<PAGE>
Greenwich Street Series Fund
Prospectus
April 30, 1999
Appreciation Portfolio
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Shares of the fund are offered only to insurance company separate accounts that
fund certain variable annuity and variable life insurance contracts. This
prospectus should be read together with the prospectus for those contracts.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
Greenwich Street Series Fund consists of 10 separate investment funds, each
with its own investment objective and policies. This prospectus relates to one
of those funds--the Appreciation Portfolio.
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<TABLE>
<CAPTION>
Page
------------------------------------------
<S> <C>
Fund goals and investments 2
More on the fund's investments 4
Management 6
Share transactions 7
Share price 7
Dividends, distributions and taxes 8
Financial highlights 9
</TABLE>
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The Manager:
SSBC Fund Management Inc. (SSBC), is the manager of the fund. The manager is an
affiliate of Salomon Smith Barney Inc. (Salomon Smith Barney) and a subsidiary
of Citigroup Inc. (Citigroup) Citigroup businesses produce a broad range of
financial services.
SSBC, as manager of the fund, selects investments for the fund.
You should know:
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
<PAGE>
The Fund's Goal and Investments
Appreciation Portfolio
Manager
SSBC is the manager
Portfolio Manager
Harry D. Cohen (since 1991)
Mr. Cohen is an investment officer of SSBC and a managing director of Salomon
Smith Barney
Investment Goal
Long-term appreciation of capital.
Key Investments
The fund invests primarily in equity securities of U.S. companies. The fund
typically invests in medium and large capitalization companies but may also
invest in small capitalization companies. Equity securities include exchange
traded and over-the-counter common stocks and preferred stocks, debt
securities convertible into equity securities, and warrants and rights
relating to equity securities.
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Selection Process
The manager's investment strategy consists of individual
company selection and management of cash reserves. The
manager looks for investments among a strong core of growth
stocks, consisting primarily of blue chip companies
dominant in their industries. The fund may also invest in
companies with prospects for sustained earnings growth
and/or a cyclical earnings record.
In selecting individual companies for the fund's portfolio,
the manager looks for the following:
. Strong or rapidly improving balance sheets
. Recognized industry leadership
. Effective management teams that exhibit a desire to earn
consistent returns for shareholders
In addition, the manager considers the following
characteristics:
. Past growth records
. Future earnings prospects
. Technological innovation
. General market and economic factors
. Current yield or potential for dividend growth
Generally, companies in the fund's portfolio fall into one
of the following categories:
. Undervalued companies: companies with assets or earning
power that are either unrecognized or undervalued. The
manager generally looks for a catalyst that will unlock
these values. The manager also looks for companies that
are expected to have unusual earnings growth or whose
stocks appear likely to go up in value because of marked
changes in the way they do business (for example, a
corporate restructuring).
. Growth at a reasonable price: companies with superior
demonstrated and expected growth characteristics whose
stocks are available at a reasonable price. Typically,
there is strong recurring demand for these companies'
products.
The manager adjusts the amount held in cash reserves
depending on the manager's outlook for the stock market.
The manager will increase the fund's allocation to cash
when, in the manager's opinion, market valuation levels
become excessive. The manager may sometimes hold a
significant portion of the fund's assets in cash while
waiting for buying opportunities or to provide a hedge
against stock market declines.
Greenwich Street Series Fund
2
<PAGE>
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
. The U.S. stock market declines
. Large and medium capitalization stocks or growth stocks are temporarily out
of favor
. An adverse event depresses the value of a company's stock
. The manager's judgment about the attractiveness, value or potential
appreciation of a particular stock or about the amount to hold in cash
reserves proves to be incorrect
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Fund Performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
Standard & Poor's 500 Stock Price Index (the "S&P 500 Index"), an unmanaged
broad-based index of common stocks. Past performance does not necessarily
indicate how the fund will perform in the future. Performance figures do not
reflect expenses incurred from investing through a separate account; if those
expenses had been reflected, performance would have been lower. Please refer to
the separate account prospectus for more information on expenses.
[BAR GRAPH]
% Total Return
1992 1993 1994 1995 1996 1997 1998
- ---- ---- ------ ---- ---- ---- ----
6.13% 7.03% -1.12% 28.84% 19.77% 26.39% 19.15%
Calendar years ended
December 31
The bar chart shows the fund's performance for each full calendar year since
inception.
Quarterly returns:
Highest: 16.91% in 4th quarter 1998
Lowest: -9.65% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
<TABLE>
- ---------------------------------------
<CAPTION>
One Five Since
year years inception*
- ---------------------------------------
<S> <C> <C> <C>
Fund 19.15% 18.10% 15.00%
S&P 500 Index 28.60% 24.05% 20.12
- ---------------------------------------
</TABLE>
* Inception date of 10/16/91
Index comparison begins on October 31, 1991
Greenwich Street Series Fund
3
<PAGE>
More on the Fund's Investments
Additional investments and investment techniques
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- --------------------------------------------------------------------------------
Appreciation Portfolio
The fund de- Although the fund intends to be fully invested in equity se-
scribes its curities, it may invest up to 35% of its total assets in debt
investment ob- securities and money market instruments for cash management
jective and or other purposes.
its principal
investment
strategies and
risks under
"Fund goals
and invest-
ments."
This section
provides addi-
tional infor-
mation about
the fund's in-
vestments and
certain port-
folio manage-
ment tech-
niques the
fund may use.
More informa-
tion about the
fund's invest-
ments and
portfolio man-
agement tech-
niques, some
of which en-
tail risks, is
included in
the statement
of additional
information
(SAI).
- --------------------------------------------------------------------------------
Equity Equity securities include exchange-traded and over-the-
investments counter (OTC) common and preferred stocks, warrants, rights,
convertible securities, depositary receipts and shares, trust
certificates, limited partnership interests, shares of other
investment companies, real estate investment trusts and eq-
uity participations.
- --------------------------------------------------------------------------------
Fixed income securities include bonds, notes (including
Fixed income structured notes), mortgage-related securities, asset-backed
investments to securities, convertible securities, Eurodollar and Yankee
a limited dollar instruments, preferred stocks and money market instru-
extent ments. Fixed income securities may be issued by U.S. and for-
eign companies; U.S. and foreign banks; the U.S. government,
its agencies, authorities, instrumentalities or sponsored en-
terprises; state and municipal governments; supranational or-
ganizations; and foreign governments and their political sub-
divisions. Fixed income securities may have all types of in-
terest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment
in kind and auction rate features.
Mortgage-related securities may be issued by private compa-
nies or by agencies of the U.S. government and represent di-
rect or indirect participations in, or are collateralized by
and payable from, mortgage loans secured by real property.
- --------------------------------------------------------------------------------
Credit quality of fixed income securities
If a security receives different ratings, the fund will treat
the securities as being rated in the highest rating category.
The fund may choose not to sell securities that are down-
graded below the fund's minimum acceptable credit rating af-
ter their purchase. The fund's credit standards also apply to
counterparties to OTC derivative contracts.
- --------------------------------------------------------------------------------
Greenwich Street Series Fund
4
<PAGE>
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Below investment grade securities
Securities are below investment grade if:
. They are rated, respectively, below one of the top four
long-term rating categories by all the nationally
recognized rating organizations that have rated the
securities
. They have received comparable short-term ratings, or
. They are unrated securities the manager believes are of
comparable quality to below investment grade securities
- --------------------------------------------------------------------------------
Derivatives
and hedging The fund may, but need not, use derivative contracts, such as
techniques futures and options on securities, securities indices or cur-
rencies; options on these futures; forward currency con-
tracts; and interest rate or currency swaps for any of the
following purposes:
. To hedge against the economic impact of adverse changes in
the market value of its securities, because of changes in
stock market prices, currency exchange rates or interest
rates
. As a substitute for buying or selling securities
A derivative contract will obligate or entitle a fund to de-
liver or receive an asset or cash payment based on the change
in value of one or more securities, currencies or indices.
Even a small investment in derivative contracts can have a
big impact on the fund's stock market, currency and interest
rate exposure. Therefore, using derivatives can dispropor-
tionately increase losses and reduce opportunities for gains
when stock prices, currency rates or interest rates are
changing. The fund may not fully benefit from or may lose
money on derivatives if changes in their value do not corre-
spond accurately to changes in the value of the fund's hold-
ings. The other parties to certain derivative contracts pres-
ent the same types of credit risk as issuers of fixed income
securities. Derivatives can also make a fund less liquid and
harder to value, especially in declining markets.
- --------------------------------------------------------------------------------
Defensive
investing The fund may depart from its principal investment strategies
in response to adverse market, economic or political condi-
tions by taking temporary defensive positions in all types of
money market and short-term debt securities. If the fund
takes a temporary defensive position, it may be unable to
achieve its investment goal.
- --------------------------------------------------------------------------------
Portfolio
turnover The fund may engage in active and frequent trading to achieve
its principal investment strategies. Frequent trading also
increases transaction costs, which could detract from the
fund's performance.
