Conseco, Inc. Sr. Notes
10.50%.................. 12/15/04 355 417,569
Reliance Group Holdings
Sr. Notes
9.00%................... 11/15/00 200 205,500
Travelers-Aetna Property
Casualty Corp. Sr. Notes
7.75%................... 04/15/26 250 257,500
-------------
1,253,319
-------------
MACHINERY & EQUIPMENT -- 0.0%
Clark Materials Handling
Sr. Notes 144A
10.75%.................. 11/15/06 15 15,750
Hawk Corp. Sr. Notes 144A
10.25%.................. 12/01/03 15 15,450
Motors and Gears, Inc. Sr.
Notes 144A
10.75%.................. 11/15/06 35 36,181
Ryder TRS, Inc.
Sr. Sub. Notes 144A
10.00%.................. 12/01/06 15 15,600
-------------
82,981
-------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.0%
Fresenius Medical Care AG
9.00%................... 12/01/06 50 50,938
-------------
METALS & MINING -- 0.3%
AK Steel Corp. Sr. Notes
144A
9.125%.................. 12/15/06 30 30,900
Noranda, Inc.
7.00%................... 07/15/05 680 669,800
WCI Steel, Inc. Sr. Notes
144A
10.00%.................. 12/01/04 50 50,750
-------------
751,450
-------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
OFFICE EQUIPMENT -- 0.1%
United Stationery Supply
Sr. Sub. Notes
12.75%.................. 05/01/05 $ 200 $ 222,500
-------------
OIL & GAS -- 0.8%
Abraxas Petroleum Corp.
Sr. Notes 144A
11.50%.................. 11/01/04 25 26,750
Citgo Petroleum Corp. Sr.
Notes
7.875%.................. 05/15/06 170 175,525
El Paso Natural Gas Co.
Debs.
7.50%................... 11/15/26 180 179,775
Flores & Rucks
Sr. Sub. Notes
9.75%................... 10/01/06 150 158,625
Forcenergy, Inc.
Sr. Sub. Notes
9.50%................... 11/01/06 25 26,125
HS Resources, Inc.
Sr. Sub. Notes 144A
9.25%................... 11/15/06 25 25,625
Husky Oil Ltd. Debs.
7.55%................... 11/15/16 305 303,475
Kelley Oil & Gas Corp. Sr.
Sub. Notes 144A
10.375%................. 10/15/06 25 26,000
LASMO (USA), Inc. Notes
7.50%................... 06/30/06 235 242,638
Maxus Energy Corp. Notes
10.83%.................. 09/01/04 150 160,500
Parker Drilling Corp.
Notes 144A
9.75%................... 11/15/06 30 31,650
Petroliam Nasional BHD
Notes 144A
7.625%.................. 10/15/26 750 754,688
Transtexas Gas Corp. Sr.
Disc. Notes [STEP] 144A
13.24%.................. 12/31/03 124 68,510
Transtexas Gas Corp. Sr.
Notes
11.50%.................. 06/15/02 150 162,000
-------------
2,341,886
-------------
PAPER & FOREST PRODUCTS -- 0.1%
Florida Coast Paper LLC
First Mtge.
12.75%.................. 06/01/03 150 163,500
Maxxam Group Holdings,
Inc. Sr. Notes 144A
12.00%.................. 08/01/03 20 20,450
Radnor Holdings Sr. Notes
144A
10.00%.................. 12/01/03 15 15,338
PAR
MATURITY (000) VALUE
--------- -------- -------------
Repap New Brunswick Sr.
Notes
10.625%................. 04/15/05 $ 200 $ 213,000
-------------
412,288
-------------
PRINTING & PUBLISHING -- 0.1%
America Media Operation
Sr. Sub. Notes
11.625%................. 11/15/04 150 161,250
K-III Communications Corp.
Cl-B [PIK]
11.625%................. 05/01/05 200 203,500
-------------
364,750
-------------
RETAIL & MERCHANDISING -- 0.2%
Phar-Mor, Inc. Sr. Notes
11.72%.................. 09/11/02 150 157,500
Rite Aid Corp. Notes
6.70%................... 12/15/01 170 169,788
Southland Corp. Sr. Sub.
Debs.
5.00%................... 12/15/03 200 165,750
-------------
493,038
-------------
SEMI-CONDUCTORS -- 0.0%
International Semi-Tech
Microelectronics Sr.
Disc. Notes [STEP]
13.30%.................. 08/15/03 200 131,500
-------------
TELECOMMUNICATIONS -- 2.2%
Adelphia Communications
Sr. Notes
12.50%.................. 05/15/02 150 154,125
Airtouch Communications,
Inc. Notes
7.125%.................. 07/15/01 295 300,531
Arch Communications Group
Sr. Disc. Notes [STEP]
14.26%.................. 03/15/08 250 143,750
Centennial Cellular Sr.
Notes
8.875%.................. 11/01/01 200 193,500
Century Communications
Corp. Sr. Notes
9.50%................... 03/01/05 150 154,125
Cia Telecom Chile Notes
7.625%.................. 07/15/06 295 304,956
Colt Telecom Group PLC
Units [STEP]
12.00%.................. 12/15/06 35 21,000
Comcast U.K. Cable Corp.
Debs. [STEP]
10.24%.................. 11/15/07 300 212,250
Comcast U.K. Cable Corp.
Sr. Sub. Debs.
9.50%................... 01/15/08 150 155,625
Commodore Media, Inc. Sr.
Sub. Notes [STEP]
7.50%................... 05/01/03 200 210,500
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Diamond Cable
Communications PLC Sr.
Disc. Notes [STEP]
10.61%.................. 12/15/05 $ 200 $ 143,000
Echostar Satellite
Broadcasting Co. Sr.
Disc. Notes [STEP]
9.54%................... 03/15/04 100 76,500
Globo Communicacoes
Partners Notes 144A
10.50%.................. 12/20/06 60 60,000
Heartland Wireless Sr.
Notes 144A
14.00%.................. 10/15/04 80 82,600
Intercel, Inc. Units
[STEP]
12.17%.................. 02/01/06 200 132,000
Intermedia Communications
of Florida, Inc. Sr.
Notes
13.50%.................. 06/01/05 300 346,500
International Cabletel,
Inc. Sr. Notes [STEP]
11.88%.................. 02/01/06 300 204,000
Jacor Communications Co.
Notes
9.75%................... 12/15/06 20 20,600
JCAC Communications, Inc.
Sr. Sub. Notes
10.125%................. 06/15/06 100 104,000
Jones Intercable Sr. Sub.
Debs.
10.50%.................. 03/01/08 200 214,000
Marcus Cable Co. Debs.
11.875%................. 10/01/05 150 157,500
Marcus Cable Co. Sr. Notes
[STEP]
12.08%.................. 12/15/05 100 71,000
MFS Communications Co.,
Inc. Sr. Disc. Notes
[STEP]
8.11%................... 01/15/04 200 174,000
Millicom International
Cellular Sr. Disc. Notes
[STEP]
12.59%.................. 06/01/06 200 124,000
Mobile Telecommunications
Corp. Sr. Notes
13.50%.................. 12/15/02 150 150,750
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
13.02%.................. 09/01/03 150 115,500
13.30%.................. 08/15/04 750 511,875
Omnipoint Corp. Sr. Notes
11.625%................. 08/15/06 150 156,750
Paxson Communications Sr.
Sub. Notes
11.625%................. 10/01/02 150 156,375
PAR
MATURITY (000) VALUE
--------- -------- -------------
Pegasus Media &
Communications, Inc.
Notes Cl-B
12.50%.................. 07/01/05 $ 200 $ 216,500
Pricellular Wireless
Sr. Notes 144A
10.75%.................. 11/01/04 200 209,500
Rogers Cablesystems Ltd.
Notes
11.00%.................. 12/01/15 200 216,000
Teleport Communications
Sr. Disc. Notes [STEP]
9.61%................... 07/01/07 440 304,150
Telewest PLC Debs. [STEP]
12.12%.................. 10/01/07 150 104,625
TV Filme, Inc. Sr. Notes
144A
12.875%................. 12/15/04 15 15,094
Viacom, Inc. Sub. Debs.
8.00%................... 07/07/06 200 195,000
Videotron Holdings PLC Sr.
Disc. Notes [STEP]
6.66%................... 08/15/05 100 81,000
-------------
6,193,181
-------------
UTILITIES -- 0.6%
AES China Generating Co.
Ltd. Sr. Notes
10.125%................. 12/15/06 20 20,750
Arizona Public Service Sr.
Notes
6.75%................... 11/15/06 205 200,900
Cleveland Electric
Illumination Co.
First Mtge. Cl-B
9.50%................... 05/15/05 200 210,250
Connecticut Light & Power
First Mtge.
7.875%.................. 06/01/01 205 208,588
El Paso Electric Co.
First Mtge. Cl-E
9.40%................... 05/01/11 200 213,000
Emp Distribuidora Norte
Edenor Notes 144A
9.75%................... 12/04/01 35 35,788
Enersis SA Notes
7.40%................... 12/01/16 220 213,675
6.60%................... 12/01/26 220 216,425
Long Island Lighting Debs.
9.00%................... 11/01/22 150 159,000
Niagara Mohawk Power Corp.
Notes
9.95%................... 06/01/00 200 185,000
Norcen Energy Resources
Debs.
7.375%.................. 05/15/06 130 132,113
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Northeast Utilities System
Notes
8.58%................... 12/01/06 $ 10 $ 9,399
-------------
1,804,888
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $32,110,963).................... 32,496,762
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 9.7%
FEDERAL HOME LOAN MORTGAGE CORP. -- 1.1%
9.50%................... 05/01/05 505 528,883
8.00% [TBA]............. 01/16/27 600 611,628
7.50% [TBA]............. 02/16/27 2,015 2,013,106
-------------
3,153,617
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 7.6%
6.50%................... 07/01/03 355 351,781
6.50%................... 09/01/03 866 858,259
6.50% [TBA]............. 01/16/04 1,875 1,858,594
8.50%................... 10/15/08 1,171 1,218,184
6.50%................... 05/01/11 1,422 1,396,648
6.50%................... 06/01/11 1,041 1,022,760
7.50%................... 10/15/23 45 44,562
7.00%................... 12/15/25 346 339,040
6.50%................... 01/01/26 901 859,871
6.50%................... 02/01/26 687 656,185
7.50%................... 02/15/26 24 24,515
7.50%................... 03/15/26 309 309,513
6.50%................... 04/01/26 902 860,973
7.00%................... 04/15/26 1,140 1,115,454
7.00%................... 05/15/26 382 374,093
7.50%................... 05/15/26 42 42,382
7.00%................... 06/01/26 521 509,587
7.50%................... 07/01/26 688 687,646
7.00%................... 09/01/26 262 256,425
7.00%................... 10/01/26 261 255,920
7.50%................... 10/15/26 1,390 1,391,587
7.00%................... 11/01/26 1,720 1,682,385
7.00%................... 12/01/26 330 322,639
7.39% [VR].............. 12/01/26 580 602,838
6.50% [TBA]............. 01/16/27 775 739,156
7.00% [TBA]............. 01/16/27 1,260 1,232,041
7.50% [TBA]............. 01/26/27 2,725 2,723,310
-------------
21,736,348
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 1.0%
6.50%................... 10/15/23 546 520,890
6.50%................... 11/15/23 557 531,030
6.50%................... 12/15/23 764 728,504
8.00%................... 11/15/26 1,231 1,255,970
-------------
3,036,394
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $27,951,684).................... 27,926,359
-------------
PAR
MATURITY (000) VALUE
--------- -------- -------------
COLLATERALIZED MORTGAGE & ASSET-BACKED OBLIGATIONS -- 3.5%
Federal Deposit Insurance
Credit Corp.
6.75%................... 05/25/26 $ 1,190 $ 1,184,422
Fifth Third Auto Grantor
Trust
6.45%................... 03/15/02 776 781,485
Ford Credit Auto Owner
Trust
6.50%................... 11/15/99 890 897,952
GE Capital Mortgage
Services, Inc.
7.25%................... 05/25/26 995 966,221
Premier Auto Trust
Series 1996-4 Cl-A4
6.40%................... 10/06/01 500 502,147
Residential Funding Mtge.
Securities, Inc.
7.10%................... 01/25/26 1,000 953,125
Sears Credit Account
Master Trust Series
1996-4 Cl-A
6.45%................... 10/16/06 500 498,889
Securitized Asset Sales,
Inc.
6.8076%................. 11/28/23 978 908,615
Standard Credit Card
Master Trust Series
1995-6 Cl-A
6.75%................... 06/07/00 860 869,119
Structured Asset
Securities Corp.
7.375%.................. 09/25/24 1,500 1,502,344
6.525%.................. 02/25/28 860 836,350
-------------
TOTAL COLLATERALIZED MORTGAGE &
ASSET-BACKED OBLIGATIONS (COST
$9,942,039)........................... 9,900,669
-------------
U.S. TREASURY OBLIGATIONS -- 4.6%
U.S. TREASURY BONDS -- 1.6%
8.125%.................. 08/15/19 3,885 4,494,595
-------------
U.S. TREASURY NOTES -- 3.0%
5.625%.................. 11/30/98 8,195 8,160,089
6.625%.................. 07/31/01 235 238,819
6.50%................... 08/15/05 165 166,064
6.00%................... 02/15/26 120 109,291
-------------
8,674,263
-------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $13,122,278).................... 13,168,858
-------------
SOVEREIGN ISSUES -- 0.6%
ARGENTINA -- 0.3%
Republic of Argentina
[BRB, FRB]
6.625%.................. 03/31/97 637 555,384
6.625%.................. 03/31/05 219 190,540
-------------
745,924
-------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C>
CANADA -- 0.2%
Quebec Province Debs.
7.125%.................. 02/09/24 $ 450 $ 429,188
-------------
MEXICO -- 0.1%
United Mexican States Cl-C
[BRB, FRB] (with Value
Recovery Rights
Attached)
6.375%.................. 12/31/19 400 345,000
-------------
NETHERLANDS -- 0.0%
Asia Pulp & Paper
International Finance
Co. Notes
11.75%.................. 10/01/05 100 107,250
-------------
TOTAL SOVEREIGN ISSUES
(COST $1,480,785)..................... 1,627,362
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C> <C>
FOREIGN BONDS -- 4.0%
AUSTRALIA -- 0.3%
Australian
Government
10.00%.................. 10/15/02 285 257,432
9.50%................... 08/15/03 385 342,813
10.00%.................. 02/15/06 200 186,338
------------
786,583
------------
CANADA -- 0.2%
Canadian Government
8.75%................... 12/01/05 40 33,957
9.00%................... 06/01/25 605 543,011
------------
576,968
------------
DENMARK -- 0.1%
Kingdom of Denmark
8.00%................... 03/15/06 1,295 242,452
------------
FRANCE -- 0.8%
French O.A.T.
6.00%................... 10/25/25 818 141,721
French Treasury Bill
4.50%................... 10/12/98 3,000 589,262
7.00%................... 10/12/00 7,440 1,573,081
------------
2,304,064
------------
GERMANY -- 1.4%
Bundesobligation
5.25%................... 02/21/01 2,535 1,698,631
Deutscheland Republic
6.25%................... 04/26/06 2,610 1,754,801
Treuhan Obligationen
5.625%.................. 09/24/98 815 549,502
------------
4,002,934
------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- --------- ------------
<S> <C> <C> <C>
ITALY -- 0.2%
Italian Government
9.50%................... 02/01/01 820,000 $ 590,841
------------
SPAIN -- 0.2%
Spanish Government
10.10%.................. 02/28/01 62,000 551,553
------------
UNITED KINGDOM -- 0.8%
United Kingdom Treasury
9.00%................... 03/03/00 325 585,904
7.75%................... 09/08/06 1,090 1,895,019
------------
2,480,923
------------
TOTAL FOREIGN BONDS
(COST $11,339,498).......... 11,536,318
------------
<CAPTION>
PAR
(000)
---------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 5.0%
UBS Securities Funding, Inc.
6.75% dated 12/31/96,
repurchase price $14,447,416
(Collateralized by U.S.
Treasury Note, par value
$13,656,000, market value
$14,742,547, due 01/31/00)
(COST $14,442,000)............. 01/02/97 $14,442 14,442,000
-----------
<CAPTION>
SHARES
--------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Fund
(COST $8,153).............. 8,153 8,153
-----------
TOTAL INVESTMENTS -- 103.3%
(COST $288,350,890)........ 296,051,419
<CAPTION>
PAR
MATURITY (000)
-------- -----
<S> <C> <C> <C>
SALE COMMITMENTS -- (0.8%)
Federal National Mortgage
Association [TBA]
6.50%
(COST ($2,420,296)).......... 01/16/12 $ 2,463 (2,418,358)
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (2.5%)....... (7,153,656)
------------
NET ASSETS -- 100.0%........... $286,479,405
============
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy AUD $ 873,055 1.2599 03/97 $ 1,224
Buy CAD 1,762,282 1.3460 03/97 (21,467)
Buy CHF 2,201,426 1.3095 03/97 (29,989)
Buy DEM 66,853 1.5548 01/97 783
Buy DEM 2,868,990 1.5415 03/97 23,148
Buy DKK 378,559 5.9103 03/97 3,821
Buy FRF 770,867 5.2668 03/97 16,474
Buy GBP 10,062 0.5957 01/97 204
Buy GBP 802,260 0.5996 03/97 18,769
Buy GBP 775,444 0.5989 05/97 18,483
Buy ITL 782,315 1536.6142 03/97 8,021
Buy JPY 7,326,946 111.3728 03/97 (192,014)
Buy SEK 349,106 6.7945 03/97 1,335
--------------
$ (151,208)
=============
Sell AUD $1,486,724 1.2230 03/97 $ 41,621
Sell CAD 924,642 1.3381 03/97 16,585
Sell CHF 3,565,843 1.2966 03/97 83,393
Sell DEM 6,287,993 1.5235 03/97 (76,203)
Sell DEM 1,581,065 1.4914 05/97 33,374
Sell DKK 253,353 5.9206 03/97 (3,003)
Sell ESP 72,744 131.7960 03/97 (1,189)
Sell FRF 1,470,853 5.2536 03/97 (27,654)
Sell FRF 3,036,501 5.0815 05/97 34,018
Sell GBP 12,459 0.5846 01/97 (14)
Sell GBP 1,285,444 0.6112 03/97 (52,642)
Sell GBP 771,235 0.6237 05/97 (49,794)
Sell JPY 5,221,403 111.8344 03/97 115,760
Sell NLG 1,923,231 1.6831 05/97 29,639
--------------
$ 143,891
=============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 0.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 91.2%
ADVERTISING -- 0.7%
Larmar Advertising Co.
Sr. Sub. Notes
9.625%............... 12/01/06 $ 1,400 $ 1,445,500
------------
AEROSPACE -- 0.3%
Tracor, Inc. Sr. Sub.
Notes
10.875%.............. 08/15/01 650 693,875
------------
AUTOMOTIVE PARTS -- 2.5%
Aftermarket Technology,
Inc. Sr. Sub. Notes
12.00%............... 08/01/04 1,250 1,403,125
Blue Bird Body Co. Sr.
Sub. Notes 144A
10.75%............... 11/15/06 250 261,875
Exide Corp. Sr. Notes
10.00%............... 04/15/05 1,225 1,280,125
JPS Automotive Products
Corp. Sr. Notes
11.125%.............. 06/15/01 250 269,375
Lear Corp. Sub. Notes
9.50%................ 07/15/06 1,000 1,075,000
Lear Seating Corp. Sr.
Sub. Notes
11.25%............... 07/15/00 150 153,750
8.25%................ 02/01/02 550 556,875
Safelite Glass Corp.
Sr. Sub. Notes 144A
9.875%............... 12/15/06 175 180,688
------------
5,180,813
------------
BEVERAGES -- 0.7%
Delta Beverage Group
Sr. Notes 144A
9.75%................ 12/15/03 300 309,000
Dr. Pepper Bottling
Holding Co. Sr. Notes
[STEP]
9.50%................ 02/15/03 1,250 1,184,375
------------
1,493,375
------------
BROADCASTING -- 6.8%
Argyle Television, Inc.
Sr. Sub. Notes
9.75%................ 11/01/05 500 506,250
Australis Media Ltd.
Units [STEP]
8.95%................ 05/15/03 625 368,750
Chancellor Broadcasting
Co. Sr. Sub. Notes
9.375%............... 10/01/04 750 759,375
12.50%............... 10/01/04 375 423,750
Granite Broadcasting
Corp. Sr. Sub. Debs.
10.375%.............. 05/15/05 1,000 1,030,000
PAR
MATURITY (000) VALUE
-------- ------- ------------
Heritage Media Corp.
Sr. Sub. Notes
8.75%................ 02/15/06 $ 2,000 $ 1,932,500
Lenfest Communications
Sr. Sub. Notes
8.375%............... 11/01/05 500 485,000
10.50%............... 06/15/06 550 580,250
NWCG Holding Corp. Sr.
Disc. Notes [ZCB]
13.20%............... 06/15/99 300 251,250
SCI Television, Inc.
Sr. Notes
11.00%............... 06/30/05 1,150 1,239,125
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%............... 05/15/06 1,600 1,692,000
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%............... 12/15/03 650 666,250
10.00%............... 09/30/05 1,250 1,281,250
Sullivan Broadcasting
Holdings Co. Sr. Sub.
Notes
10.25%............... 12/15/05 1,500 1,522,500
13.25%............... 12/15/06 150 138,750
Young Broadcasting
Corp. Sr. Sub. Notes
11.75%............... 11/15/04 250 276,250
10.125%.............. 02/15/05 750 780,000
------------
13,933,250
------------
BUSINESS SERVICES -- 0.9%
Monarch Marking
Systems, Inc. Sr.
Notes
12.50%............... 07/01/03 1,050 1,233,750
Outsourcing Solutions
Corp. Sr. Sub. Notes
144A
11.00%............... 11/01/06 500 525,000
------------
1,758,750
------------
CAPITAL GOODS -- 0.3%
Australis Holdings Ltd.
Units [STEP] 144A
9.88%................ 11/01/02 1,000 580,000
------------
CHEMICALS -- 5.0%
Arcadian Partners L.P.
Sr. Notes Cl-B
10.75%............... 05/01/05 800 888,000
Astor Corp. Sr. Sub.
Notes 144A
10.50%............... 10/15/06 1,025 1,062,156
Crain Industries, Inc.
Sr. Sub. Notes
13.50%............... 08/15/05 700 792,750
Foamex L.P. Sr. Notes
11.25%............... 10/01/02 550 588,500
11.875%.............. 10/01/04 250 270,313
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
Harris Chemical North
America Sr. Notes
[STEP]
10.25%............... 07/15/01 $ 1,750 $ 1,837,500
ISP Holdings, Inc. Sr.
Notes 144A
9.00%................ 10/15/03 1,275 1,300,500
Polymer Group, Inc. Sr.
Notes
12.25%............... 07/15/02 1,000 1,090,000
RBX Corp. Notes Cl-B
11.25%............... 10/15/05 1,000 851,250
Sterling Chemicals
Holdings Sr. Disc.
Notes [STEP]
12.60%............... 08/15/08 1,575 913,500
Sterling Chemicals,
Inc. Sr. Sub. Notes
11.75%............... 08/15/06 250 265,000
Uniroyal Technology
Corp. Sr. Notes
11.75%............... 06/01/03 425 426,063
------------
10,285,532
------------
CLOTHING & APPAREL -- 3.2%
Collins & Aikman
Products Sr. Sub.
Notes
11.50%............... 04/15/06 1,850 2,035,000
Hosiery Corp. of
America, Inc. Sr.
Sub. Notes
13.75%............... 08/01/02 500 552,500
Pillowtex Corp. Sr.
Sub. Notes 144A
10.00%............... 11/15/06 500 523,125
Westpoint Stevens, Inc.
Sr. Sub. Debs.
9.375%............... 12/15/05 3,250 3,371,875
------------
6,482,500
------------
COMPUTER SERVICES & SOFTWARE -- 0.8%
Alvey Systems, Inc. Sr.
Sub. Notes
11.375%.............. 01/31/03 1,500 1,586,250
------------
CONSUMER PRODUCTS & SERVICES -- 4.3%
American Safety Razor
Co. Sr. Notes
9.875%............... 08/01/05 1,250 1,326,563
Cabot Safety Corp. Sr.
Sub. Notes
12.50%............... 07/15/05 1,250 1,400,000
Herff Jones, Inc. Sr.
Sub. Notes
11.00%............... 08/15/05 550 594,688
PAR
MATURITY (000) VALUE
-------- ------- ------------
Playtex Family Products
Corp. Sr. Sub. Notes
9.00%................ 12/15/03 $ 2,100 $ 2,094,750
Rayovac Corp. Sr. Sub.
Notes 144A
10.25%............... 11/01/06 100 103,875
Revlon Consumer
Products Corp. Sr.
Notes
9.375%............... 04/01/01 500 513,125
10.50%............... 02/15/03 1,375 1,447,188
Simmons Co. Sr. Sub.
Notes
10.75%............... 04/15/06 1,250 1,321,875
------------
8,802,064
------------
CONTAINERS & PACKAGING -- 4.1%
Container Corp. of
America Sr. Notes
9.75%................ 04/01/03 250 263,750
11.25%............... 05/01/04 250 272,813
Four M Corp. Sr. Notes
12.00%............... 06/01/06 750 787,500
Owens Illinois, Inc.
Sr. Sub. Notes
10.50%............... 06/15/02 250 265,625
9.75%................ 08/15/04 200 210,000
9.95%................ 10/15/04 2,750 2,921,875
Packaging Resources,
Inc. Sr. Notes
11.625%.............. 05/01/03 450 477,000
Plastic Containers Sr.
Notes 144A
10.00%............... 12/15/06 450 466,875
Riverwood International
Co. Notes
10.875%.............. 04/01/08 1,500 1,395,000
Stone Container Corp.
Sr. Notes
11.50%............... 10/01/04 500 528,750
11.875%.............. 08/01/16 300 318,000
U.S. Can Corp. Sr. Sub.
Notes 144A
10.125%.............. 10/15/06 400 421,000
------------
8,328,188
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.5%
Advanced Micro Devices,
Inc. Sr. Notes
11.00%............... 08/01/03 900 981,000
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 2.8%
AMF Group, Inc. Notes
10.875%.............. 03/15/06 $ 400 $ 423,000
AMF Group, Inc. Sr.
Disc. Notes [STEP]
12.28%............... 03/15/06 1,850 1,225,625
Cobblestone Golf Group
Sr. Notes
11.50%............... 06/01/03 750 784,688
Premier Parks Corp. Sr
Notes Cl-A
12.00%............... 08/15/03 600 658,500
Six Flags Theme Parks
Sr. Sub. Notes Cl-A
[STEP]
9.94%................ 06/15/05 2,825 2,683,750
------------
5,775,563
------------
ENVIRONMENTAL SERVICES -- 1.4%
Allied Waste North
America Sr. Sub.
Notes 144A
10.25%............... 12/01/06 600 631,500
Envirosource, Inc. Sr.
Notes
9.75%................ 06/15/03 1,400 1,316,000
ICF Kaiser
International, Inc.
Sr. Sub. Notes
13.00%............... 12/31/03 600 567,000
Mid-American Waste
Systems, Inc. Sr.
Sub. Notes*
12.25%............... 02/15/03 900 360,000
------------
2,874,500
------------
EQUIPMENT SERVICES -- 0.8%
Coinmach Corp. Sr.
Notes
11.75%............... 11/15/05 781 845,433
Primeco, Inc. Sr. Sub.
Notes
12.75%............... 03/01/05 667 763,715
------------
1,609,148
------------
FARMING & AGRICULTURE -- 0.6%
Dimon, Inc. Sr. Notes
8.875%............... 06/01/06 1,150 1,201,750
------------
FINANCIAL-BANK & TRUST -- 1.3%
First Nationwide Escrow
Sr. Sub. Notes 144A
10.625%.............. 10/01/03 1,750 1,890,000
First Nationwide
Holdings Sr. Notes
12.25%............... 05/15/01 750 849,375
------------
2,739,375
------------
PAR
MATURITY (000) VALUE
-------- ------- ------------
FINANCIAL SERVICES -- 2.1%
Contifinancial Corp.
Sr. Notes
8.375%............... 08/15/03 $ 750 $ 775,313
Intertek Finance PLC
Sr. Sub. Notes 144A
10.25%............... 11/01/06 600 627,000
Mesa Operating Co.
Disc. Notes [STEP]
10.11%............... 07/01/06 1,000 695,000
Mesa Operating Co. Sr.
Sub. Notes
10.625%.............. 07/01/06 500 545,000
Unifrax Investment
Corp. Sr. Notes
10.50%............... 11/01/03 1,650 1,687,125
------------
4,329,438
------------
FOOD -- 3.7%
Carr-Gottstein Foods
Co. Sr. Sub. Notes
12.00%............... 11/15/05 900 959,625
Curtice-Burns Foods,
Inc. Sr. Sub. Notes
12.25%............... 02/01/05 850 884,000
International Home
Foods Sr. Sub. Notes
144A
10.375%.............. 11/01/06 1,500 1,567,500
PMI Acquisition Corp.
Sr. Sub. Notes
10.25%............... 09/01/03 750 778,125
Smith's Food & Drug
Centers Sr. Sub.
Notes
11.25%............... 05/15/07 1,300 1,439,750
Specialty Foods Corp.
Sr. Notes Cl-B
11.125%.............. 10/01/02 400 378,000
11.25%............... 08/15/03 600 459,000
Van de Kamps, Inc. Sr.
Sub. Notes
12.00%............... 09/15/05 950 1,052,125
------------
7,518,125
------------
HEALTHCARE SERVICES -- 2.1%
Genesis Health
Ventures, Inc. Sr.
Sub. Notes
9.75%................ 06/15/05 1,250 1,321,875
Icon Fitness Corp.
Notes [STEP] 144A
14.00%............... 11/15/06 1,100 592,625
Icon Health & Fitness
Sr. Sub. Notes
13.00%............... 07/15/02 530 602,213
Tenet Healthcare Corp.
Sr. Sub. Notes
10.125%.............. 03/01/05 1,700 1,887,000
------------
4,403,713
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
HOTELS & MOTELS -- 0.7%
Courtyard By Mariott
Sr. Notes
10.75%............... 02/01/08 $ 1,250 $ 1,328,125
------------
INDUSTRIAL PRODUCTS -- 1.6%
American Standard Debs.
11.375%.............. 05/15/04 250 268,125
Bar Technologies, Inc.
Notes
13.50%............... 04/01/01 300 308,250
IMO Industries, Inc.,
Sr. Sub. Notes
11.75%............... 05/01/06 900 846,000
International Knife &
Saw, Inc. Sr. Sub.
Notes 144A
11.375%.............. 11/15/06 600 621,000
Prime Succession
Acquisition Co. Sr.
Sub. Notes 144A
10.75%............... 08/15/04 350 380,625
Ryerson Tull, Inc.
Notes
9.125%............... 07/15/06 700 738,500
------------
3,162,500
------------
MACHINERY & EQUIPMENT -- 1.8%
Clark Materials
Handling Sr. Notes
144A
10.75%............... 11/15/06 300 312,750
Fairfield Manufacturing
Co. Sr. Sub. Notes
11.375%.............. 07/01/01 500 525,000
Mettler-Toledo, Inc.
Notes
9.75%................ 10/01/06 1,000 1,057,500
Ryder TRS, Inc. Sr.
Sub. Notes 144A
10.00%............... 12/01/06 675 703,688
Tokheim Corp. Sr. Sub.
Notes 144A
11.50%............... 08/01/06 1,100 1,174,250
------------
3,773,188
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.0%
Dade International,
Inc. Sr. Sub. Notes
11.125%.............. 05/01/06 1,900 2,066,250
------------
METALS & MINING -- 3.5%
Acme Metals, Inc. Sr.
Disc. Notes [STEP]
10.71%............... 08/01/04 825 853,875
Armco, Inc. Sr. Notes
9.375%............... 11/01/00 250 254,375
Bayou Steel Corp. First
Mtge.
10.25%............... 03/01/01 750 693,750
PAR
MATURITY (000) VALUE
-------- ------- ------------
Euramax International
Ltd. Sr. Sub. Notes
144A
11.25%............... 10/01/06 $ 1,250 $ 1,300,000
GS Technologies
Operating Corp. Sr.
Notes
12.00%............... 09/01/04 725 756,719
12.25%............... 10/01/05 1,200 1,263,000
Republic Engineered
Steel First Mtge.
9.875%............... 12/15/01 750 705,938
Royal Oak Mines, Inc.
Sr. Sub. Notes
11.00%............... 08/15/06 1,400 1,428,000
------------
7,255,657
------------
OFFICE EQUIPMENT -- 1.2%
Knoll, Inc. Sr. Sub.
Notes
10.875%.............. 03/15/06 1,150 1,273,625
United Stationery
Supply Sr. Sub. Notes
12.75%............... 05/01/05 1,100 1,226,500
------------
2,500,125
------------
OIL & GAS -- 2.8%
Abraxas Petroleum Corp.
Sr. Notes 144A
11.50%............... 11/01/04 1,150 1,233,375
Falcon Drilling Co.,
Inc. Sr. Notes
9.75%................ 01/15/01 350 368,375
12.50%............... 03/15/05 300 336,375
Forcenergy, Inc. Sr.
Sub. Notes
9.50%................ 11/01/06 1,500 1,567,500
Giant Industries, Inc.
Sr. Sub. Notes
9.75%................ 11/15/03 550 574,750
HS Resources, Inc. Sr.
Sub. Notes
9.875%............... 12/01/03 250 262,500
United Meridian Corp.
Sr. Sub. Notes
10.375%.............. 10/15/05 1,300 1,433,250
------------
5,776,125
------------
PAPER & FOREST PRODUCTS -- 1.6%
Buckeye Cellulos Corp.