- --------------------------------------------------------------------------------
Greenwich Street Series Fund
5
<PAGE>
Management
The manager
SSBC, located at 388 Greenwich Street, New York, New York 10013, acts as
investment manager to investment companies having aggregate assets as of March
31, 1999 in excess of approximately $114 billion.
SSBC is a wholly owned subsidiary of Citigroup, a financial services holding
company engaged, through its subsidiary, principally in five business segments:
Investment Services, Asset Management, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services.
Management fees
The fund's manager oversees the investment operations of the fund and receives
the following fee for these services:
<TABLE>
----------------------------------------------------------
<CAPTION>
Actual management fee
paid for the fiscal year
ended December 31, 1998
(as a percentage
of the fund's
Fund Manager average daily net assets)
----------------------------------------------------------
<S> <C> <C>
Appreciation Portfolio SSBC 0.55%
----------------------------------------------------------
</TABLE>
Administrator
SSBC serves as administrator to the fund, performing certain account
maintenance and administrative services. As compensation for these services
SSBC receives a fee equal on an annual basis to 0.20% of the fund's average
daily net assets.
Year 2000 issue
Information technology experts are concerned about computer systems' ability to
process date-related information on and after January 1, 2000. This situation,
commonly known as the "Year 2000" issue, could have an adverse impact on the
funds. Individual companies and governmental issuers of securities held by a
fund may also be adversely affected by the cost of addressing their Year 2000
System problem, which could be substantial. The manager is addressing the
Year 2000 issue for their systems. The fund has been informed by its other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot
guarantee that its efforts or the efforts of its service providers to
correct the problem will be successful.
Greenwich Street Series Fund
6
<PAGE>
Share Transactions
Availability of the fund
Shares of the fund are available only through the purchase of variable annuity
or variable life insurance contracts issued by insurance companies through
their separate accounts.
The interests of different variable contract separate accounts investing in a
fund could conflict due to differences of tax treatment and other
considerations. The fund currently does not foresee any disadvantages to
investors arising from the fact that the fund may offer its shares to different
insurance company separate accounts that serve as the investment medium for
their variable annuity and variable life products. Nevertheless, the board of
trustees intends to monitor events to identify any material conflicts which may
arise, and to determine what action, if any, should be taken in response to
these conflicts. If a conflict were to occur, one or more insurance companies'
separate accounts might be required to withdraw their investments in one or
more funds and shares of another fund might be substituted. In addition, the
sale of shares may be suspended or terminated if required by law or regulatory
authority or if in the best interests of the funds' shareholders.
Redemption of shares
The redemption price of the fund's shares will be the net asset value next
determined after receipt by the fund of a redemption order from a separate
account. The fund will ordinarily pay redemption proceeds within one business
day, and must pay redemption proceeds within seven days after receipt of the
request in good order, except on a day when the New York Stock Exchange is
closed or as permitted by the Securities and Exchange Commission in
extraordinary circumstances.
Share Price
The fund's net asset value is the value of its assets minus its liabilities.
The fund calculates its net asset value every day the New York Stock Exchange
is open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time). If the Exchange closes early, each fund
accelerates the calculation of its net asset value to the actual closing time.
The fund generally values its portfolio securities based on market prices or
quotations. To the extent the fund holds securities denominated in a foreign
currency, the fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When market prices are not
available, or when the manager believes they are unreliable or that the value
of a security has been materially affected by events occurring after a foreign
exchange closes, the fund may price that security at fair value. Fair value is
determined in accordance with procedures approved by the fund's board. A fund
that uses fair value to price securities may value those securities higher or
lower than another fund that uses market quotations to price the same
securities.
International markets may be open on days when U.S. markets are closed, and the
value of foreign securities owned by the fund could change on days when fund
shares may not be purchased or redeemed.
Greenwich Street Series Fund
7
<PAGE>
Dividends, Distributions and Taxes
All income and capital gain distributions are automatically reinvested in
additional shares of the fund at net asset value and are includable in gross
income of the separate accounts holding these shares. See the accompanying
separate account contract prospectus for information regarding the federal
income tax treatment of distributions to the separate accounts and to holders
of the contracts.
If a fund fails to comply with special diversification requirements under the
Internal Revenue Code of 1986 (the "Code"), the contracts invested in that fund
would not be treated as annuity, endowment or life insurance contracts under
the Code.
Greenwich Street Series Fund
8
<PAGE>
Financial Highlights
The financial highlights tables are intended to help you understand the
performance of the fund for the past five years. The information in the
following tables was audited by KPMG LLP, independent accountants, whose
report, along with the fund's financial statements, are included in the annual
report (available upon request). Certain information reflects financial results
for a single share. Total return represents the rate that a shareholder would
have earned (or lost) on a share of the fund assuming reinvestment of all
dividends and distributions. The information for the fiscal year ended December
31, 1994 has been audited by other auditors.
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
Appreciation Portfolio
1998(1) 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $18.73 $15.86 $14.39 $11.54 $11.80
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.27 0.24 0.27 0.23 0.20
Net realized and unrealized gain
(loss) 3.24 3.90 2.60 3.04 (0.32)
- ------------------------------------------------------------------------------
Total income (loss) from operations 3.51 4.14 2.87 3.27 (0.12)
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.22) (0.21) (0.25) (0.21) (0.14)
Net realized gains (0.86) (1.06) (1.15) (0.21) --
- ------------------------------------------------------------------------------
Total distributions (1.08) (1.27) (1.40) (0.42) (0.14)
- ------------------------------------------------------------------------------
Net asset value, end of year $21.16 $18.73 $15.86 $14.39 $11.54
- ------------------------------------------------------------------------------
Total return 19.15% 26.39% 19.77% 28.84% (1.12)%
- ------------------------------------------------------------------------------
Net assets, end of year (millions) $ 246 $ 144 $ 101 $ 94 $ 81
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 0.80% 0.80% 0.85% 0.97% 0.88%
Net investment income 1.36 1.68 1.59 1.65 1.75
- ------------------------------------------------------------------------------
Portfolio turnover rate 22% 34% 39% 43% 61%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
Greenwich Street Series Fund
9
<PAGE>
This page is intentionally left blank
<PAGE>
Greenwich Street Series Fund
Additional Information
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends one report to a household if more than one account has the same
address. Contact your participating life insurance company representative if
you do not want this policy to apply to you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund. It is incorporated by
reference into this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by calling 1-800-451-2010
or writing to Greenwich Street Series Fund, 388 Greenwich Street New York, NY
10013.
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can obtain copies of these materials upon payment of a
duplicating fee, by writing to the Public Reference Section of the Commission,
Washington, D.C. 20549-60019. You can get the same reports and information free
from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. The fund is not offering to sell its
shares to any person to whom the fund may not lawfully sell its shares.
Appreciation Portfolio
(Investment Company Act file no. 811-6310)
GREENWICH STREET SERIES FUND
PROSPECTUS
April 30, 1999
FIXED INCOME FUND EQUITY FUND
- -------------------------------------- --------------------------------------
Diversified Strategic Income Portfolio Appreciation Portfolio
Shares of each fund are offered only to insurance company separate accounts that
fund certain variable annuity and variable life insurance contracts. This
prospectus should be read together with the prospectus for those contracts.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
Greenwich Street Series Fund consists of 10 separate investment funds, each
with its own investment objective and policies. This prospectus relates to two
of those funds--the Appreciation Portfolio and the Diversified Strategic Income
Portfolio. Each fund offers different levels of potential return and involves
different levels of risk.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund goals and investments Page
----------------------------------------------
<S> <C>
Appreciation Portfolio 2
Diversified Strategic Income Portfolio 4
More on the funds' investments 6
Management 9
Share transactions 10
Share price 10
Dividends, distributions and taxes 11
Financial highlights 12
</TABLE>
- --------------------------------------------------------------------------------
The Managers:
SSBC Fund Management Inc. (SSBC), is the manager of the funds. The manager is
an affiliate of Salomon Smith Barney Inc. (Salomon Smith Barney) and a
subsidiary of Citigroup Inc. (Citigroup) Citigroup businesses produce a broad
range of financial services.
SSBC selects investments for the funds for which it serves as manager, except
that SSBC has engaged Smith Barney Global Capital Management, also an affiliate
of Salomon Smith Barney and subsidiary of Citigroup, as subadviser to select
investments for the Diversified Strategic Income Portfolio.
You should know:
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
<PAGE>
The Fund's Goal and Investments
Appreciation Portfolio
Manager
SSBC is the manager
Portfolio Manager
Harry D. Cohen (since 1991)
Mr. Cohen is an investment
officer of SSBC and a managing
director of Salomon Smith Barney
Investment Goal
Long-term appreciation of capital.
Key Investments
The fund invests primarily in equity securities of U.S. companies. The fund
typically invests in medium and large capitalization companies but may also
invest in small capitalization companies. Equity securities include exchange
traded and over-the-counter common stocks and preferred stocks, debt
securities convertible into equity securities, and warrants and rights
relating to equity securities.
- --------------------------------------------------------------------------------
Selection Process
The manager's investment strategy consists of individual
company selection and management of cash reserves. The
manager looks for investments among a strong core of growth
stocks, consisting primarily of blue chip companies
dominant in their industries. The fund may also invest in
companies with prospects for sustained earnings growth
and/or a cyclical earnings record.
In selecting individual companies for the fund's portfolio,
the manager looks for the following:
. Strong or rapidly improving balance sheets
. Recognized industry leadership
. Effective management teams that exhibit a desire to earn
consistent returns for shareholders
In addition, the manager considers the following
characteristics:
. Past growth records
. Future earnings prospects
. Technological innovation
. General market and economic factors
. Current yield or potential for dividend growth
Generally, companies in the fund's portfolio fall into one
of the following categories:
. Undervalued companies: companies with assets or earning
power that are either unrecognized or undervalued. The
manager generally looks for a catalyst that will unlock
these values. The manager also looks for companies that
are expected to have unusual earnings growth or whose
stocks appear likely to go up in value because of marked
changes in the way they do business (for example, a
corporate restructuring).
. Growth at a reasonable price: companies with superior
demonstrated and expected growth characteristics whose
stocks are available at a reasonable price. Typically,
there is strong recurring demand for these companies'
products.
The manager adjusts the amount held in cash reserves
depending on the manager's outlook for the stock market.
The manager will increase the fund's allocation to cash
when, in the manager's opinion, market valuation levels
become excessive. The manager may sometimes hold a
significant portion of the fund's assets in cash while
waiting for buying opportunities or to provide a hedge
against stock market declines.
Greenwich Street Series Fund
2
<PAGE>
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
. The U.S. stock market declines
. Large and medium capitalization stocks or growth stocks are temporarily out
of favor
. An adverse event depresses the value of a company's stock
. The manager's judgment about the attractiveness, value or potential
appreciation of a particular stock or about the amount to hold in cash
reserves proves to be incorrect
- --------------------------------------------------------------------------------
Fund Performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
Standard & Poor's 500 Stock Price Index (the "S&P 500 Index"), an unmanaged
broad-based index of common stocks. Past performance does not necessarily
indicate how the fund will perform in the future. Performance figures do not
reflect expenses incurred from investing through a separate account; if those
expenses had been reflected, performance would have been lower. Please refer to
the separate account prospectus for more information on expenses.
[CHART APPEARS HERE]
% Total Return
1992 1993 1994 1995 1996 1997 1998
6.13% 7.03% -1.12% 28.84% 19.77% 26.39% 19.15%
Calendar year ended December 31
The bar chart shows the fund's performance for each full calendar year since
inception.
Quarterly returns:
Highest:16.91% in 4th quarter 1998
Lowest:-9.65% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
<TABLE>
- ---------------------------------------
<CAPTION>
One Five Since
year years inception*
- ---------------------------------------
<S> <C> <C> <C>
Fund 19.15% 18.10% 15.00%
S&P 500 Index 28.60% 24.05% 20.12%
- ---------------------------------------
</TABLE>
* Inception date of 10/16/91
Index comparison begins on October 31, 1991
Greenwich Street Series Fund
3
<PAGE>
The Fund's Goal and Investments
Diversified Strategic Income Portfolio
Manager and subadviser
SSBC is the manager and Smith Barney Global Capital Management, Inc. is the
subadviser
Portfolio Managers (since)
James E. Conroy (1991)
John C. Bianchi (1991)
Simon R. Hildreth (1998)
Messrs. Conroy and Bianchi are investment officers of SSBC and managing
directors of Salomon Smith Barney. Mr. Hildreth is a managing director of
Smith Barney Global Capital Management, Inc.
Investment Goal
High current income.
Key Investments
The fund invests primarily in three types of fixed income securities:
.U.S. government and mortgage-related securities
.foreign government securities
. corporate debt securities and non-convertible preferred stocks rated
below investment grade
Allocation: The fund currently expects to maintain approximately 50% of its
assets in government and mortgage-related securities, 25% in foreign
government securities and 25% in below investment grade corporate debt.
However, these percentages may vary significantly over time.
Maturity: The fund will invest primarily in intermediate-term and long-term
securities. As a result, the weighted average maturity of the fund's portfolio
is normally expected to be from four years to 12 years.
- --------------------------------------------------------------------------------
Selection Process
Government and mortgage-related securities
In selecting government and mortgage-related securities, the
manager focuses on identifying undervalued sectors and securities.
Specifically, the manager:
. Emphasizes those sectors and maturities that seem to be most
undervalued based on the manager's economic and interest rate
outlook
. Monitors the yield spreads between U.S. Treasury and government
agency or instrumentality securities and purchases agency and
instrumentality securities when their additional yield justifies
their additional risk
. Uses research to uncover inefficient sectors of the government
and mortgage markets and adjusts portfolio positions to take
advantage of new information
. Measures the potential impact of supply/demand imbalances,
changes in the relative yields for securities with different
maturities, and changing prepayment patterns to identify
individual securities that balance potential return and risk
Foreign government securities
In selecting foreign government securities, the subadviser
considers and compares the relative yields of various foreign
government obligations. The subadviser diversifies this portion of
the portfolio by spreading assets among countries and regions. The
subadviser also attempts to preserve the U.S. dollar value of
securities by using currency derivatives to hedge foreign currency
exposure. In selecting securities, the subadviser looks for:
. Political and economic stability, and favorable inflation and
government deficit prospects
. Favorable yield and maturity
. Strong financial condition and high credit quality
. Low sensitivity to interest rate changes
Below investment grade corporate fixed income securities
In selecting below investment grade corporate securities, the
manager considers and compares the relative yields of various types
of obligations and employs a forward looking strategy seeking to
identify companies that exhibit favorable earnings prospects or
demonstrate a potential for higher ratings over time. The manager
looks for:
. ""Fallen angels" or companies that are repositioning in the
marketplace and which the manager believes are temporarily
undervalued
. Younger companies with smaller capitalizations that have
exhibited improving financial strength or improving credit
ratings over time
The subadviser also employs an active sell strategy to dispose of
securities that no longer meet the manager's investment criteria to
harvest gains for reinvestment in new securities.
Greenwich Street Series Fund
4
<PAGE>
Principal risks of investing in the fund
Investors could lose money in the fund, or the fund's performance could fall
below other investments, if:
. Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio
. As interest rates decline, the issuers of securities held by the fund may pay
principal earlier than scheduled or exercise a right to call the securities,
forcing the fund to reinvest in lower yielding securities. This is known as
prepayment or call risk
. As interest rates increase, slower than expected principal payments may
extend the average life of fixed income securities held by the fund, locking
in below market interest rates and reducing the value of these securities.
This is known as extension risk
. The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest, or the security's credit rating is downgraded.
This risk is higher for below investment grade bonds, as described below
. Foreign government bond investments lose their value because of an increase
in market interest rates in one or more regions, a decline in a government's
credit rating or financial condition or a default by a government
. Adverse governmental action or political, economic or market instability
affects a foreign country or region
. An unhedged currency in which a security is priced declines in value relative
to the U.S. dollar
. The manager's or subadviser's judgment about the attractiveness, relative
yield, value or potential appreciation of a particular security, or the
proper allocation among types of investments, proves to be incorrect
Payments of principal and interest on mortgage pools issued by
instrumentalities of the U.S. government are not guaranteed by the U.S.
government. Although payments of principal and interest on mortgage pools
issued by some U.S. agencies are guaranteed, this guarantee does not apply to
losses resulting from declines in their market values.
Many foreign countries in which the fund invests have less liquid and more
volatile markets than in the U.S. In some of these foreign countries, there is
also less information available about foreign issuers and markets because of
less rigorous accounting and regulatory standards than in the U.S. Currency
fluctuations could erase investment gains or add to investment losses. The risk
of investing in foreign securities is greater in the case of less developed
countries.
Below investment grade bonds, which are commonly known as "junk bonds," are
speculative and their issuers may have diminished capacity to pay principal and
interest. These securities have a higher risk of default, tend to be less
liquid, and may be more difficult to value. Changes in economic conditions or
other circumstances are likely to weaken the capacity of issuers of these
securities to make principal and interest payments.
- --------------------------------------------------------------------------------
Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
an unmanaged, blended index consisting of three broad-based components: Merrill
Lynch GNMA Master Index (35%), Merrill Lynch Global Bond Index (35%) and
Merrill Lynch High Yield Master II Index (30%). Lehmam Brothers Aggregate Bond
Index ("Lehman Brothers Index"), an unmanaged index are composed of the Lehman
Intermediate Government/Corporate Bond Index and the Mortgage-Backed Securities
Index and includes treasury issues, agency issues, corporate bond issues and
mortgage-backed securities. Past performance does not necessarily indicate how
the fund will perform in the future. Performance figures do not reflect
expenses incurred from investing through a separate account; if these expenses
had been reflected, performance would have been lower. Please refer to the
separate account prospectus for more information on expenses.