Sr. Sub. Notes
9.25%................ 09/15/08 1,000 1,037,500
Repap New Brunswick Sr.
Notes
10.625%.............. 04/15/05 500 525,000
S.D. Warren Co. Sr.
Sub. Notes
12.00%............... 12/15/04 800 865,000
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
Uniforet, Inc. Sr.
Notes 144A
11.125%.............. 10/15/06 $ 950 $ 888,250
------------
3,315,750
------------
PRINTING & PUBLISHING -- 2.0%
Affiliated Newspaper
Investments, Inc. Sr.
Disc. Notes [STEP]
13.61%............... 07/01/06 1,850 1,526,250
Garden State Newspapers
Sr. Sub. Notes
12.00%............... 07/01/04 200 219,000
Hollinger International
Publishing Co. Notes
9.25%................ 02/01/06 1,000 993,750
K-III Communications
Corp. Sr. Notes
8.50%................ 02/01/06 500 493,125
Petersen Publishing Sr.
Sub. Notes 144A
11.125%.............. 11/15/06 800 838,000
------------
4,070,125
------------
REAL ESTATE -- 1.0%
Trizec Finance Ltd. Sr.
Notes
10.875%.............. 10/15/05 1,925 2,129,531
------------
RETAIL & MERCHANDISING -- 1.8%
Brylane L.P. Sr. Sub.
Notes Cl-B
10.00%............... 09/01/03 1,325 1,364,750
Ralph's Grocery Co. Sr.
Notes
10.45%............... 06/15/04 1,950 2,076,750
11.00%............... 06/15/05 325 342,875
------------
3,784,375
------------
TELECOMMUNICATIONS -- 21.9%
Arch Communications
Group Sr. Disc. Notes
[STEP]
10.88%............... 03/15/08 525 303,188
Bell Cablemedia PLC Sr.
Disc. Notes [STEP]
11.81%............... 07/15/04 850 748,000
Brooks Fiber Properties
Sr. Disc. Notes
[STEP]
13.19%............... 03/01/06 2,900 1,943,000
Cablevision Systems
Corp. Sr. Sub. Debs.
9.875%............... 02/15/13 500 493,750
Cablevision Systems
Corp. Sr. Sub. Notes
9.25%................ 11/01/05 1,850 1,831,500
9.875%............... 05/15/06 300 309,000
PAR
MATURITY (000) VALUE
-------- ------- ------------
CAI Wireless Systems,
Inc. Sr. Notes
12.25%............... 09/15/02 $ 250 $ 122,500
Cellular Communications
International, Inc.
Notes [ZCB]
12.17%............... 08/15/00 1,100 767,250
CF Cable TV, Inc. Sr.
Notes
11.625%.............. 02/15/05 500 583,750
Charter Communications
Southeast L.P. Sr.
Notes
11.25%............... 03/15/06 1,000 1,041,250
Comcast U.K. Cable
Corp. Debs. [STEP]
11.56%............... 11/15/07 2,150 1,526,500
CS Wireless Systems,
Inc. Units [STEP]
11.38%............... 03/01/06 500 182,500
Diamond Cable
Communications PLC
Sr. Disc. Notes
[STEP]
12.07%............... 09/30/04 250 205,000
12.16%............... 12/15/05 1,750 1,246,875
Echostar Satellite
Broadcasting Co. Sr.
Disc. Notes [STEP]
13.34%............... 03/15/04 1,725 1,311,000
Fonorola, Inc. Sr.
Notes
12.50%............... 08/15/02 150 164,063
Insight Communications
Co. Sr. Sub. Notes
[STEP]
11.25%............... 03/01/00 400 414,500
Intermedia
Communications of
Florida, Inc. Sr.
Disc. Notes [STEP]
11.94%............... 05/15/06 2,475 1,639,688
International Cabletel,
Inc. Sr. Notes [STEP]
13.57%............... 10/15/03 500 421,250
10.15%............... 04/15/05 1,050 787,500
12.22%............... 02/01/06 1,775 1,211,438
Jacor Communications
Co. Notes
9.75%................ 12/15/06 500 513,750
Millicom International
Cellular Sr. Disc.
Notes [STEP]
13.17%............... 06/01/06 2,350 1,462,875
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
12.94%............... 09/01/03 300 234,750
12.76%............... 08/15/04 1,350 926,438
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
Nextlink
Communications, Inc.
Sr. Notes
12.50%............... 04/15/06 $ 500 $ 538,750
Paging Network, Inc.
Sr. Sub. Notes
10.125%.............. 08/01/07 1,750 1,791,563
Panamsat L.P. Sr. Sub.
Notes [STEP]
9.97%................ 08/01/03 1,400 1,305,500
Park Communications,
Inc. Sr. Notes [PIK]
13.75%............... 05/15/04 450 510,750
Pegasus Media &
Communications, Inc.
Notes
12.50%............... 07/01/05 975 1,057,875
Peoples Choice T.V.
Corp. Units [STEP]
12.74%............... 06/01/04 1,150 494,500
Phonetel Technologies
Sr. Notes
12.00%............... 12/15/06 800 830,000
Rogers Cablesystems Sr.
Notes
10.00%............... 03/15/05 800 858,000
10.00%............... 12/01/07 600 640,500
11.00%............... 12/01/15 750 810,000
Sygnet Wireless, Inc.
Sr. Notes
11.50%............... 10/01/06 1,425 1,478,438
Teleport Communications
Group, Inc. Sr. Notes
9.875%............... 07/01/06 225 241,313
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP]
10.22%............... 07/01/07 3,675 2,544,938
Telewest PLC Debs.
[STEP]
11.09%............... 10/01/07 3,625 2,523,906
UIH Australia Pacific
Sr. Disc. Notes
[STEP]
14.10%............... 05/15/06 1,600 840,000
USA Mobile Communi-
cations Sr. Notes
9.50%................ 02/01/04 1,050 997,500
Vanguard Cellular
System Debs.
9.375%............... 04/15/06 2,000 2,025,000
Viacom, Inc. Sub. Debs.
8.00%................ 07/07/06 3,425 3,326,531
Videotron Holdings PLC
Sr. Notes
10.625%.............. 02/15/05 1,000 1,102,500
Wireless One, Inc. Sr.
Notes
13.00%............... 10/15/03 500 490,000
PAR
MATURITY (000) VALUE
-------- ------- ------------
Wireless One, Inc.
Units [STEP]
13.50%............... 08/01/06 $ 300 $ 147,000
------------
44,945,879
------------
TRANSPORTATION -- 3.4%
Ameritruck Distribution
Sr. Sub. Notes
12.25%............... 11/15/05 1,200 1,212,000
Gearbulk Holding Ltd.
Sr. Notes
11.25%............... 12/01/04 1,250 1,381,250
Great Dane Holdings Sr.
Sub. Debs.
12.75%............... 08/01/01 500 503,750
Johnstown America, Inc.
Sr. Sub. Notes
11.75%............... 08/15/05 350 337,750
Statia Terminals First
Mtge. Notes 144A
11.75%............... 11/15/03 1,000 1,030,000
Stena AB Sr. Notes
10.50%............... 12/15/05 1,625 1,763,125
Trism, Inc. Sr. Sub.
Notes
10.75%............... 12/15/00 725 699,625
------------
6,927,500
------------
UTILITIES -- 2.0%
California Energy Co.,
Inc. Disc. Notes
[STEP]
10.25%............... 01/15/04 2,800 2,968,000
El Paso Electric Co.
First Mtge. Cl-E
9.40%................ 05/01/11 1,075 1,143,767
------------
4,111,767
------------
TOTAL CORPORATE OBLIGATIONS
(COST $178,719,854)................ 187,149,606
------------
U.S. TREASURY OBLIGATIONS -- 1.7%
U.S. Treasury Notes
6.375%
(COST $3,452,895).... 08/15/02 3,500 3,523,065
------------
REPURCHASE AGREEMENTS -- 3.1%
HSBC Securities, Inc.
5.50% dated 12/31/96,
repurchase price
$6,436,966
(Collateralized by
U.S. Treasury Note,
par value $6,325,000,
market value
$6,595,409 due
04/15/98)
(COST $6,435,000).... 01/02/97 6,435 6,435,000
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 0.2%
BROADCASTING -- 0.0%
Sullivan Broadcasting Holdings
Co.*........................... 2,400 $ 24,600
------------
CHEMICALS -- 0.0%
Sterling Chemicals Holdings
Warrants*...................... 1,075 37,625
Uniroyal Technology Corp.
Warrants*...................... 2,500 3,125
------------
40,750
------------
CLOTHING & APPAREL -- 0.0%
Hosiery Corp. of America,
Inc.*.......................... 400 2,200
------------
ENVIRONMENTAL SERVICES -- 0.0%
ICF Kaiser International, Inc.
Warrants*...................... 1,200 600
------------
HEALTHCARE SERVICES -- 0.0%
Icon Health & Fitness Warrants
144A*.......................... 250 15,031
------------
INDUSTRIAL PRODUCTS -- 0.0%
Bar Technologies, Inc. Warrants
144A*.......................... 300 18,000
------------
PRINTING & PUBLISHING -- 0.1%
Affiliated Newspaper Investments,
Inc.*.......................... 1,000 60,000
------------
RETAIL & MERCHANDISING -- 0.0%
Grand Union Co.*................. 7,069 34,907
------------
TELECOMMUNICATIONS -- 0.1%
Cellular Communications
International, Inc.
Warrants*...................... 1,100 22,000
CS Wireless Systems, Inc.
144A*.......................... 137 0
Park Communications, Inc.
Warrants*...................... 4,500 90,000
Pegasus Media & Communications,
Inc. 144A*..................... 50 15,000
Wireless One, Inc. Warrants*..... 1,500 1,500
------------
128,500
------------
TOTAL COMMON STOCK
(COST $418,079).................. 324,588
------------
SHARES VALUE
------- ------------
PREFERRED STOCK -- 2.0%
BROADCASTING -- 0.4%
Chancellor Broadcasting Co.
12.25% [PIK]................... 7,500 $ 840,000
------------
PRINTING & PUBLISHING -- 0.9%
K-III Communications Corp. Cl-B
11.625% [PIK].................. 8,709 886,172
K-III Communications Corp. Cl-C
10.00% [CVT]................... 10,750 1,056,188
------------
1,942,360
------------
TELECOMMUNICATIONS -- 0.1%
Panamsat Corp.
12.75%......................... 225 275,419
------------
UTILITIES -- 0.6%
El Paso Electric Co.
11.40% [PIK]................... 10,300 1,147,163
------------
TOTAL PREFERRED STOCK
(COST $3,702,173)................ 4,204,942
------------
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund... 238 238
Temporary Investment Fund........ 238 238
------------
(COST $476)...................... 476
------------
TOTAL INVESTMENTS -- 98.2%
(COST $192,728,477)................ 201,637,677
OTHER ASSETS LESS
LIABILITIES -- 1.8%................ 3,623,899
------------
NET ASSETS -- 100.0%................. $205,261,576
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 9.5% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
COMMON STOCK -- 48.9%
ADVERTISING -- 0.1%
Omnicom Group, Inc. ................ 1,500 $ 68,625
-----------
AEROSPACE -- 0.9%
Boeing Co. ......................... 3,184 338,697
Lockheed Martin Corp. .............. 1,500 137,250
McDonnell Douglas Corp. ............ 2,000 128,000
Northrop Grumman Corp. ............. 800 66,200
Raytheon Co. ....................... 1,800 86,625
Rockwell International Corp.*....... 2,400 146,100
United Technologies Corp. .......... 2,800 184,800
-----------
1,087,672
-----------
AIRLINES -- 0.2%
Alaska Air Group, Inc.*............. 2,700 56,700
AMR Corp.*.......................... 1,600 141,000
-----------
197,700
-----------
AUTOMOBILE MANUFACTURERS -- 0.7%
Ford Motor Co. ..................... 11,100 353,812
General Motors Corp. ............... 6,400 356,800
Honda Motor Co. Ltd. [ADR] ......... 3,200 181,200
-----------
891,812
-----------
AUTOMOTIVE PARTS -- 0.3%
Arvin Industries, Inc. ............. 1,300 32,175
Echlin, Inc. ....................... 3,100 98,037
Genuine Parts Co. .................. 2,400 106,800
Goodyear Tire & Rubber Co. ......... 1,200 61,650
TRW, Inc. .......................... 2,200 108,900
-----------
407,562
-----------
BEVERAGES -- 1.5%
Anheuser-Busch Companies, Inc. ..... 5,400 216,000
Cadbury Schweppes PLC [ADR] ........ 3,473 118,516
Coca-Cola Co. ...................... 19,100 1,005,137
Coca-Cola Enterprises, Inc. ........ 2,300 111,550
Pepsico, Inc. ...................... 12,000 351,000
-----------
1,802,203
-----------
BROADCASTING -- 0.3%
Chris-Craft Industries, Inc.*....... 1,300 54,437
TCA Cable TV, Inc. ................. 1,600 48,200
U.S. West, Inc.*.................... 6,500 120,250
Viacom, Inc. Cl-B*.................. 4,000 139,500
-----------
362,387
-----------
BUILDING MATERIALS -- 0.1%
Calmat Co. ......................... 1,700 31,875
Masco Corp. ........................ 3,600 129,600
-----------
161,475
-----------
BUSINESS SERVICES -- 0.2%
Cognizant Corp. .................... 1,500 49,500
Equifax, Inc. ...................... 3,900 119,437
Flightsafety International, Inc. ... 1,600 76,600
Olsten Corp. ....................... 2,000 30,250
-----------
275,787
-----------
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
CHEMICALS -- 1.7%
Akzo-Nobel NV [ADR]................. 1,000 67,500
Cabot Corp. ........................ 2,300 $ 57,787
Crompton & Knowles Corp. ........... 3,800 73,150
Dow Chemical Co. ................... 2,600 203,775
Dupont, (E.I.) de Nemours & Co. .... 4,900 462,437
FMC Corp.*.......................... 1,200 84,150
Great Lakes Chemical Corp. ......... 1,300 60,775
Hanna, (M.A.) Co. .................. 2,100 45,937
IMC Global, Inc. ................... 2,000 78,250
Loctite Corp. ...................... 1,200 73,050
Lubrizol Corp. ..................... 2,200 68,200
Millennium Chemicals, Inc.*......... 192 3,407
Monsanto Co. ....................... 5,000 194,375
Morton International, Inc. ......... 2,800 114,100
Olin Corp. ......................... 1,200 45,150
PPG Industries, Inc. ............... 2,800 157,150
Rohm & Haas Co. .................... 1,300 106,112
Witco Corp. ........................ 3,400 103,700
-----------
1,999,005
-----------
CLOTHING & APPAREL -- 0.4%
Cintas Corp. ....................... 1,800 105,750
Jones Apparel Group, Inc.*.......... 3,400 127,075
Nike, Inc. Cl-B .................... 2,400 143,400
Springs Industries, Inc. Cl-A ...... 2,000 86,000
-----------
462,225
-----------
COMPUTER HARDWARE -- 1.5%
Bay Networks, Inc.*................. 1,900 39,662
Compaq Computer Corp.*.............. 2,100 155,925
Dell Computer Corp.*................ 2,600 138,125
Digital Equipment Corp.*............ 1,400 50,925
Hewlett-Packard Co. ................ 7,200 361,800
International Business Machines
Corp. ............................ 3,900 588,900
Seagate Technology, Inc.*........... 3,600 142,200
Stratus Computer, Inc.*............. 1,100 29,975
Sun Microsystems, Inc.*............. 3,200 82,200
3Com Corp.*......................... 2,148 157,610
-----------
1,747,322
-----------
COMPUTER SERVICES & SOFTWARE -- 2.0%
America Online, Inc.*............... 1,900 63,175
Automatic Data Processing, Inc. .... 3,300 141,487
BMC Software, Inc.*................. 3,400 140,675
Cadence Design Systems, Inc.*....... 1,550 61,612
Ceridian Corp.*..................... 1,500 60,750
Cisco Systems, Inc.*................ 4,600 292,675
Computer Associates International,
Inc. ............................. 3,175 157,956
First Data Corp. ................... 4,100 149,650
Informix Corp.*..................... 5,600 114,100
Microsoft Corp.*.................... 7,400 611,425
Novell, Inc.*....................... 2,900 27,459
Oracle Corp.*....................... 5,600 233,800
Parametric Technology Corp.*........ 2,400 123,300
Paychex, Inc. ...................... 2,400 123,450
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Storage Technology Corp.*............... 1,200 $ 57,150
Structural Dynamics Research
Corp.*............................ 1,300 26,000
-----------
2,384,664
-----------
CONGLOMERATES -- 0.9%
Hanson PLC [ADR].................... 2,700 18,225
Minnesota Mining & Manufacturing
Co. .............................. 4,100 339,787
Philip Morris Companies, Inc. ...... 6,400 720,800
-----------
1,078,812
-----------
CONSTRUCTION -- 0.0%
Granite Construction, Inc. ......... 1,100 20,900
Jacobs Engineering Group, Inc.*..... 1,000 23,625
-----------
44,525
-----------
CONSUMER PRODUCTS & SERVICES -- 1.1%
A.C. Nielson Corp.*................. 1 15
American Brands, Inc. .............. 2,400 119,100
Colgate-Palmolive Co. .............. 2,000 184,500
Cross, (A.T.) Co. Cl-A ............. 1,400 16,275
CUC International, Inc.*............ 2,700 64,125
Eastman Kodak Co. .................. 3,000 240,750
National Presto Industries, Inc. ... 800 29,900
Pittston Brink Group ............... 1,300 35,100
Procter & Gamble Co. ............... 5,700 612,750
Tambrands, Inc. .................... 1,500 61,312
-----------
1,363,827
-----------
CONTAINERS & PACKAGING -- 0.2%
Bemis Co., Inc. .................... 2,700 99,563
Sealed Air Corp.*................... 2,700 112,387
-----------
211,950
-----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.2%
Altera Corp.*....................... 1,400 101,762
Applied Materials, Inc.*............ 1,100 39,531
Arrow Electronics, Inc.*............ 900 48,150
Diebold, Inc. ...................... 1,800 113,175
Emerson Electric Co. ............... 2,000 193,500
General Electric Co. ............... 13,000 1,285,375
Hitachi Ltd. [ADR].................. 1,600 148,000
Honeywell, Inc. .................... 1,500 98,625
Hubbell, Inc. Cl-B ................. 2,000 86,500
Molex, Inc. ........................ 2,800 109,550
Philips Electronics NV [ADR]........ 3,600 144,000
Solectron Corp.*.................... 1,500 80,062
Sundstrand Corp. ................... 2,200 93,500
Symbol Technologies, Inc.*.......... 700 30,975
Tandy Corp. ........................ 600 26,400
Teleflex, Inc. ..................... 900 46,912
Varian Associates, Inc. ............ 700 35,612
-----------
2,681,629
-----------
ENTERTAINMENT & LEISURE -- 0.8%
Brunswick Corp. .................... 2,000 48,000
Callaway Golf Co. .................. 1,900 54,625
Circus Circus Enterprises*.......... 2,700 92,812
Harley-Davidson, Inc. .............. 1,900 89,300
Mattel, Inc. ....................... 1,900 52,725
Mirage Resorts, Inc.*............... 3,800 82,175
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
President Casinos, Inc. Warrants*... 883 $ 221
Time Warner, Inc. .................. 5,500 206,250
Walt Disney Co. .................... 5,464 380,431
-----------
1,006,539
-----------
ENVIRONMENTAL SERVICES -- 0.3%
Browning-Ferris Industries, Inc. ... 3,100 81,375
USA Waste Services, Inc.*........... 2,600 82,875
WMX Technologies, Inc............... 4,500 146,812
-----------
311,062
-----------
FINANCIAL-BANK & TRUST -- 4.0%
Australia and New Zealand Banking
Group Ltd. [ADR].................. 3,600 112,050
Banc One Corp. ..................... 4,300 184,900
Banco Bilbao Vizcaya [ADR].......... 3,000 160,125
Banco Frances del Rio de la Plata SA
[ADR]............................. 5,060 139,150
Bancorp Hawaii, Inc. ............... 1,500 63,000
Chase Manhattan Corp. .............. 3,956 353,072
Citicorp ........................... 4,300 442,900
City National Corp. ................ 1,800 38,925
CoreStates Financial Corp. ......... 2,900 150,437
Crestar Financial Corp. ............ 1,300 96,687
Fifth Third Bancorp ................ 2,100 131,906
First Bank System, Inc. ............ 2,000 136,500
First Chicago NBD Corp. ............ 3,400 182,750
First Security Corp. ............... 3,150 106,313
First Tennessee National Corp. ..... 3,200 120,000
First Union Corp. .................. 2,500 185,000
Fleet Financial Group, Inc. ........ 2,900 144,637
Keycorp ............................ 3,000 151,500
Mellon Bank Corp. .................. 2,200 156,200
Mercantile Bancorporation, Inc. .... 1,400 71,925
Mercantile Bankshares Corp. ........ 1,800 57,600
Morgan, (J.P.) & Co., Inc. ......... 2,000 195,250
NationsBank Corp. .................. 2,900 283,475
Northern Trust Corp. ............... 3,800 137,750
Norwest Corp. ...................... 4,000 174,000
PNC Bank Corp. ..................... 4,820 181,352
Southtrust Corp. ................... 3,000 104,625
State Street Boston Corp. .......... 1,800 116,100
U.S. Bancorp ....................... 2,852 128,162
Wells Fargo & Co. .................. 900 242,775
-----------
4,749,066
-----------
FINANCIAL SERVICES -- 1.6%
American Express Co. ............... 3,900 220,350
Bear Stearns Companies, Inc. ....... 2,300 64,112
Charles Schwab Corp. ............... 3,200 102,400
Comdisco, Inc. ..................... 1,900 60,325
Dean Witter Discover & Co. ......... 2,000 132,500
Echelon International Corp.*........ 147 2,292
Edwards (A.G.), Inc. ............... 1,500 50,437
Federal Home Loan Mtge. Corp. ...... 1,700 187,212
Federal National Mtge. Assoc. ...... 6,000 223,500
Franklin Resources, Inc. ........... 1,900 129,912
Green Tree Financial Corp. ......... 2,500 96,562
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Grupo Financiero Bancomer
[ADR] 144A*....................... 1,400 $ 11,200
H & R Block, Inc. .................. 1,500 43,500
Household International, Inc. ...... 1,600 147,600
Merrill Lynch & Co., Inc. .......... 1,300 105,950
Morgan Stanley Group, Inc. ......... 900 51,412
Paine Webber Group, Inc. ........... 2,400 67,500
Salomon, Inc. ...................... 1,400 65,975
SunAmerica, Inc. ................... 2,400 106,500
-----------
1,869,239
-----------
FOOD -- 1.5%
Archer-Daniels-Midland Co. ......... 7,412 163,064
Conagra, Inc. ...................... 2,900 144,275
CPC International, Inc. ............ 1,800 139,500
Dole Food Co. ...................... 1,700 57,587
Earthgrains Co. .................... 148 7,732
General Mills, Inc. ................ 2,000 126,750
Grand Metropolitan PLC [ADR]........ 2,800 88,550
Heinz, (H.J.) Co. .................. 3,750 134,062
IBP, Inc. .......................... 2,400 58,200
Kellogg Co. ........................ 2,400 157,500
McCormick & Co., Inc. .............. 2,600 61,262
Ralston Purina Group ............... 1,800 132,075
Sara Lee Corp. ..................... 5,500 204,875
Smucker, (J.M.) Co. ................ 1,600 28,200
Unilever PLC [ADR].................. 1,100 192,775
Universal Corp. .................... 1,000 32,125
Universal Foods Corp. .............. 1,300 45,825
-----------
1,774,357
-----------
FURNITURE -- 0.1%
Legget & Platt, Inc. ............... 2,000 69,250
-----------
HEALTHCARE SERVICES -- 0.6%
Apria Healthcare Group, Inc.*....... 2,000 37,500
Columbia-HCA Healthcare Corp........ 6,096 248,412
Healthsouth Corp.*.................. 3,400 131,325
Pacificare Health Systems, Inc.
Cl-A*............................. 400 32,500
Pacificare Health Systems, Inc.
Cl-B*............................. 1,000 85,250
United Healthcare Corp.............. 2,100 94,500
Vencor, Inc.*....................... 2,200 69,575
-----------
699,062
-----------
HOTELS & MOTELS -- 0.2%
HFS, Inc.*.......................... 2,400 143,400
ITT Corp.*.......................... 900 39,037
-----------
182,437
-----------
INDUSTRIAL PRODUCTS -- 0.4%
Corning, Inc. ...................... 2,600 120,250
Dexter Corp. ....................... 1,500 47,812
Harsco Corp. ....................... 1,000 68,500
Measurex Corp....................... 1,300 31,200
Pall Corp. ......................... 2,900 73,950
Tomkins PLC [ADR]................... 6,000 111,000
-----------
452,712
-----------
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
INSURANCE -- 1.8%
Aetna, Inc. ........................ 2,102 $ 168,160
AFLAC, Inc. ........................ 2,550 109,012
American Financial Group, Inc. ..... 1,700 64,175
American General Corp. ............. 3,600 147,150
American International Group,
Inc. ............................. 4,100 443,825
Chubb Corp. ........................ 2,600 139,750
CIGNA Corp. ........................ 1,100 150,288
General Re Corp. ................... 1,100 173,525
Hartford Steam Boiler Inspection &
Insurance Co. .................... 1,100 51,013
Loews Corp. ........................ 1,700 160,225
Progressive Corp. .................. 1,300 87,588
Selective Insurance Group .......... 1,000 38,000
Torchmark Corp. .................... 1,800 90,900
Transatlantic Holdings, Inc. ....... 700 56,350
Travelers Group, Inc. .............. 4,700 213,258
UNUM Corp. ......................... 1,700 122,825
-----------
2,216,044
-----------
MACHINERY & EQUIPMENT -- 1.0%
AlliedSignal, Inc. ................. 2,900 194,300
Black & Decker Corp. ............... 1,800 54,225
Caterpillar, Inc. .................. 2,400 180,600
Danaher Corp. ...................... 1,100 51,288
Deere & Co. ........................ 3,300 134,063
Duriron Co., Inc. .................. 2,900 78,663
Federal Signal Corp. ............... 1,700 43,988
Gencorp, Inc. ...................... 2,800 50,750
Illinois Tool Works, Inc. .......... 1,800 143,775
Sequa Corp. Cl-A*................... 700 27,475
Tecumseh Products Co. Cl-A ......... 1,400 80,325
Thermo Electron Corp.*.............. 4,050 167,063
-----------
1,206,515
-----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.5%
Baxter International, Inc. ......... 2,400 98,400
Becton Dickinson & Co. ............. 2,700 117,113
Boston Scientific Corp.*............ 1,700 102,000
Guidant Corp. ...................... 500 28,500
Medtronic, Inc. .................... 2,000 136,000
Stryker Corp........................ 3,400 101,575
-----------
583,588
-----------
METALS & MINING -- 0.5%
Aluminum Co. of America ............ 2,700 172,125
Barrick Gold Corp. ................. 4,700 135,125
Brush Wellman, Inc. ................ 1,300 21,288
Carpenter Technology Corp. ......... 2,600 95,225
Nucor Corp. ........................ 1,600 81,600
Placer Dome, Inc. .................. 4,700 102,225
-----------
607,588
-----------
MISCELLANEOUS -- 0.1%
Imperial Tobacco Group PLC [ADR]*... 675 8,710
International Flavors & Fragrances,
Inc. ............................. 2,600 117,000
-----------
125,710
-----------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
OFFICE EQUIPMENT -- 0.5%
Alco Standard Corp. ................ 2,300 $ 118,738
Pitney Bowes, Inc. ................. 1,900 103,550
Standard Register Co. .............. 1,100 35,750
Staples, Inc.*...................... 2,900 52,381
Viking Office Products, Inc.*....... 2,100 56,044
Wallace Computer Service, Inc....... 3,000 103,500
Xerox Corp. ........................ 2,600 136,825
-----------
606,788
-----------
OIL & GAS -- 5.4%
Amerada Hess Corp. ................. 4,700 272,013
Atlantic Richfield Co. ............. 1,800 238,500
BJ Services Co.*.................... 3,300 168,300
British Petroleum Co. PLC [ADR]..... 1,100 155,513
Chevron Corp........................ 5,100 331,500
El Paso Natural Gas Co. ............ 1,400 70,700
Enron Corp. ........................ 3,800 163,875
Ensco International, Inc.*.......... 2,100 101,850
Ente Nazionale Idrocarbure SPA
[ADR]............................. 3,500 180,688
Exxon Corp. ........................ 10,000 980,000
Global Marine, Inc.* ............... 4,200 86,625
Halliburton Co. .................... 800 48,200
Helmerich & Payne, Inc. ............ 900 46,913
MCN Corp. .......................... 2,400 69,300
Mobil Corp. ........................ 3,400 415,650
Murphy Oil Corp. ................... 1,200 66,750
National Fuel Gas Co. .............. 1,600 66,000
Noble Affiliates, Inc. ............. 2,600 124,475
Occidental Petroleum Corp. ......... 5,500 128,563
Phillips Petroleum Co. ............. 4,000 177,000
Ranger Oil Ltd. .................... 5,400 53,325
Repsol SA [ADR] .................... 3,000 114,375
Royal Dutch Petroleum Co. [ADR]..... 4,600 785,450
Schlumberger Ltd. .................. 1,700 169,788
Shell Transport & Trading Co.
[ADR]............................. 1,400 143,325
Societe Nationale Elf Aquitaine SA
[ADR]............................. 2,000 90,500
Sonat, Inc. ........................ 2,100 108,150
Texaco, Inc. ....................... 2,800 274,750
Tidewater, Inc. .................... 3,100 140,275
Tosco Corp.......................... 1,000 79,125
Total SA [ADR]...................... 3,000 120,750
Union Pacific Resources Group,
Inc. ............................. 4,609 134,813
Unocal Corp. ....................... 3,000 121,875
USX Marathon Group.................. 4,500 107,438
Valero Energy Corp. ................ 3,000 85,875
Washington Gas Light Co. ........... 2,200 49,775
-----------
6,472,004
-----------
PAPER & FOREST PRODUCTS -- 0.6%
Georgia Pacific Corp. .............. 1,500 108,000
Glatfelter, (P.H.) Co. ............. 2,600 46,800
International Paper Co. ............ 3,800 153,425
Kimberly-Clark Corp. ............... 2,700 257,175
Wausau Paper Mills Co. ............. 1,900 35,150
Weyerhaeuser Co. ................... 3,200 151,600
-----------
752,150
-----------
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
PERSONAL SERVICES -- 0.1%
Service Corp. International......... 3,800 $ 106,400
-----------
PHARMACEUTICALS -- 3.5%
Abbott Laboratories................. 5,900 299,425
American Home Products Corp. ....... 4,900 287,263
Amgen, Inc.*........................ 2,300 125,063
Bristol-Meyers Squibb Co. .......... 3,700 402,375
Cardinal Health, Inc. .............. 2,400 139,800
Carter-Wallace, Inc. ............... 3,900 60,938
Centocor, Inc.*..................... 1,200 42,900
Genzyme Corp.*...................... 2,100 45,675
Glaxo Wellcome PLC [ADR]............ 4,500 142,875
Ivax Corp........................... 2,200 22,550
Johnson & Johnson Co. .............. 10,200 507,450
Lilly, (Eli) & Co. ................. 3,900 284,700
McKesson Corp. ..................... 1,300 72,800
Merck & Co., Inc. .................. 9,300 737,025
Perrigo Co.* ....................... 3,600 32,850
Pfizer, Inc. ....................... 4,400 364,650
Pharmacia & Upjohn, Inc............. 4,300 170,388
Scherer, (R.P.) Corp.*.............. 1,000 50,250
Schering-Plough Corp. .............. 2,800 181,300
Warner-Lambert Co. ................. 3,000 225,000
Watson Pharmaceuticals, Inc.*....... 1,500 67,406
-----------
4,262,683
-----------
PRINTING & PUBLISHING -- 0.4%
Banta Corp. ........................ 2,900 66,338
Belo, (A.H.) Corp. Cl-A............. 1,300 45,338
Dun & Bradstreet Corp. ............. 1,500 35,625
Gannett Co., Inc. .................. 2,200 164,725
McGraw-Hill Co., Inc. .............. 2,400 110,700
-----------
422,726
-----------
RAILROADS -- 0.5%
Burlington Northern Santa Fe........ 1,300 112,288
Conrail, Inc. ...................... 836 83,287
CSX Corp. .......................... 2,300 97,175
Kansas City Southern Industries,
Inc. ............................. 1,800 81,000
Norfolk Southern Corp. ............. 900 78,750
Union Pacific Corp. ................ 1,900 114,238
-----------
566,738
-----------
RESTAURANTS -- 0.4%
Brinker International, Inc.*........ 7,300 116,800
Cracker Barrel Old Country Store,
Inc. ............................. 2,700 68,513
Darden Restaurants, Inc. ........... 2,900 25,375
McDonald's Corp. ................... 4,800 217,200
Outback Steakhouse, Inc.*........... 1,900 50,825
-----------
478,713
-----------
RETAIL & MERCHANDISING -- 2.1%
Albertson's, Inc. .................. 4,200 149,625
Ann Taylor Stores Corp.*............ 1,600 28,000
Bed, Bath & Beyond, Inc.* .......... 2,200 53,350
Circuit City Stores, Inc. .......... 900 27,113
Dayton-Hudson Corp. ................ 2,400 94,200
Fastenal Co......................... 1,400 64,050
Federated Department Stores,
Inc.* ............................ 1,900 64,838
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Gap, Inc............................ 2,900 $ 87,363
Home Depot, Inc. ................... 4,500 225,563
J.C. Penney Co., Inc................ 2,800 136,500
Kohls Corp.*........................ 3,100 121,675
Kroger Co.*......................... 2,200 102,300
Lands' End, Inc.*................... 1,800 47,700
May Department Stores Co. .......... 3,300 154,275
Meyer, (Fred), Inc.*................ 1,500 53,250
Micro Warehouse, Inc.*.............. 1,500 17,625
Payless Shoesource, Inc.*........... 672 25,200
Petrie Stores Corp.*................ 2,700 7,425
Price Costco, Inc.*................. 3,900 97,988
Revco D.S., Inc.*................... 2,800 103,600
Tiffany & Co........................ 1,200 43,950
TJX Companies, Inc.................. 900 42,638
Toys 'R' Us, Inc.*.................. 3,820 114,600
Vons Companies, Inc.*............... 1,600 95,800
Wal-Mart Stores, Inc. .............. 19,200 439,200
Walgreen Co. ....................... 2,700 108,000
-----------
2,505,828
-----------
SEMI-CONDUCTORS -- 1.3%
Analog Devices, Inc.*............... 5,650 191,394
Atmel Corp.*........................ 2,000 66,250
Intel Corp. ........................ 6,300 824,906
Linear Technology Corp. ............ 1,900 83,363
Maxim Integrated Products, Inc.*.... 2,000 86,500
Motorola, Inc. ..................... 4,300 263,913
Xilinx, Inc.*....................... 3,100 114,119
-----------
1,630,445
-----------
TELECOMMUNICATIONS -- 4.2%
ADC Telecommunications, Inc.*....... 3,400 105,825
Airtouch Communications, Inc.*...... 5,000 126,250
Ameritech Corp. .................... 3,800 230,375
AT&T Corp. ......................... 12,400 539,400
Bell Atlantic Corp. ................ 4,000 259,000
BellSouth Corp. .................... 7,100 286,663
British Telecommunications PLC
[ADR]............................. 2,000 137,250
Century Telephone Enterprises,
Inc. ............................. 2,800 86,450
Cia de Telecomunicaciones de Chile
SA [ADR] ......................... 400 40,450
Comcast Corp. Cl-A.................. 5,700 101,531
GTE Corp. .......................... 7,200 327,600
Hong Kong Telecommunications Ltd.