[SMITH BARNEY BAR CHART APPEARS HERE]
1992 1993 1994 1995 1996 1997 1998
1.42% 12.56% -2.81% 16.18% 11.16% 8.14% 6.41%
Calendar year ended December 31
The bar chart shows the fund's performance for each full calendar year since
inception.
Quarterly returns:
Highest: 4.53% in 1st quarter 1993
Lowest:-2.29% in 1st quarter 1994
Average Annual Total Returns
(for the periods ended December 31, 1998)
<TABLE>
- ----------------------------------------------
<CAPTION>
One Five Since
year years inception*
- ----------------------------------------------
<S> <C> <C> <C>
Fund 6.41% 7.63% 7.39%
Blended Index 6.79% 7.94% 9.27%
Lehman Brothers Index 8.69% 7.27% 8.04%
- ----------------------------------------------
</TABLE>
* Inception date 10/16/91
Index comparison begins on October 31, 1991
Greenwich Street Series Fund
5
<PAGE>
More on the Funds' Investments
Additional investments and investment techniques
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Greenwich Street Series Fund
Each fund de- Appreciation Portfolio
scribes its Although the fund intends to be fully invested in equity se-
investment ob- curities, it may invest up to 35% of its total assets in debt
jective and securities and money market instruments for cash management
its principal or other purposes.
investment
strategies and
risks under
"Fund goals
and invest-
ments."
This section Diversified Strategic Income Portfolio
provides addi- The fund may invest up to 35% of its assets in corporate
tional infor- fixed income securities of U.S. issuers rated Ba or lower by
mation about Moody's or BB or lower by S&P, but not lower than Caa or CCC,
the funds' in- respectively; or, if unrated, judged by the subadviser to be
vestments and within this quality range. The fund may invest up to 5% of
certain port- its assets in securities of less developed countries.
folio manage-
ment tech-
niques the
funds may use.
More informa-
tion about the
funds' invest-
ments and
portfolio man-
agement tech-
niques, some
of which en-
tail risks, is
included in
the statement
of additional
information
(SAI).
- --------------------------------------------------------------------------------
Equity Equity securities include exchange-traded and over-the-
investments counter (OTC) common and preferred stocks, warrants, rights,
Appreciation convertible securities, depositary receipts and shares, trust
Portfolio certificates, limited partnership interests, shares of other
investment companies, real estate investment trusts and eq-
uity participations.
- --------------------------------------------------------------------------------
Fixed income Fixed income securities include bonds, notes (including
investments structured notes), mortgage-related securities, asset-backed
Diversified securities, convertible securities, Eurodollar and Yankee
Strategic In- dollar instruments, preferred stocks and money market instru-
come Portfolio ments. Fixed income securities may be issued by U.S. and for-
and, to a lim- eign companies; U.S. and foreign banks; the U.S. government,
ited extent, its agencies, authorities, instrumentalities or sponsored en-
the Apprecia- terprises; state and municipal governments; supranational or-
tion Portfolio ganizations; and foreign governments and their political sub-
divisions. Fixed income securities may have all types of in-
terest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment
in kind and auction rate features.
Mortgage-related securities may be issued by private compa-
nies or by agencies of the U.S. government and represent di-
rect or indirect participations in, or are collateralized by
and payable from, mortgage loans secured by real property.
Diversified The fund may invest in asset-backed securities. Asset-backed
Strategic In- securities represent participations in, or are secured by and
come Portfolio payable from, assets such as installment sales or loan con-
tracts, leases, credit card receivables and other categories
of receivables.
6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Greenwich Street Series Fund
Credit quality of fixed income securities
If a security receives different ratings, a fund will treat
the securities as being rated in the highest rating category.
A fund may choose not to sell securities that are downgraded
below the fund's minimum acceptable credit rating after their
purchase. Each fund's credit standards also apply to
counterparties to OTC derivative contracts.
Below investment grade securities
Securities are below investment grade if:
. They are rated, respectively, below one of the top four
long-term rating categories by all the nationally
recognized rating organizations that have rated the
securities
. They have received comparable short-term ratings, or
. They are unrated securities the manager believes are of
comparable quality to below investment grade securities
Risks of high yield, lower quality fixed income securities
Diversified The issuers of lower quality bonds may be highly leveraged
Strategic In- and have difficulty servicing their debt, especially during
come Portfolio prolonged economic recessions or periods of rising interest
rates. The prices of lower quality securities are volatile
and may go down because of market perceptions of deteriorat-
ing creditworthiness or economic conditions. Lower quality
securities may become illiquid and hard to value in down mar-
kets.
- --------------------------------------------------------------------------------
Derivatives Each fund may, but need not, use derivative contracts, such
and hedging as futures and options on securities, securities indices or
techniques currencies; options on these futures; forward currency con-
tracts; and interest rate or currency swaps for any of the
following purposes:
. To hedge against the economic impact of adverse changes in
the market value of its securities, because of changes in
stock market prices, currency exchange rates or interest
rates
. As a substitute for buying or selling securities
A derivative contract will obligate or entitle a fund to de-
liver or receive an asset or cash payment based on the change
in value of one or more securities, currencies or indices.
Even a small investment in derivative contracts can have a
big impact on a fund's stock market, currency and interest
rate exposure. Therefore, using derivatives can dispropor-
tionately increase losses and reduce opportunities for gains
when stock prices, currency rates or interest rates are
changing. A fund may not fully benefit from or may lose money
on derivatives if changes in their value do not correspond
accurately to changes in the value of the fund's holdings.
The other parties to certain derivative contracts present the
same types of credit risk as issuers of fixed income securi-
ties. Derivatives can also make a fund less liquid and harder
to value, especially in declining markets.
7
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Greenwich Street Series Fund
- --------------------------------------------------------------------------------
Defensive Each fund may depart from its principal investment strategies
investing in response to adverse market, economic or political condi-
tions by taking temporary defensive positions in all types of
money market and short-term debt securities. If a fund takes
a temporary defensive position, it may be unable to achieve
its investment goal.
- --------------------------------------------------------------------------------
Portfolio Each fund may engage in active and frequent trading to
turnover achieve its principal investment strategies. Frequent trading
also increases transaction costs, which could detract from a
fund's performance.
8
<PAGE>
Management
The managers
SSBC Fund Management Inc. (SSBC)
Smith Barney Global Capital Management (Subadviser for Diversified Strategic
Income Portfolio)
SSBC, located at 388 Greenwich Street, New York, New York 10013, acts as
investment manager to investment companies having aggregate assets as of March
31, 1999 in excess of $114 billion.
SSBC, is a wholly owned subsidiary of Citigroup, a financial services holding
company engaged, through its subsidiaries, principally in five business
segments: Investment Services, Asset Management, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services. Smith
Barney Global Capital Management, a U.S. registered investment adviser, located
at 10 Piccadilly, London, England, engaged by SSBC as subadviser for
Diversified Strategic Income Fund, is also a wholly owned subsidiary of
Citigroup.
Management fees
Each fund's manager oversees the investment operations of the fund and receives
the following fee for these services:
<TABLE>
--------------------------------------------------------------------------
<CAPTION>
Actual management fee
paid for the fiscal year
ended December 31, 1998
(as a percentage
of the fund's
Fund Manager average daily net assets)
--------------------------------------------------------------------------
<S> <C> <C>
Appreciation Portfolio SSBC 0.55%
Diversified Strategic Income Portfolio SSBC 0.45%
--------------------------------------------------------------------------
</TABLE>
Smith Barney Global Capital Management, as subadviser to the Diversified
Strategic Income Portfolio, is paid a fee by SSBC at the annual percentage of
0.15% of the value of the fund's average net assets.
Administrator
SSBC serves as administrator to each fund, performing certain account
maintenance and administrative services. As compensation for these services
SSBC receives a fee equal on an annual basis to 0.20% of each fund's average
daily net assets.
Year 2000 issue
Information technology experts are concerned about computer systems' ability to
process date-related information on and after January 1, 2000. This situation,
commonly known as the "Year 2000" issue, could have an adverse impact on the
funds. Individual companies and governmental issuers of securities held by a
fund may also be adversely affected by the cost of addressing the Year 2000
systems problem, which could be substantial. The managers are addressing the
Year 2000 issue for their systems. The funds have been informed by their other
service providers that they are taking similar measures. Although the funds do
not expect the Year 2000 issue to adversely affect them, the funds cannot
guarantee that their efforts or the efforts of their service providers to
correct the problem will be successful.
Greenwich Street Series Fund
9
<PAGE>
Share Transactions
Availability of the funds
Shares of the funds are available only through the purchase of variable annuity
or variable life insurance contracts issued by insurance companies through
their separate accounts. The separate accounts may or may not invest in all the
funds described in this prospectus.
The interests of different variable contract separate accounts investing in a
fund could conflict due to differences of tax treatment and other
considerations. The funds currently do not foresee any disadvantages to
investors arising from the fact that each fund may offer its shares to
different insurance company separate accounts that serve as the investment
medium for their variable annuity and variable life products. Nevertheless, the
board of trustees intends to monitor events to identify any material conflicts
which may arise, and to determine what action, if any, should be taken in
response to these conflicts. If a conflict were to occur, one or more insurance
companies' separate accounts might be required to withdraw their investments in
one or more funds and shares of another fund might be substituted. In addition,
the sale of shares may be suspended or terminated if required by law or
regulatory authority or if in the best interests of the funds' shareholders.
Redemption of shares
The redemption price of each fund's shares will be the net asset value next
determined after receipt by the fund of a redemption order from a separate
account. The fund will ordinarily pay redemption proceeds within one business
day, and must pay redemption proceeds within seven days after receipt of the
request in good order, except on a day when the New York Stock Exchange is
closed or as permitted by the Securities and Exchange Commission in
extraordinary circumstances.
Share Price
Each fund's net asset value is the value of its assets minus its liabilities.
Each fund calculates its net asset value every day the New York Stock Exchange
is open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time). If the New York Stock Exchange closes
early, each fund accelerates the calculation of its net asset value to the
actual closing time.
Each fund generally values its portfolio securities based on market prices or
quotations. To the extent a fund holds securities denominated in a foreign
currency, the fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When market prices are not
available, or when the manager believes they are unreliable or that the value
of a security has been materially affected by events occurring after a foreign
exchange closes, the funds may price that security at fair value. Fair value is
determined in accordance with procedures approved by the fund's board. A fund
that uses fair value to price securities may value those securities higher or
lower than another fund that uses market quotations to price the same
securities.
International markets may be open on days when U.S. markets are closed, and the
value of foreign securities owned by the fund could change on days when fund
shares may not be purchased or redeemed.
Greenwich Street Series Fund
10
<PAGE>
Dividends, Distributions and Taxes
All income and capital gain distributions are automatically reinvested in
additional shares of the fund at net asset value and are includable in gross
income of the separate accounts holding these shares. See the accompanying
separate account contract prospectus for information regarding the federal
income tax treatment of distributions to the separate accounts and to holders
of the contracts.
If a fund fails to comply with special diversification requirements under the
Internal Revenue Code of 1986 (the "Code"), the contracts invested in that fund
would not be treated as annuity, endowment or life insurance contracts under
the Code.
Greenwich Street Series Fund
11
<PAGE>
Financial Highlights
The financial highlights tables are intended to help you understand the
performance of each fund for the past five years. The information in the
following tables was audited by KPMG LLP, independent accountants, whose
report, along with each fund's financial statements, are included in the annual
report (available upon request). Certain information reflects financial results
for a single share. Total return represents the rate that a shareholder would
have earned (or lost) on a share of a fund assuming reinvestment of all
dividends and distributions. The information for the fiscal year ended December
31, 1994 has been audited by other auditors.
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
Appreciation Portfolio
1998(1) 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $18.73 $15.86 $14.39 $11.54 $11.80
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.27 0.24 0.27 0.23 0.20
Net realized and unrealized gain
(loss) 3.24 3.90 2.60 3.04 (0.32)
- ------------------------------------------------------------------------------
Total income (loss) from operations 3.51 4.14 2.87 3.27 (0.12)
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.22) (0.21) (0.25) (0.21) (0.14)
Net realized gains (0.86) (1.06) (1.15) (0.21) --
- ------------------------------------------------------------------------------
Total distributions (1.08) (1.27) (1.40) (0.42) (0.14)
- ------------------------------------------------------------------------------
Net asset value, end of year $21.16 $18.73 $15.86 $14.39 $11.54
- ------------------------------------------------------------------------------
Total return 19.15% 26.39% 19.77% 28.84% (1.12)%
- ------------------------------------------------------------------------------
Net assets, end of year (millions) $ 246 $ 144 $ 101 $ 94 $ 81
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 0.80% 0.80% 0.85% 0.97% 0.88%
Net investment income 1.36 1.68 1.59 1.65 1.75
- ------------------------------------------------------------------------------
Portfolio turnover rate 22% 34% 39% 43% 61%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
Greenwich Street Series Fund
12
<PAGE>
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
Diversified Strategic Income
Portfolio
1998 (1) 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.89 $10.98 $10.01 $ 9.18 $10.07
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (2) 0.69 0.77 0.88 0.74 0.58
Net realized and unrealized gain
(loss) (0.01) 0.12 0.24 0.70 (0.86)
- ------------------------------------------------------------------------------
Total income (loss) from operations 0.68 0.89 1.12 1.44 (0.28)
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.67) (0.98) (0.15) (0.61) (0.58)
Capital -- -- -- -- (0.03)
- ------------------------------------------------------------------------------
Total distributions (0.67) (0.98) (0.15) (0.61) (0.61)
- ------------------------------------------------------------------------------
Net asset value, end of year $10.90 $10.89 $10.98 $10.01 $ 9.18
- ------------------------------------------------------------------------------
Total return 6.41% 8.14% 11.16% 16.18% (2.81)%
- ------------------------------------------------------------------------------
Net assets, end of year (millions) $ 81 $ 63 $ 60 $ 59 $ 55
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 0.78% 0.78% 0.84% 0.90% 0.95%
Net investment income 6.38 7.29 7.94 7.73 7.31
- ------------------------------------------------------------------------------
Portfolio turnover rate 86% 47% 106% 46% 54%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
(2) Includes realized gains and losses from foreign currency transactions for
the two years ended December 31, 1995.
Greenwich Street Series Fund
13
<PAGE>
This page is intentionally left blank
<PAGE>
Greenwich Street Series Fund
Additional Information
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about each fund's investments. These reports discuss the
market conditions and investment strategies that affected the funds'
performance.
The funds send one report to a household if more than one account has the same
address. Contact your participating life insurance company representative if
you do not want this policy to apply to you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund. It is incorporated by
reference into this prospectus.
You can make inquiries about the funds or obtain shareholder reports or the
statement of additional information (without charge) by calling 1-800-451-2010
or writing to Greenwich Street Series Fund, 388 Greenwich Street, New York, NY
10013.
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can obtain copies of these materials upon payment of a
duplicating fee, by writing to the Public Reference Section of the Commission,
Washington, D.C. 20549-60019. You can get the same reports and information free
from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Each fund is not offering to sell its
shares to any person to whom the fund may not lawfully sell its shares.
Appreciation Portfolio
Diversified Strategic Income Portfolio
(Investment Company Act file no. 811-6310)
L-21694 4/99
<PAGE>
Greenwich Street Series Fund
- --------------------
Prospectus
- --------------------
April 30, 1999
Equity Index Portfolio
- --------------------------------------------------------------------------------
Class I Shares
Shares of the fund are offered only to insurance company separate accounts that
fund certain variable annuity and variable life insurance contracts. This
prospectus should be read together with the prospectus for those contracts.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
Greenwich Street Series Fund consists of 10 separate investment funds, each
with its own investment objective and policies. This prospectus relates to one
of those funds--the Equity Index Portfolio.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
------------------------------------------
<S> <C>
Fund's goals and investments 2
More on the fund's investments 4
Management 6
Share transactions 7
Share price 7
Dividends, distributions and taxes 8
Financial highlights 9
</TABLE>
- --------------------------------------------------------------------------------
The Manager:
Travelers Investment Management Company (TIMCO) is the manager of the fund. The
manager is an affiliate of Salomon Smith Barney Inc. (Salomon Smith Barney) and
a subsidiary of Citigroup Inc. (Citigroup). Citigroup businesses produce a
broad range of financial services.
TIMCO, as manager of the fund, selects investments for the fund.
SSBC Fund Management Inc. (SSBC) is the fund's administrator.
You should know:
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
<PAGE>
The Fund's Goal and Investments
Manager
TIMCO is the manager
Portfolio Manager
Sandip A. Bhagat (since 1994)
Mr. Bhagat is an investment officer of SSBC and president of TIMCO
Investment Goal
Investment results that, before expenses, correspond to the price and yield
performance of the S&P 500 Index. The fund will hold substantially all of the
stocks in the S&P 500 Index, with comparable economic sector weightings,
market capitalization and liquidity.
Key Investments
The fund invests at least 90% of its assets in common stocks included in the
S&P 500 Index. The fund holds stocks of substantially all of the companies in
the S&P 500 Index, including those companies headquartered outside the U.S.
The fund may purchase stock index futures and related options to hedge any
cash reserves in anticipation of purchasing additional stocks at a later date.
- --------------------------------------------------------------------------------
Selection Process
The fund is managed as a pure index fund. This means the
manager does not evaluate individual companies to identify
attractive investment candidates. Instead, the manager
attempts to mirror the composition of the S&P 500 Index as
closely as possible by adjusting the fund's portfolio as
necessary. With the exception of a portion of the assets
held in cash and liquid securities to meet redemptions, the
fund intends to be fully invested in common stocks.