[ADR]............................. 9,245 150,231
Lucent Technologies, Inc. .......... 4,676 216,265
MCI Communications Corp. ........... 6,700 219,006
Nextel Communications, Inc. Cl-A*... 3,600 47,025
Nokia Corp. Cl-A [ADR].............. 1,800 103,725
Northern Telecom Ltd. .............. 3,400 210,375
NYNEX Corp. ........................ 3,200 154,000
Pacific Telesis Group .............. 4,300 158,025
SBC Communications, Inc............. 4,500 232,875
Southern New England
Telecommunications Corp........... 2,400 93,300
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Sprint Corp......................... 3,300 $ 131,588
Telebras SA [ADR]................... 3,300 252,450
Telefonaktiebolaget LM Ericsson
[ADR] ............................ 4,800 144,900
Telefonica de Espana [ADR].......... 1,600 110,800
Telefonos de Mexico SA Cl-L [ADR]... 1,800 59,400
Telephone & Data Systems, Inc. ..... 2,000 72,500
Tellabs, Inc.*...................... 2,000 75,250
U.S. Robotics Corp.*................ 1,600 115,200
U.S. West Communications Group...... 3,100 99,975
Vodafone Group PLC [ADR]............ 2,000 82,750
Worldcom, Inc.*..................... 3,100 80,794
360 Communications Co.*............. 2,300 53,188
-----------
5,104,416
-----------
TRANSPORTATION -- 0.0%
Alexander & Baldwin, Inc. .......... 1,800 45,000
-----------
UTILITIES -- 2.2%
Allegheny Power System, Inc. ....... 2,700 82,013
American Water Works Co., Inc....... 1,200 24,750
Calenergy, Inc.* ................... 2,400 80,700
CMS Energy Corp. ................... 2,800 94,150
Duke Power Co....................... 3,100 143,375
Edison International, Inc........... 7,800 155,025
Empresa Nacional de Electridad SA
[ADR]............................. 1,900 133,000
Empresa Nacional Electridad SA
[ADR]............................. 2,000 31,000
Entergy Corp. ...................... 4,800 133,200
Florida Progress Corp. ............. 2,200 70,950
FPL Group, Inc. .................... 3,100 142,600
Idaho Power Co. .................... 2,600 80,925
Illinova Corp. ..................... 2,700 74,250
IPALCO Enterprises, Inc. ........... 2,400 65,400
Midamerican Energy Co. ............. 3,800 60,325
New York State Electric & Gas
Corp. ............................ 3,400 73,525
Niagara Mohawk Power Corp. ......... 9,200 90,850
NIPSCO Industries, Inc. ............ 2,300 91,138
Pacific Gas & Electric Co. ......... 6,800 142,800
Portland General Corp. ............. 2,700 113,400
Potomac Electric Power Co. ......... 3,200 82,400
Public Service Co. of New Mexico ... 1,000 19,625
Scana Corp.......................... 2,700 72,225
Southern Co. ....................... 8,700 196,838
Southwestern Public Service Co. .... 2,100 74,288
Teco Energy, Inc. .................. 3,100 74,788
Texas Utilities Co.................. 3,700 150,775
Unicom Corp. ....................... 4,200 113,925
-----------
2,668,240
-----------
TOTAL COMMON STOCK
(COST $49,680,204).................... 58,704,482
-----------
FOREIGN STOCK -- 10.9%
AEROSPACE -- 0.1%
Mitsubishi Heavy Industries
Ltd. -- (JPY)..................... 17,000 135,236
-----------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
AIRLINES -- 0.2%
KLM Royal Dutch Airlines
NV -- (NLG)....................... 3,000 $ 84,532
Singapore Airlines Ltd. -- (SGD).... 15,000 136,208
-----------
220,740
-----------
AUTOMOBILE MANUFACTURERS -- 0.2%
Man AG -- (DEM)..................... 1,000 241,705
-----------
AUTOMOTIVE PARTS -- 0.2%
Bridgestone Corp. -- (JPY).......... 15,000 285,344
-----------
BEVERAGES -- 0.3%
Lion Nathan Ltd. -- (NZD)........... 50,000 119,830
Louis Vuitton Moet
Hennessy -- (FRF)................. 660 184,611
-----------
304,441
-----------
BUILDING MATERIALS -- 0.2%
Holderbank Financiere Glarus AG --
(CHF)............................. 200 142,868
Malayan Cement BHD -- (MYR)......... 41,000 94,167
-----------
237,035
-----------
CHEMICALS -- 0.5%
AKZO Nobel NV -- (NLG).............. 400 54,731
BASF AG -- (DEM).................... 5,600 214,964
Bayer AG -- (DEM)................... 3,200 130,020
L'Air Liquide -- (FRF).............. 660 103,199
Sumitomo Chemical Co. -- (JPY)...... 26,000 103,191
-----------
606,105
-----------
CLOTHING & APPAREL -- 0.2%
Benetton Group SPA -- (ITL)......... 4,000 50,367
Kuraray Co. Ltd. -- (JPY)........... 16,000 148,033
-----------
198,400
-----------
COMPUTER SERVICES & SOFTWARE -- 0.2%
Getronics NV -- (NLG)............... 7,268 197,628
-----------
CONGLOMERATES -- 0.9%
Cycle & Carriage Ltd. -- (SGD)...... 15,000 183,398
GKN PLC -- (GBP).................... 6,000 102,874
Hutchison Whampoa Ltd. -- (HKD)..... 56,000 439,847
Sime Darby BHD -- (MYR)............. 50,000 197,006
United Engineers Ltd. -- (MYR)...... 15,000 135,429
Valmet Corp. -- (FIM)............... 4,000 70,573
-----------
1,129,127
-----------
CONSTRUCTION -- 0.2%
Matsushita Electric
Works -- (JPY).................... 15,000 129,313
Societe Technip -- (FRF)............ 1,700 159,817
-----------
289,130
-----------
CONSUMER PRODUCTS & SERVICES -- 0.2%
Kao Corp. -- (JPY).................. 17,000 198,444
Orkla AS Cl-A -- (NOK).............. 1,000 69,963
-----------
268,407
-----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.3%
Mitsubishi Electric
Corp. -- (JPY).................... 17,000 101,427
Sharp Corp. -- (JPY)................ 9,000 128,405
Siemans AG -- (DEM)................. 2,000 92,934
-----------
322,766
-----------
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 2.5%
Abbey National PLC -- (GBP)......... 18,000 $ 235,860
ABN AMRO Holding NV -- (NLG)........ 2,000 130,334
Banca Commerciale Italia
NA -- (ITL)....................... 30,000 54,331
Bank of Scotland -- (GBP)........... 20,208 106,782
Bankgesellschaft Berlin
AG -- (DEM)....................... 5,450 99,284
Barclays PLC -- (GBP)............... 15,191 260,330
DCB Holdings BHD -- (MYR)........... 33,000 113,036
Deutsche Bank AG -- (DEM)........... 2,600 121,457
Developmental Bank of Singapore Ltd.
Cl-F -- (SGD)..................... 7,000 94,595
HSBC Holdings PLC -- (GBP).......... 18,000 402,658
ING Groep NV -- (NLG)............... 10,153 366,139
Kredietbank NV -- (BEF)............. 300 98,531
Oversea-Chinese Banking Corp.
Ltd. -- (SGD)..................... 10,000 124,410
Schweizerischer
Bankverein -- (CHF)............... 1,200 228,200
Societe Generale -- (BEF)........... 1,000 78,636
Svenska Handlesbanken
Cl-A -- (SEK)..................... 5,000 144,290
Toronto Dominion Bank -- (CAD)...... 4,100 105,397
Union Bank of Switzerland Cl-B --
(CHF)............................. 200 175,297
Westpac Banking Corp.
Ltd. -- (AUD)..................... 10,000 56,956
-----------
2,996,523
-----------
FINANCIAL SERVICES -- 0.2%
Gemina SPA -- (ITL)*................ 50,000 24,475
Mediobanca -- (ITL)................. 7,000 37,595
Societe Generale -- (FRF)........... 1,212 131,253
-----------
193,323
-----------
FOOD -- 0.6%
CSM NV -- (NLG)..................... 2,400 133,581
Danisco AS -- (DKK)................. 3,000 182,796
Eridania Beghin-Say SA -- (FRF)..... 1,300 209,544
Huhtamaki Group -- (FIM)............ 1,500 69,919
Nestle SA -- (CHF).................. 150 161,063
-----------
756,903
-----------
INSURANCE -- 0.3%
AXA SA -- (FRF)..................... 2,900 184,738
CKAG Colonia Konzern AG -- (DEM).... 1,500 125,211
-----------
309,949
-----------
MACHINERY & EQUIPMENT -- 0.2%
ABB AG -- (CHF)..................... 80 99,529
SIG Holding AG -- (CHF)............. 70 177,314
-----------
276,843
-----------
METALS & MINING -- 0.1%
CRA Ltd. -- (AUD)................... 6,000 94,265
Lonrho PLC -- (GBP)................. 22,000 46,915
-----------
141,180
-----------
OFFICE EQUIPMENT -- 0.2%
Canon, Inc. -- (JPY)................ 6,000 132,815
Ricoh Corp. Ltd. -- (JPY)........... 13,000 149,503
-----------
282,318
-----------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
OIL & GAS -- 0.1%
Societe Nationale Elf Aquitaine
SA -- (FRF)....................... 1,100 $ 100,290
-----------
PAPER & FOREST PRODUCTS -- 0.1%
Bobst SA -- (CHF)................... 60 81,148
Kimberly-Clark de Mexico SA Cl-A --
(MXP)............................. 2,000 39,507
-----------
120,655
-----------
PHARMACEUTICALS -- 0.8%
Altana AG -- (DEM).................. 110 85,810
Astra AB Cl-B -- (SEK).............. 5,500 266,420
Gehe AG -- (DEM).................... 1,250 80,392
Novartis AG -- (CHF)*............... 160 183,158
Roussel-Uclaf -- (FRF).............. 500 147,385
Takeda Chemical
Industries -- (JPY)............... 10,000 210,117
-----------
973,282
-----------
PRINTING & PUBLISHING -- 0.4%
Dai Nippon Printing Co.
Ltd. -- (JPY)..................... 12,000 210,636
Elsevier NV -- (NLG)................ 12,000 203,154
Pearson PLC -- (GBP)................ 5,600 71,892
-----------
485,682
-----------
REAL ESTATE -- 0.4%
Cheung Kong Holdings
Ltd. -- (HKD)..................... 38,000 337,772
DBS Land Ltd. -- (SGD).............. 25,000 92,056
Hopewell Holdings Ltd. -- (HKD)..... 59,463 38,440
-----------
468,268
-----------
RETAIL & MERCHANDISING -- 0.4%
Carrefour Supermarche SA -- (FRF)... 150 97,755
Mauri Co. Ltd. -- (JPY)............. 7,000 126,502
Pinault-Printemps Redoute
SA -- (FRF)....................... 250 99,319
Tesco PLC -- (GBP).................. 25,443 154,492
-----------
478,068
-----------
TELECOMMUNICATIONS -- 0.5%
Telecom Corp. of New Zealand Ltd. --
(NZD)............................. 22,000 112,294
Telecom Italia Mobile
SPA -- (ITL)...................... 75,000 188,730
Telecom Italia SPA -- (ITL)......... 75,000 193,898
Telekom Malaysia BHD -- (MYR)....... 16,000 142,557
-----------
637,479
-----------
TRANSPORTATION -- 0.1%
BAA PLC -- (GBP).................... 12,000 99,997
-----------
UTILITIES -- 0.3%
Electrabel SA -- (BEF).............. 420 99,612
Hong Kong Electric Holdings Ltd. --
(HKD)............................. 30,000 99,683
Veba AG -- (DEM).................... 2,500 143,949
-----------
343,244
-----------
TOTAL FOREIGN STOCK
(COST $11,201,323).................... 13,100,068
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 15.9%
ADVERTISING -- 0.1%
Outdoor Systems, Inc.
Sr. Sub. Notes
9.375%................... 10/15/06 $ 150 $ 154,875
AEROSPACE -- 0.9%
BE Aerospace, Inc. Sr. Sub.
Notes
9.875%................... 02/01/06 $ 150 $ 156,938
Boeing Co. Notes
6.35%.................... 06/15/03 120 118,500
K&F Industries, Inc. Sr.
Sub. Notes
10.375%.................. 09/01/04 150 158,250
Raytheon Co. Notes
6.50%.................... 07/15/05 350 342,125
Tracor, Inc. Sr. Sub. Notes
10.875%.................. 08/15/01 150 160,313
UNC, Inc. Sr. Sub. Notes
11.00%................... 06/01/06 150 160,500
------------
1,096,626
------------
AIRLINES -- 0.0%
Southwest Airlines Co.
Debs.
9.25%.................... 02/15/98 25 25,844
------------
AUTOMOBILE MANUFACTURERS -- 0.0%
Daimler-Benz Auto Grantor
Trust
3.90%.................... 10/15/98 21 21,004
------------
AUTOMOTIVE PARTS -- 0.4%
Hayes Wheels International,
Inc. Notes
11.00%................... 07/15/06 150 163,125
Safelite Glass Corp.
Sr. Sub. Notes 144A
9.875%................... 12/15/06 150 154,500
Speedy Muffler King, Inc.
Notes
10.875%.................. 10/01/06 150 160,875
------------
478,500
------------
BEVERAGES -- 0.5%
Anheuser-Busch Companies,
Inc. Debs.
7.00%.................... 12/01/25 150 142,500
Coca-Cola Bottling Group
Sr. Sub. Notes
9.00%.................... 11/15/03 100 102,250
Dr. Pepper Bottling Holding
Co. Sr. Notes [STEP]
11.625%.................. 02/15/03 140 123,900
Texas Bottling Group, Inc.
Sr. Sub. Notes
9.00%.................... 11/15/03 100 101,250
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
TLC Beatrice International
Holdings Sr. Notes
11.50%................... 10/01/05 $ 150 $ 159,375
------------
629,275
------------
BROADCASTING -- 0.2%
Chancellor Broadcasting Co.
Sr. Sub. Notes
9.375%................... 10/01/04 175 178,063
Young Broadcasting Corp.
Sr. Sub. Notes
10.125%.................. 02/15/05 100 102,500
------------
280,563
------------
BUILDING MATERIALS -- 0.1%
Building Materials Corp.
Sr. Notes [STEP]
6.56%.................... 07/01/04 150 129,750
------------
CHEMICALS -- 0.2%
Agricultural Minerals &
Chemicals, Inc. Sr. Notes
10.75%................... 09/30/03 100 106,875
Scotts Co. Sr. Sub. Notes
9.875%................... 08/01/04 100 105,125
------------
212,000
------------
CLOTHING & APPAREL -- 0.5%
Dan River, Inc. Sr. Sub.
Notes
10.125%.................. 12/15/03 100 101,500
Dominion Textile USA, Inc.
Sr. Notes
9.25%.................... 04/01/06 150 153,375
Loehmann's Holdings, Inc.
Sr. Notes
11.875%.................. 05/15/03 125 131,250
Pillowtex Corp. Sr. Sub.
Notes 144A
10.00%................... 11/15/06 150 156,375
------------
542,500
------------
COMPUTER HARDWARE -- 0.1%
International Business
Machines Corp. Notes
6.375%................... 11/01/97 100 100,451
------------
CONGLOMERATES -- 0.1%
Jordan Industries Sr. Notes
10.375%.................. 08/01/03 125 123,750
------------
CONSUMER PRODUCTS & SERVICES -- 0.4%
American Safety Razor Co.
Sr. Notes
9.875%................... 08/01/05 150 159,188
Herff Jones, Inc. Sr. Sub.
Notes Cl-B
11.00%................... 08/15/05 125 135,000
MAFCO, Inc. Sr. Sub. Notes
11.875%.................. 11/15/02 100 106,000
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
Revlon Worldwide Corp. Sr.
Disc. Notes [ZCB]
11.29%................... 03/15/98 $ 150 $ 129,375
------------
529,563
------------
CONTAINERS & PACKAGING -- 0.8%
Container Corp. of America
Sr. Notes
11.25%................... 05/01/04 100 108,500
Gaylord Container Corp. Sr.
Sub. Debs.
12.75%................... 05/15/05 150 165,000
Owens Illinois, Inc. Debs.
11.00%................... 12/01/03 150 167,625
Plastic Containers Sr.
Notes 144A
10.00%................... 12/15/06 150 155,250
Portola Packaging, Inc. Sr.
Notes
10.75%................... 10/01/05 150 156,375
U.S. Can Corp. Sr. Sub.
Notes 144A
10.125%.................. 10/15/06 150 157,875
910,625
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.4%
Alpine Group, Inc. Sr.
Notes
12.25%................... 07/15/03 50 54,875
Ametek, Inc. Sr. Notes
9.75%.................... 03/15/04 100 107,125
Celestica International Sr.
Sub. Notes 144A
10.50%................... 12/31/06 150 158,063
Westinghouse Electric Corp.
Debs.
8.875%................... 06/01/01 200 209,250
------------
529,313
------------
ENTERTAINMENT & LEISURE -- 0.6%
Rio Hotel & Casino, Inc.
Sr. Sub. Notes
10.625%.................. 07/15/05 150 157,125
Six Flags Theme Parks Sr.
Sub. Notes Cl-A [STEP]
8.44%.................... 06/15/05 150 141,188
Time Warner Entertainment
Debs.
7.25%.................... 09/01/08 100 96,500
Trump Atlantic City First
Mtge.
11.25%................... 05/01/06 125 123,750
United Artists Theatre Pass
Through Trust
9.30%.................... 07/01/15 248 231,204
------------
749,767
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
ENVIRONMENTAL SERVICES -- 0.1%
Allied Waste North America
Sr. Sub. Notes 144A
10.25%................... 12/01/06 $ 100 $ 105,500
------------
EQUIPMENT SERVICES -- 0.1%
Coinmach Corp. Sr. Notes
11.75%................... 11/15/05 125 134,688
------------
FINANCIAL-BANK & TRUST -- 1.1%
Airplanes Pass Through
Trust
10.875%.................. 03/15/19 150 165,460
Aristar, Inc. Sr. Notes
8.875%................... 08/15/98 200 208,000
7.875%................... 02/15/99 200 206,250
Banesto Delaware Sub. Notes
8.25%.................... 07/28/02 50 53,313
Bank of Nova Scotia Sub.
Notes
6.25%.................... 09/15/08 50 46,563
CoreStates Home Equity
Trust Cl-A
6.65%.................... 05/15/09 71 69,990
Export-Import Bank of Korea
Notes
6.50%.................... 05/15/00 40 39,800
First Federal Financial
Notes
11.75%................... 10/01/04 125 122,969
NationsBank Texas Sr. Notes
6.75%.................... 08/15/00 150 151,125
Provident Bank Corp. Sub.
Notes
7.125%................... 03/15/03 175 176,969
U.S. Bancorp Notes
6.72%.................... 06/01/98 100 101,000
------------
1,341,439
------------
FINANCIAL SERVICES -- 2.1%
Aames Financial Corp. Sr.
Notes
9.125%................... 11/01/03 150 153,375
Advanta Corp. Notes
7.07%.................... 09/15/97 235 236,727
Ahmanson, (H.F.) & Co. Sr.
Notes
9.875%................... 11/15/99 100 108,125
Associates Corp. of North
America Sr. Notes
8.625%................... 06/15/97 10 10,132
7.70%.................... 03/15/00 50 51,813
Chrysler Financial Corp.
Notes
8.46%.................... 01/19/00 200 210,500
Ciesco L.P. Notes
7.38%.................... 04/19/00 250 255,312
Commercial Credit Co. Debs.
8.125%................... 03/01/97 5 5,019
Enhance Financial Services
Group Debs.
6.75%.................... 03/01/03 300 300,000
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
Ford Motor Credit Co. Notes
9.45%.................... 05/20/97 $ 50 $ 50,720
General Motors Acceptance
Corp. Grantor Trust
6.30%.................... 06/15/99 21 20,969
General Motors Acceptance
Corp. Notes
7.75%.................... 04/15/97 50 50,314
8.375%................... 05/01/97 10 10,092
Household Finance Corp. Sr.
Notes
6.96%.................... 04/27/98 300 303,750
Intertek Finance PLC Sr.
Sub. Notes 144A
10.25%................... 11/01/06 150 155,625
Lehman Brothers Holdings
Notes
7.625%................... 06/15/97 65 65,497
Ocwen Financial Corp. Notes
11.875%.................. 10/01/03 150 162,187
Salomon, Inc. Sr. Notes
6.75%.................... 02/15/03 184 179,860
Smith Barney Holdings Notes
6.625%................... 06/01/00 200 200,750
------------
2,530,767
------------
FOOD -- 0.1%
Keebler Corp. Sr. Sub.
Notes
10.75%................... 07/01/06 150 162,375
------------
HOTELS & MOTELS -- 0.1%
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%.................... 05/15/05 150 156,750
------------
INDUSTRIAL PRODUCTS -- 0.5%
American Standard Debs.
11.375%.................. 05/15/04 150 162,000
9.25%.................... 12/01/16 25 26,188
Hawk Corp. 144A
10.25%................... 12/01/03 150 154,500
International Knife & Saw,
Inc. Sr. Sub. Notes 144A
11.375%.................. 11/15/06 150 156,000
Synthetic Industries Debs.
12.75%................... 12/01/02 125 137,500
------------
636,188
------------
INSURANCE -- 0.1%
New York Life Insurance
Notes 144A
7.50%.................... 12/15/23 100 97,125
------------
MACHINERY & EQUIPMENT -- 0.3%
Mettler-Toledo, Inc. Notes
9.75%.................... 10/01/06 150 158,250
Tokheim Corp. Sr. Sub.
Notes 144A
11.50%................... 08/01/06 150 159,000
------------
317,250
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 0.1%
Dade International, Inc.
Sr. Sub. Notes
11.125%.................. 05/01/06 $ 125 $ 135,312
-------------
METALS & MINING -- 0.3%
Freeport-McMoran Resource
Sr. Notes
7.00%.................... 02/15/08 150 144,562
Haynes International, Inc.
Sr. Notes
11.625%.................. 09/01/04 150 158,250
-------------
302,812
-------------
MISCELLANEOUS -- 0.3%
Consolidated Cigar Sr. Sub.
Notes
10.50%................... 03/01/03 125 131,406
Doane Products Co. Sr.
Notes
10.625%.................. 03/01/06 150 160,125
-------------
291,531
-------------
OIL & GAS -- 1.1%
Dual Drilling Co. Sr. Sub.
Notes
9.875%................... 01/15/04 125 135,625
Falcon Drilling Co., Inc.
Sr. Notes
8.875%................... 03/15/03 150 152,625
Ferrellgas L.P. Financial
Corp. Sr. Notes
10.00%................... 08/01/01 100 105,500
Flores & Rucks Sr. Sub.
Notes
9.75%.................... 10/01/06 50 52,875
Kelley Oil & Gas Corp. Sr.
Sub. Notes 144A
10.375%.................. 10/15/06 125 130,000
Maxus Energy Corp. Notes
9.375%................... 11/01/03 50 51,000
Petroleum Heat & Power Sub.
Notes
10.125%.................. 04/01/03 100 101,125
12.25%................... 02/01/05 188 210,090
Rowan Co. Sr. Notes
11.875%.................. 12/01/01 150 160,312
Tenneco, Inc. Notes
8.20%.................... 11/15/99 55 57,337
8.075%................... 10/01/02 150 157,500
-------------
1,313,989
-------------
PAPER & FOREST PRODUCTS -- 0.2%
Celulosa Arauco Notes
7.00%.................... 12/15/07 250 241,562
-------------
PHARMACEUTICALS -- 0.1%
Owens & Minor, Inc. Sr.
Sub. Notes
10.875%.................. 06/01/06 150 161,250
-------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
REAL ESTATE -- 0.3%
B.F. Saul Sr. Notes
11.625%.................. 04/01/02 $ 150 $ 161,625
HMC Acquisition Properties
Sr. Notes Cl-B
9.00%.................... 12/15/07 150 152,250
-------------
313,875
-------------
RESTAURANTS -- 0.1%
McDonald's Corp. Notes
6.625%................... 09/01/05 100 98,625
-------------
RETAIL & MERCHANDISING -- 0.2%
Grand Union Co. Sr. Notes
12.00%................... 09/01/04 150 159,750
Wal-Mart Stores, Inc. Debs.
7.25%.................... 06/01/13 85 85,212
-------------
244,962
-------------
TELECOMMUNICATIONS -- 1.3%
Communication & Power
Industries Sr. Sub. Notes
Cl-B
12.00%................... 08/01/05 150 167,625
Frontiervision Sr. Sub.
Notes
11.00%................... 10/15/06 150 150,375
Fundy Cable Ltd. Sr. Notes
11.00%................... 11/15/05 150 159,375
Lucent Technologies, Inc.
Notes
6.90%.................... 07/15/01 200 202,500
Rogers Cablesystems Sr.
Notes
10.00%................... 03/15/05 125 133,906
TCI Communications, Inc.
Sr. Notes
8.65%.................... 09/15/04 200 205,250
Tele-Communications, Inc.
Notes
8.75%.................... 02/15/23 175 166,687
Teleport Communications,
Inc. Notes
9.875%................... 07/01/06 50 53,250
United Telecommunications
Debs.
9.75%.................... 04/01/00 250 273,437
-------------
1,512,405
-------------
TRANSPORTATION -- 0.1%
Federal Express Notes
6.25%.................... 04/15/98 70 70,175
Sea Containers Ltd. Sr.
Sub. Notes
12.50%................... 12/01/04 70 77,350
-------------
147,525
-------------
UTILITIES -- 2.0%
Citizens Utilities Co.
Debs.
8.45%.................... 09/01/01 335 360,962
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C>
Commonwealth Edison Notes
7.00%.................... 02/15/97 $ 50 $ 50,062
9.00%.................... 10/15/99 250 264,375
Consumers Power Co. First
Mtge.
6.00%.................... 07/01/97 65 64,919
6.625%................... 10/01/98 50 50,125
El Paso Electric Co. First
Mtge.
8.90%.................... 02/01/06 150 156,750
Florida Power & Light First
Mtge.
5.70%.................... 03/05/98 200 199,250
Gulf States Utilities First
Mtge.
5.375%................... 02/01/97 128 128,000
Monongahela Power First
Mtge.
8.50%.................... 06/01/22 150 159,375
Pacific Gas & Electric Co.
First Mtge.
6.75%.................... 12/01/00 200 200,500
Potomac Capital Investment
Corp. Notes 144A
6.19%.................... 04/28/97 250 250,170
Public Service Electric &
Gas First Mtge.
7.00%.................... 09/01/24 300 278,625
Southern California Edison
Notes
6.50%.................... 06/01/01 100 99,500
Wisconsin Electric Power
Co. First Mtge.
5.875%................... 10/01/97 100 100,125
------------
2,362,738
------------
TOTAL CORPORATE OBLIGATIONS
(COST $18,713,428).................... 19,123,074
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 10.6%
FEDERAL HOME LOAN MORTGAGE CORP. -- 0.2%
7.00%.................... 11/01/97 180 181,745
7.50%.................... 07/15/20 15 15,164
------------
196,909
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 0.0%
6.02%.................... 01/20/98 60 60,160
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 10.4%
9.50%.................... 10/15/09 $ 23 $ 25,292
10.00%................... 11/15/09 22 24,450
11.50%................... 06/15/10 42 46,906
12.00%................... 09/15/13 1 1,496
12.00%................... 01/15/14 7 7,479
10.50%................... 08/15/15 13 14,735
11.50%................... 09/15/15 97 110,150
11.50%................... 11/15/15 37 41,630
8.00%.................... 05/15/16 26 26,491
8.50%.................... 06/15/16 35 36,195
9.00%.................... 07/15/16 16 16,618
8.00%.................... 12/15/16 50 50,975
8.00%.................... 02/15/17 97 99,265
8.00%.................... 05/15/17 63 63,898
9.00%.................... 05/15/17 77 81,167
8.00%.................... 06/15/17 27 28,009
9.50%.................... 11/15/18 4 4,827
9.50%.................... 03/15/19 17 18,344
9.50%.................... 01/15/20 8 8,441
9.50%.................... 06/15/20 14 15,192
8.00%.................... 06/15/22 143 145,533
8.00%.................... 09/15/22 31 31,443
8.00%.................... 07/15/23 81 82,357
7.00%.................... 09/15/23 373 365,062
6.50%.................... 02/15/24 701 669,248
6.50%.................... 04/15/24 85 80,896
6.50%.................... 05/15/24 882 841,651
7.50%.................... 06/15/24 86 85,719
7.00%.................... 12/15/25 291 284,784
7.00%.................... 01/15/26 41 40,060
6.00%.................... 02/15/26 402 373,515
7.00%.................... 02/15/26 40 39,339
7.00%.................... 03/15/26 110 107,225
7.00%.................... 04/15/26 899 879,887
7.50%.................... 04/15/26 144 144,486
6.00%.................... 05/15/26 327 303,633
7.00%.................... 05/15/26 904 884,854
7.50%.................... 05/15/26 1,086 1,086,998
7.00%.................... 06/15/26 1,093 1,069,318
7.50%.................... 06/15/26 297 297,347
8.00%.................... 06/15/26 804 820,332
8.50%.................... 06/15/26 618 641,035
8.50%.................... 07/15/26 1,045 1,082,982
7.00%.................... 08/15/26 888 869,291
8.50%.................... 10/15/26 494 512,109
------------
12,460,664
------------
TENNESSEE VALLEY AUTHORITY NOTES -- 0.0%
7.75%.................... 12/15/22 10 10,263
7.25%.................... 07/15/43 20 19,475
6.875%................... 12/15/43 40 37,350
------------
67,088
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $12,702,002)............................ 12,784,821
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS
-- 7.6%
U.S. TREASURY BONDS -- 0.9%
11.625%.................. 11/15/02 $ 100 $ 126,337
7.125%................... 02/15/23 240 250,649
7.625%................... 02/15/25 300 333,249
6.875%................... 08/15/25 300 305,844
6.00%.................... 02/15/26 100 91,076
-------------
1,107,155
-------------
U.S. TREASURY NOTES -- 6.7%
6.125%................... 05/15/98 100 100,517
6.00%.................... 05/31/98 450 451,539
5.125%................... 12/31/98 50 49,335
6.375%................... 05/15/99 1,950 1,967,881
6.75%.................... 05/31/99 460 468,128
6.875%................... 03/31/00 250 255,745
6.25%.................... 05/31/00 100 100,479
6.125%................... 09/30/00 150 150,006
5.625%................... 11/30/00 275 270,217
5.625%................... 02/28/01 1,100 1,078,605
5.75%.................... 08/15/03 665 645,396
7.50%.................... 02/15/05 250 267,340
5.875%................... 11/15/05 425 410,036
5.625%................... 02/15/06 500 473,165
6.50%.................... 10/15/06 1,350 1,357,587
-------------
8,045,976
-------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $9,060,043)..................... 9,153,131
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C> <C>
FOREIGN BONDS -- 2.6%
AUSTRALIA -- 0.0%
Australian Government
9.50%................. 08/15/03 20 17,808
------------
BELGIUM -- 0.1%
Belgium Kingdom
Government
7.25%................. 04/29/04 1,550 54,119
------------
CANADA -- 0.2%
Canadian Government
8.50%................. 04/01/02 130 107,097
6.50%................. 06/01/04 110 82,190
9.75%................. 06/01/21 10 9,555
------------
198,842
------------
DENMARK -- 0.0%
Kingdom of Denmark
7.00%................. 12/15/04 275 48,785
------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- --------- ------------
<S> <C> <C> <C>
FRANCE -- 0.3%
French O.A.T.