The S&P 500 Index is one of the mostly widely used
benchmarks of U.S. equity performance. The index is
unmanaged and consists of 500 stocks chosen for market
capitalization, liquidity and industry group
representation. The index is market-value-weighted, so the
larger of the 500 companies have a bigger impact on the
performance of the index.
The fund's ability to replicate the performance of the S&P
500 will depend to some extent on the size of cash flows
into and out of the fund. The fund will make investment
changes to accommodate these cash flows and to maximize the
similarity of the fund's assets to those of the S&P 500.
Greenwich Street Series Fund
2
<PAGE>
Principal risks of investing in the fund
Investors could lose money on their investments in the fund, or the fund may
not perform as well as other investments, if:
. The S&P 500 Index declines, or performs poorly relative to other U.S. equity
indexes or individual stocks
. An adverse company specific event, such as an unfavorable earnings report,
negatively affects the stock price of one of the larger companies in the S&P
500 Index
. The stocks of companies which comprise the S&P 500 Index fall out of favor
with investors
Because the fund is an index fund, it will not ordinarily sell a portfolio
security because of the security's poor performance. The fund normally buys or
sells a portfolio security only to reflect additions or deletions of stocks
comprising the S&P 500 Index or to adjust their relative weightings.
Although the manager seeks to replicate the performance of the S&P 500 Index,
the fund may underperform the index because:
. The fund incurs brokerage commissions and other expenses that do not apply to
the S&P 500 Index
. The performance of the fund's futures positions may not match that of the S&P
500 Index
. The prices of S&P 500 Index stocks may rise after the close of the stock
market and before the fund can invest cash from fund share purchases in these
stocks
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% Total Return
<S> <C> <C> <C> <C> <C> <C>
6.74% 6.66% 0.85% 35.81% 21.69% 32.16% 28.46%
- --------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
</TABLE>
Calendar years ended
December 31
The bar chart shows the Class I shares' performance for each full calendar year
since inception.
Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the S&P 500 Index, an unmanaged broad-based index of common stocks. Past
performance does not necessarily indicate how the fund will perform in the
future. Performance figures do not reflect expenses incurred from investing
through a separate account; if these expenses had been reflected, performance
would have been lower. Please refer to the separate account prospectus for more
information on expenses.
Quarterly returns:
Highest: 21.39% in 4th quarter 1998
Lowest: -9.92% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
<TABLE>
- ---------------------------------------
<CAPTION>
One Five Since
year years inception*
- ---------------------------------------
<S> <C> <C> <C>
Class I 28.46% 23.12% 18.89%
S&P 500 Index 28.60% 24.05% 20.12%
- ---------------------------------------
</TABLE>
* Inception date of Class I shares is 10/16/91.
Index comparison begins on October 31, 1991
Greenwich Street Series Fund
3
<PAGE>
More on the Fund's Investments
Additional investments and investment techniques
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Greenwich Street Series Fund
This section provides additional information about the fund's
investments and certain portfolio management techniques the fund may use.
More information about the fund's investments
and portfolio management techniques, some of which entail
risks, is included in the statement
of additional information (SAI).
The fund de- The fund may invest up to 5% of its assets in equity securi-
scribes its ties not included in the S&P 500 to help approximate the re-
investment ob- turn of the S&P 500.
jective and
its principal
investment
strategies and
risks under
"Fund goals
and invest-
ments."
- --------------------------------------------------------------------------------
Equity
investments Equity securities include exchange-traded and over-the-
counter (OTC) common and preferred stocks, warrants, rights,
convertible securities, depositary receipts and shares, trust
certificates, limited partnership interests, shares of other
investment companies, real estate investment trusts and eq-
uity participations.
- --------------------------------------------------------------------------------
Fixed income Fixed income securities include bonds, notes (including
investments structured notes), mortgage-related securities, asset-backed
To a limited securities, convertible securities, Eurodollar and Yankee
extent, dollar instruments, preferred stocks and money market instru-
ments. Fixed income securities may be issued by U.S. and for-
eign companies; U.S. and foreign banks; the U.S. government,
its agencies, authorities, instrumentalities or sponsored en-
terprises; state and municipal governments; supranational or-
ganizations; and foreign governments and their political sub-
divisions. Fixed income securities may have all types of in-
terest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment
in kind and auction rate features.
Mortgage-related securities may be issued by private compa-
nies or by agencies of the U.S. government and represent di-
rect or indirect participations in, or are collateralized by
and payable from, mortgage loans secured by real property.
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Credit quality of fixed income securities
If a security receives different ratings, the fund will treat
the securities as being rated in the highest rating category.
The fund may choose not to sell securities that are down-
graded below the fund's minimum acceptable credit rating af-
ter their purchase. The fund's credit standards also apply to
counterparties to OTC derivative contracts.
Below investment grade securities
Securities are below investment grade if:
. They are rated, respectively, below one of the top four
long-term rating categories by all the nationally
recognized rating organizations that have rated the
securities
. They have received comparable short-term ratings, or
. They are unrated securities the manager believes are of
comparable quality to below investment grade securities
- --------------------------------------------------------------------------------
Derivatives The fund may, but need not, use derivative contracts, such as
and hedging futures and options on securities, securities indices or cur-
techniques rencies; options on these futures; forward currency con-
tracts; and interest rate or currency swaps for any of the
following purposes:
. To hedge against the economic impact of adverse changes in
the market value of its securities, because of changes in
stock market prices, currency exchange rates or interest
rates
. As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to
deliver or receive an asset or cash payment based on the
change in value of one or more securities, currencies or in-
dices. Even a small investment in derivative contracts can
have a big impact on the fund's stock market, currency and
interest rate exposure. Therefore, using derivatives can dis-
proportionately increase losses and reduce opportunities for
gains when stock prices, currency rates or interest rates are
changing. The fund may not fully benefit from or may lose
money on derivatives if changes in their value do not corre-
spond accurately to changes in the value of the fund's hold-
ings. The other parties to certain derivative contracts pres-
ent the same types of credit risk as issuers of fixed income
securities. Derivatives can also make the fund less liquid
and harder to value, especially in declining markets.
- --------------------------------------------------------------------------------
Defensive The fund may depart from its principal investment strategies
investing in response to adverse market, economic or political condi-
tions by taking temporary defensive positions in all types of
money market and short-term debt securities. If the fund
takes a temporary defensive position, it may be unable to
achieve its investment goal.
Greenwich Street Series Fund
5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio
turnover The fund may engage in active and frequent trading to achieve
its principal investment strategies. Frequent trading also
increases transaction costs, which could detract from the
fund's performance.
Management
The manager
TIMCO, located at One Tower Square, Hartford, CT 06183-2030, provides
investment advice to investment companies with aggregate assets under
management as of March 31, 1999 in excess of approximately $800 million.
TIMCO is a wholly owned subsidiary of Citigroup, a financial services holding
company engaged, through its subsidiaries, principally in five business
segments: Investment Services, Asset Management, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services.
Management fees
The fund's manager oversees the investment operations of the fund and receives
the following fee for these services:
<TABLE>
----------------------------------------------------------
<CAPTION>
Actual management fee
paid for the fiscal year
ended December 31, 1998
(as a percentage
of the fund's
Fund Manager average daily net assets)
----------------------------------------------------------
<S> <C> <C>
Equity Index Portfolio TIMCO 0.15%
----------------------------------------------------------
</TABLE>
Administrator
SSBC serves as administrator to the fund, performing certain account
maintenance and administrative services. As compensation for these services
SSBC receives a fee equal on an annual basis to 0.06% of the value of the
fund's average daily net assets.
Classes of Shares
The shares of the fund that were outstanding on January 15, 1999 have been
designated Class I Shares of the Portfolio.
Year 2000 issue
Information technology experts are concerned about computer systems' ability to
process date-related information on and after January 1, 2000. This situation,
commonly known as the "Year 2000" issue, could have an adverse impact on the
funds. Individual companies and governmental issuers of securities held by a
fund may also be adversely affected by the cost of addressing their Year 2000
systems problem, which could be substantial. The manager and the
administrator are addressing the
Year 2000 issue for their systems. The fund has been informed by its other
service providers that they are taking similar measures. Although the fund
does not expect the Year 2000 issue to adversely affect it, the fund cannot
guarantee that its efforts or the efforts of its service providers to
correct the problem will be successful.
Greenwich Street Series Fund
6
<PAGE>
Share Transactions
Availability of the fund
Shares of the fund are available only through the purchase of variable annuity
or variable life insurance contracts issued by insurance companies through
their separate accounts.
The interests of different variable contract separate accounts investing in the
fund could conflict due to differences of tax treatment and other
considerations. The fund currently does not foresee any disadvantages to
investors arising from the fact that the fund may offer its shares to different
insurance company separate accounts that serve as the investment medium for
their variable annuity and variable life products. Nevertheless, the board of
trustees intends to monitor events to identify any material conflicts which may
arise, and to determine what action, if any, should be taken in response to
these conflicts. If a conflict were to occur, one or more insurance companies'
separate accounts might be required to withdraw their investments in the fund
and shares of another fund might be substituted. In addition, the sale of
shares may be suspended or terminated if required by law or regulatory
authority or if in the best interests of the fund's shareholders.