8.50%................. 11/25/02 1,406 $ 319,317
8.25%................. 02/27/04 264 59,728
8.50%................. 04/25/23 50 11,775
French Treasury Bill
8.50%................. 03/12/97 75 14,614
------------
405,434
------------
GERMANY -- 0.6%
Deutscheland Republic
8.50%................. 08/21/00 375 277,285
8.375%................ 05/21/01 410 305,619
6.50%................. 07/15/03 110 76,105
------------
659,009
------------
ITALY -- 0.2%
Italian Government
11.50%................ 03/01/03 275,000 219,242
8.50%................. 08/01/04 45,000 31,570
------------
250,812
------------
JAPAN -- 0.8%
European Investment Bank
4.625%................ 02/26/03 53,000 523,584
International Bank
Recovery & Development
Global Bond
6.75%................. 03/15/00 14,000 142,239
Japanese Government
4.50%................. 06/20/03 33,500 329,438
------------
995,261
------------
NETHERLANDS -- 0.1%
Netherlands Government
5.75%................. 01/15/04 115 68,141
------------
SPAIN -- 0.0%
Spanish Government
8.00%................. 05/30/04 6,400 53,636
------------
UNITED KINGDOM -- 0.3%
United Kingdom Gilt
9.00%................. 03/03/00 85 153,236
United Kingdom Treasury
8.00%................. 06/10/03 91 160,838
------------
314,074
------------
TOTAL FOREIGN BONDS
(COST $2,866,664)................... 3,065,921
-------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 3.1%
Temporary Investment Fund
(COST $3,725,574).............. 3,725,574 $ 3,725,574
------------
TOTAL INVESTMENTS -- 99.6%
(COST $107,949,238)................ 119,657,071
OTHER ASSETS LESS
LIABILITIES -- 0.4%................ 492,003
------------
NET ASSETS -- 100.0%................. $120,149,074
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 1.7% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 11.4%
AIRLINES -- 3.2%
American Airlines
Notes
10.19%.............. 05/26/15 $ 250 $ 304,488
United Air Lines, Inc.
Notes
10.36%.............. 11/13/12 6,925 8,342,686
10.36%.............. 11/27/12 500 588,685
10.02%.............. 03/22/14 2,000 2,322,180
------------
11,558,039
------------
ENTERTAINMENT & LEISURE -- 1.1%
Time Warner, Inc.
Notes
7.45%............... 02/01/98 2,000 2,027,500
6.46% [VR].......... 08/15/00 437 438,639
7.975%.............. 08/15/04 262 267,895
8.11%............... 08/15/06 525 540,094
8.18%............... 08/15/07 525 542,063
------------
3,816,191
------------
FOOD -- 1.9%
RJR Nabisco, Inc.
Notes
8.625%.............. 12/01/02 6,500 6,703,125
------------
OIL & GAS -- 0.1%
Arkla, Inc. Notes
9.20%............... 12/18/97 500 514,375
------------
REAL ESTATE -- 1.4%
Spieker Properties
Notes
6.95%............... 12/15/02 5,000 4,968,750
------------
TELECOMMUNICATIONS -- 1.5%
Cablevision Industries
Sr. Notes
10.75%.............. 01/30/02 5,000 5,306,250
------------
UTILITIES -- 2.2%
Cleveland Electric
Illumination Co.
Notes
8.75%............... 11/15/05 100 101,168
CMS Energy Corp. First
Mtge.
9.50%............... 10/01/97 150 154,125
Commonwealth Edison
Notes
6.50%............... 07/15/97 750 751,875
Long Island Lighting
Co. Notes
7.85%............... 05/15/99 7,000 7,131,250
------------
8,138,418
------------
TOTAL CORPORATE OBLIGATIONS
(COST $40,334,319)................ 41,005,148
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 50.8%
FEDERAL HOME LOAN MORTGAGE CORP. -- 3.0%
8.25%............... 08/01/17 $ 610 $ 626,871
7.00% [IO].......... 04/25/19 411 40,801
7.55% [VR].......... 02/01/24 3,213 3,321,350
6.50%............... 12/01/25 2,951 2,822,541
6.50% [TBA]......... 02/13/27 4,000 3,843,750
------------
10,655,313
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 2.6%
9.40%............... 07/25/03 311 325,714
6.50% [IO].......... 05/25/08 236 73,363
6.50% [IO].......... 06/25/14 2,091 122,981
6.90%............... 05/25/23 192 160,029
7.96% [VR].......... 01/01/24 448 464,831
7.50%............... 04/01/24 4,041 4,041,091
7.00%............... 04/25/24 602 541,365
7.76% [VR].......... 04/01/25 790 821,623
6.12% [TBA]......... 01/23/27 3,000 2,985,000
------------
9,535,997
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 45.2%
6.50% [VR].......... 03/20/17 754 768,196
7.125% [VR]......... 06/20/22 2,517 2,568,571
7.125% [VR]......... 04/20/23 3,157 3,214,157
7.125% [VR]......... 09/20/23 7,090 7,213,976
7.00% [VR].......... 10/20/23 694 705,576
7.50%............... 12/20/23 445 442,916
6.50%............... 01/15/24 502 478,970
6.50%............... 04/15/24 368 350,637
6.50%............... 05/15/24 304 290,066
7.125% [VR]......... 09/20/24 1,451 1,486,080
7.00% [VR].......... 10/20/24 3,831 3,912,431
6.50%............... 08/15/25 1,328 1,267,424
6.50%............... 09/15/25 1,805 1,722,355
6.50%............... 10/15/25 1,242 1,184,778
6.50%............... 11/15/25 611 583,183
6.50%............... 12/15/25 3,371 3,216,363
6.50%............... 01/15/26 3,563 3,399,354
6.50%............... 02/15/26 8,825 8,419,214
6.50%............... 03/15/26 10,207 9,738,049
6.50%............... 04/15/26 10,803 10,306,417
6.50%............... 05/15/26 4,942 4,714,549
6.50%............... 06/15/26 556 530,071
6.50%............... 07/15/26 668 636,871
6.50%............... 08/15/26 1,551 1,479,726
6.50%............... 10/15/26 535 510,081
7.00%............... 12/20/26 24,950 25,481,435
6.50% [TBA]......... 01/21/27 25,000 23,843,750
7.00% [TBA]......... 01/21/27 30,000 29,343,900
6.00% [TBA]......... 01/23/27 15,000 15,004,688
------------
162,813,784
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $181,149,967)............... 183,005,094
------------
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 6.1%
Citicorp Mtge.
Securities, Inc.
[VR]
7.452%.............. 09/25/22 $ 666 $ 682,320
Collateralized Mtge.
Securities Corp.
[VR]
7.985%.............. 05/01/17 536 541,059
Countrywide Adjustable
Rate Mtge. [VR]
7.8499%............. 03/25/24 894 915,802
8.2169%............. 11/25/24 1,000 1,026,522
Guardian Adjustable
Rate Mtge.[VR]
6.7963%............. 12/25/19 86 57,035
Mortgage Capital Trust
VI
9.50%............... 02/01/18 856 862,736
Prudential Home Mtge.
Securities
6.50%............... 01/25/00 10,000 9,971,800
Prudential-Bache CMO
Trust
8.40%............... 03/20/21 3,236 3,324,816
Resolution Trust Corp.
8.00%............... 09/25/21 476 481,454
Rothschild L.F. Mtge.
Trust
9.95%............... 08/01/17 2,747 2,930,809
Ryland Mtge.
Securities Corp.
[VR]
7.843%.............. 09/25/23 1,215 1,236,642
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $21,832,471)................ 22,030,995
-----------
U.S. TREASURY OBLIGATIONS -- 45.6%
U.S. TREASURY BILLS -- 0.6%
4.975% #............ 01/23/97 300 299,065
5.01% #............. 03/06/97 70 69,372
5.025% #............ 03/06/97 800 792,821
5.06% #............. 03/06/97 20 19,821
4.81% #............. 03/13/97 305 301,956
5.00% #............. 03/13/97 530 524,710
-----------
2,007,745
-----------
U.S. TREASURY NOTES -- 45.0%
5.875%.............. 07/31/97 78,000 78,209,032
5.625%.............. 10/31/97 50,000 50,021,500
5.375%.............. 11/30/97 30,000 29,939,100
6.00%............... 09/30/98 4,000 4,012,640
-----------
162,182,272
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $163,910,566)............... 164,190,017
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 2.1%
ARGENTINA -- 1.4%
Republic of Argentina
[BRB,FRB]
6.625%.............. 03/31/05 $ 5,880 $ 5,122,950
-----------
MEXICO -- 0.7%
United Mexican States
Cl-B [BRB,FRB] (with
Value Recovery
Rights Attached)
6.25%............... 12/31/19 1,500 1,098,750
United Mexican States
Cl-C [BRB,FRB] (with
Value Recovery
Rights Attached)
6.375%.............. 12/31/19 1,000 861,250
United Mexican States
Cl-D [BRB,FRB] (with
Value Recovery
Rights Attached)
6.4531%............. 12/31/19 500 430,625
-----------
2,390,625
-----------
TOTAL SOVEREIGN ISSUES
(COST $6,676,521)................. 7,513,575
-----------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
----------
<S> <C> <C> <C>
FOREIGN BONDS -- 3.3%
CANADA -- 1.1%
Canadian Government
4.25%............... 12/01/26 5,086 3,857,126
-----------
NEW ZEALAND -- 2.2%
New Zealand Government
10.00%.............. 03/15/02 10,000 7,941,668
-----------
TOTAL FOREIGN BONDS
(COST $11,283,283)................ 11,798,794
-----------
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C> <C>
OTC INTEREST RATE CAPS -- 0.0%
Three-Month Libor
Strike at $90.65.... 06/16/97 $ 325,000 $ 3,380
Strike at $85.50.... 06/16/97 46,000 468
Strike at $86.50.... 06/16/97 100,000 1,021
Strike at $91.80.... 06/16/97 100,000 794
Strike at $82.00.... 06/16/97 100,000 1,107
Strike at $89.30.... 12/15/97 375,000 7,028
------------
TOTAL OTC INTEREST RATE CAPS
(COST $13,798).................... 13,798
------------
<CAPTION>
SHARES
----------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.5%
Temporary Investment Cash
Fund.......................... 903,112 903,112
Temporary Investment Fund....... 903,112 903,112
------------
(COST $1,806,224)............... 1,806,224
------------
TOTAL INVESTMENTS -- 119.8%
(COST $427,007,149)............... 431,363,645
------------
<CAPTION>
NOTIONAL
AMOUNT
(000)
----------
<S> <C> <C>
WRITTEN OPTIONS -- 0.0%
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.00, Expire
03/17/97...................... $ 62,000 (1,550)
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.50, Expire
06/16/97...................... 600,000 (45,000)
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.25, Expire
06/16/97...................... 300,000 (15,000)
------------
TOTAL WRITTEN OPTIONS
(COST ($668,559))................. (61,550)
------------
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (19.8%)................. (71,292,134)
------------
NET ASSETS -- 100.0%................ $ 360,009,961
=============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy CAD $2,283,957 1.3135 05/97 $ (74,028)
Buy DEM 4,742,424 1.4984 01/97 (114,163)
---------
$(188,191)
=========
Sell CAD $3,916,230 1.3370 01/97 $ 85,580
Sell CAD 2,196,193 1.3660 05/97 (13,735)
Sell DEM 4,996,105 1.4309 01/97 337,845
Sell NZD 7,697,105 1.4149 01/97 9,257
---------
$ 418,947
=========
</TABLE>
# Securities with an aggregate market value of $2,007,745 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at December 31, 1996:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
EXPIRATION AMOUNT APPRECIATION
DESCRIPTION MONTH (000) (DEPRECIATION)
- -----------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury 5 Year
Note 03/97 $ 5,000 $ (25,000)
U.S. Treasury 10 Year
Note 03/97 68,100 (778,595)
U.S. Treasury 30 Year
Bond 03/97 25,900 (152,218)
Eurodollar 03/97 50,000 270,000
Eurodollar 06/97 50,000 155,000
-------------
$ (530,813)
=============
</TABLE>
Interest rate swap agreements outstanding at December 31, 1996:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATON
- -----------------------------------------------------------------
<S> <C> <C> <C>
Receive variable rate
payments on the
three-month USD-LIBOR-BBA
floating rate and pay
fixed rate payments on the
then current U.S. Treasury
10 Year Note. 03/97 $13,000 $ 12,276
======= ========
</TABLE>
- --------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 70.4%
AEROSPACE -- 2.0%
General Motors Corp. Cl-H ........ 20,000 $ 1,125,000
Lockheed Martin Corp. ............ 20,000 1,830,000
Northrop Grumman Corp. ........... 49,000 4,054,750
------------
7,009,750
------------
AIRLINES -- 0.2%
KLM Royal Dutch Airlines NV ...... 30,000 836,250
------------
AUTOMOBILE MANUFACTURERS -- 0.7%
Chrysler Corp. ................... 40,000 1,320,000
Ford Motor Co. ................... 30,000 956,250
------------
2,276,250
------------
AUTOMOTIVE PARTS -- 0.6%
Borg Warner Automotive, Inc. ..... 50,000 1,925,000
------------
BEVERAGES -- 2.0%
Anheuser-Busch Companies, Inc. ... 140,000 5,600,000
Coors, (Adolph) Co. Cl-B ......... 70,000 1,330,000
------------
6,930,000
------------
BROADCASTING -- 0.6%
News Corp. Ltd. [ADR] ............ 100,000 2,087,500
------------
CHEMICALS -- 3.7%
Agrium, Inc. ..................... 210,000 2,887,500
Air Products & Chemicals, Inc. ... 50,000 3,456,250
Arco Chemical Co. ................ 20,000 980,000
General Chemical Group, Inc. ..... 60,000 1,417,500
Lawter International, Inc. ....... 100,000 1,262,500
Olin Corp. ....................... 80,000 3,010,000
------------
13,013,750
------------
COMPUTER HARDWARE -- 2.1%
Hewlett-Packard Co. .............. 40,000 2,010,000
International Business Machines
Corp. .......................... 35,000 5,285,000
------------
7,295,000
------------
COMPUTER SERVICES & SOFTWARE -- 0.4%
Reynolds & Reynolds Co. Cl-A ..... 60,000 1,560,000
------------
CONGLOMERATES -- 0.5%
Philip Morris Companies, Inc. .... 15,000 1,689,375
------------
CONSTRUCTION -- 1.0%
Fluor Corp. ...................... 54,000 3,388,500
Newport News Shipbuilding,
Inc.* .......................... 6,500 97,500
------------
3,486,000
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.0%
Emerson Electric Co. ............. 40,000 3,870,000
General Electric Co. ............. 37,000 3,658,375
Honeywell, Inc. .................. 40,000 2,630,000
Polaroid Corp. ................... 30,000 1,305,000
Sundstrand Corp. ................. 140,000 5,950,000
Texas Instruments, Inc. .......... 55,000 3,506,250
------------
20,919,625
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 3.5%
Bank of New York Co., Inc. ....... 60,000 $ 2,025,000
BankAmerica Corp. ................ 20,000 1,995,000
CoreStates Financial Corp. ....... 60,000 3,112,500
First Chicago NBD Corp. .......... 56,200 3,020,750
Mellon Bank Corp. ................ 30,000 2,130,000
------------
12,283,250
------------
FINANCIAL SERVICES -- 2.7%
Associates First Capital Corp. ... 100,000 4,412,500
Beneficial Corp. ................. 50,000 3,168,750
Dean Witter Discover & Co. ....... 30,000 1,987,500
------------
9,568,750
------------
FOOD -- 3.0%
General Mills, Inc. .............. 35,000 2,218,125
Heinz, (H.J.) Co. ................ 73,000 2,609,750
Kellogg Co. ...................... 70,000 4,593,750
Quaker Oats Co. .................. 30,000 1,143,750
------------
10,565,375
------------
HOTELS & MOTELS -- 1.1%
Hilton Hotels Corp. .............. 150,000 3,918,750
------------
INDUSTRIAL PRODUCTS -- 0.7%
Albany International Corp.
Cl-A ........................... 100,000 2,312,500
------------
INSURANCE -- 6.8%
Allmerica Financial Corp. ........ 60,000 2,010,000
Allmerica Property & Casualty
Companies, Inc. ................ 100,000 3,037,500
American States Financial
Corp. .......................... 150,800 3,996,200
Ohio Casualty Corp. .............. 50,000 1,775,000
Safeco Corp. ..................... 100,000 3,943,750
St. Paul Companies, Inc. ......... 50,000 2,931,250
Travelers-Aetna Property Casualty
Corp. Cl-A ..................... 167,500 5,925,312
------------
23,619,012
------------
MACHINERY & EQUIPMENT -- 1.3%
AlliedSignal, Inc. ............... 50,000 3,350,000
Cooper Industries, Inc. .......... 25,000 1,053,125
------------
4,403,125
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.8%
Becton Dickinson & Co. ........... 60,000 2,602,500
------------
METALS & MINING -- 0.4%
Newmont Mining Corp. ............. 30,994 1,386,982
------------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
OIL & GAS -- 6.8%
Amoco Corp. ...................... 15,000 $ 1,207,500
Burlington Resources, Inc. ....... 40,000 2,020,000
Chevron Corp. .................... 30,000 1,950,000
Dresser Industries, Inc. ......... 70,000 2,170,000
Exxon Corp. ...................... 20,000 1,960,000
Halliburton Co. .................. 25,000 1,506,250
Mobil Corp. ...................... 12,000 1,467,000
Schlumberger Ltd. ................ 21,000 2,097,375
Sonat, Inc. ...................... 35,000 1,802,500
Tenneco, Inc.* ................... 32,500 1,466,563
Union Pacific Resources Group,
Inc. ........................... 91,173 2,666,810
Unocal Corp. ..................... 40,000 1,625,000
USX Marathon Group ............... 80,000 1,910,000
------------
23,848,998
------------
PAPER & FOREST PRODUCTS -- 2.2%
Champion International Corp. ..... 60,000 2,595,000
James River Corp. of Virginia .... 50,000 1,656,250
Kimberly-Clark Corp. ............. 35,000 3,333,750
------------
7,585,000
------------
PERSONAL SERVICES -- 0.4%
Service Corp. International ...... 52,000 1,456,000
------------
PHARMACEUTICALS -- 4.0%
American Home Products Corp. ..... 25,000 1,465,625
Glaxo Wellcome PLC [ADR] ......... 100,000 3,175,000
Novo Nordisk AS [ADR] ............ 20,000 935,000
Pfizer, Inc. ..................... 30,000 2,486,250
Smithkline Beecham PLC [ADR] ..... 30,000 2,040,000
Warner-Lambert Co. ............... 50,000 3,750,000
------------
13,851,875
------------
PRINTING & PUBLISHING -- 0.7%
Belo, (A.H.) Corp. Cl-A .......... 35,000 1,220,625
R.R. Donnelley & Sons Co. ........ 40,000 1,255,000
------------
2,475,625
------------
RAILROADS -- 2.2%
Conrail, Inc. .................... 26,792 2,669,153
Kansas City Southern Industries,
Inc. ........................... 80,000 3,600,000
Union Pacific Corp. .............. 25,000 1,503,125
------------
7,772,278
------------
REAL ESTATE -- 1.0%
Patriot American Hospitality, Inc.
[REIT] ......................... 80,000 3,450,000
------------
RETAIL & MERCHANDISING -- 2.6%
Dayton-Hudson Corp. .............. 60,000 2,355,000
J.C. Penney Co., Inc. ............ 90,000 4,387,500
May Department Stores Co. ........ 50,000 2,337,500
------------
9,080,000
------------
SEMI-CONDUCTORS -- 2.1%
Intel Corp. ...................... 40,000 5,237,500
Motorola, Inc. ................... 35,000 2,148,125
------------
7,385,625
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
TELECOMMUNICATIONS -- 7.8%
Ameritech Corp. .................. 50,000 $ 3,031,250
AT&T Corp. ....................... 40,000 1,740,000
Bell Atlantic Corp. .............. 30,000 1,942,500
BellSouth Corp. .................. 20,000 807,500
Deutsche Telekom AG [ADR]* ....... 100,000 2,037,500
Frontier Corp. ................... 125,000 2,828,125
GTE Corp. ........................ 30,000 1,365,000
Lucent Technologies, Inc. ........ 112,963 5,224,539
Nokia Corp. Cl-A [ADR] ........... 30,000 1,728,750
NYNEX Corp. ...................... 25,000 1,203,125
SBC Communications, Inc. ......... 50,000 2,587,500
U.S. West Communications Group ... 80,000 2,580,000
------------
27,075,789
------------
UTILITIES -- 0.5%
IES Industries, Inc. ............. 60,000 1,792,500
------------
TOTAL COMMON STOCK
(COST $203,578,320) .............. 245,462,434
------------
PREFERRED STOCK -- 0.3%
METALS & MINING
Amax Gold, Inc. $3.75 Cl-B
(COST $996,575) .................. 20,000 1,052,500
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 12.9%
AIRLINES -- 0.2%
Delta Air Lines, Inc.
Equipment Trust
9.30% ................. 01/02/11 $ 500 574,766
-----------
BROADCASTING -- 1.2%
Allbritton Communications
Co. Sr. Sub. Debs.
11.50% ................ 08/15/04 1,000 1,060,000
-----------
9.75% ................. 11/30/07 1,000 972,500
American Radio Systems
Notes
9.00% ................. 02/01/06 1,000 985,000
Benedek Broadcasting
Corp. Sr. Notes
11.875% ............... 03/01/05 1,000 1,043,750
-----------
4,061,250
-----------
CONSUMER PRODUCTS & SERVICES -- 0.3%
Rayovac Corp. Sr. Sub.
Notes 144A
10.25% ................ 11/01/06 1,000 1,032,500
-----------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 1.3%
Station Casinos Sr. Sub.
Notes
9.625% ................ 06/01/03 $ 500 $ 489,375
Time Warner, Inc. Notes
6.85% ................. 01/15/26 1,000 982,500
Trump Atlantic City
Assoc., Inc. Notes
11.25% ................ 05/01/06 1,000 990,000
Trump Castle Funding
Mtge.
11.75%................. 11/15/03 1,000 885,000
United Artists
Sr. Notes Cl-B
11.50%................. 05/01/02 1,000 1,065,000
------------
4,411,875
------------
FINANCIAL SERVICES -- 1.7%
Donaldson, Lufkin &
Jenrette, Inc. Notes
5.625%................. 02/15/16 1,000 966,250
DQU II Funding Corp.
8.70%.................. 06/01/16 2,000 2,080,000
Export Import Bank of
Korea Notes
6.50%.................. 11/15/06 1,000 979,596
General Motors Acceptance
Corp. Notes
7.125%................. 06/01/99 500 509,375
6.70%.................. 04/25/01 1,000 1,000,000
Tembec Finance Corp. Sr.
Notes
9.875%................. 09/30/05 500 472,500
-----------
6,007,721
-----------
HEALTHCARE SERVICES -- 0.3%
Tenet Healthcare Corp.
Sr. Sub. Notes
10.125%................ 03/01/05 900 995,625
-----------
LUMBER & WOOD PRODUCTS -- 0.3%
Malette, Inc.
12.25%................. 07/15/04 1,000 1,070,000
-----------
METALS & MINING -- 0.8%
Freeport-McMoran Copper &
Gold Debs.
7.20%.................. 11/15/26 1,900 1,878,625
USX Corp. Sub. Debs.
5.75%.................. 07/01/01 1,025 957,094
-----------
2,835,719
-----------
OIL & GAS -- 0.6%
Clark Oil & Refining
Corp. Sr. Notes
10.50%................. 12/01/01 1,000 1,045,000
Veritas Holdings Sr.
Notes 144A
9.625%................. 12/15/03 1,000 1,012,500
-----------
2,057,500
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
PAPER & FOREST PRODUCTS -- 0.3%
S.D. Warren Co. Sr. Sub.
Notes Cl-B
12.00%................. 12/15/04 $ 1,000 $ 1,082,500
-----------
PHARMACEUTICALS -- 0.3%
McKesson Corp.
4.50%.................. 03/01/04 1,225 1,085,656
-----------
PRINTING & PUBLISHING -- 0.2%
Affiliated Newspaper
Investments, Inc. Sr.
Disc. Notes [STEP]
8.28%.................. 07/01/06 1,000 832,500
-----------
TELECOMMUNICATIONS -- 4.1%
Centennial Cellular Sr.
Notes
8.875%................. 11/01/01 1,000 967,500
Commnet Cellular, Inc.
Sub. Notes
11.25%................. 07/01/05 1,000 1,062,500
Continental Cablevision
Sr. Sub. Debs.
11.00%................. 06/01/07 1,500 1,708,125
EZ Communications, Inc.
Sr. Sub. Notes
9.75%.................. 12/01/05 1,500 1,567,500
International Cabletel,
Inc. Sr. Notes [STEP]
11.75%................. 02/01/06 1,000 680,000
Marcus Cable Co. Sr.
Notes [STEP]
11.61%................. 12/15/05 900 639,000
MFS Communications Co.,
Inc. Sr. Notes [STEP]
8.85%.................. 01/15/06 1,000 730,000
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
12.48%................. 08/15/04 1,000 682,500
Paging Network, Inc. Sr.
Sub. Notes 144A
10.00%................. 10/15/08 1,000 1,013,750
Panamsat L.P. Sr. Sub.
Notes [STEP]
5.06%.................. 08/01/03 1,500 1,391,250
Viacom, Inc. Sub. Debs.
8.00%.................. 07/07/06 1,500 1,462,500
Videotron Holdings PLC
Sr. Notes [STEP]
7.94%.................. 07/01/04 1,650 1,443,750
Western Wireless Corp.
Sr. Sub. Notes
10.50%................. 06/01/06 1,000 1,037,500
-----------
14,385,875
-----------
</TABLE>
68
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C>
TRANSPORTATION -- 0.2%
Teekay Shipping Corp.
Notes
8.32%.................. 02/01/08 $ 500 $ 501,250
------------
UTILITIES -- 1.1%
Enersis SA Notes
6.90%.................. 12/01/06 1,000 976,250
North Atlantic Energy
First Mtge.
9.05%.................. 06/01/02 1,000 1,002,500
Penn Power Co. First
Mtge.
6.375%................. 09/01/04 1,000 945,000
PSI Energy, Inc. Debs.
6.35%.................. 11/15/06 1,000 991,250
------------
3,915,000
------------
TOTAL CORPORATE OBLIGATIONS
(COST $44,477,078)................... 44,849,737
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 6.9%
Federal Home Loan Mtge. Corp.
6.50%.................. 10/01/10 1,791 1,759,991
6.50%.................. 11/01/10 1,825 1,793,600
6.50%.................. 04/01/11 2,873 2,823,265
6.50%.................. 08/01/11 2,950 2,899,153
6.50%.................. 09/01/11 15,093 14,833,675
------------
(COST $24,038,422)................. 24,109,684
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 1.7%
U.S. Treasury Notes
5.50%.................. 12/31/00 $ 2,000 $ 1,955,220
6.50%.................. 05/15/05 4,000 4,027,759
------------
(COST $6,159,503).................. 5,982,979
------------
COMMERCIAL PAPER -- 4.4%
General Electric Capital
Corp.
5.7555%................ 01/02/97 5,562 5,562,000
General Motors Acceptance
Corp.
7.0027%................ 01/02/97 9,600 9,600,000
------------
(COST $15,162,000)................. 15,162,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund.... 32,428 $ 32,428
Temporary Investment Fund......... 32,428 32,428
------------
(COST $64,856).................... 64,856
------------
TOTAL INVESTMENTS -- 96.6%
(COST $294,476,754)................. 336,684,190
OTHER ASSETS LESS
LIABILITIES -- 3.4%................. 11,995,787
------------
NET ASSETS -- 100.0%.................. $348,679,977
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 0.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 85.8%
AEROSPACE -- 0.9%
Remec, Inc.*................... 97,400 $ 1,911,475
------------
BROADCASTING -- 0.5%
SFX Broadcasting, Inc. Cl-A*... 34,025 1,012,244
------------
BUSINESS SERVICES -- 1.6%
Caribiner International,
Inc.*........................ 31,900 1,602,975
Teletech Holdings, Inc.*....... 77,450 2,013,700
------------
3,616,675
------------
CHEMICALS -- 0.8%
Crompton & Knowles Corp........ 87,025 1,675,231
------------
CLOTHING & APPAREL -- 0.5%
Mens Warehouse, Inc.*.......... 45,450 1,113,525
------------
COMPUTER SERVICES &
SOFTWARE -- 19.9%
Avant Corp.*................... 198,100 6,289,675
BA Merchant Services, Inc.*.... 123,250 2,203,094
CDW Computers Centers, Inc.*... 50,000 2,965,625
CSG Systems International,
Inc.*........................ 27,750 426,656
Cybercash, Inc.*............... 31,825 731,975
Dendrite International,
Inc.*........................ 60,300 497,475
Farallon Communications*....... 23,375 149,016
Geoworks*...................... 201,125 4,927,563
HCIA, Inc.*.................... 34,500 1,190,250
HPR, Inc.*..................... 109,675 1,508,031
Network General Corp.*......... 121,000 3,660,250
Parametric Technology Corp.*... 28,000 1,438,500
PRI Automation, Inc.*.......... 39,050 1,776,775
Ross Systems, Inc.*............ 276,925 2,665,403
Scopus Technology, Inc.*....... 79,400 3,692,100
Sterling Commerce, Inc.*....... 69,075 2,434,894
Summit Design, Inc.*........... 126,150 1,293,038
Sync Research, Inc.*........... 143,725 1,976,219
Synopsys, Inc.*................ 50,000 2,312,500
Vanstar Corp.*................. 68,275 1,672,738
------------
43,811,777
------------
CONSUMER PRODUCTS &
SERVICES -- 4.2%
Nautica Enterprises, Inc.*..... 60,000 1,515,000
Protection One, Inc.*.......... 120,750 1,192,406
Quicksilver, Inc.*............. 79,800 1,705,725
Rexall Sundown, Inc.*.......... 71,450 1,942,547
Warnaco Group, Inc. Cl-A....... 100,000 2,962,500
------------
9,318,178
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.1%
Berg Electronics Corp.*........ 48,250 1,417,344
Concord EFS, Inc.*............. 64,550 1,823,538
Cypress Semiconductor Corp.*... 64,925 917,066
Fore Systems, Inc.*............ 56,000 1,841,000
Premenos Technology Corp.*..... 52,075 449,147
Sanmina Corp.*................. 48,850 2,760,025
Sawtek, Inc.*.................. 80,775 3,200,709
Ultrak, Inc.*.................. 32,875 1,002,688
------------
13,411,517
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 1.9%
Fairfield Communities, Inc.*... 66,350 $ 1,642,163
Midway Games, Inc.*............ 47,125 954,281
Signature Resorts, Inc.*....... 45,150 1,591,538
------------
4,187,982
------------
ENVIRONMENTAL SERVICES -- 1.6%
United Waste Systems, Inc.*.... 104,525 3,593,047
------------
FINANCIAL-BANK & TRUST -- 0.7%
Banco Latinoamericano de
Exportaciones SA Cl-E [ADR].. 29,400 1,492,050
------------
FINANCIAL SERVICES -- 1.7%
Credit Acceptance Corp.*....... 40,075 941,763
First USA Paymentech, Inc.*.... 82,525 2,795,534
------------
3,737,297
------------
FOOD -- 1.3%
JP Foodservice, Inc.*.......... 77,500 2,160,313
United Natural Foods, Inc.*.... 46,225 785,825
------------
2,946,138
------------
HEALTHCARE SERVICES -- 4.5%
Advance Paradigm, Inc.*........ 49,525 1,027,644
Multicare Companies, Inc.*..... 74,000 1,498,500
Omnicare, Inc.................. 93,800 3,013,325
Orthodontic Centers of America,
Inc.*........................ 125,150 2,002,400
Pediatrix Medical Group,
Inc.*........................ 35,000 1,290,625
Sunrise Assisted Living,
Inc.*........................ 39,900 1,112,213
------------
9,944,707
------------
HOTELS & MOTELS -- 2.1%
Doubletree Corp.*.............. 102,150 4,596,750
------------
INDUSTRIAL PRODUCTS -- 1.1%
Harsco Corp. .................. 35,000 2,397,500
------------
INSURANCE -- 1.6%
Executive Risk, Inc. .......... 22,800 843,600
Reliastar Financial Corp. ..... 45,000 2,598,750
------------
3,442,350
------------
MACHINERY & EQUIPMENT -- 0.6%
Asyst Technologies, Inc.*...... 22,500 385,313
Rental Service Corp.*.......... 35,125 965,937
------------
1,351,250
------------
MEDICAL SUPPLIES &
EQUIPMENT -- 3.6%
Express Scripts, Inc. Cl-A*.... 26,500 950,687
Gulf South Medical Supply,
Inc.*........................ 45,000 1,153,125
Henry Schein, Inc.*............ 60,725 2,087,422
Physio-Control International
Corp.*....................... 77,925 1,753,312
Sola International, Inc.*...... 48,000 1,824,000
Visible Genetics, Inc.*........ 25,925 226,844
------------
7,995,390
------------
OFFICE EQUIPMENT -- 1.1%
American Pad & Paper Co.*...... 107,675 2,436,147
------------
OIL & GAS -- 0.9%
Falcon Drilling Co., Inc.*..... 50,000 1,962,500
------------
</TABLE>
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PERSONAL SERVICES -- 0.2%
Sylvan Learning Systems,
Inc.*........................ 17,500 $ 498,750
------------
PHARMACEUTICALS -- 6.0%
Genelabs Technologies, Inc.*... 271,000 1,659,875
Medicis Pharmaceutical Cl-A*... 9,575 421,300
NCS Healthcare, Inc. Cl-A*..... 41,950 1,221,794
Nexstar Pharmaceuticals,
Inc.*........................ 25,250 378,750
Paraxel International Corp.*... 49,050 2,532,206
Pharmaceutical Product
Development, Inc.*........... 46,200 1,166,550
SEQUUS Pharmaceuticals,
Inc.*........................ 102,450 1,639,200
Watson Pharmaceuticals,
Inc.*........................ 93,950 4,221,877
------------
13,241,552
------------
PRINTING & PUBLISHING -- 1.0%
World Color Press, Inc.*....... 116,900 2,250,325
------------
RETAIL & MERCHANDISING -- 6.4%
Consolidated Stores Corp.*..... 32,718 1,051,066
Corporate Express, Inc.*....... 31,000 912,562
Insight Enterprises, Inc.*..... 43,000 1,204,000
Kenneth Cole Productions, Inc.