Redemption of shares
The redemption price of the fund's shares will be the net asset value next
determined after receipt by the fund of a redemption order from a separate
account. The fund will ordinarily pay redemption proceeds within one business
day, and must pay redemption proceeds within seven days after receipt of the
request in good order, except on a day when the New York Stock Exchange is
closed or as permitted by the Securities and Exchange Commission in
extraordinary circumstances.
Share Price
The fund's net asset value is the value of its assets minus its liabilities.
The fund calculates its net asset value every day the New York Stock Exchange
is open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time). If the Exchange closes early, each fund
accelerates the calculation of its net asset value to the actual closing time.
The fund generally values its portfolio securities based on market prices or
quotations. To the extent the fund holds securities denominated in a foreign
currency, the fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When market prices are not
available, or when the manager believes they are unreliable or that the value
of a security has been materially affected by events occurring after a foreign
exchange closes, the fund may price that security at fair value. Fair value is
determined in accordance with procedures approved by the fund's board. A fund
that uses fair value to price securities may value those securities higher or
lower than another fund that uses market quotations to price the same
securities.
International markets may be open on days when U.S. markets are closed, and the
value of foreign securities owned by the fund could change on days when fund
shares may not be purchased or redeemed.
Greenwich Street Series Fund
7
<PAGE>
Dividends, Distributions and Taxes
All income and capital gain distributions are automatically reinvested in
additional shares of the fund at net asset value and are includable in gross
income of the separate accounts holding these shares. See the accompanying
separate account contract prospectus for information regarding the federal
income tax treatment of distributions to the separate accounts and to holders
of the contracts.
If a fund fails to comply with special diversification requirements under the
Internal Revenue Code of 1986 (the "Code"), the contracts invested in that fund
would not be treated as annuity, endowment or life insurance contracts under
the Code.
Greenwich Street Series Fund
8
<PAGE>
Financial Highlights
The financial highlights tables are intended to help you understand the
performance of the fund for the past five years. The information in the
following tables was audited by KPMG LLP, independent accountants, whose
report, along with the fund's financial statements, are included in the annual
report (available upon request). Certain information reflects financial results
for a single share. Total return represents the rate that a shareholder would
have earned (or lost) on a share of the fund assuming reinvestment of all
dividends and distributions. The information for the fiscal year ended December
31, 1994 has been audited by other auditors.
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
Equity Index Portfolio
1998(1) 1997 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $23.59 $18.36 $15.58 $11.69 $11.90
- ----------------------------------------------------------------------------
Income from operations:
Net investment income (2) 0.36 0.12 0.22 0.25 0.23
Net realized and unrealized gain
(loss) 6.33 5.76 3.17 3.88 (0.14)
- ----------------------------------------------------------------------------
Total income from operations 6.69 5.88 3.39 4.13 0.09
- ----------------------------------------------------------------------------
Less distributions from:
Net investment income (0.08) (0.17) (0.23) (0.23) (0.15)
Net realized gains (0.21) (0.48) (0.38) (0.01) (0.15)
- ----------------------------------------------------------------------------
Total distributions (0.29) (0.65) (0.61) (0.24) (0.30)
- ----------------------------------------------------------------------------
Net asset value, end of year $29.99 $23.59 $18.36 $15.58 $11.69
- ----------------------------------------------------------------------------
Total return 28.46% 32.16% 21.68% 35.81% 0.85%
- ----------------------------------------------------------------------------
Net assets, end of year (millions) $ 177 $ 35 $ 19 $ 15 $ 10
- ----------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.30% 0.76% 1.06% 1.00% 1.00%
Net investment income 1.36 1.08 1.37% 1.84% 2.10%
- ----------------------------------------------------------------------------
Portfolio turnover rate 5% 6% 7% 5% 1%
- ----------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
(2) For the year ended December 31, 1998, the administrator agreed to reimburse
expenses of $114,983. In addition, the manager waived all or part of its
fees for the two years ended December 31, 1995. IDS Life also reimbursed
expenses of $6,942 and $25,496 for the two years ended December 31, 1995.
If such fees had not been waived and expenses reimbursed, the per share
effect on net investment income and the expense ratios would have been as
follows:
<TABLE>
---------------------------------------------------------------------
<CAPTION>
Expense Ratios
Per Share Decreases to Without Waivers
Net Investment Income and Reimbursements
---------------------------------------------------------------------
Portfolio 1998 1997 1996 1995 1994 1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Index $0.02 N/A N/A $0.02 $0.06 0.42 N/A N/A 1.17% 1.53%
---------------------------------------------------------------------
</TABLE>
(3) As a result of the 0.30% voluntary expense limitation for the ratio of
expenses to average net assets, which became effective during 1998, the
manager will reimburse fees for the amount that exceeds the limitation.
Greenwich Street Series Fund
9
<PAGE>
This page is intentionally left blank
<PAGE>
Greenwich Street Series Fund
Additional Information
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends one report to a household if more than one account has the same
address. Contact your participating life insurance company representative if
you do not want this policy to apply to you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund. It is incorporated by
reference into this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by calling 1-800-451-2010
or writing to Greenwich Street Series Fund, 388 Greenwich Street, New York NY
10013.
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can obtain copies of these materials upon payment of a
duplicating fee, by writing to the Public Reference Section of the Commission,
Washington, D.C. 20549-60019. You can get the same reports and information free
from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. The fund is not offering to sell its
shares to any person to whom the fund may not lawfully sell its shares.
Equity Index Portfolio
Class I Shares
L-21691 4/99
<PAGE>
Greenwich Street Series Fund
- -----------
Prospectus
- -----------
April 30, 1999
Equity Index Portfolio
- --------------------------------------------------------------------------------
Class II Shares
Shares of the fund are offered only to insurance company separate accounts that
fund certain variable annuity and variable life insurance contracts. This
prospectus should be read together with the prospectus for those contracts.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
Greenwich Street Series Fund consists of 10 separate investment funds, each
with its own investment objective and policies. This prospectus relates to one
fund--the Equity Index Portfolio.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
------------------------------------------
<S> <C>
Fund's goals and investments 2
More on the fund's investments 4
Management 6
Share transactions 7
Share price 7
Dividends, distributions and taxes 8
</TABLE>
- --------------------------------------------------------------------------------
The Manager:
Travelers Investment Management Company (TIMCO) is the manager of the fund. The
manager is an affiliate of Salomon Smith Barney Inc. (Salomon Smith Barney) and
a subsidiary of Citigroup Inc. (Citigroup). Citigroup businesses produce a
broad range of financial services.
TIMCO, as manager of the fund, selects investments for the fund.
SSBC Fund Management Inc. (SSBC) is the fund's administrator.
You should know:
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
<PAGE>
The Fund's Goal and Investments
Manager
TIMCO is the manager
Portfolio Manager
Sandip A. Bhagat (since 1994)
Mr. Bhagat is an investment officer of SSBC and president of TIMCO
Investment Goal
Investment results that, before expenses, correspond to the price and yield
performance of the S&P 500 Index. The fund will hold substantially all of the
stocks in the S&P 500 Index, with comparable economic sector weightings,
market capitalization and liquidity.
Key Investments
The fund invests at least 90% of its assets in common stocks included in the
S&P 500 Index. The fund holds stocks of substantially all of the companies in
the S&P 500 Index, including those companies headquartered outside the U.S.
The fund may purchase stock index futures and related options to hedge any
cash reserves in anticipation of purchasing additional stocks at a later date.
- --------------------------------------------------------------------------------
Selection Process
The fund is managed as a pure index fund. This means the
manager does not evaluate individual companies to identify
attractive investment candidates. Instead, the manager
attempts to mirror the composition of the S&P 500 Index as
closely as possible by adjusting the fund's portfolio as
necessary. With the exception of a portion of the assets
held in cash and liquid securities to meet redemptions, the
fund intends to be fully invested in common stocks.
The S&P 500 Index is one of the mostly widely used
benchmarks of U.S. equity performance. The index is
unmanaged and consists of 500 stocks chosen for market
capitalization, liquidity and industry group
representation. The index is market-value-weighted, so the
larger of the 500 companies have a bigger impact on the
performance of the index.
The fund's ability to replicate the performance of the S&P
500 will depend to some extent on the size of cash flows
into and out of the fund. The fund will make investment
changes to accommodate these cash flows and to maximize the
similarity of the fund's assets to those of the S&P 500.