Cl-A*........................ 85,100 1,319,050
Proffitt's, Inc.*.............. 58,550 2,159,031
The Sports Authority, Inc.*.... 100,550 2,186,962
Williams-Sonoma, Inc.*......... 26,000 945,750
Wolverine World Wide, Inc. .... 145,212 4,211,147
------------
13,989,568
------------
SEMI-CONDUCTORS -- 1.9%
International Rectifier
Corp.*....................... 64,175 978,669
Speedfam International,
Inc.*........................ 46,875 1,335,937
Vitesse Semiconductor, Inc.*... 38,900 1,769,950
------------
4,084,556
------------
TELECOMMUNICATIONS -- 10.9%
Cellular Communications
International, Inc.*......... 35,375 1,025,875
Digital Microwave Corp.*....... 124,700 3,476,012
Heartport, Inc.*............... 68,025 1,556,072
Intermedia Communications of
Florida, Inc.*............... 44,125 1,136,219
LCI International, Inc.*....... 21,600 464,400
McLeod, Inc. Cl-A*............. 34,500 879,750
Omnipoint Corp.*............... 14,000 269,500
P-Com, Inc.*................... 176,525 5,229,552
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Pacific Gateway Exchange,
Inc.*........................ 43,200 $ 1,576,800
Periphonics Corp.*............. 100,000 2,925,000
Picturetel Corp.*.............. 46,750 1,215,500
Tel-Save Holdings, Inc.*....... 47,375 1,373,875
Telco Communications Group*.... 35,975 629,562
Teltrend, Inc.*................ 21,525 597,319
Winstar Communications,
Inc.*........................ 70,925 1,489,425
------------
23,844,861
------------
TRANSPORTATION -- 2.2%
Atlas Air, Inc.*............... 54,675 2,610,731
Mark VII, Inc.*................ 60,000 1,661,250
Rural Metro Corp.*............. 14,800 532,800
------------
4,804,781
------------
TOTAL COMMON STOCK
(COST $155,183,424).............. 188,668,123
------------
FOREIGN STOCK -- 5.2%
BROADCASTING -- 1.0%
Flextech PLC -- (GBP)*......... 187,000 2,170,061
------------
BUILDING MATERIALS -- 0.7%
Hunter Douglas NV -- (NLG)..... 23,356 1,577,559
------------
CONTAINERS & PACKAGING -- 0.8%
Hoya Corp. -- (JPY)............ 45,000 1,770,428
------------
RESTAURANTS -- 0.8%
J.D. Wetherspoon PLC -- (GBP).. 89,533 1,794,279
------------
RETAIL & MERCHANDISING -- 0.8%
Next PLC -- (GBP).............. 190,000 1,846,888
------------
TRANSPORTATION -- 1.1%
IHC Caland NV -- (NLG)......... 40,000 2,288,961
------------
TOTAL FOREIGN STOCK
(COST $7,551,483)................ 11,448,176
------------
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Cash
Fund......................... 500 500
Temporary Investment Fund...... 500 500
------------
(COST $1,000).................. 1,000
------------
</TABLE>
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 12.8%
American Express Credit
Corp.
6.30%................ 01/03/97 $ 8,398 $ 8,395,061
McCormick and Co., Inc.
6.00%................ 01/02/97 10,000 9,998,333
Merrill Lynch & Co.,
Inc.
5.80%................ 01/06/97 9,851 9,843,065
------------
(COST $28,236,459)................ 28,236,459
------------
TOTAL INVESTMENTS -- 103.8%
(COST $190,972,366)................. 228,353,758
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (3.8%).............. (8,285,476)
------------
NET ASSETS -- 100.0%.................. $220,068,282
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
FOREIGN STOCK -- 95.4%
ARGENTINA -- 0.7%
Banco de Galicia Buenos Aires
SA [ADR]...................... 14,268 $ 345,999
Banco Frances del Rio de la
Plata SA [ADR]................ 16,411 451,303
Compania Naviera Perez Companc
SA............................ 90,361 635,238
Enron Global Power & Pipelines
LLC........................... 1,356 36,612
Sociedad Comercial del Plata SA
[ADR]*........................ 1,640 42,328
Sociedad Comercial del Plata SA
[ADR] 144A*................... 14,380 36,813
Telecom Argentina Stet SA Cl-B
[ADR]......................... 941 37,993
Telecom Argentina Stet-Fran Tel
SA Cl-B....................... 10,450 43,054
Telefonica de Argentina SA Cl-B
[ADR]......................... 22,810 590,209
Transportadora de Gas del Sur SA
Cl-B [ADR].................... 2,632 32,242
YPF SA [ADR].................... 18,679 471,645
------------
2,723,436
------------
AUSTRALIA -- 1.7%
Australia & New Zealand Bank
Group Ltd..................... 59,000 372,182
Australian Gas Light Co. Ltd.... 124,945 711,643
Broken Hill Proprietary Co.
Ltd........................... 60,747 865,950
Coca-Cola Amatil Ltd............ 4,251 45,482
Commonwealth Installments
Receipts...................... 60,900 379,323
Fletcher Challenge Forest
Ltd........................... 1,702 2,870
Howard Smith Ltd................ 30,929 254,646
Lend Lease Corp. Ltd............ 14,486 281,170
National Australia Bank Ltd..... 35,291 415,485
National Mutual Holdings
Ltd.*......................... 130,000 194,416
News Corp. Ltd.................. 158,178 835,496
Publishing & Broadcasting
Ltd........................... 64,300 313,035
Sydney Harbour Casino Holdings
Ltd.*......................... 182,000 280,869
Tabcorp Holdings Ltd............ 99,000 472,516
Westpac Banking Corp. Ltd....... 101,000 575,261
WMC Ltd......................... 42,377 267,321
Woodside Petroleum Ltd.......... 86,000 628,701
------------
6,896,366
------------
AUSTRIA -- 0.0%
Energie-Versorgung
Niederoesterreich AG.......... 624 94,134
Flughafen Wien AG............... 1,581 80,769
------------
174,903
------------
BELGIUM -- 1.0%
Credit Communal Holding Dexia
SA*........................... 2,026 185,229
Generale de Banque SA*.......... 2,834 1,018,056
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Generale de Banque SA-Strip*.... 214 $ 122
Kredietbank NV.................. 6,500 2,134,849
UCB SA.......................... 251 655,541
------------
3,993,797
------------
BRAZIL -- 2.5%
Brazil Fund, Inc.**............. 29,290 651,703
Centrais Electrobras SA [ADR]... 44,628 798,841
Cesp-Cia Energetica de Sao Paolo
[ADR]*........................ 5,020 58,714
Companhia Energetica de Minas
Geras [ADR]................... 44,868 1,528,563
Lojas Americanas SA [ADR]....... 23,000 303,255
Pao de Acucar SA [ADR]*......... 21,420 374,850
Telebras SA [ADR]............... 64,490 4,933,485
Telebras SA [ADR] 144A.......... 217 16,707
Uniao Siderurgicas de Minas
Gerais SA [ADR]............... 78,390 799,656
Usinas Siderurgicas de Minas
Gerais SA [ADR]............... 61,345 625,780
Usinas Siderurgicas de Minas
Gerais SA [ADR] 144A.......... 11,100 113,231
------------
10,204,785
------------
CANADA -- 0.3%
Alcan Aluminium Ltd............. 26,420 892,372
Royal Bank of Canada............ 10,980 385,699
------------
1,278,071
------------
CHILE -- 0.5%
A.F.P. Provida SA [ADR]......... 1,152 21,600
Chile Fund, Inc.**.............. 9,294 194,012
Chilectra Metropolitana SA
[ADR]......................... 4,136 213,451
Chilgener SA [ADR].............. 6,371 132,995
Cia de Telecomunicaciones de
Chile SA [ADR]................ 2,390 241,689
Compania Cervecerias Unidas SA
[ADR]......................... 3,628 58,501
Empresa Nacional Electridad SA
[ADR]......................... 18,526 287,153
Enersis SA [ADR]................ 12,553 348,346
Five Arrows Chile Fund Ltd.**... 89,390 250,739
Five Arrows Chile Investment
Trust**....................... 29,340 82,445
Genesis Chile Fund**............ 9,350 343,613
------------
2,174,544
------------
CHINA -- 0.3%
Huaneng Power International,
Inc. [ADR]*................... 51,000 1,147,500
------------
CZECH REPUBLIC -- 0.0%
SPT Telecom AS*................. 1,360 168,433
------------
DENMARK -- 0.2%
Den Danske Bank................. 6,380 515,795
Tele Danmark AS Cl-B............ 2,030 112,290
Unidanmark AS Cl-A.............. 6,110 317,178
------------
945,263
------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
FINLAND -- 0.2%
Nokia AB Cl-A................... 14,644 $ 851,017
------------
FRANCE -- 8.6%
Accor SA........................ 4,320 547,891
Alcatel Alsthom................. 7,720 621,141
Assurances Generales de
France........................ 7,533 243,572
AXA SA.......................... 6,898 439,422
Canal Plus...................... 3,880 858,344
Carrefour Supermarche SA........ 5,637 3,673,631
Chargeurs International SA*..... 2,331 115,643
Cie de Gaz Petrole Warrants*.... 217 5,404
CLF Dexia France Reg'd.......... 1,928 167,853
Compagnie de Saint-Gobain....... 11,740 1,663,448
Compagnie Generale Des Eaux..... 41,960 5,208,247
Credit Local de France.......... 5,200 453,719
GTM Entrepose SA................ 4,510 208,945
Guilbert SA..................... 5,003 980,261
Havas SA........................ 2,940 206,583
L'Oreal......................... 1,607 606,158
Lapeyre SA...................... 8,105 466,245
Legrand SA...................... 3,823 652,382
Louis Vuitton Moet Hennessy..... 10,760 3,009,718
Pathe*.......................... 2,331 562,467
Pinault-Printemps Redoute SA.... 7,663 3,044,313
Primagaz Cie.................... 5,902 696,122
Rexel SA........................ 2,365 719,046
Sanofi SA....................... 12,329 1,228,069
Schneider SA.................... 14,250 659,918
Societe Generale................ 2,050 222,005
Societe Nationale Elf Aquitaine
SA............................ 15,090 1,375,790
Societe Television Francaise.... 11,080 1,060,881
Sodexho SA...................... 4,210 2,348,686
Total SA Cl-B................... 30,884 2,515,887
------------
34,561,791
------------
GERMANY -- 3.8%
Allianz AG...................... 754 1,358,868
Altana AG....................... 216 168,500
Bayer AG........................ 82,973 3,371,284
Bilfinger & Berger Bau AG....... 10,700 402,381
Buderus AG...................... 807 390,636
Deutsche Bank AG................ 7,757 362,363
Fielmann AG Pfd................. 5,723 180,589
Gehe AG......................... 41,391 2,662,004
Hoechst AG...................... 12,980 602,130
Hornbach Baumarkt AG............ 1,300 41,275
Hornbach Holdings AG Pfd........ 5,870 420,104
Krones AG Hermann Kronseder
Maschinenfabrik Pfd........... 456 165,548
Mannesmann AG................... 1,880 809,978
Praktiker Bau-Und
Heimwerkemaerkte AG*.......... 3,779 75,728
Rhoen-Klinikum AG............... 7,030 750,111
SAP AG.......................... 2,110 288,975
SAP AG Pfd...................... 2,368 326,313
Schering AG..................... 3,695 312,284
Veba AG......................... 33,965 1,955,695
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Veba AG Warrants*............... 1,220 $ 391,321
Volkswagen AG................... 619 256,742
Volkswagen AG Warrants*......... 370 55,849
------------
15,348,678
------------
HONG KONG -- 5.0%
Cathay Pacific Air.............. 464,000 731,890
Dao Heng Bank Group Ltd......... 243,000 1,165,596
First Pacific Co. Ltd........... 926,954 1,204,459
Guangdong Investments Ltd....... 813,000 783,095
Guangzhou Investment Co. Ltd.... 1,616,000 773,056
Guoco Group Ltd................. 276,000 1,545,129
Hong Kong Land Holdings Ltd..... 929,582 2,584,238
Hopewell Holdings Ltd........... 1,740,000 1,124,830
Hutchison Whampoa Ltd........... 329,000 2,584,104
New World Development Co. Ltd... 367,141 2,480,201
Shanghai Petrochemical Co. Ltd.
Cl-H.......................... 1,660,000 504,364
Swire Pacific Ltd. Cl-A......... 208,000 1,983,321
Wharf Holdings Ltd.............. 449,000 2,240,791
Yizheng Chemical Fibre Co. Ltd.
Cl-H.......................... 1,306,000 317,445
------------
20,022,519
------------
INDONESIA -- 0.0%
PT Telekomunikasi Indonesia..... 88,000 151,756
------------
ITALY -- 1.8%
Banca Fideuram SPA.............. 178,490 390,593
Ente Nazionale Idrocarburi
SPA........................... 205,366 1,049,064
Finanziaria Autogrill SPA*...... 36,752 35,450
Industrie Natuzzi SPA [ADR]..... 15,260 350,980
Istituto Mobiliare Italiano
SPA........................... 68,710 586,109
Istituto Nazionale Delle
Assicurazioni................. 106,480 138,061
Italgas......................... 112,936 469,455
La Rinascente SPA............... 22,800 131,654
La Rinascente SPA Warrants*..... 1,140 500
Mediolanum SPA*................. 38,440 362,204
Sasib SPA....................... 39,177 73,136
Stet di Risp SPA................ 139,220 468,177
Stet Societa' Finanziaria
Telefonica SPA................ 272,480 1,233,669
Telecom Italia Mobile SPA....... 604,848 1,398,169
Telecom Italia SPA.............. 202,673 523,971
Unicem SPA*..................... 8,642 56,139
------------
7,267,331
------------
JAPAN -- 20.9%
Advantest Corp.................. 6,400 300,493
Alps Electric Co. Ltd........... 50,000 544,747
Amada Co. Ltd................... 109,000 848,249
Canon, Inc...................... 162,000 3,585,992
Citizen Watch Co. Ltd........... 68,000 488,024
Dai Nippon Screen Manufacturing
Co. Ltd....................... 88,000 650,584
Daifuku Co. Ltd................. 18,000 227,237
Daiichi Pharmaceutical Co.
Ltd........................... 112,000 1,801,297
Daiwa House Industry Co. Ltd.... 141,000 1,816,602
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
DDI Corp........................ 170 $ 1,125,984
Denso Corp. Ltd................. 145,000 3,498,054
East Japan Railway Co........... 358 1,612,780
Fanuc Co........................ 26,000 834,068
Hitachi Ltd..................... 193,000 1,802,335
Hitachi Zosen Corp.............. 181,000 704,280
Honda Motor Co.................. 11,000 314,829
Inax............................ 46,000 341,271
Ishihara Sangyo Kaisha Ltd.*.... 56,000 135,581
Ito-Yokado Co. Ltd.............. 42,000 1,830,350
Kao Corp........................ 47,000 548,638
Kawada Industries............... 14,000 85,949
Kokuyo.......................... 58,000 1,434,328
Komatsu Ltd..................... 135,000 1,108,949
Komori Corp..................... 49,000 1,042,283
Kumagai Gumi Co. Ltd............ 88,000 218,383
Kuraray Co. Ltd................. 126,000 1,165,759
Kyocera Corp.................... 51,000 3,183,917
Makita Corp..................... 84,000 1,176,654
Matsushita Electric Industrial
Co............................ 153,000 2,500,389
Mauri Co. Ltd................... 101,000 1,825,249
Mitsubishi Corp................. 65,000 674,449
Mitsubishi Heavy Industries
Ltd........................... 454,000 3,611,587
Mitsubishi Paper Mills Ltd...... 64,000 250,687
Mitsui Fudosan.................. 243,000 2,437,354
Mitsui Petrochemical
Industries.................... 43,000 223,087
Murata Manufacturing Co. Ltd.... 56,000 1,864,246
National House Industrial....... 26,000 346,217
NEC Corp........................ 288,000 3,486,381
Nippon Hodo..................... 22,000 254,907
Nippon Steel Co................. 705,000 2,084,825
Nippon Telegraph & Telephone
Corp.......................... 142 1,078,046
Nomura Securities Co. Ltd....... 150,000 2,256,809
Pioneer Electronic Corp......... 68,000 1,299,438
Sangetsu Co. Ltd................ 11,000 230,177
Sankyo Co. Ltd.................. 104,000 2,949,589
Sega Enterprises................ 15,700 529,442
Sekisui Chemical Co. Ltd........ 165,000 1,669,261
Sekisui House Ltd............... 107,000 1,091,742
Seven Eleven Japan.............. 16,000 938,003
Sharp Corp...................... 135,000 1,926,070
Shin-Etsu Chemical Co........... 95,000 1,733,247
Shiseido Co. Ltd................ 30,000 347,601
Sony Corp....................... 37,700 2,474,215
Sumitomo Corp................... 218,000 1,721,003
Sumitomo Electric Industries.... 211,000 2,955,642
Sumitomo Forestry Co............ 73,000 890,013
TDK Corp........................ 37,000 2,415,478
Teijin Ltd...................... 303,000 1,325,707
Tokio Marine & Fire Insurance
Co............................ 47,000 442,974
Tokyo Electron Ltd.............. 17,000 521,833
Tokyo Steel Manufacturing....... 56,500 806,096
Toppan Printing Co. Ltd......... 95,000 1,191,094
UNY Co. Ltd..................... 51,000 934,890
Yurtec Corp..................... 22,050 299,339
------------
84,014,704
------------
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
KOREA -- 0.7%
Cho Hung Bank Co. Ltd........... 41,600 $ 334,670
Hanil Bank...................... 25,200 173,814
Hanil Securities Co.*........... 14,060 102,662
Kookmin Bank.................... 14,003 229,903
Korea Electric Power Corp....... 22,700 664,074
Pohang Iron & Steel Co. Ltd..... 6,030 346,802
Samsung Electronics Co.*........ 8,702 468,397
Samsung Electronics Co. [GDR]
144A*......................... 1,986 24,209
Samsung Electronics Co. [GDS]
144A*......................... 108 2,787
Samsung Fire and Marine
Insurance..................... 165 67,519
Seoul Bank*..................... 11,000 55,595
Shinhan Bank.................... 7,110 114,737
Yukong Ltd...................... 8,383 159,505
Yukong Ltd. Cl-F*............... 525 9,989
------------
2,754,663
------------
MALAYSIA -- 3.3%
Affin Holdings BHD.............. 614,000 1,689,819
Berjaya Sports Toto BHD......... 268,000 1,337,188
Commerce Asset Holding BHD...... 136,000 1,023,245
MBF Capital BHD................. 526,000 853,998
Multi-Purpose Holdings BHD...... 673,000 1,305,865
Multi-Purpose Holdings BHD
Rights*....................... 673,000 0
Renong BHD...................... 680,000 1,206,352
Renong BHD Iculs*............... 79,000 33,160
Resorts World BHD............... 161,000 733,180
Tanjong PLC..................... 329,000 1,315,844
Technology Resources Industries
BHD*.......................... 247,000 487,095
Time Engineering BHD............ 190,000 352,117
United Engineers Ltd. .......... 307,000 2,771,789
------------
13,109,652
------------
MEXICO -- 1.6%
Cementos de Mexico
SA de CV [ADS]................ 65,090 464,092
Cemex SA [ADS] 144A............. 50,068 356,985
Cemex SA Cl-B................... 67,925 264,038
Cifra SA de CV Cl-B [ADR]*...... 575,870 703,713
Fomento Economico Mexicano
SA Cl-B....................... 46,409 157,998
Gruma SA Cl-B................... 110,638 671,811
Gruma SA de CV [ADS] 144A*...... 8,835 212,482
Grupo Embotelladoras de Mexico
SA Cl-B*...................... 10,080 3,829
Grupo Financiero Banamex SA
Cl-B*......................... 146,200 305,698
Grupo Financiero Banamex SA
Cl-L*......................... 4,184 7,951
Grupo Financiero Bancomer SA
Cl-B [GDR]*................... 2,330 18,780
Grupo Financiero Bancomer SA
Cl-L*......................... 1,725 563
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Grupo Industrial Maseca SA
de CV Cl-B.................... 218,095 $ 274,281
Grupo Modelo SA Cl-C............ 48,506 279,131
Grupo Televisia SA [GDR]*....... 5,034 128,996
Kimberly-Clark de Mexico SA
Cl-A.......................... 22,464 436,610
Panamerica Beverages, Inc.
Cl-A.......................... 14,270 668,906
Telefonos de Mexico SA
Cl-L [ADR].................... 42,014 1,386,462
------------
6,342,326
------------
NETHERLANDS -- 10.4%
ABN AMRO Holding NV............. 33,903 2,209,356
AKZO Nobel NV................... 1,902 260,246
CSM NV.......................... 30,721 1,709,889
Elsevier NV..................... 446,712 7,562,610
Fortis Amev NV.................. 38,702 1,357,532
Gucci Group NV.................. 2,782 177,353
Hagemeyer NV.................... 7,792 623,884
ING Groep NV.................... 95,792 3,454,466
ING Groep Warrants*............. 79,813 573,795
Koninklijke Ahold NV............ 27,381 1,714,487
Koninklijke PTT Nederland NV.... 11,749 448,898
Nutricia Verenigde Bedrijven
NV............................ 6,130 932,934
Otra NV......................... 6,490 111,754
Polygram NV..................... 47,347 2,415,663
Royal Dutch Petroleum Co. NV.... 45,766 8,037,176
Unilever NV..................... 14,440 2,558,479
Wolters Kluwer NV............... 57,727 7,681,091
------------
41,829,613
------------
NEW ZEALAND -- 0.6%
Air New Zealand Ltd. ........... 72,545 196,941
Carter Holt Harvey Ltd. ........ 79,700 180,867
Fernz Corp. Ltd. ............... 45,100 154,638
Fletcher Challenge Building
Ltd. ......................... 98,250 302,147
Fletcher Challenge Energy
Ltd. ......................... 18,250 52,899
Fletcher Challenge Forest
Ltd. ......................... 341,573 572,307
Fletcher Challenge Paper
Ltd. ......................... 29,500 60,689
Telecom Corp. of New Zealand
Ltd. ......................... 185,000 944,291
------------
2,464,779
------------
NORWAY -- 1.7%
Bergesen D.Y. AS Cl-A........... 5,170 126,801
Norsk Hydro AS.................. 64,870 3,518,615
Orkla AS Cl-A................... 40,140 2,808,317
Saga Petroleum AS Cl-B.......... 15,160 238,346
------------
6,692,079
------------
PANAMA -- 0.1%
Banco Latinamericano de
Exportaciones SA Cl-E......... 4,035 204,776
------------
PERU -- 0.0%
Telefonica del Peru SA C1-B
[ADR]......................... 5,598 106,362
Telefonica del Peru SA Cl-B..... 26,690 49,957
------------
156,319
------------
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
PHILIPPINES -- 0.1%
Philippine National Bank*....... 43,400 $ 515,684
------------
PORTUGAL -- 0.5%
Estabelecimentos Jeronimo
Martins & Filho............... 16,550 853,983
Estabelecimentos Jeronimo
Martins & Filho Bond Warrants
[CVT]*........................ 16,550 146,011
Estabelecimentos Jeronimo
Martins & Filho Bonus
Rights*....................... 16,550 284,661
Estabelecimentos Jeronimo
Martins & Filho New Shares*... 16,550 569,519
------------
1,854,174
------------
RUSSIA -- 0.0%
Gazprom [ADS]*.................. 5,750 101,488
------------
SINGAPORE -- 2.3%
City Developments............... 33,000 297,297
DBS Land Ltd. .................. 190,000 699,628
Developmental Bank of Singapore
Ltd. Cl-F..................... 41,000 554,054
Far East Levingston Shipbuilding
Ltd. ......................... 52,000 271,414
Fraser & Neave Ltd. ............ 81,000 833,977
Keppel Corp. Ltd. .............. 44,000 342,914
Overseas Union Bank Ltd. Cl-F... 222,000 1,714,286
Singapore Airlines Ltd. ........ 10,000 90,805
Singapore Land Ltd. ............ 161,000 892,142
Singapore Press Holdings
Ltd. ......................... 63,000 1,243,243
Total Access Communication
Ltd. ......................... 12,000 82,800
United Industrial Corp. Ltd. ... 327,000 275,890
United Overseas Bank Ltd. ...... 164,400 1,833,719
United Overseas Bank Ltd.
Warrants*..................... 27,092 95,692
------------
9,227,861
------------
SPAIN -- 2.6%
Aquas de Barcelona Rfd.*........ 58 2,406
Argentaria SA................... 12,814 575,165
Banco Popular Espanol SA........ 5,190 1,022,443
Banco Santander SA.............. 16,946 1,087,927
Centros Comerciales Continente
SA............................ 6,360 130,698
Centros Comerciales Pryca SA.... 14,319 304,212
Empresa Nacional de
Electridad SA................. 31,785 2,268,954
Fomento de Construcciones y
Contratas SA.................. 1,297 121,243
Gas Natural SDG................. 6,233 1,454,238
General de Aguas de Barcelona
SA............................ 4,081 170,252
Iberdrola SA.................... 86,553 1,230,358
Repsol SA....................... 43,588 1,676,980
Repsol SA [ADR]................. 110 4,194
Telefonica de Espana SA......... 18,270 425,557
------------
10,474,627
------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
SWEDEN -- 2.7%
ABB AB Cl-A..................... 6,680 $ 757,314
Astra AB Cl-B................... 95,480 4,625,056
Atlas Copco AB Cl-B............. 40,130 980,812
Electrolux AB Cl-B.............. 22,740 1,325,850
Esselte AB...................... 5,800 128,948
Hennes & Mauritz AB Cl-B........ 10,350 1,438,537
Sandvik AB Cl-A................. 6,140 166,339
Sandvik AB Cl-B................. 43,420 1,182,688
Scribona AB Cl-B................ 5,500 61,949
Stora Kopparbergs Bergslags
Aktiebolag AB Cl-B............ 20,740 283,988
------------
10,951,481
------------
SWITZERLAND -- 4.2%
ABB AG.......................... 2,439 3,034,398
CS Holding AG................... 7,130 732,552
Nestle SA....................... 3,048 3,272,791
Novartis AG*.................... 3,960 4,536,042
Roche Holding AG................ 525 4,085,687
Swiss Bank Corp................. 5,920 1,125,786
------------
16,787,256
------------
THAILAND -- 0.4%
Advanced Information
Services PLC.................. 26,700 228,961
Bangkok Bank PLC................ 67,400 651,538
Siam Cement Co. PLC............. 3,000 94,017
Siam Commercial Bank PLC........ 34,300 248,677
Thai Farmers Bank PLC........... 41,400 258,195
------------
1,481,388
------------
UNITED KINGDOM -- 16.6%
Abbey National PLC.............. 304,000 3,983,420
Argos PLC....................... 158,749 2,089,661
Asda Group PLC.................. 704,450 1,484,145
British Gas PLC................. 126,210 485,323
British Petroleum Co. PLC....... 124,840 1,497,900
Cable & Wireless PLC............ 267,000 2,220,350
Cadbury Schweppes PLC........... 205,456 1,733,190
Caradon PLC..................... 315,700 1,292,390
Coats Viyella PLC............... 91,270 207,922
Compass Group PLC............... 117,000 1,237,496
David Smith Holdings PLC........ 197,900 1,064,379
East Midlands Electricity PLC... 48,385 551,544
Electrocomponents PLC........... 100,000 791,340
GKN PLC......................... 17,000 291,477
Glaxo Wellcome PLC.............. 189,000 3,068,960
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Grand Metropolitan PLC.......... 336,300 $ 2,643,995
Guinness PLC.................... 267,640 2,097,313
Heywood Williams Group PLC...... 32,010 130,218
Hillsdown Holdings PLC.......... 95,160 325,991
Kingfisher PLC.................. 281,950 3,049,766
Ladbroke Group PLC.............. 150,000 593,505
Laing, (John) PLC Cl-A.......... 70,000 335,120
London Electricity PLC.......... 105,517 1,229,905
National Westminster Bank PLC... 542,670 6,371,832
Rank Group PLC.................. 207,120 1,545,010
Reed International PLC.......... 258,370 4,874,697
Rolls-Royce PLC................. 78,140 344,645
RTZ Corp. PLC................... 136,600 2,191,187
Safeway PLC..................... 254,660 1,762,232
Sears PLC....................... 75,490 122,838
Shell Transport & Trading Co.
PLC........................... 225,000 3,898,248
Smithkline Beecham PLC.......... 449,220 6,228,694
T & N PLC....................... 181,680 539,918
Tesco PLC....................... 208,000 1,262,992
Tomkins PLC..................... 584,220 2,686,840
United News & Media PLC......... 231,470 2,757,483
------------
66,991,926
------------
VENEZUELA -- 0.1%
Cia Anonima Nacional Tele
Venezuela [ADS]*.............. 8,050 226,406
------------
TOTAL FOREIGN STOCK
(COST $337,575,748)............... 384,091,392
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000)
-------- --------
<S> <C> <C> <C>
FOREIGN BONDS -- 0.0%
BELGIUM -- 0.0%
Kredietbank NV
5.75%.............. 11/30/03 900 39,413
------------
ITALY -- 0.0%
Danieli & Co.
7.25%.............. 01/01/00 4,380 2,903
------------
TOTAL FOREIGN BONDS
(COST $29,477)................... 42,316
------------
TOTAL INVESTMENTS -- 95.4%
(COST $337,605,225).............. 384,133,708
OTHER ASSETS LESS
LIABILITIES -- 4.6%.............. 18,425,379
------------
NET ASSETS -- 100.0%............... $402,559,087
============
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Buy ESP $ 260,551 130.8050 01/97 $ 2,745
Buy MYR 355,259 2.5270 01/97 214
---------
$ 2,959
---------
Sell FRF $ 525,531 5.2260 01/97 $ (4,734)
=========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Closed-end funds.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 0.2% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
FOREIGN BONDS -- 82.3%
AUSTRALIA -- 3.8%
Australian Government
7.00%................... 04/15/00 4,650 $ 3,741,817
-----------
CANADA -- 6.5%
Canadian Government
6.25%................... 09/15/98 3,200 2,419,427
7.25%................... 06/01/03 1,200 935,942
8.00%................... 06/01/23 1,550 1,258,705
Province of Ontario
8.25%................... 12/01/05 1,000 820,142
Province of Quebec
7.75%................... 03/30/06 1,200 939,697
-----------
6,373,913
-----------
CZECH REPUBLIC -- 1.5%
Czech Electric Co.
14.375%................. 01/27/01 14,000 531,273
European Bank
Reconstruction &
Development
11.50%.................. 07/08/97 8,000 293,343
European Investment Bank
11.00%.................. 10/10/01 8,000 294,660
International Bank
Reconstruction &
Development Global Bond
11.50%.................. 10/09/97 8,000 293,343
-----------
1,412,619
-----------
DENMARK -- 3.9%
Kingdom of Denmark
7.00%................... 11/15/07 8,000 1,384,076
Nykredit
7.00%................... 10/01/16 11,502 1,976,252
6.00%................... 10/01/26 3,000 442,693
-----------
3,803,021
-----------
EUROPEAN CURRENCY UNIT -- 2.7%
French O.A.T.
7.50%................... 04/25/05 1,000 1,385,346
Republic of Portugal
6.00%................... 02/16/04 995 1,262,798
-----------
2,648,144
-----------
FINLAND -- 0.7%
Finnish Government
7.25%................... 04/18/06 3,000 699,605
-----------
FRANCE -- 3.4%
French Treasury Bill
4.50%................... 10/12/98 6,000 1,178,272
7.75%................... 04/12/00 8,000 1,717,275
French O.A.T. Principal
Strip
6.46%................... 10/25/05 4,000 464,915
-----------
3,360,462
-----------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
GERMANY -- 14.5%
Bundesobligation
5.75%................... 08/22/00 3,500 $ 2,385,784
Deutscheland Republic
6.25%................... 04/26/06 2,750 1,849,317
Federal National Mtge.
Assoc. Global Bond
5.00%................... 02/16/01 3,500 2,307,905
General Electric Capital
Corp.
7.25%................... 02/03/00 1,580 1,119,258
Inter-America Development
Bank
7.00%................... 06/08/05 4,500 3,161,371
KFW International Finance,
Inc.
6.75%................... 06/20/05 3,500 2,391,021
Land Baden-Wuerttemberg
6.50%................... 07/21/06 1,500 1,004,229
-----------
14,218,885
-----------
GREECE -- 1.0%
Hellenic Republic [FRN]
14.30%.................. 08/14/03 230,000 951,128
-----------
HUNGARY -- 0.8%
Hungarian Government
23.50%.................. 11/06/97 60,000 378,267
24.00%.................. 03/21/98 45,000 288,407
21.50%.................. 10/03/98 25,000 156,900
-----------
823,574
-----------
IRELAND -- 1.1%
Irish Government Treasury
8.00%................... 10/18/00 600 1,085,588
-----------
ITALY -- 9.6%
Italian Government
9.50%................... 12/01/99 2,000,000 1,412,205
9.50%................... 02/01/01 4,700,000 3,386,529
8.25%................... 07/01/01 1,000,000 699,803
9.00%................... 10/01/03 3,000,000 2,154,528
8.75%................... 07/01/06 2,500,000 1,797,080
-----------
9,450,145
-----------
JAPAN -- 12.0%
Asian Development Bank
3.125%.................. 06/29/05 288,000 2,626,338
Export-Import Bank of
Japan
4.375%.................. 10/01/03 150,000 1,475,326
2.875%.................. 07/28/05 200,000 1,754,980
International Bank
Reconstruction &
Development Global Bond
4.75%................... 12/20/04 200,000 2,036,782
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
Japanese Government
3.10%................... 03/20/06 180,000 $ 1,608,872
Republic of Austria
5.00%................... 01/22/01 150,000 1,486,808
4.50%................... 09/28/05 80,000 801,264
-----------
11,790,370
-----------
NETHERLANDS -- 1.7%
Netherlands Government
9.00%................... 01/15/01 2,500 1,687,877
-----------
PHILIPPINES -- 0.3%
Philippines Government
12.50%.................. 04/25/01 8,000 295,867
-----------
SPAIN -- 3.7%
Spanish Government
7.90%................... 02/28/02 150,000 1,236,349
10.90%.................. 08/30/03 250,000 2,385,468
-----------
3,621,817
-----------
SWEDEN -- 1.7%
Swedish Government
10.25%.................. 05/05/00 10,000 1,700,658
-----------
UNITED KINGDOM -- 13.4%
Alliance & Leicester BHD
8.75%................... 12/07/06 500 874,627
Annington Finance
7.75%................... 10/02/11 500 859,968
Bayerische Landesbank
Girozentrale
8.50%................... 02/26/03 400 709,475
Deutsche Siedlungs Bank
Finance BV
7.50%................... 12/27/00 900 1,554,096
Dresdner Finance BV
7.125%.................. 12/28/01 500 846,258
Guaranteed Export Finance
Corp.
10.625%................. 09/15/01 750 1,432,376
Halifax Building Society
8.75%................... 07/10/06 750 1,329,605
Swiss Bank Corp.
8.75%................... 06/20/05 500 892,672
United Kingdom Treasury
7.00%................... 11/06/01 450 762,596
8.00%................... 06/10/03 560 989,774
6.75%................... 11/26/04 1,000 1,645,413
6.25%................... 11/25/10 800 1,207,564
-----------
13,104,424
-----------
TOTAL FOREIGN BONDS
(COST $79,486,836).................... 80,769,914
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 8.1%
ARGENTINA -- 1.3%
Republic of Argentina
[FRB, BRB]
6.625%.................. 03/31/05 $ 608 $ 529,751
Republic of Argentina
Bocon Pre II [FRN, PIK]
5.375%.................. 04/01/01 505 623,675
Republic of Argentina
Bocon Pre IV [FRN, PIK]
5.6875%................. 09/01/02 150 161,438
-----------
1,314,864
-----------
BRAZIL -- 0.9%
Republic of Brazil
Capitalization [FRB, BRB]
8.00%................... 04/15/14 980 723,526
Republic of Brazil Disc.
ZL [FRN, BRB]
6.50%................... 04/15/24 250 192,969
-----------
916,495
-----------
BULGARIA -- 0.2%
National Republic of
Bulgaria [FRN]
6.6875%................. 07/28/11 200 102,750
2.25%................... 07/28/12 320 123,000
-----------
225,750
-----------
ECUADOR -- 0.2%
Republic of Ecuador PDI
[FRN]
3.00%................... 02/27/15 238 146,316
-----------
MEXICO -- 0.8%
Grupo Elektra SA
12.75%.................. 05/15/01 200 214,000
United Mexican States Cl-A
[BRB, FRB] (with Value
Recovery Rights
Attached)
6.25%................... 12/31/19 250 183,438
United Mexican States
Global Bond
11.375%................. 09/15/16 375 390,000
-----------
787,438
-----------
PANAMA -- 0.3%
Republic of Panama [FRN]
6.5468%................. 05/10/02 258 249,367
-----------
PERU -- 0.2%
Peru Interest Note [WI]
3.25%................... 12/29/49 350 192,063
-----------
PHILIPPINES -- 1.6%
Philippines Peso Linked
Note
9.4678%................. 01/06/97 650 649,122
9.3253%................. 12/11/97 950 868,300
-----------
1,517,422
-----------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
POLAND -- 0.6%
Government of Poland PDI
3.75%................... 10/27/14 $ 250 $ 211,250
4.00%................... 10/27/14 125 105,625
Poland Communication, Inc.
9.875%.................. 11/01/03 300 298,500
-----------
615,375
-----------
RUSSIA -- 1.1%
Republic of Kazakhstan
9.25%................... 12/20/99 100 100,125
Russia Loan Participation*
0.00%................... 06/20/26 1,050 835,406
Russian Interest Note [WI]
0.75%................... 12/29/49 250 173,594
-----------
1,109,125
-----------
VENEZUELA -- 0.9%
Republic of Venezuela
[FRN, BRB]
6.625%.................. 12/18/07 1,000 882,500
-----------
TOTAL SOVEREIGN ISSUES
(COST $7,344,712)..................... 7,956,715
-----------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C>
PURCHASED OPTIONS -- 0.0%
Put Option on German
Deutschemarks,
Strike Price DEM 1.55,
Expire 01/17/97
(COST $38,720).................... 6,820 29,040
-----------
TOTAL INVESTMENTS -- 90.4%
(COST $86,870,268).................... 88,755,669
OTHER ASSETS LESS LIABILITIES -- 9.6%... 9,479,111
-----------
NET ASSETS -- 100.0%.................... $98,234,780
===========
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------
(DOLLAR BASED)
<S> <C> <C> <C> <C> <C>
Buy GBP $ 457,604 0.5894 01/97 $ 4,281
Buy IEP 199,278 0.6035 01/97 4,712
Buy ITL 500,000 1,515.2000 01/97 (2,374)
Buy JPY 13,091,589 110.9825 01/97 (473,365)
Buy MYR 525,000 2.5027 01/97 (5,087)
----------
$ (471,833)
==========
Sell MYR $ 521,251 2.5207 01/97 $ 1,339
==========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL UNREALIZED
IN LOCAL IN LOCAL EXPIRATION APPRECIATION
BUY CURRENCY SELL CURRENCY MONTH (DEPRECIATION)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUD 594,389 DEM 750,000 01/97 $ (15,437)
AUD 737,244 GBP 360,000 01/97 (30,047)
DEM 2,350,047 GBP 934,412 01/97 (67,828)
ECU 709,946 SEK 6,021,903 01/97 4,413
ESP 159,687,880 IEP 749,603 01/97 (38,058)
ITL 1,621,920,728 DEM 1,629,776 01/97 4,425
JPY 100,315,350 ECU 709,946 01/97 (23,090)
NOK 5,637,020 DKK 5,172,052 01/97 6,231
----------
$ (159,391)
==========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
BERGER CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 90.4%
AEROSPACE -- 2.0%
Boeing Co. ........................ 25,000 $ 2,659,375
------------
AUTOMOTIVE PARTS -- 1.3%
Lear Seating Corp.*................ 50,000 1,706,250
------------
CHEMICALS -- 1.7%
Praxair, Inc....................... 50,000 2,306,250
------------
COMPUTER HARDWARE -- 1.9%
3Com Corp.*........................ 35,000 2,568,125
------------
COMPUTER SERVICES & SOFTWARE -- 11.8%
BMC Software, Inc.*................ 50,000 2,068,750
Cadence Design Systems, Inc.*...... 55,000 2,186,250
Cisco Systems, Inc.*............... 25,000 1,590,625
Computer Associates International,
Inc.............................. 45,000 2,238,750
Informix Corp.*.................... 80,000 1,630,000
Microsoft Corp.*................... 30,000 2,478,750
National Data Corp................. 50,000 2,175,000
Oracle Corp.*...................... 40,000 1,670,000
------------
16,038,125
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.0%
Altera Corp.*...................... 30,000 2,180,625
Input-Output, Inc.*................ 115,000 2,127,500
Sanmina Corp.*..................... 45,000 2,542,500
------------
6,850,625
------------
ENTERTAINMENT & LEISURE -- 1.3%
Hasbro, Inc........................ 45,000 1,749,375
------------
FARMING & AGRICULTURE -- 1.7%
Agco, Inc.......................... 80,000 2,290,000
------------
FINANCIAL-BANK & TRUST -- 3.9%
Citicorp........................... 25,000 2,575,000
Wells Fargo & Co................... 10,000 2,697,500
------------
5,272,500
------------
FINANCIAL SERVICES -- 3.9%
Federal Home Loan Mtge. Corp....... 25,000 2,753,125
Federal National Mtge. Assoc....... 70,000 2,607,500
------------
5,360,625
------------
HEALTHCARE SERVICES -- 3.0%
Oxford Health Plans, Inc.*......... 35,000 2,049,688
United Healthcare Corp............. 45,000 2,025,000
------------
4,074,688
------------
INSURANCE -- 2.1%
Conseco, Inc....................... 45,000 2,868,750
------------
MEDICAL SUPPLIES & EQUIPMENT -- 5.6%
Amerisource Health Corp. Cl-A*..... 50,000 2,412,500
Boston Scientific Corp.*........... 50,000 3,000,000
Steris Corp.*...................... 50,000 2,175,000
------------
7,587,500
------------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
OIL & GAS -- 14.0%
BJ Services Co.*................... 50,000 $ 2,550,000
Diamond Offshore Drilling*......... 20,000 1,140,000
Ensco International, Inc.*......... 40,000 1,940,000
Falcon Drilling Co., Inc.*......... 70,000 2,747,500
Petroleum Geo Services [ADR]*...... 50,000 1,950,000
Schlumberger Ltd................... 25,000 2,496,875
Tidewater, Inc..................... 40,000 1,810,000
Transocean Offshore, Inc........... 40,000 2,505,000
Western Atlas, Inc.*............... 28,000 1,984,500
------------
19,123,875
------------
PHARMACEUTICALS -- 11.7%
Biochem Pharma, Inc.*.............. 40,000 2,010,000
Biogen, Inc.*...................... 65,000 2,518,750
Cardinal Health, Inc............... 30,000 1,747,500
Incyte Pharmaceuticals, Inc.*...... 7,700 396,550
Lilly, (Eli) & Co.................. 35,000 2,555,000
McKesson Corp...................... 35,000 1,960,000
Pfizer, Inc........................ 30,000 2,486,250
Warner Lambert Co.................. 30,000 2,250,000
------------
15,924,050
------------
REAL ESTATE -- 4.7%
Innkeepers USA Trust [REIT]........ 150,000 2,081,250
Patriot American Hospitality, Inc.
[REIT]........................... 50,000 2,156,250
Starwood Lodging Trust [REIT]...... 40,000 2,205,000
------------
6,442,500
------------
RETAIL & MERCHANDISING -- 0.7%
Saks Holdings, Inc.*............... 36,600 988,200
------------
SEMI-CONDUCTORS -- 8.4%
Adaptec, Inc.*..................... 60,000 2,400,000
Analog Devices, Inc.*.............. 75,000 2,540,625
Atmel Corp.*....................... 60,000 1,987,500
Intel Corp......................... 20,000 2,618,750
VLSI Technology, Inc.*............. 80,000 1,910,000
------------
11,456,875
------------
TELECOMMUNICATIONS -- 4.5%
Boston Technology, Inc.*........... 75,000 2,156,250
Nokia Corp. Cl-A [ADR]............. 70,000 4,033,750
------------
6,190,000
------------
TRANSPORTATION -- 1.2%
Atlas Air, Inc.*................... 35,000 1,671,250
------------
TOTAL COMMON STOCK
(COST $107,785,138).................. 123,128,938
------------
PREFERRED STOCK -- 2.2%
HEALTHCARE SERVICES
Pacificare Health Systems, Inc.
Cl-B
(COST $3,031,827).................. 35,000 2,983,750
------------
</TABLE>
<PAGE>
BERGER CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.7%
Temporary Investment Cash Fund..... 506,824 $ 506,824
Temporary Investment Fund.......... 506,824 506,824
------------
(COST $1,013,648).................. 1,013,648
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 6.6%
U.S. Treasury Bill
4.77%
(COST $8,948,722)..... 02/13/97 $9,000 8,948,722
-----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
------------
<S> <C>
TOTAL INVESTMENTS -- 99.9%
(COST $120,779,335)................. $136,075,058
OTHER ASSETS LESS
LIABILITIES -- 0.1%................. 171,796
-----------
NET ASSETS -- 100.0%.................. $136,246,854
===========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
FOREIGN STOCK -- 80.9%
AUSTRALIA -- 1.3%
Village Roadshow Ltd............ 396,000 $ 1,553,003
-----------
BELGIUM -- 0.7%
S.A. D'ieteren NV............... 4,250 877,783
-----------
CANADA -- 3.1%
Cinar Films, Inc. Cl-B*......... 47,500 1,235,000
Gulf Canada Resources Ltd.*..... 320,000 2,360,000
-----------
3,595,000
-----------
CHILE -- 1.1%
Banco de A. Edwards [ADR]....... 53,000 950,688
Compania Cervecerias Unidas SA
[ADR]......................... 17,900 288,638
-----------
1,239,326
-----------
DENMARK -- 1.5%
Kobenhavns Lufthavne............ 17,400 1,776,900
-----------
FINLAND -- 5.3%
Amer Group Ltd.................. 95,000 1,965,803
KCI Konecranes International*... 50,000 1,579,177
Oy Tamro AB..................... 210,800 1,409,619
Valmet Corp..................... 75,000 1,323,241
-----------
6,277,840
-----------
FRANCE -- 7.3%
Altran Technologies SA.......... 3,500 1,126,286
Dassault Systems SA*............ 21,000 970,079
Guilbert SA..................... 11,700 2,292,435
Salomon SA...................... 18,200 1,563,423
Skis Rossignol SA............... 40,000 1,109,588
Sylea SA........................ 14,208 1,560,595
-----------
8,622,406
-----------
GERMANY -- 6.9%
Marschollek Lautenschlaeger Ung
Partner AG.................... 18,150 2,527,066
Plettac AG...................... 9,370 1,725,250
Porsche AG Pfd.................. 1,400 1,252,440
Schwarz Pharma AG............... 20,700 1,521,861
Turbon International AG......... 42,000 1,087,573
-----------
8,114,190
-----------
HONG KONG -- 5.7%
Asia Satellite
Telecommunications [ADR]*..... 7,000 163,625
Guoco Group Ltd................. 360,000 2,015,386
Manhattan Card Co. Ltd.......... 3,515,500 1,783,999
New Asia Realty & Trust Co.
Cl-A.......................... 182,000 671,808
South China Morning Post Ltd.... 932,000 771,194
VTech Holdings Ltd.............. 753,000 1,353,248
-----------
6,759,260
-----------
INDONESIA -- 0.8%
London Sumatra*................. 95,000 251,270
Matahari Putra Prima............ 531,000 617,964
Sorini Corp..................... 72,000 33,517
-----------
902,751
-----------
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
ITALY -- 2.8%
Bulgari SPA..................... 85,000 $ 1,717,848
Industria Machine Automatiche
SPA........................... 140,000 546,588
Industrie Natuzzi SPA [ADR]..... 46,000 1,058,000
-----------
3,322,436
-----------
JAPAN -- 5.8%
Doutor Coffee Co. Ltd........... 47,000 1,991,353
Laox Ltd........................ 85,000 1,293,558
Noritsu Koki Co. Ltd............ 39,000 1,837,873
Paris Miki Inc.................. 47,000 1,698,746
-----------
6,821,530
-----------
MALAYSIA -- 0.4%
Chemical Co. of Malaysia BHD
Warrants*..................... 10,000 9,266
Kentucky Fried Chicken BHD...... 106,666 439,285
Kentucky Fried Chicken Holdings
Warrants*..................... 21,333 5,276
-----------
453,827
-----------
MEXICO -- 0.2%
Grupo Iusacell [ADR]*........... 33,000 251,625
-----------
NETHERLANDS -- 5.9%
Baan Company NV*................ 26,000 903,500
Grolsch NV...................... 52,000 2,019,944
Hunter Douglas NV............... 31,200 2,107,375
IHC Caland NV................... 33,000 1,888,393
-----------
6,919,212
-----------
NEW ZEALAND -- 1.1%
Tranz Rail Holdings [ADR]*...... 75,000 1,326,563
-----------
NORWAY -- 5.4%
Kverneland AS................... 85,000 2,352,016
Petroleum Geo Services [ADR]*... 50,000 1,950,000
Tomra Systems AS................ 129,500 2,025,823
-----------
6,327,839
-----------
PANAMA -- 1.4%
Banco Latinoamericano de
Exportaciones SA Cl-E......... 33,000 1,674,750
-----------
PHILIPPINES -- 0.1%
International Container Terminal
Services, Inc.*............... 197,400 103,203
-----------
SWEDEN -- 3.5%
ASG AB Cl-B..................... 76,000 1,566,572
BT Industries AB................ 77,900 1,456,632
Enator AB*...................... 41,500 1,066,233
-----------
4,089,437
-----------
UNITED KINGDOM -- 20.6%
Abacus Polar PLC................ 27,000 82,782
British-Borneo Petro Syndica
PLC........................... 103,200 1,431,811
BTG PLC......................... 49,000 380,622
Cairn Energy PLC*............... 186,000 1,328,526
Capital Radio PLC............... 114,500 1,071,807
CMG PLC......................... 121,800 1,752,458
</TABLE>
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
DFS Furniture Co. PLC........... 110,000 $ 1,137,080
Dorling Kindersly Holdings
PLC........................... 225,000 1,585,891
Flextech PLC*................... 192,800 2,237,368
J.D. Wetherspoon PLC............ 115,000 2,304,649
JBA Holdings PLC................ 200,000 1,815,628
Medeva PLC [ADR]................ 68,450 1,155,094
Misys PLC....................... 6,900 131,956
Next PLC........................ 142,000 1,380,306
Parity PLC...................... 213,800 1,620,474
Pizza Express PLC............... 156,100 1,410,413
Psion PLC....................... 226,000 1,701,329
Regent Inns PLC................. 162,000 917,081
TLG PLC......................... 396,000 715,597
-----------
24,160,872
-----------
TOTAL FOREIGN STOCK
(COST $89,519,370)................ 95,169,753
-----------
COMMON STOCK -- 4.0%
EQUIPMENT SERVICES -- 1.5%
Rofin-Sinar Technologies,
Inc.*......................... 154,000 1,809,500
-----------
TELECOMMUNICATIONS -- 2.5%
Cellular Communications
International, Inc.*.......... 56,500 1,638,500
Comcast UK Cable Partners
Cl-A*......................... 93,000 1,267,125
-----------
2,905,625
-----------
TOTAL COMMON STOCK
(COST $5,093,320)................. 4,715,125
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ ------------
<S> <C> <C>
COMMERCIAL PAPER -- 14.5%
Air Products & Chemicals,
Inc.
6.20%.................... 01/03/97 $1,156 $ 1,155,602
American Express Capital
Corp.
6.30%.................... 01/03/97 5,500 5,498,075
Lubrizol Corp.
5.90%.................... 01/02/97 5,400 5,399,115
Merrill Lynch & Co., Inc.
5.80%.................... 01/06/97 4,991 4,986,979
-------------
TOTAL COMMERCIAL PAPER
(COST $17,039,771)..................... 17,039,771
-------------
TOTAL INVESTMENTS -- 99.4%
(COST $111,652,461).................... 116,924,649
OTHER ASSETS LESS LIABILITIES -- 0.6%.... 718,053
-------------
NET ASSETS -- 100.0%..................... $117,642,702
=============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy FIM $ 211,645 4.6439 01/97 $2,478
Buy GBP 161,825 0.5935 01/97 2,670
Buy HKD 140,883 7.7345 01/97 1
Buy JPY 185,791 114.9643 01/97 (908)
---------
$4,241
=========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
COMMON STOCK -- 84.3%
CHEMICALS -- 5.4%
Applied Extrusion Technologies,
Inc.*.............................. 40,600 $ 426,300
Dupont, (E.I.) de Nemours & Co. ..... 3,200 302,000
FMC Corp.*........................... 7,000 490,875
Great Lakes Chemical Corp. .......... 19,300 902,275
Lyondell Petrochemical Co. .......... 54,000 1,188,000
Millennium Chemicals, Inc.*.......... 12,000 213,000
Polymer Group, Inc.*................. 40,000 555,000
Union Carbide Corp. ................. 16,400 670,350
------------
4,747,800
------------
CONSUMER & SERVICE -- 0.4%
Warner-Lambert Co. .................. 5,000 375,000
------------
DIVERSIFIED METALS -- 5.3%
Freeport-McMoran Copper & Gold, Inc.
Cl-A............................... 31,900 897,188
Freeport-McMoran Copper & Gold, Inc.
Cl-B............................... 10,000 298,750
Nucor Corp. ......................... 26,000 1,326,000
Reynolds Metals Co. ................. 21,800 1,228,975
Steel Dynamics, Inc.*................ 50,000 956,250
------------
4,707,163
------------
DIVERSIFIED RESOURCES -- 3.5%
Burlington Northern Santa Fe
Corp. ............................. 12,200 1,053,775
Canadian National Railway Co. ....... 10,500 399,000
Hanson Trust PLC [ADR]............... 60,000 405,000
Western Water Co.*................... 28,000 406,000
Zeigler Coal Holding Co. ............ 39,600 846,450
------------
3,110,225
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.2%
General Electric Co. ................ 2,000 197,750
------------
ENERGY SERVICES -- 9.8%
BJ Services Co.*..................... 13,000 663,000
Camco International, Inc. ........... 4,800 221,400
Carbo Ceramics, Inc. ................ 43,750 918,750
Coflexip SA [ADR]*................... 47,600 1,249,500
Cooper Cameron Corp.*................ 12,900 986,850
Halliburton Co. ..................... 16,800 1,012,200
McDermott International, Inc. ....... 54,000 897,750
Petrolite Corp. ..................... 19,900 955,200
Weatherford Enterra, Inc.*........... 22,800 684,000
Western Atlas, Inc.*................. 14,850 1,052,494
------------
8,641,144
------------
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
INTEGRATED PETROLEUM -- 21.5%
Amerada Hess Corp. .................. 20,000 $ 1,157,500
Atlantic Richfield Co. .............. 4,500 596,250
British Petroleum Co. PLC [ADR]...... 10,000 1,413,750
Ente Nazionale Idrocarbure SPA
[ADR].............................. 13,000 671,125
Mobil Corp. ......................... 24,600 3,007,350
Phillips Petroleum Co. .............. 25,000 1,106,250
Repsol SA [ADR]...................... 63,600 2,424,750
Royal Dutch Petroleum Co. [ADR]...... 5,500 939,125
Sun Co., Inc. ....................... 35,700 870,187
Texaco, Inc. ........................ 26,000 2,551,250
Total SA [ADR]....................... 45,000 1,811,250
Ultramar Diamond Shamrock Corp. ..... 10,800 341,550
USX Marathon Group................... 90,500 2,160,687
------------
19,051,024
------------
MISCELLANEOUS ENERGY -- 2.3%
TPC Corp.*........................... 54,400 489,600
Uranium Resources, Inc.*............. 101,000 795,375
USX-Delhi Group...................... 46,000 730,250
------------
2,015,225
------------
PAPER & FOREST PRODUCTS -- 8.8%
Georgia Pacific Corp. ............... 24,300 1,749,600
International Paper Co. ............. 26,200 1,057,825
James River Corp. of Virginia........ 34,300 1,136,187
Jefferson Smurfit Corp.*............. 104,600 1,680,137
Kimberly-Clark Corp. ................ 11,600 1,104,900
Willamette Industries, Inc. ......... 15,000 1,044,375
------------
7,773,024
------------
PETROLEUM EXPLORATION &
PRODUCTION -- 11.5%
Alberta Energy Co. Ltd. ............. 41,400 993,600
Barrett Resources Corp.*............. 13,100 558,388
Enserch Exploration, Inc.*........... 77,000 904,750
Flores & Rucks, Inc.*................ 12,500 665,625
Houston Exploration Co.*............. 50,500 883,750
HS Resources, Inc.*.................. 43,300 714,450
Louisiana Land & Exploration Co. .... 10,000 536,250
Monterey Resources, Inc.*............ 26,200 422,475
Noble Affiliates, Inc. .............. 9,900 473,963
Rutherford-Moran Oil Corp.*.......... 35,300 988,400
Triton Energy Ltd.*.................. 8,300 402,550
Union Texas Petroleum Holdings,
Inc. .............................. 78,700 1,760,913
United Meridian Corp.*............... 17,800 921,150
------------
10,226,264
------------
</TABLE>
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
PRECIOUS METALS -- 10.0%
Battle Mountain Gold Co. ............ 181,000 $ 1,244,375
Cambior, Inc. ....................... 64,400 941,850
Dayton Mining Corp.*................. 60,000 401,250
Durban Roodepoort Deep Ltd. [ADR]*... 53,640 395,595
Golden Star Resources Ltd.*.......... 31,000 403,000
Newmont Mining Corp. ................ 32,100 1,436,475
Pegasus Gold, Inc.*.................. 49,100 371,319
Placer Dome, Inc. ................... 56,300 1,224,525
Santa Fe Pacific Gold Corp. ......... 83,800 1,288,425
TVX Gold, Inc.*...................... 150,900 1,169,475
------------
8,876,289
------------
REAL ESTATE -- 4.1%
Apartment Investment & Management Co.
C1-A [REIT]........................ 23,700 669,525
Beacon Properties Corp. ............. 30,800 1,128,050
Homestead Village, Inc.*............. 3,770 67,860
Homestead Village, Inc. Warrants*.... 2,529 20,548
Red Roof Inns, Inc.*................. 40,000 620,000
Security Capital Pacific Trust
[REIT]............................. 30,000 686,250
The Rouse Co. ....................... 13,200 419,100
------------
3,611,333
------------
SCIENCE & TECHNOLOGY -- 1.5%
Silicon Graphics, Inc.*.............. 40,000 1,020,000
Vodafone Group PLC [ADR]............. 7,800 322,725
------------
1,342,725
------------
TOTAL COMMON STOCK
(COST $66,445,523)..................... 74,674,966
------------
PREFERRED STOCK -- 0.3%
OIL & GAS
Cross Timbers Oil Co. $1.5625 Cl-A
[CVT] (COST $225,345).............. 9,890 299,172
------------
FOREIGN STOCK -- 7.6%
DIVERSIFIED METALS -- 1.1%
Bougainville Copper Ltd. -- (AUD)*... 382,470 139,954
Lonrho PLC -- (GBP).................. 382,600 815,897
------------
955,851
------------
PETROLEUM EXPLORATION &
PRODUCTION -- 0.9%
Anderson Exploration
Ltd. -- (CAD)*..................... 25,000 323,158
Morrison Petroleum Ltd. -- (CAD)..... 76,000 457,898
------------
781,056
------------
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
PRECIOUS METALS -- 5.2%
Banro Resources Corp. Special
Warrants -- (CAD) 144A*............ 83,300 $ 194,669
Barnato Exploration Ltd. -- (ZAR)*... 18,200 72,357
Delta Gold NL -- (AUD)*.............. 262,821 493,403
Highlands Gold Ltd. -- (AUD)......... 430,600 253,475
Potgietersrust Platinums
Ltd. -- (ZAR)...................... 124,730 613,186
Prime Resources Group,
Inc. -- (CAD)...................... 163,300 1,156,803
Rustenburg Platinum Holdings Ltd. --
(ZAR).............................. 80,000 1,094,368
Samax -- (CAD) 144A*................. 150,000 575,111
War Eagle Mining Co.,
Inc. -- (CAD)*..................... 118,000 155,116
War Eagle Mining Co., Inc.
Warrants -- (CAD)*................. 59,000 0
------------
4,608,488
------------
REAL ESTATE -- 0.4%
Security Capital U.S. Realty -- (NLG)
144A*.............................. 30,000 384,000
------------
TOTAL FOREIGN STOCK
(COST $7,296,839)...................... 6,729,395
------------
SHORT TERM INVESTMENTS -- 0.9%
Temporary Investment Cash Fund
(COST $773,987)...................... 773,987 773,987
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 4.8%
Federal Home Loan Mtge.
Corp. Disc. Notes
5.40% (COST $4,212,865)... 01/17/97 $4,223 4,212,865
-----------
COMMERCIAL PAPER -- 10.8%
BMW U.S. Capital Corp.
6.70%..................... 01/02/97 1,000 999,814
Ciesco, L.P. 5.90%.......... 01/07/97 5,705 5,699,390
5.80%..................... 01/16/97 376 375,091
Dover Corp.+ 5.45%.......... 02/07/97 2,500 2,485,997
TOTAL COMMERCIAL PAPER (COST
$9,560,292)............................. 9,560,292
-----------
TOTAL INVESTMENTS -- 108.7%
(COST $88,514,851)...................... 96,250,677
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (8.7%)........................ (7,716,666)
-----------
NET ASSETS -- 100.0%...................... $88,534,011
===========
</TABLE>
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy AUD $ 57,964 1.2594 01/97 $ 106
Buy GBP 211,904 0.5905 01/97 2,380
---------
$2,486
=========
Sell AUD $ 256,649 1.2594 01/97 $ (469)
=========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 1.3% of net assets.
+ Security is restricted as to resale and may not be resold except to qualified
institutional buyers. At the end of the year, these securities amounted to
2.8% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 68.1%
FEDERAL HOME LOAN MORTGAGE CORP. -- 4.7%
5.00%................... 02/15/11 $ 9,925 $ 9,866,208
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 45.9%
4.90%................... 12/25/12 9,825 9,742,158
6.25% [VR].............. 03/01/17 2,455 2,448,545
7.50%................... 01/25/22 4,000 4,049,992
7.50%................... 10/01/22 25,716 25,715,712
8.00%................... 11/25/23 4,823 4,961,153
7.50%................... 05/01/24 44,763 44,804,512
7.409% [VR]............. 01/01/25 681 695,271
6.557% [VR]............. 05/01/25 1,662 1,673,137
6.089% [VR]............. 12/01/27 230 229,394
6.091% [VR]............. 12/01/27 99 98,178
6.089% [VR]............. 07/01/28 1,379 1,372,548
-------------
95,790,600
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 17.5%
7.125% [VR]............. 07/20/17 338 346,097
7.125% [VR]............. 08/20/17 425 435,677
7.125% [VR]............. 09/20/17 362 371,412
7.00%................... 01/15/24 43 41,891
7.00%................... 02/15/24 58 56,763
7.00%................... 04/15/24 361 352,934
7.125% [VR]............. 05/20/24 3,670 3,754,596
7.00%................... 06/15/24 59 57,246
7.125% [TBA]............ 07/20/24 444 455,114
7.00%................... 07/15/25 436 427,077
7.00%................... 08/15/25 1,889 1,848,613
7.00% [TBA]............. 01/21/27 2,000 1,956,260
6.00% [TBA]............. 01/23/27 26,500 26,508,281
-------------
36,611,961
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $143,896,978)................... 142,268,769
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.5%
Merrill Lynch Mtge.
Investors, Inc. Cl-B
7.6077% [VR]............ 06/15/21 1,340 1,353,532
Resolution Trust Corp.
7.2825% [VR]............ 07/25/28 10,000 10,150,434
-------------
(COST $11,519,512).................. 11,503,966
-------------
CORPORATE OBLIGATIONS -- 4.6%
CONSUMER PRODUCTS & SERVICES -- 3.4%
First Brands Corp. Sr.
Sub. Notes
9.125%.................. 04/01/99 7,000 7,096,250
-------------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C>
UTILITIES -- 1.2%
CMS Energy Corp. First Mtge.
9.50%................... 10/01/97 1,000 1,027,500
Texas Utilities Co. First Mtge.
5.89% [VR].............. 05/01/99 1,500 1,504,540
-------------
2,532,040
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $9,556,600)..................... 9,628,290
-------------
U.S. TREASURY OBLIGATIONS -- 0.1%
U.S. Treasury Bills
4.95% #................. 01/30/97 $ 50 $ 49,795
5.00% #................. 03/06/97 30 29,731
5.01% #................. 03/06/97 30 29,731
4.90% #................. 03/13/97 10 9,900
-------------
(COST $119,170)..................... 119,157
-------------
SOVEREIGN ISSUES -- 2.0%
ARGENTINA
Republic of Argentina
[FRB, BRB]
6.625%
(COST $3,812,871)......... 03/31/05 4,900 4,269,125
-------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
-------
<S> <C> <C> <C>
FOREIGN BONDS -- 7.1%
CANADA -- 3.7%
Canadian Government
8.00%................... 11/01/98 10,000 7,781,348
-------------
NEW ZEALAND -- 3.4%
New Zealand Government
10.00%.................. 03/15/02 8,900 7,068,085
-------------
TOTAL FOREIGN BONDS
(COST $14,983,669).................... 14,849,433
-------------
<CAPTION>
PAR
(000)
-------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 25.4%
AT&T Corp.
5.40%................... 01/30/97 $ 4,000 3,982,600
Canadian Treasury Bill
5.35%................... 01/13/97 1,400 1,397,503
Dow Jones & Co.+
5.35%................... 01/24/97 1,000 996,582
Electricite de France
5.35%................... 01/02/97 10,000 9,998,514
Ford Motor Credit Co.
6.09%................... 01/09/97 600 599,188
</TABLE>
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
General Electric Capital
Corp.
5.31%................... 01/07/97 $ 1,100 $ 1,099,027
5.42%................... 01/16/97 2,000 1,995,483
5.40%................... 01/21/97 900 897,300
General Motors Acceptance
Corp.
5.53%................... 01/29/97 900 896,129
Kellogg Co.
5.35%................... 01/30/97 1,000 995,690
KFW International
Financial Corp.
5.37%................... 01/09/97 600 599,284
5.35%................... 01/13/97 300 299,465
5.40%................... 02/19/97 1,600 1,588,044
Kingdom of Sweden
5.33%................... 01/21/97 1,500 1,495,558
Lilly, (Eli) & Co.
5.33%................... 01/06/97 5,800 5,794,872
Motorola, Inc.
5.33%................... 01/16/97 2,000 1,995,558
New Center Asset Trust
5.40%................... 01/15/97 8,500 8,482,150
Province of Alberta
5.35%................... 01/14/97 10,000 9,980,681
-------------
TOTAL COMMERCIAL PAPER
(COST $53,094,659).................... 53,093,628
-------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
--------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.3%
Temporary Investment Cash Fund.... 323,161 323,161
Temporary Investment Fund......... 323,161 323,161
------------
(COST $646,322)................... 646,322
------------
TOTAL INVESTMENTS -- 113.1%
(COST $237,629,781)................. 236,378,690
------------
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
(000) VALUE
-------- ------------
<S> <C> <C>
WRITTEN OPTIONS -- 0.0%
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.00, Expire
03/17/97....................... $ 43,000 $ (1,075)
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.50, Expire
06/16/97....................... 100,000 (7,500)
------------
TOTAL WRITTEN OPTIONS
(COST ($43,935))................... (8,575)
------------
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (13.1%)............ (27,357,107)
------------
NET ASSETS -- 100.0%................. $209,013,008
============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell CAD $8,102,930 1.3310 02/97 $ 199,515
Sell NZD 7,002,800 1.4286 02/97 (48,319)
---------
$ 151,196
=========
</TABLE>
# Securities with an aggregate market value of $119,157 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at December 31, 1996:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
EXPIRATION AMOUNT APPRECIATION
DESCRIPTION MONTH (000) (DEPRECIATION)
- -----------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury 10 Year
Note 03/97 $ 2,000 $(35,624)
Eurodollar 06/97 25,000 77,500
--------------
$ 41,876
=============
</TABLE>
- --------------------------------------------------------------------------------
+ Security is restricted as to resale and may not be resold except to qualified
institutional buyers. At the end of the year, these securities amounted to
0.5% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCK -- 91.6%
AEROSPACE -- 4.5%
BE Aerospace, Inc. ................ 3,000 $ 81,375
Boeing Co. ........................ 9,700 1,031,838
Precision Castparts Corp. ......... 8,200 406,925
United Technologies Corp. ......... 10,600 699,600
------------
2,219,738
------------
AIRLINES -- 2.9%
AMR Corp.* ........................ 3,500 308,438
Continental Airlines, Inc.
Cl-B* ........................... 7,500 211,875
Delta Air Lines, Inc. ............. 5,500 389,813
UAL Corp.* ........................ 7,700 481,250
------------
1,391,376
------------
BROADCASTING -- 0.0%
Univision Communications, Inc.
Cl-A* ........................... 500 18,500
------------
CLOTHING & APPAREL -- 2.3%
Nike, Inc. Cl-B ................... 18,800 1,123,300
------------
COMPUTER HARDWARE -- 17.2%
Cabletron Systems, Inc.* .......... 34,328 1,141,406
Compaq Computer Corp.* ............ 30,828 2,288,979
Dell Computer Corp.* .............. 38,200 2,029,375
Seagate Technology, Inc.* ......... 36,300 1,433,850
3Com Corp.* ....................... 20,258 1,486,431
------------
8,380,041
------------
COMPUTER SERVICES & SOFTWARE -- 16.5%
BMC Software, Inc.* ............... 6,600 273,075
Cadence Design Systems, Inc.* ..... 45,900 1,824,525
Cisco Systems, Inc.* .............. 10,975 698,284
Computer Sciences Corp.* .......... 13,100 1,075,838
Electronic Arts, Inc.* ............ 10,000 299,375
HBO & Co. ......................... 13,000 771,875
Informix Corp.* ................... 7,200 146,700
Intelligroup, Inc.* ............... 500 5,500
Microsoft Corp.* .................. 14,800 1,222,850
Parametric Technology Corp.* ...... 33,300 1,710,788
------------
8,028,810
------------
CONSUMER PRODUCTS & SERVICES -- 0.3%
Central Garden & Pet Co.* ......... 6,100 128,481
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.0%
SCI Systems, Inc.* ................ 11,400 508,725
------------
FINANCIAL-BANK & TRUST -- 6.3%
Chase Manhattan Corp. ............. 8,200 731,850
Citicorp .......................... 7,300 751,900
Comerica, Inc. .................... 6,700 350,912
MBNA Corp. ........................ 10,200 423,300
Mellon Bank Corp. ................. 8,500 603,500
Northern Trust Corp. .............. 5,400 195,750
------------
3,057,212
------------
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
FINANCIAL SERVICES -- 10.0%
Aames Financial Corp. ............. 10,200 $ 365,925
Capital One Financial Corp. ....... 2,000 72,000
Charles Schwab Corp. .............. 18,730 599,360
First USA, Inc. ................... 24,000 831,000
Green Tree Financial Corp. ........ 9,200 355,350
Household International, Inc. ..... 7,800 719,550
Merrill Lynch & Co., Inc. ......... 19,838 1,616,797
The Money Store, Inc. ............. 10,800 298,350
------------
4,858,332
------------
HEALTHCARE SERVICES -- 6.3%
Columbia-HCA Healthcare Corp. ..... 18,100 737,575
Oxford Health Plans, Inc.* ........ 24,900 1,458,206
United Healthcare Corp. ........... 20,000 900,000
------------
3,095,781
------------
INSURANCE -- 1.1%
Conseco, Inc. ..................... 8,500 541,875
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.8%
Guidant Corp. ..................... 1,800 102,600
Medtronic, Inc. ................... 11,600 788,800
------------
891,400
------------
PHARMACEUTICALS -- 5.4%
Amgen, Inc.* ...................... 14,200 772,125
Biochem Pharma, Inc.* ............. 13,400 673,350
Biogen, Inc.* ..................... 19,500 755,625
Cardinal Health, Inc. ............. 7,050 410,662
------------
2,611,762
------------
RETAIL & MERCHANDISING -- 10.2%
Abercrombie & Fitch Co. Cl-A* ..... 5,800 95,700
CompUSA, Inc.* .................... 61,452 1,267,447
Meyer, (Fred), Inc.* .............. 7,500 266,250
Ross Stores, Inc. ................. 12,100 605,000
Safeway, Inc.* .................... 14,300 611,325
Starbucks Corp.* .................. 14,800 423,650
TJX Companies, Inc. ............... 11,700 554,287
Walgreen Co. ...................... 12,500 500,000
Williams-Sonoma, Inc.* ............ 17,500 636,563
------------
4,960,222
------------
SEMI-CONDUCTORS -- 5.6%
Intel Corp. ....................... 15,500 2,029,531
Micron Technology, Inc. ........... 24,900 725,212
------------
2,754,743
------------
TELECOMMUNICATIONS -- 0.2%
LCI International, Inc.* .......... 4,800 103,200
------------
TOTAL COMMON STOCK
(COST $41,858,965) .................. 44,673,498
------------
</TABLE>
<PAGE>
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 7.5%
Temporary Investment Cash Fund .... 1,841,169 $ 1,841,169
Temporary Investment Fund ......... 1,841,168 1,841,168
------------
(COST $3,682,337) ............... 3,682,337
------------
TOTAL INVESTMENTS -- 99.1%
(COST $45,541,302)................... 48,355,835
OTHER ASSETS LESS
LIABILITIES -- 0.9%.................. 434,061
------------
NET ASSETS -- 100.0%................... $48,789,896
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
See Notes to Financial Statements.
<PAGE>
DEFINITION OF ABBREVIATIONS
- --------------------------------------------------------------------------------
THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THE SCHEDULES OF INVESTMENTS:
SECURITY DESCRIPTIONS:
- -----------------------
ADR-American Depository Receipt
ADS-American Depository Shares
BRB-Brady Bond
CVT-Convertible Security
FRB-Floating Rate Bond (1)
FRN-Floating Rate Note (1)
GDR-Global Depository Receipt
GDS-Global Depository Shares
IO-Interest Only Security
PIK-Payment in Kind
REIT-Real Estate Investment Trust
STEP-Stepped Coupon Security (2)
TBA-To be Announced Security
VR-Variable Rate Security (1)
WI-When Issued Security (2)
ZCB-Zero Coupon Security (2)
(1)- Rates shown for variable and floating rate securities are the coupon rates
as of December 31, 1996.
(2)- Rates shown are the effective yields at purchase date.
COUNTRIES/CURRENCIES:
- -----------------------
ATS-Austria/Austrian Schilling
AUD-Australia/Australian Dollar
BEF-Belgium/Belgium Franc
CAD-Canada/Canadian Dollar
CHF-Switzerland/Swiss Franc
DEM-Germany/German Deutschemark
DKK-Denmark/Danish Krone
ECU-Europe/European Currency Unit
ESP-Spain/Spanish Peseta
FIM-Finland/Finnish Markka
FRF-France/French Franc
GBP-United Kingdom/British Pound
HKD-Hong Kong/Hong Kong Dollar
IEP-Ireland/Irish Punt
ITL-Italy/Italian Lira
JPY-Japan/Japanese Yen
MXP-Mexico/Mexican Peso
MYR-Malaysia/Malaysian Ringgit
NLG-Netherlands/Netherland Guilder
NOK-Norway/Norwegian Kroner
NZD-New Zealand/New Zealand Dollar
PTE-Portugal/Portuguese Escudo
SEK-Sweden/Swedish Kroner
SGD-Singapore/Singapore Dollar
ZAR-South Africa/South African Rand
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
T. ROWE
AST PUTNAM LORD ABBETT AST FEDERATED AST PRICE
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY PUTNAM FEDERATED ASSET
EQUITY INCOME GROWTH MARKET INCOME BALANCED HIGH YIELD ALLOCATION
------------- ----------- -------- -------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in
securities at
value (A)....... $345,881 $ 528,558 $872,986 $548,206 $122,651 $296,051 $201,638 $119,657
Cash in bank,
including
foreign currency
holdings........ 283 18 -- 4 -- 451 -- 94
Receivable for:
Securities
sold.......... 378 -- -- -- 450 5,749 -- --
Dividends and
interest...... 924 1,325 397 3,637 383 1,719 3,800 890
Fund shares
sold.......... -- 15,791 19,521 -- -- 78 803 105
Other assets...... 38 8 15 9 2 5 3 2
Unrealized
appreciation on
foreign currency
exchange
contracts....... 1,004 -- 248 -- -- 144 -- --
-------- --------- -------- -------- -------- -------- -------- --------
TOTAL
ASSETS...... 348,508 545,700 893,167 551,856 123,486 304,197 206,244 120,748
-------- --------- -------- -------- -------- -------- -------- --------
LIABILITIES
Cash overdraft.... -- -- 255 -- -- -- -- --
Written options
outstanding, at
value........... -- -- -- -- -- -- -- --
Sale commitments,
at value........ -- -- -- -- -- 2,418 -- --
Payable for:
Securities
purchased..... 1,045 14,873 -- -- -- 14,955 851 506
Fund shares
redeemed...... 266 -- -- -- 269 -- -- --
Futures
variation
margin........ -- -- -- -- -- -- -- --
Advisory fees... 169 194 387 70 34 104 54 34
Shareholder
servicing
fees.......... 28 43 74 45 10 24 17 10
Accrued
expenses...... 64 93 127 95 35 66 60 49
Accrued
dividends..... -- -- -- 2,176 -- -- -- --
Unrealized
depreciation on
foreign currency
exchange
contracts....... 725 -- -- -- -- 151 -- --
-------- --------- -------- -------- -------- -------- -------- --------
TOTAL
LIABILITIES... 2,297 15,203 843 2,386 348 17,718 982 599
-------- --------- -------- -------- -------- -------- -------- --------
NET ASSETS........... $346,211 $ 530,497 $892,324 $549,470 $123,138 $286,479 $205,262 $120,149
======== ========= ======== ======== ======== ======== ======== ========
COMPONENTS OF NET
ASSETS
Common stock
(unlimited number of
shares authorized,
$.001 par value per
share).............. $ 18 $ 31 $ 47 $ 549 $ 10 $ 22 $ 17 $ 9
Additional paid-in
capital............. 299,358 439,062 667,184 548,841 102,352 241,860 184,462 103,476
Undistributed net
investment income... 2,686 7,379 1,593 -- 3,613 7,010 10,610 2,578
Accumulated net
realized gain (loss)
on investments and
foreign currency
transactions........ 19,995 13,059 42,753 80 5,063 29,891 1,264 2,380
Accumulated net
unrealized
appreciation
(depreciation) on
investments, foreign
currency
transactions, and
forward currency
contracts........... 24,154 70,966 180,747 -- 12,100 7,696 8,909 11,706
-------- --------- -------- -------- -------- -------- -------- --------
NET ASSETS........... $346,211 $ 530,497 $892,324 $549,470 $123,138 $286,479 $205,262 $120,149
======== ========= ======== ======== ======== ======== ======== ========
Shares of common
stock outstanding... 18,010 30,896 47,495 549,390 9,596 21,722 16,918 9,051
Net asset value,
offering and
redemption price per
share............... $ 19.22 $ 17.17 $ 18.79 $ 1.00 $ 12.83 $ 13.19 $ 12.13 $ 13.27
======== ========= ======== ======== ======== ======== ======== ========
(A) Investments at
cost................ $322,003 $ 457,592 $692,485 $548,206 $110,555 $288,351 $192,728 $107,949
======== ========= ======== ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
PIMCO T. ROWE T. ROWE T. ROWE PIMCO
TOTAL INVESCO FOUNDERS PRICE PRICE BERGER PRICE LIMITED
RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL FOUNDERS NATURAL MATURITY
BOND INCOME APPRECIATION EQUITY BOND GROWTH PASSPORT RESOURCES BOND
-------- -------- ------------ ------------- ------------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$431,364 $336,684 $228,354 $384,134 $ 88,756 $136,075 $116,925 $96,251 $236,379
-- -- -- 19,733 19,561 -- 2,329 584 --
3,846 159 441 348 -- -- 57 263 --
4,486 1,343 28 612 2,222 122 184 49 1,308
475 14,890 26 999 27 288 288 383 --
18 6 3 7 2 2 2 1 4
419 -- -- 3 1 -- 4 2 151
-------- -------- -------- -------- -------- -------- -------- ------- --------
440,608 353,082 228,852 405,836 110,569 136,487 119,789 97,533 237,842
-------- -------- -------- -------- -------- -------- -------- ------- --------
-- -- -- -- -- -- -- -- --
62 -- -- -- -- -- -- -- 9
-- -- -- -- -- -- -- -- --
79,238 4,194 7,632 2,969 11,591 144 2,022 8,931 28,585
-- -- 977 -- -- -- -- -- 82
919 -- -- -- -- -- -- -- 28
87 112 106 171 34 51 57 35 52
31 29 17 33 8 11 10 7 18
73 67 52 99 70 34 57 26 55
-- -- -- -- -- -- -- -- --
188 -- -- 5 631 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------- --------
80,598 4,402 8,784 3,277 12,334 240 2,146 8,999 28,829
-------- -------- -------- -------- -------- -------- -------- ------- --------
$360,010 $348,680 $220,068 $402,559 $ 98,235 $136,247 $117,643 $88,534 $209,013
======== ======== ======== ======== ======== ======== ======== ======= ========
$ 32 $ 25 $ 13 $ 33 $ 9 $ 9 $ 10 $ 6 $ 19
344,223 289,356 183,200 352,380 92,256 119,436 111,455 78,336 200,615
15,700 7,107 -- 1,993 3,522 223 971 423 10,849
(4,622) 9,984 (527) 1,612 1,133 1,283 (66) 2,034 (1,446)
4,677 42,208 37,382 46,541 1,315 15,296 5,273 7,735 (1,024)
-------- -------- -------- -------- -------- -------- -------- ------- --------
$360,010 $348,680 $220,068 $402,559 $ 98,235 $136,247 $117,643 $88,534 $209,013
======== ======== ======== ======== ======== ======== ======== ======= ========
32,405 24,923 13,102 33,340 9,015 9,469 10,113 6,117 19,333
$ 11.11 $ 13.99 $ 16.80 $ 12.07 $ 10.90 $ 14.39 $ 11.63 $ 14.47 $ 10.81
======== ======== ======== ======== ======== ======== ======== ======= ========
$427,007 $294,477 $190,972 $337,605 $ 86,870 $120,779 $111,652 $88,515 $237,630
======== ======== ======== ======== ======== ======== ======== ======= ========
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------
PORTFOLIO
-------------------
ROBERTSON
STEPHENS
VALUE +
GROWTH
---------
<S> <C>
$48,356
--
--
23
449
1
--
--------
48,829
--------
--
--
--
--
--
23
4
12
--
--
--------
39
--------
$48,790
========
$ 4
46,028
--
(57)
2,815
--------
$48,790
========
4,439
$ 10.99
========
$45,541
========
-------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
AST PUTNAM LORD ABBETT AST FEDERATED
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY AST PUTNAM FEDERATED
EQUITY INCOME GROWTH MARKET INCOME BALANCED HIGH YIELD
------------- ----------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest.................... $ 725 $ 1,910 $ 2,355 $25,431 $ 357 $ 7,396 $11,919
Dividends................... 5,641 9,192 6,256 -- 4,330 2,082 53
------- ------- -------- ------- ------- ------- -------
Total Investment
Income................ 6,366 11,102 8,611 25,431 4,687 9,478 11,972
------- ------- -------- ------- ------- ------- -------
EXPENSES
Investment advisory fees.... 3,079 2,881 5,727 2,325 765 1,828 992
Shareholder servicing
fees...................... 313 384 636 465 115 263 132
Administration and
accounting fees........... 268 306 403 340 115 238 132
Custodian fees.............. 210 85 140 97 54 85 41
Professional fees........... 28 34 56 41 10 23 12
Trustees' fees and
expenses.................. 11 13 22 16 4 8 5
Insurance fees.............. 3 7 8 2 1 4 2
Miscellaneous expenses...... 15 13 26 23 10 19 46
------- ------- -------- ------- ------- ------- -------
Total Expenses.......... 3,927 3,723 7,018 3,309 1,074 2,468 1,362
Less: Advisory fee
waivers and expense
reimbursements........ (307) -- -- (519) -- -- --
------- ------- -------- ------- ------- ------- -------
Net Expenses............ 3,620 3,723 7,018 2,790 1,074 2,468 1,362
------- ------- -------- ------- ------- ------- -------
Net Investment Income (Loss)... 2,746 7,379 1,593 22,641 3,613 7,010 10,610
------- ------- -------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Securities and foreign
exchange
transactions.......... 20,748 13,085 42,941 80 7,915 29,898 1,294
Futures contracts....... -- -- -- -- -- -- --
Written option
contracts............. -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Net realized gain (loss).... 20,748 13,085 42,941 80 7,915 29,898 1,294
------- ------- -------- ------- ------- ------- -------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
exchange
transactions.......... 4,755 46,955 108,269 -- 978 (8,583) 6,820
Futures contracts....... -- -- -- -- -- -- --
Written option
contracts............. -- -- -- -- -- -- --
Interest rate swaps..... -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Net change in unrealized
appreciation
(depreciation)............ 4,755 46,955 108,269 -- 978 (8,583) 6,820
------- ------- -------- ------- ------- ------- -------
Net Increase in Net Assets
Resulting from
Operations................ $28,249 $67,419 $152,803 $22,721 $12,506 $28,325 $18,724
======= ======= ======== ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
PIMCO
T. ROWE TOTAL INVESCO FOUNDERS T. ROWE PRICE T. ROWE PRICE BERGER
PRICE ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL FOUNDERS
ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH PASSPORT
----------- --------- ------- ------------ ------------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,578 $18,300 $ 5,465 $ 857 $ 1,010 $4,371 $ 756 $ 539
1,035 -- 4,109 215 5,459 -- 385 1,492
------- ------- ------- ------- ------- ------ ------- ------
3,613 18,300 9,574 1,072 6,469 4,371 1,141 2,031
------- ------- ------- ------- ------- ------ ------- ------
728 1,896 1,884 1,240 3,011 596 684 778
86 292 251 138 301 70 91 78
89 255 230 138 261 97 96 90
55 102 51 55 250 64 27 75
7 25 22 12 26 6 8 7
3 10 9 5 10 3 3 3
1 5 3 2 4 1 2 1
57 14 17 9 65 14 7 25
------- ------- ------- ------- ------- ------ ------- ------
1,026 2,599 2,467 1,599 3,928 851 918 1,057
-- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------ ------- ------
1,026 2,599 2,467 1,599 3,928 851 918 1,057
------- ------- ------- ------- ------- ------ ------- ------
2,587 15,701 7,107 (527) 2,541 3,520 223 974
------- ------- ------- ------- ------- ------ ------- ------
2,313 (4,897) 9,984 (527) 2,395 904 1,487 (20)
-- 1,120 -- -- -- -- -- --
-- (77) -- -- -- 188 -- --
------- ------- ------- ------- ------- ------ ------- ------
2,313 (3,854) 9,984 (527) 2,395 1,092 1,487 (20)
------- ------- ------- ------- ------- ------ ------- ------
6,558 1,893 24,709 24,027 34,967 504 10,400 5,257
-- (1,275) -- -- -- -- -- --
-- 578 -- -- -- (46) -- --
-- 12 -- -- -- -- -- --
------- ------- ------- ------- ------- ------ ------- ------
6,558 1,208 24,709 24,027 34,967 458 10,400 5,257
------- ------- ------- ------- ------- ------ ------- ------
$11,458 $13,055 $41,800 $22,973 $39,903 $5,070 $12,110 $6,211
======= ======= ======= ======= ======= ====== ======= ======
<CAPTION>
---------------------------------------------
PORTFOLIO
---------------------------------------------
T. ROWE PIMCO ROBERTSON
PRICE LIMITED STEPHENS
NATURAL MATURITY VALUE +
RESOURCES BOND GROWTH(1)
---------- ----------- ---------
<S> <C> <C>
$ 285 $12,543 $ 46
647 -- 44
------ ------- ------
932 12,543 90
------ ------- ------
352 1,240 118
39 191 12
72 189 14
34 35 9
3 16 1
1 6 --
1 5 --
7 12 2
------ ------- ------
509 1,694 156
-- -- --
------ ------- ------
509 1,694 156
------ ------- ------
423 10,849 (66)
------ ------- ------
2,036 (1,168) (57)
-- (153) --
-- -- --
------ ------- ------
2,036 (1,321) (57)
------ ------- ------
7,352 (1,463) 2,814
-- (84) --
-- 35 --
-- -- --
------ ------- ------
7,352 (1,512) 2,814
------ ------- ------
$9,811 $ 8,016 $2,691
====== ======= ======
---------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
AST PUTNAM LORD ABBETT
INTERNATIONAL EQUITY GROWTH AND INCOME
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)........................... $ 2,746 $ 2,165 $ 7,379 $ 3,534
Net realized gain (loss) on investments and foreign
currency transactions................................ 20,748 8,916 13,085 7,136
Net change in unrealized appreciation (depreciation) on
investments, foreign currency transactions, and
forward currency contracts........................... 4,755 13,385 46,955 23,471
-------- -------- -------- --------
Net Increase in Net Assets from Operations........... 28,249 24,466 67,419 34,141
-------- -------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment income... (5,032) -- (3,534) (1,700)
Distributions to shareholders from capital gains....... (5,923) (12,667) (7,139) (1,699)
-------- -------- -------- --------
Total Dividends and Distributions to Shareholders.... (10,955) (12,667) (10,673) (3,399)
-------- -------- -------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............................. 101,730 105,273 217,780 170,735
Net asset value of shares issued in reinvestment of
dividends and distributions.......................... 10,955 12,667 10,673 3,399
Cost of shares redeemed................................ (51,824) (99,733) (43,451) (8,177)
-------- -------- -------- --------
Increase in Net Assets from Capital Share
Transactions...................................... 60,861 18,207 185,002 165,957
-------- -------- -------- --------
Total Increase in Net Assets...................... 78,155 30,006 241,748 196,699
NET ASSETS
Beginning of Period.................................... 268,056 238,050 288,749 92,050
-------- -------- -------- --------
End of Period.......................................... $346,211 $268,056 $530,497 $288,749
======== ======== ======== ========
SHARES ISSUED AND REDEEMED
Shares sold............................................ 5,530 6,250 13,666 11,930
Shares issued in reinvestment of dividends and
distributions........................................ 610 823 707 276
Shares redeemed........................................ (2,856) (5,865) (2,755) (600)
-------- -------- -------- --------
Net Increase in Shares Outstanding................... 3,284 1,208 11,618 11,606
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PORTFOLIO
- -------------------------------------------------------------------------------------------------------
FEDERATED UTILITY
JANCAP GROWTH AST MONEY MARKET INCOME AST PUTNAM BALANCED
- ---------------------- ------------------------ --------------------- ---------------------
1996 1995 1996 1995 1996 1995 1996 1995
- --------- -------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,593 $ 1,686 $ 22,641 $ 17,992 $ 3,613 $ 4,023 $ 7,010 $ 5,210
42,941 38,435 80 156 7,915 358 29,898 9,100
108,269 58,329 -- -- 978 16,069 (8,583) 18,547
- --------- -------- ----------- -------- -------- -------- -------- --------
152,803 98,450 22,721 18,148 12,506 20,450 28,325 32,857
- --------- -------- ----------- -------- -------- -------- -------- --------
(753) (1,363) (22,641) (17,992) (4,103) (3,376) (5,212) (3,867)
(24,162) -- (149) -- -- -- (8,816) --
- --------- -------- ----------- -------- -------- -------- -------- --------
(24,915) (1,363) (22,790) (17,992) (4,103) (3,376) (14,028) (3,867)
- --------- -------- ----------- -------- -------- -------- -------- --------
517,512 135,311 1,478,919 674,956 59,384 43,009 27,031 92,940
24,915 1,363 22,199 17,896 4,103 3,376 14,028 3,867
(209,312) (48,085) (1,295,804) (637,371) (56,151) (27,265) (24,083) (16,215)
- --------- -------- ----------- -------- -------- -------- -------- --------
333,115 88,589 205,314 55,481 7,336 19,120 16,976 80,592
- --------- -------- ----------- -------- -------- -------- -------- --------
461,003 185,676 205,245 55,637 15,739 36,194 31,273 109,582
431,321 245,645 344,225 288,588 107,399 71,205 255,206 145,624
- --------- -------- ----------- -------- -------- -------- -------- --------
$ 892,324 $431,321 $ 549,470 $344,225 $123,138 $107,399 $286,479 $255,206
========= ======== =========== ======== ======== ======== ======== ========
30,067 9,644 1,478,919 674,956 4,958 4,009 2,155 7,580
1,569 119 22,199 17,896 351 344 1,158 367
(12,155) (3,650) (1,295,804) (637,371) (4,710) (2,569) (1,954) (1,473)
- --------- -------- ----------- -------- -------- -------- -------- --------
19,481 6,113 205,314 55,481 599 1,784 1,359 6,474
========= ======== =========== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
T. ROWE PRICE
FEDERATED HIGH YIELD ASSET ALLOCATION
----------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)........................... $ 10,610 $ 4,026 $ 2,587 $ 1,306
Net realized gain (loss) on investments and foreign
currency transactions................................ 1,294 124 2,313 483
Net change in unrealized appreciation (depreciation) on
investments, foreign currency transactions, and
forward currency contracts........................... 6,820 3,479 6,558 5,440
-------- -------- -------- -------
Net Increase in Net Assets from Operations........... 18,724 7,629 11,458 7,229
-------- -------- -------- -------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment income... (4,032) (1,210) (1,316) (525)
Distributions to shareholders from capital gains....... -- -- (226) --
-------- -------- -------- -------
Total Dividends and Distributions to Shareholders.... (4,032) (1,210) (1,542) (525)
-------- -------- -------- -------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............................. 151,204 75,531 52,390 31,289
Net asset value of shares issued in reinvestment of
dividends and distributions.......................... 4,032 1,210 1,542 525
Cost of shares redeemed................................ (48,358) (20,776) (3,098) (2,582)
-------- -------- -------- -------
Increase in Net Assets from Capital Share
Transactions...................................... 106,878 55,965 50,834 29,232
-------- -------- -------- -------
Total Increase in Net Assets...................... 121,570 62,384 60,750 35,936
NET ASSETS
Beginning of Period.................................... 83,692 21,308 59,399 23,463
-------- -------- -------- -------
End of Period.......................................... $205,262 $ 83,692 $120,149 $59,399
======== ======== ======== =======
SHARES ISSUED AND REDEEMED
Shares sold............................................ 13,287 7,197 4,228 2,775
Shares issued in reinvestment of dividends and
distributions........................................ 368 124 128 52
Shares redeemed........................................ (4,248) (2,008) (249) (244)
-------- -------- -------- -------
Net Increase in Shares Outstanding................ 9,407 5,313 4,107 2,583
======== ======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------
PIMCO TOTAL FOUNDERS CAPITAL T. ROWE PRICE
RETURN BOND INVESCO EQUITY INCOME APPRECIATION INTERNATIONAL EQUITY
- --------------------- --------------------- ---------------------- ---------------------
1996 1995 1996 1995 1996 1995 1996 1995
- -------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15,701 $ 5,966 $ 7,107 $ 3,658 $ (527) $ (151) $ 2,541 $ 1,454
(3,854) 6,557 9,984 5,268 (527) 2,836 2,395 (908)
1,208 4,574 24,709 19,246 24,027 10,589 34,967 15,141
- -------- -------- -------- -------- --------- -------- -------- --------
13,055 17,097 41,800 28,172 22,973 13,274 39,903 15,687
- -------- -------- -------- -------- --------- -------- -------- --------
(6,111) (1,271) (3,685) (1,056) -- (280) (1,759) (121)
(6,703) -- (4,986) -- (1,655) -- -- (249)
- -------- -------- -------- -------- --------- -------- -------- --------
(12,814) (1,271) (8,671) (1,056) (1,655) (280) (1,759) (370)
- -------- -------- -------- -------- --------- -------- -------- --------
196,298 199,583 184,426 93,257 237,559 62,848 222,719 101,284
12,814 1,271 8,671 1,056 1,655 280 1,759 370
(74,678) (37,838) (54,262) (9,914) (130,924) (14,221) (55,730) (30,055)
- -------- -------- -------- -------- --------- -------- -------- --------
134,434 163,016 138,835 84,399 108,290 48,907 168,748 71,599
- -------- -------- -------- -------- --------- -------- -------- --------
134,675 178,842 171,964 111,515 129,608 61,901 206,892 86,916
225,335 46,493 176,716 65,201 90,460 28,559 195,667 108,751
- -------- -------- -------- -------- --------- -------- -------- --------
$360,010 $225,335 $348,680 $176,716 $ 220,068 $ 90,460 $402,559 $195,667
======== ======== ======== ======== ========= ======== ======== ========
18,267 18,460 14,201 8,188 15,149 4,764 19,721 10,012
1,211 128 705 105 115 26 161 41
(6,938) (3,491) (4,116) (850) (8,512) (1,074) (4,907) (2,997)
- -------- -------- -------- -------- --------- -------- -------- --------
12,540 15,097 10,790 7,443 6,752 3,716 14,975 7,056
======== ======== ======== ======== ========= ======== ======== ========
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
T. ROWE PRICE
INTERNATIONAL BOND BERGER CAPITAL GROWTH
----------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)........................... $ 3,520 $ 1,705 $ 223 $ 150
Net realized gain (loss) on investments and foreign
currency transactions................................ 1,092 13 1,487 (195)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency transactions, and
forward currency contracts........................... 458 1,290 10,400 4,860
-------- -------- -------- -------
Net Increase in Net Assets from Operations........... 5,070 3,008 12,110 4,815
-------- -------- -------- -------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment income... (697) (263) (150) (3)
Distributions to shareholders from capital gains....... (884) -- -- --
-------- -------- -------- -------
Total Dividends and Distributions to Shareholders.... (1,581) (263) (150) (3)
-------- -------- -------- -------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............................. 60,046 30,340 147,599 42,283
Net asset value of shares issued in reinvestment of
dividends and distributions.......................... 1,581 263 150 3
Cost of shares redeemed................................ (12,483) (2,964) (69,441) (4,149)
-------- -------- -------- -------
Increase in Net Assets from Capital Share
Transactions...................................... 49,144 27,639 78,308 38,137
-------- -------- -------- -------
Total Increase in Net Assets...................... 52,633 30,384 90,268 42,949
NET ASSETS
Beginning of Period.................................... 45,602 15,218 45,979 3,030
-------- -------- -------- -------
End of Period.......................................... $ 98,235 $ 45,602 $136,247 $45,979
======== ======== ======== =======
SHARES ISSUED AND REDEEMED
Shares sold............................................ 5,742 2,996 10,695 3,773
Shares issued in reinvestment of dividends and
distributions........................................ 156 27 12 --
Shares redeemed........................................ (1,183) (295) (4,945) (370)
-------- -------- -------- -------
Net Increase in Shares Outstanding................ 4,715 2,728 5,762 3,403
======== ======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on May 2, 1995.
(2) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
PORTFOLIO
- -----------------------------------------------------------------------------------------
ROBERTSON
T. ROWE PRICE PIMCO LIMITED STEPHENS VALUE
FOUNDERS PASSPORT NATURAL RESOURCES MATURITY BOND + GROWTH
- -------------------- ------------------- --------------------- --------------
1996 1995(1) 1996 1995(1) 1996 1995(1) 1996(2)
- -------- ------- -------- ------ -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 974 $ 72 $ 423 $ 30 $ 10,849 $ 765 $ (66)
(20) 8 2,036 31 (1,321) 174 (57)
5,257 16 7,352 383 (1,512) 488 2,814
- -------- ------- -------- ------ -------- -------- -------
6,211 96 9,811 444 8,016 1,427 2,691
- -------- ------- -------- ------ -------- -------- -------
(129) -- (29) -- (761) -- --
-- -- (34) -- (303) -- --
- -------- ------- -------- ------ -------- -------- -------
(129) -- (63) -- (1,064) -- --
- -------- ------- -------- ------ -------- -------- -------
103,946 29,685 87,969 9,686 104,208 166,622 52,408
129 -- 63 -- 1,064 -- --
(20,969) (1,326) (18,508) (868) (65,151) (6,109) (6,309)
- -------- ------- -------- ------ -------- -------- -------
83,106 28,359 69,524 8,818 40,121 160,513 46,099
- -------- ------- -------- ------ -------- -------- -------
89,188 28,455 79,272 9,262 47,073 161,940 48,790
28,455 -- 9,262 -- 161,940 -- --
- -------- ------- -------- ------ -------- -------- -------
$117,643 $28,455 $ 88,534 $9,262 $209,013 $161,940 $48,790
======== ======= ======== ====== ======== ======== =======
9,188 2,884 6,706 918 9,943 16,062 5,032
12 -- 5 -- 102 -- --
(1,843) (128) (1,428) (84) (6,177) (597) (593)
- -------- ------- -------- ------ -------- -------- -------
7,357 2,756 5,283 834 3,868 15,465 4,439
======== ======= ======== ====== ======== ======== =======
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
\
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
YEAR BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ------------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AST Putnam 12/31/96 $18.20 $ 0.16 $ 1.55 $ 1.71 $ (0.32) $ (0.37) $ (0.69) $19.22
International
Equity 12/31/95 17.61 0.14 1.44 1.58 -- (0.99) (0.99) 18.20
12/31/94 17.34 0.10 0.36 0.46 (0.03) (0.16) (0.19) 17.61
12/31/93 12.74 0.14 4.46 4.60 -- -- -- 17.34
12/31/92 13.90 (0.17) (0.99) (1.16) -- -- -- 12.74
Lord Abbett 12/31/96 $14.98 $ 0.23 $ 2.48 $ 2.71 $ (0.17) $ (0.35) $ (0.52) $17.17
Growth and
Income 12/31/95 12.00 0.16 3.22 3.38 (0.20) (0.20) (0.40) 14.98
12/31/94 12.06 0.20 0.06 0.26 (0.12) (0.20) (0.32) 12.00
12/31/93 10.70 0.11 1.35 1.46 (0.04) (0.06) (0.10) 12.06
12/31/92(2) 10.00 0.07 0.63 0.70 -- -- -- 10.70
JanCap Growth 12/31/96 $15.40 $ 0.02 $ 4.19 $ 4.21 $ (0.02) $ (0.80) $ (0.82) $18.79
12/31/95 11.22 0.06 4.18 4.24 (0.06) -- (0.06) 15.40
12/31/94 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03) 11.22
12/31/93 10.53 0.03 1.22 1.25 -- -- -- 11.78
12/31/92(3) 10.00 (0.01) 0.54 0.53 -- -- -- 10.53
AST Money
Market 12/31/96 $ 1.00 $0.0492 $0.0005 $0.0497 $(0.0492) $(0.0005) $(0.0497) $ 1.00
12/31/95 1.00 0.0494 -- 0.0494 (0.0494) -- (0.0494) 1.00
12/31/94 1.00 0.0369 -- 0.0369 (0.0367) (0.0002) (0.0369) 1.00
12/31/93 1.00 0.0252 -- 0.0252 (0.0252) -- (0.0252) 1.00
12/31/92(4) 1.00 0.0032 -- 0.0032 (0.0032) -- (0.0032) 1.00
Federated
Utility
Income 12/31/96 $11.94 $ 0.36 $ 0.97 $ 1.33 $ (0.44) $ -- $ (0.44) $12.83
12/31/95 9.87 0.40 2.09 2.49 (0.42) -- (0.42) 11.94
12/31/94 10.79 0.46 (1.20) (0.74) (0.16) (0.02) (0.18) 9.87
12/31/93(5) 10.00 0.17 0.62 0.79 -- -- -- 10.79
AST Putnam
Balanced 12/31/96 $12.53 $ 0.32 $ 1.02 $ 1.34 $ (0.25) $ (0.43) $ (0.68) $13.19
12/31/95 10.49 0.26 2.06 2.32 (0.28) -- (0.28) 12.53
12/31/94 10.57 0.27 (0.26) 0.01 (0.07) (0.02) (0.09) 10.49
12/31/93(5) 10.00 0.08 0.49 0.57 -- -- -- 10.57
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(2) Commenced operations on May 1, 1992.
(3) Commenced operations on November 6, 1992.
(4) Commenced operations on November 10, 1992.
(5) Commenced operations on May 4, 1993.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9.65% $346,211 124% $0.0151 1.16% 1.26% 0.88% 0.78%
10.00% 268,056 59% -- 1.17% 1.27% 0.88% 0.78%
2.64% 238,050 49% -- 1.22% 1.32% 0.55% 0.46%
36.11% 150,646 32% -- 1.52% 1.52% 0.28% 0.28%
(8.35%) 24,998 55% -- 2.50% 2.50% (1.62%) (1.62%)
18.56% $530,497 43% $0.0655 0.97% 0.97% 1.92% 1.92%
28.91% 288,749 50% -- 0.99% 0.99% 2.50% 2.50%
2.22% 92,050 60% -- 1.06% 1.06% 2.45% 2.45%
13.69% 48,385 57% -- 1.22% 1.33% 2.05% 1.94%
7.00% 10,159 34% -- 0.99%(1) 1.75%(1) 2.49% (1) 1.73% (1)
28.36% $892,324 79% $0.0569 1.10% 1.10% 0.25% 0.25%
37.98% 431,321 113% -- 1.12% 1.12% 0.51% 0.51%
(4.51%) 245,645 94% -- 1.18% 1.18% 0.62% 0.62%
11.87% 157,852 92% -- 1.22% 1.22% 0.35% 0.35%
5.30% 15,218 2% -- 1.33%(1) 2.21%(1) (0.90%)(1) (1.78%)(1)
5.08% $549,470 N/A N/A 0.60% 0.71% 4.87% 4.76%
5.05% 344,225 N/A -- 0.60% 0.72% 5.38% 5.26%
3.75% 288,588 N/A -- 0.64% 0.76% 3.90% 3.78%
2.55% 114,074 N/A -- 0.65% 0.84% 2.53% 2.34%
0.32% 4,294 N/A -- 0.65%(1) 1.15%(1) 2.43% (1) 1.93% (1)
11.53% $123,138 81% $0.0446 0.93% 0.93% 3.14% 3.14%
26.13% 107,399 71% -- 0.93% 0.93% 4.58% 4.58%
(6.95%) 71,205 54% -- 0.99% 0.99% 5.11% 5.11%
7.90% 57,643 5% -- 1.18%(1) 1.18%(1) 5.09% (1) 5.09% (1)
11.23% $286,479 276% $0.0516 0.94% 0.94% 2.66% 2.66%
22.60% 255,206 161% -- 0.94% 0.94% 3.28% 3.28%
0.09% 145,624 87% -- 0.99% 0.99% 3.08% 3.08%
5.70% 91,591 46% -- 1.13%(1) 1.13%(1) 2.53% (1) 2.53% (1)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
YEAR BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- --------------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federated High
Yield 12/31/96 $11.14 $ 0.56 $ 0.90 $ 1.46 $(0.47) -- $(0.47) $12.13
12/31/95 9.69 0.38 1.46 1.84 (0.39) -- (0.39) 11.14
12/31/94(6) 10.00 0.55 (0.86) (0.31) -- -- -- 9.69
T. Rowe Price 12/31/96 $12.01 $ 0.27 $ 1.28 $ 1.55 $(0.25) $(0.04) $(0.29) $13.27
Asset
Allocation 12/31/95 9.94 0.26 2.02 2.28 (0.21) -- (0.21) 12.01
12/31/94(6) 10.00 0.21 (0.27) (0.06) -- -- -- 9.94
PIMCO Total 12/31/96 $11.34 $ 0.46 $(0.10) $ 0.36 $(0.28) $(0.31) $(0.59) $11.11
Return Bond 12/31/95 9.75 0.25 1.55 1.80 (0.21) -- (0.21) 11.34
12/31/94(6) 10.00 0.26 (0.51) (0.25) -- -- -- 9.75
INVESCO Equity
Income 12/31/96 $12.50 $ 0.27 $ 1.79 $ 2.06 $(0.24) $(0.33) $(0.57) $13.99
12/31/95 9.75 0.25 2.65 2.90 (0.15) -- (0.15) 12.50
12/31/94(6) 10.00 0.16 (0.41) (0.25) -- -- -- 9.75
Founders
Capital 12/31/96 $14.25 $(0.03) $ 2.85 $ 2.82 $ -- $(0.27) $(0.27) $16.80
Appreciation 12/31/95 10.84 (0.04) 3.54 3.50 (0.09) -- (0.09) 14.25
12/31/94(6) 10.00 0.11 0.73 0.84 -- -- -- 10.84
T. Rowe Price 12/31/96 $10.65 $ 0.06 $ 1.44 $ 1.50 $(0.08) $ -- $(0.08) $12.07
International
Equity 12/31/95 9.62 0.07 0.99 1.06 (0.01) (0.02) (0.03) 10.65
12/31/94(6) 10.00 0.02 (0.40) (0.38) -- -- -- 9.62
T. Rowe Price 12/31/96 $10.60 $ 0.23 $ 0.38 $ 0.61 $(0.14) $(0.17) $(0.31) $10.90
International
Bond 12/31/95 9.68 0.31 0.75 1.06 (0.14) -- (0.14) 10.60
12/31/94(7) 10.00 0.27 (0.59) (0.32) -- -- -- 9.68
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(6) Commenced operations on January 4, 1994.
(7) Commenced operations on May 3, 1994.
See Notes to Financial Statements.
107
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT INCOME
RATIOS OF EXPENSES (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
--------------------------------- ---------------------------------
SUPPLEMENTAL DATA AFTER AFTER
---------------------------------------------------- ADVISORY BEFORE ADVISORY ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
13.58% $205,262 43% N/A 1.03% 1.03% 8.02% 8.02%
19.57% 83,692 30% -- 1.11% 1.11% 8.72% 8.72%
(3.10%) 21,308 41% -- 1.15%(1) 1.34%(1) 9.06%(1) 8.87%(1)
13.14% $120,149 31% $0.0366 1.20% 1.20% 3.02% 3.02%
23.36% 59,399 18% -- 1.25% 1.29% 3.53% 3.49%
(0.60%) 23,463 32% -- 1.25%(1) 1.47%(1) 3.64%(1) 3.42%(1)
3.42% $360,010 403% N/A 0.89% 0.89% 5.38% 5.38%
18.78% 225,335 124% -- 0.89% 0.89% 5.95% 5.95%
(2.50%) 46,493 139% -- 1.02%(1) 1.02%(1) 5.57%(1) 5.57%(1)
17.09% $348,680 58% $0.0603 0.98% 0.98% 2.83% 2.83%
30.07% 176,716 89% -- 0.98% 0.98% 3.34% 3.34%
(2.50%) 65,201 63% -- 1.14%(1) 1.14%(1) 3.41%(1) 3.41%(1)
20.05% $220,068 69% $0.0573 1.16% 1.16% (0.38%) (0.38%)
32.56% 90,460 68% -- 1.22% 1.22% (0.28%) (0.28%)
8.40% 28,559 198% -- 1.30%(1) 1.55%(1) 2.59%(1) 2.34%(1)
14.17% $402,559 11% $0.0255 1.30% 1.30% 0.84% 0.84%
11.09% 195,667 17% -- 1.33% 1.33% 1.03% 1.03%
(3.80%) 108,751 16% -- 1.75%(1) 1.77%(1) 0.45%(1) 0.43%(1)
5.98% $ 98,235 241% N/A 1.21% 1.21% 5.02% 5.02%
11.10% 45,602 325% -- 1.53% 1.53% 6.17% 6.17%
(3.20%) 15,218 163% -- 1.68%(1) 1.68%(1) 7.03%(1) 7.03%(1)
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
YEAR BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ---------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Berger
Capital
Growth 12/31/96 $12.40 $ 0.01 $ 2.01 $ 2.02 $(0.03) -- $(0.03) $14.39
12/31/95 9.97 0.04 2.40 2.44 (0.01) -- (0.01) 12.40
12/31/94(8) 10.00 0.01 (0.04) (0.03) -- -- -- 9.97
Founders
Passport 12/31/96 $10.33 $ 0.09 $ 1.24 $ 1.33 $(0.03) -- $(0.03) $11.63
12/31/95(9) 10.00 0.03 0.30 0.33 -- -- -- 10.33
T. Rowe
Price 12/31/96 $11.11 $ 0.05 $ 3.35 $ 3.40 $(0.02) $(0.02) $(0.04) $14.47
Natural
Resources 12/31/95(9) 10.00 0.04 1.07 1.11 -- -- -- 11.11
PIMCO
Limited 12/31/96 $10.47 $ 0.56 $(0.15) $ 0.41 $(0.05) $(0.02) $(0.07) $10.81
Maturity
Bond 12/31/95(9) 10.00 0.05 0.42 0.47 -- -- -- 10.47
Robertson
Stephens
Value +
Growth 12/31/96(10) $10.00 $(0.01) $ 1.00 $ 0.99 -- -- -- $10.99
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(8) Commenced operations on October 20, 1994.
(9) Commenced operations on May 2, 1995.
(10) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
109
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------
SUPPLEMENTAL DATA
------------------------------------------------------
NET ASSETS AT PORTFOLIO AVERAGE
TOTAL END OF PERIOD TURNOVER COMMISSION
RETURN (IN 000'S) RATE RATE PAID+
------- ------------- --------- ----------
<S> <C> <C> <C> <C>
16.34% $136,247 156% $0.0614
24.42% 45,979 84% --
(0.30%) 3,030 5% --
12.91% $117,643 133% $0.0190
3.30% 28,455 4% --
30.74% $ 88,534 31% $0.0238
11.10% 9,262 2% --
3.90% $209,013 247% N/A
4.70% 161,940 205% --
9.90% $ 48,790 77% $0.0529
-----------------------------------------------------
<CAPTION>
----------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------------- --------------------------------------
AFTER AFTER
ADVISORY BEFORE ADVISORY ADVISORY BEFORE ADVISORY
FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------------- --------------- ------------- --------------
<C> <C> <C> <C>
1.01% 1.01% 0.24% 0.24%
1.17% 1.17% 0.70% 0.70%
1.25%(1) 1.70%(1) 1.41% (1) 0.97% (1)
1.36% 1.36% 1.25% 1.25%
1.46%(1) 1.46%(1) 0.94% (1) 0.94% (1)
1.30% 1.30% 1.08% 1.08%
1.35%(1) 1.80%(1) 1.28% (1) 0.83% (1)
0.89% 0.89% 5.69% 5.69%
0.89%(1) 0.89%(1) 4.87% (1) 4.87% (1)
1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
American Skandia Trust (the "Trust"), was organized under the laws of the
Commonwealth of Massachusetts on October 31, 1988, as a "Massachusetts Business
Trust". The Trust is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Trust operates as a
series company, issuing eighteen classes of shares of beneficial interest during
1996: AST Putnam International Equity Portfolio ("Putnam International")
(formerly, Seligman Henderson International Equity Portfolio), Lord Abbett
Growth and Income Portfolio ("Lord Abbett"), JanCap Growth Portfolio ("JanCap"),
AST Money Market Portfolio ("Money Market"), Federated Utility Income Portfolio
("Federated"), AST Putnam Balanced Portfolio ("Putnam Balanced") (formerly, AST
Phoenix Balanced Asset Portfolio), Federated High Yield Portfolio ("High
Yield"), T. Rowe Price Asset Allocation Portfolio ("Asset Allocation"), PIMCO
Total Return Bond Portfolio ("PIMCO"), INVESCO Equity Income Portfolio
("INVESCO"), Founders Capital Appreciation Portfolio ("Founders"), T. Rowe Price
International Equity Portfolio ("T. Rowe"), T. Rowe Price International Bond
Portfolio ("International Bond") (formerly, AST Scudder International Bond
Portfolio), Berger Capital Growth Portfolio ("Berger"), Founders Passport
Portfolio ("Passport") (formerly, Seligman Henderson International Small Cap
Portfolio), T. Rowe Price Natural Resources Portfolio ("Natural Resources"),
PIMCO Limited Maturity Bond Portfolio ("Limited Maturity"), and Robertson
Stephens Value + Growth Portfolio ("Robertson Stephens") (collectively "the
Portfolios").
The following is a summary of the Trust's significant accounting policies:
Security Valuation
All Portfolios, other than Money Market: Securities are valued at the close of
regular trading on each business day the New York Stock Exchange ("NYSE") is
open. Securities are valued at the last sale price on the securities exchange or
securities market on which such securities primarily are traded. Securities not
listed on an exchange or securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices.
Any securities or other assets for which recent market quotations are not
readily available are valued at fair value as determined in good faith by or at
the direction of the Board of Trustees.
Short-term obligations which mature in sixty days or less are valued at
amortized cost. Short-term obligations with more than sixty days remaining to
maturity are valued at current market value until the sixtieth day prior to
maturity, and thereafter are valued on an amortized cost basis based on the
value on such date.
Money Market: Securities are valued at amortized cost. The amortized cost method
values a security at its cost at the time of purchase and thereafter assumes a
constant amortization to maturity of any discount or premium.
Foreign Currency Translation and Foreign Currency Exchange Contracts
The Trust's investment valuations, other assets, and liabilities initially
expressed in foreign currencies are converted each business day into U.S.
dollars based upon current exchange rates determined prior to the close of the
NYSE. Purchases and sales of foreign investments and income and expenses are
converted into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Gains and losses attributable to changes
in foreign currency exchange rates are recorded for financial statement purposes
as net realized gains and losses on investments and foreign currency
transactions.
A foreign currency exchange contract (FCEC) is a commitment to purchase or sell
a specified amount of
<PAGE>
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foreign currency at the settlement date at a specified rate. FCECs are used to
hedge against foreign exchange rate risk arising from a Portfolio's investment
or anticipated investment in securities denominated in foreign currencies. Risks
may arise upon entering into FCECs from the potential inability of
counterparties to meet the terms of their contracts. Also, when utilizing FCECs,
a Portfolio may give up the opportunity to profit from favorable exchange rate
movements during the term of the contract. FCECs are marked-to-market daily at
the applicable exchange rates and any gains or losses are recorded as unrealized
until the contract settlement date.
Futures Contracts and Options
Certain Portfolios may enter into futures contracts for the delayed delivery of
securities, currency, or contracts based upon financial indices, at an agreed
upon price and date. Such contracts require an initial deposit, either in cash
or securities, equal to a certain percentage of the contract amount. Subsequent
payments are made or received by the Portfolios, depending on the fluctuations
in the value of the underlying instrument, and are recorded as unrealized gains
and losses.
Certain Portfolios may write covered call or put options for which premiums are
received in cash and are recorded as liabilities, adjusted to reflect the value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. If a put option is
exercised, the premium reduces the cost basis of the security or currency
purchased.
For both futures and options, risks arise from possible illiquidity, the
potential inability of counterparties to meet the terms of their contracts, and
from movements in interest or exchange rates or securities values. Futures and
options are valued based on their quoted daily settlement prices.
Investment Transactions and Investment Income
Security transactions are accounted for on the trade date. Realized gains and
losses from security transactions are recognized on the specific identification
basis. Dividend income is recorded on the ex-dividend date. Corporate actions,
including dividends, on foreign securities are recorded on the ex-dividend date
or, if such information is not available, as soon as reliable information is
available from the Trust's sources. Interest income is recorded on the accrual
basis.
Dividends and Distributions to Shareholders
All Portfolios other than Money Market: Dividends and distributions arising from
net investment income and net realized capital gains, if any, are declared and
paid annually.
Money Market: Dividends from net investment income are declared daily and paid
monthly, and capital gains, if any, are declared and paid annually.
Distributions to shareholders are recorded on their ex-dividend date.
2. INVESTMENT MANAGEMENT AGREEMENTS,
INVESTMENT SUB-ADVISORY AGREEMENTS
AND TRANSACTIONS WITH AFFILIATES
The Portfolios have entered into Investment Management Agreements with American
Skandia Investment Services, Inc. ("Investment Manager") which provide that the
Investment Manager will furnish each Portfolio with investment advice and
investment management and administrative services. The Investment Manager has
engaged the following firms as Sub-advisors for their respective Portfolios:
Putnam Investment Management, Inc. for Putnam International and Putnam Balanced,
Lord, Abbett & Co. for Lord Abbett, Janus Capital
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Corporation for JanCap, J. P. Morgan Investment Management Inc. for Money
Market, Federated Investment Counseling for Federated and High Yield, T. Rowe
Price Associates, Inc. for Asset Allocation and Natural Resources, Pacific
Investment Management Co. for PIMCO and Limited Maturity, INVESCO Trust Co. for
INVESCO, Founders Asset Management, Inc. for Founders and Passport, Rowe
Price-Fleming International, Inc., a United Kingdom Corporation, for T. Rowe and
International Bond, Berger Associates, Inc. for Berger, and Robertson, Stephens
& Company Investment Management, L.P. for Robertson Stephens. The Investment
Manager receives a fee computed daily and paid monthly based on an annual rate
of 1.00%, .75%, .90%, .50%, .75%, .75%, .75%, .85%, .65%, .75%, .90%, 1.00%,
.80%, .75%, 1.00%, .90%, .65%, and 1.00% of the average daily net assets of the
Putnam International, Lord Abbett, JanCap, Money Market, Federated, Putnam
Balanced, High Yield, Asset Allocation, PIMCO, INVESCO, Founders, T. Rowe,
International Bond, Berger, Passport, Natural Resources, Limited Maturity, and
Robertson Stephens Portfolios, respectively. The fees for Putnam International
are at the rate of .85% for average daily net assets in excess of $75 million,
for Federated are at the rate of .60% for average daily net assets in excess of
$50 million and for Putnam Balanced are at the rate of .70% for average daily
net assets in excess of $300 million. The Investment Manager is currently
voluntarily waiving .05% of its fee for Money Market.
The Investment Manager pays each Sub-advisor a fee computed daily and payable
monthly based on an annual rate of .65%, .50%, .60%, .25%, .50%, .45%, .50%,
.50%, .30%, .50%, .65%, .75%, .40%, .55%, .60%, .60%, .30%, and .60% of the
average daily net assets of the Putnam International, Lord Abbett, JanCap, Money
Market, Federated, Putnam Balanced, High Yield, Asset Allocation, PIMCO,
INVESCO, Founders, T. Rowe, International Bond, Berger, Passport, Natural
Resources, Limited Maturity, and Robertson Stephens Portfolios, respectively.
The Sub-advisors for JanCap, Money Market, and T. Rowe are currently voluntarily
waiving a portion of the fee payable to them by the Investment Manager. The
annual rates of the fees payable by the Investment Manager to the Sub-advisors
of all Portfolios, other than International Bond, are reduced for Portfolio net
assets in excess of specified levels.
On April 12, 1996, the shareholders of the AST Scudder International Bond
Portfolio approved new Investment Management and Sub-Advisory Agreements,
effective May 1, 1996. Under the new Sub-Advisory Agreement, Rowe Price-Fleming
International, Inc., became Sub-advisor to the Portfolio. Effective May 1, 1996,
the name of the Portfolio was changed to the T. Rowe Price International Bond
Portfolio. Prior to May 1, 1996, the Investment Manager received a fee computed
daily and paid monthly based on an annual rate of 1.00% of the average daily net
assets of the Portfolio. Scudder, Stephens & Clark, Inc. served as Sub-advisor
for an annual rate of .60% of the average daily net assets of the Portfolio.
On October 11, 1996, the shareholders of the Seligman Henderson International
Equity Portfolio ("Henderson"), AST Phoenix Balanced Asset Portfolio
("Balanced") and Seligman Henderson International Small Cap Portfolio ("Small
Cap") approved new Investment Management and Sub-Advisory Agreements, effective
October 15, 1996. Under the new Sub-Advisory Agreements, Putnam Investment
Management, Inc. became Sub-advisor to the Henderson and Balanced Portfolios and
Founders Asset Management, Inc. became Sub-advisor to the Small Cap Portfolio.
Effective October 15, 1996, the names of the Portfolios were changed to AST
Putnam International Equity Portfolio, AST Putnam Balanced Portfolio, and
Founders Passport Portfolio for the Henderson, Balanced, and Small Cap
Portfolios, respectively. Prior to October 15, 1996, Seligman Henderson Co., a
joint venture between J. & W. Seligman & Co. Incorporated and Henderson
International, Inc. served as Sub-advisor for the Henderson and
113
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Small Cap Portfolios and Phoenix Investment Counsel, Inc. served as Sub-advisor
for the Balanced Portfolio. Prior to October 15, 1996, the Investment Manager
received a fee computed daily and paid monthly based on an annual rate of 1.00%,
.75% and 1.00% of the average daily net assets of the Henderson, Balanced, and
Small Cap Portfolios, respectively. The Investment Manager waived .15% of its
fee for Henderson on average daily net assets in excess of $75 million. The
Investment Manager paid each Sub-advisor a fee computed daily and payable
monthly based on an annual rate of 1.00%, .50% and .60% of the average daily net
assets of the Henderson, Balanced, and Small Cap Portfolios, respectively. The
annual rates of the fees paid by the Investment Manager to the Sub-advisors of
each Portfolio were reduced for Portfolio net assets in excess of specified
levels.
The Investment Manager has agreed to reimburse each Portfolio for the amount, if
any, by which the total operating and management expenses (after fee waivers and
expense reimbursements) of the Portfolio for any fiscal year exceed the most
restrictive state blue sky expense limitation in effect from time to time, to
the extent required by such limitation. The Investment Management Agreement with
each Portfolio also provides that the Investment Manager will reimburse the
Portfolio to prevent its expenses from exceeding a specific percentage limit.
During the year ended December 31, 1996, the Investment Manager reimbursed Money
Market for expenses pursuant to those provisions.
The Trust has entered into an agreement with American Skandia Life Assurance
Corporation ("ASLAC") pursuant to which it pays ASLAC a shareholder servicing
fee at an annual rate of .10% of each Portfolio's average daily net assets.
Certain officers and/or Trustees of the Trust are also officers and/or directors
of the Investment Manager. During the year ended December 31, 1996, the Trust
made no direct payments to its officers or interested Trustees.
3. PURCHASES AND SALES OF SECURITIES
The cost of securities purchased and proceeds from securities sold, excluding
short-term obligations, during the year ended December 31, 1996 were ($ in
thousands): $432,812 and $370,749 for Putnam International, $379,695 and
$155,746 for Lord Abbett, $742,468 and $467,531 for JanCap, $94,268 and $90,156
for Federated, $744,181 and $634,180 for Putnam Balanced, $163,459 and $54,732
for High Yield, $75,595 and $24,930 for Asset Allocation, $1,580,935 and
$1,282,195 for PIMCO, $271,082 and $135,460 for INVESCO, $180,472 and $85,656
for Founders, $206,324 and $32,392 for T. Rowe, $194,274 and $151,373 for
International Bond, $195,711 and $121,117 for Berger, $160,182 and $90,198 for
Passport, $78,088 and $11,188 for Natural Resources, $542,165 and $400,931 for
Limited Maturity, and $54,447 and $12,517 for Robertson Stephens.
4. TAX MATTERS
It is the Trust's policy to comply with the requirements of the Internal Revenue
Code pertaining to regulated investment companies and to distribute all of its
taxable income, as well as any net realized gains, to its shareholders.
Therefore, no federal income or excise tax provision has been made. Foreign
taxes have been provided for on dividend and interest income earned on foreign
investments in accordance with the applicable country's tax rates and, to the
extent unrecoverable, are recorded as a reduction of investment income.
Tax Cost of Investments
At December 31, 1996, the net unrealized appreciation or depreciation based on
the cost of investments for
114
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federal income tax purposes was as follows ($ in thousands):
<TABLE>
<CAPTION>
TAX GROSS GROSS NET UNREALIZED
COST OF UNREALIZED UNREALIZED APPRECIATION
INVESTMENTS APPRECIATION DEPRECIATION (DEPRECIATION)
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Putnam
International........ $ 322,005 $ 28,977 $ (5,101) $ 23,876
Lord Abbett........... 457,800 74,563 (3,805) 70,758
JanCap................ 692,487 184,437 (3,938) 180,499
Money Market.......... 548,206 -- -- --
Federated............. 110,631 13,279 (1,259) 12,020
Putnam Balanced....... 288,453 11,294 (3,696) 7,598
High Yield............ 192,729 10,790 (1,881) 8,909
Asset Allocation...... 107,951 13,406 (1,700) 11,706
PIMCO................. 427,007 5,138 (781) 4,357
INVESCO............... 294,477 45,218 (3,011) 42,207
Founders.............. 190,972 43,161 (5,779) 37,382
T. Rowe............... 338,578 62,816 (17,260) 45,556
International Bond.... 86,891 2,494 (629) 1,865
Berger................ 120,843 16,651 (1,419) 15,232
Passport.............. 111,679 9,522 (4,276) 5,246
Natural Resources..... 88,546 9,797 (2,092) 7,705
Limited Maturity...... 237,630 834 (2,085) (1,251)
Robertson Stephens.... 45,590 3,751 (985) 2,766
</TABLE>
Capital Loss Carryforwards
At December 31, 1996, for federal income tax purposes, capital loss
carryforwards ($ in thousands) which may be applied against future net taxable
realized gains of each succeeding year until the earlier of utilization or
expiration in 2004 were: $3,901 for PIMCO, $521 for Founders, $1,177 for Limited
Maturity, and $8 for Robertson Stephens.
Reporting of Distributions
The Trust distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits be reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. Other financial statement reclassifications, due to permanent differences
between book and tax accounting, had no effect on the net assets or net asset
value per share.
5. WRITTEN OPTION TRANSACTIONS
Written option transactions entered into during the year ended December 31, 1996
are summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
PIMCO LIMITED MATURITY
------------------------ ------------------------
NUMBER NUMBER
PUT OPTIONS OF CONTRACTS PREMIUM OF CONTRACTS PREMIUM
- ---------------------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Balance at beginning
of year.............. 80 $ 32 -- $--
Written............... 1,262 1,014 143 44
Expired............... (80) (32) -- --
Exercised............. (100) (115) -- --
Closing buys.......... (200) (230) -- --
----- ------ ----- -----
Balance at end of
year................. 962 $ 669 143 $44
===== ====== ===== =====
</TABLE>
115
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<TABLE>
<CAPTION>
INTERNATIONAL BOND
---------------------------------------------
CALL OPTIONS PUT OPTIONS
-------------------- --------------------
PRINCIPAL PRINCIPAL
IN LOCAL IN LOCAL
CURRENCY CURRENCY
(000) PREMIUM (000) PREMIUM
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance at beginning of
year:
British Pound.............. 12 $ 13 -- $ --
German Deutschemark........ 23 24 -- --
Italian Lira............... 2 2 -- --
Japanese Yen............... -- -- 13 16
Swedish Kroner............. 13 16 -- --
------ -----
55 16
------ -----
Written:
Australian Dollar.......... -- -- 8 5
British Pound.............. 12 16 -- --
German Deutschemark........ 63 40 50 54
Italian Lira............... 14 10 -- --
Japanese Yen............... -- -- 38 43
Swedish Kroner............. 48 46 10 9
------ -----
112 111
------ -----
Expired:
British Pound.............. (12) (13) -- --
German Deutschemark........ (23) (24) (50) (54)
Italian Lira............... (16) (12) -- --
Japanese Yen............... -- -- (38) (43)
Swedish Kroner............. (27) (30) (10) (9)
------ -----
(79) (106)
------ -----
Closing Buys:
Australian Dollar.......... -- -- (8) (5)
British Pound.............. (12) (16) -- --
German Deutschemark........ (63) (40) -- --
Japanese Yen............... -- -- (13) (16)
Swedish Kroner............. (34) (32) -- --
------ -----
(88) (21)
------ -----
Balance at end of year..... $ -- $ --
====== =====
</TABLE>
At December 31, 1996, PIMCO and Limited Maturity had sufficient cash and/or
securities at least equal to the value of written options.
116
<PAGE>
APPENDIX
Description of Certain Debt Securities Ratings
Moody's Investors Service, Inc. ("Moody's")
Aaa -- Bonds which 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 edge." Interest payments are protected by a large, or exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which 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 which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance 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 rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Standard & Poor's Corporation ("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 strong capacity to pay interest and repay
principal, and differs from the highest rated issues only in a 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 they normally exhibit 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 and C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, economic or financial conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or minus (-) -- Ratings from AA to CCC may be modified by the
addition of a plus of minus sign to show relative standing within the major
rating categories.
c -- The letter c indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L -- The letter L indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized. In the case of
certificates of deposit, the letter L indicates that the deposit, combined with
other deposits being held in the same and right capacity, will be honored for
principal and accrued predefault interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
p -- 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 his own judgment with respect to such likelihood and risk.
* -- Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r -- The r is attached to highlight derivative, hybrid, and certain
other obligations that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to noncredit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities.
Description of Certain Commercial Paper Ratings
Moody's
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3 -- Issuers rated Prime-3 (or related supporting institutions)
have an acceptable ability for repayment of senior short-term debt obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Not Prime - Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's
A-1 -- This highest category indicates that the degree of safety
regarding time payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of the
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated B are regarded as having only speculative capacity
for timely payment.
C -- This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