Greenwich Street Series Fund
2
<PAGE>
Principal risks of investing in the fund
Investors could lose money on their investments in the fund, or the fund may
not perform as well as other investments, if:
. The S&P 500 Index declines, or performs poorly relative to other U.S. equity
indexes or individual stocks
. An adverse company specific event, such as an unfavorable earnings report,
negatively affects the stock price of one of the larger companies in the S&P
500 Index
. The stocks of companies which comprise the S&P 500 Index fall out of favor
with investors
Because the fund is an index fund, it will not ordinarily sell a portfolio
security because of the security's poor performance. The fund normally buys or
sells a portfolio security only to reflect additions or deletions of stocks
comprising the S&P 500 Index or to adjust their relative weightings.
Although the manager seeks to replicate the performance of the S&P 500 Index,
the fund may underperform the index because:
. The fund incurs brokerage commissions and other expenses that do not apply to
the S&P 500 Index
. The performance of the fund's futures positions may not match that of the S&P
500 Index
. The prices of S&P 500 Index stocks may rise after the close of the stock
market and before the fund can invest cash from fund share purchases in these
stocks
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% Total Return
<S> <C> <C> <C> <C> <C> <C>
6.74% 8.66% 0.85% 35.81% 21.68% 32.16% 28.46%
- --------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
</TABLE>
Calendar years ended
December 31
The bar chart shows the Class I shares' performance for each full calendar year
since inception. Class II shares would have different performance because of
their different expenses. Class I share performance is shown because Class II
shares were offered on January 15, 1999. Class II shares do not yet have a
sufficient operating history to generate the performance information.
Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the S&P 500 Index, an unmanaged broad-based index of common stocks. Past
performance does not necessarily indicate how the fund will perform in the
future. Performance figures do not reflect expenses incurred from investing
through a separate account; if these expenses had been reflected, performance
would have been lower. Please refer to the separate account prospectus for more
information on expenses.
Quarterly returns:
Highest: 21.39% in 4th quarter 1998
Lowest:-9.92% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
<TABLE>
- ---------------------------------------
<CAPTION>
One Five Since
year years inception*
- ---------------------------------------
<S> <C> <C> <C>
Class I 28.46% 23.12% 18.89%
S&P 500 Index 28.60% 24.05% 20.12%
- ---------------------------------------
</TABLE>
* Inception date of Class I shares is 10/16/91.
Index comparison begins on October 31, 1991
Greenwich Street Series Fund
3
<PAGE>
More on the Fund's Investments
Additional investments and investment techniques
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The fund may invest up to 5% of its assets in equity securi-
The fund de- ties not included in the S&P 500 to help approximate the re-
scribes its turn of the S&P 500.
investment ob-
jective and
its principal
investment
strategies and
risks under
"Fund goals
and invest-
ments."
This section
provides addi-
tional infor-
mation about
the fund's in-
vestments and
certain port-
folio manage-
ment tech-
niques the
fund may use.
More informa-
tion about the
fund's invest-
ments and
portfolio man-
agement tech-
niques, some
of which en-
tail risks, is
included in
the statement
of additional
information
(SAI).
- --------------------------------------------------------------------------------
Equity Equity securities include exchange-traded and over-the-
investments counter (OTC) common and preferred stocks, warrants, rights,
convertible securities, depositary receipts and shares, trust
certificates, limited partnership interests, shares of other
investment companies, real estate investment trusts and eq-
uity participations.
- --------------------------------------------------------------------------------
Fixed income
investments To Fixed income securities include bonds, notes (including
a limited structured notes), mortgage-related securities, asset-backed
extent securities, convertible securities, Eurodollar and Yankee
dollar instruments, preferred stocks and money market instru-
ments. Fixed income securities may be issued by U.S. and for-
eign companies; U.S. and foreign banks; the U.S. government,
its agencies, authorities, instrumentalities or sponsored en-
terprises; state and municipal governments; supranational or-
ganizations; and foreign governments and their political sub-
divisions. Fixed income securities may have all types of in-
terest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment
in kind and auction rate features.
Mortgage-related securities may be issued by private compa-
nies or by agencies of the U.S. government and represent di-
rect or indirect participations in, or are collateralized by
and payable from, mortgage loans secured by real property.
- --------------------------------------------------------------------------------
Credit quality of fixed income securities
If a security receives different ratings, the fund will treat
the securities as being rated in the highest rating category.
The fund may choose not to sell securities that are down-
graded below the fund's minimum acceptable credit rating af-
ter their purchase. The fund's credit standards also apply to
counterparties to OTC derivative contracts.
- --------------------------------------------------------------------------------
Greenwich Street Series Fund
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Below investment grade securities
Securities are below investment grade if:
. They are rated, respectively, below one of the top four
long-term rating categories by all the nationally
recognized rating organizations that have rated the
securities
. They have received comparable short-term ratings, or
. They are unrated securities the manager believes are of
comparable quality to below investment grade securities
- --------------------------------------------------------------------------------
Derivatives
and hedging The fund may, but need not, use derivative contracts, such as
techniques futures and options on securities, securities indices or cur-
rencies; options on these futures; forward currency con-
tracts; and interest rate or currency swaps for any of the
following purposes:
. To hedge against the economic impact of adverse changes in
the market value of its securities, because of changes in
stock market prices, currency exchange rates or interest
rates
. As a substitute for buying or selling securities
A derivative contract will obligate or entitle a fund to de-
liver or receive an asset or cash payment based on the change
in value of one or more securities, currencies or indices.
Even a small investment in derivative contracts can have a
big impact on the fund's stock market, currency and interest
rate exposure. Therefore, using derivatives can dispropor-
tionately increase losses and reduce opportunities for gains
when stock prices, currency rates or interest rates are
changing. The fund may not fully benefit from or may lose
money on derivatives if changes in their value do not corre-
spond accurately to changes in the value of the fund's hold-
ings. The other parties to certain derivative contracts pres-
ent the same types of credit risk as issuers of fixed income
securities. Derivatives can also make the fund less liquid
and harder to value, especially in declining markets.
- --------------------------------------------------------------------------------
Defensive
investing The fund may depart from its principal investment strategies
in response to adverse market, economic or political condi-
tions by taking temporary defensive positions in all types of
money market and short-term debt securities. If the fund
takes a temporary defensive position, it may be unable to
achieve its investment goal.
- --------------------------------------------------------------------------------
Portfolio
turnover The fund may engage in active and frequent trading to achieve
its principal investment strategies. Frequent trading also
increases transaction costs, which could detract from the
fund's performance.
Greenwich Street Series Fund
5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Management
The manager
TIMCO, located at One Tower Square, Hartford, CT 06183-2030, provides
investment advice to investment companies with aggregate assets under
management as of March 31, 1999 in excess of $800 million.
TIMCO is a wholly owned subsidiary of Citigroup, a financial services holding
company engaged, through its subsidiaries, principally in five business
segments: Investment Services, Asset Management, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services.
Management fees
The fund's manager oversees the investment operations of the fund and receives
the following fee for these services:
<TABLE>
----------------------------------------------------------
<CAPTION>
Management fee
(as a percentage
of the fund's
Fund Manager average daily net assets)
----------------------------------------------------------
<S> <C> <C>
Equity Index Portfolio TIMCO 0.15%
----------------------------------------------------------
</TABLE>
Administrator
SSBC serves as administrator to the fund, performing certain account
maintenance and administrative services. As compensation for these services
SSBC receives a fee equal on an annual basis to 0.06% of the value of the
fund's average daily net assets.
Distribution plan
The fund has adopted a Rule 12b-1 distribution plan for its Class
II shares. Under the plan, the fund pays a distribution fee of 0.25% of the
daily net assets of Class II shares. These fees are an ongoing expense and,
over time, may cost you more than other types of sales charges.
Year 2000 issue
Information technology experts are concerned about computer systems' ability to
process date-related information on and after January 1, 2000. This situation,
commonly known as the "Year 2000" issue, could have an adverse impact on the
funds. Individual companies and governmental issuers of securities held by a
fund may also be adversely affected by the cost of addressing their Year 2000
systems problem, which could be substantial. The manager and administrator are
addressing the Year 2000 issue for their systems. The fund has been informed by
its other service providers that they are taking similar measures. Although the
fund does not expect the Year 2000 issue to adversely affect it, the fund
cannot guarantee that its efforts or the efforts of its service providers to
correct the problem will be successful.
Greenwich Street Series Fund
6
<PAGE>
Share Transactions
Availability of the fund
Shares of the fund are available only through the purchase of variable annuity
or variable life insurance contracts issued by insurance companies through
their separate accounts.
The interests of different variable contract separate accounts investing in the
fund could conflict due to differences of tax treatment and other
considerations. The fund currently does not foresee any disadvantages to
investors arising from the fact that the fund may offer its shares to different
insurance company separate accounts that serve as the investment medium for
their variable annuity and variable life products. Nevertheless, the board of
trustees intends to monitor events to identify any material conflicts which may
arise, and to determine what action, if any, should be taken in response to
these conflicts. If a conflict were to occur, one or more insurance companies'
separate accounts might be required to withdraw their investments in one or
more funds and shares of another fund might be substituted. In addition, the
sale of shares may be suspended or terminated if required by law or regulatory
authority or if in the best interests of the fund's shareholders.
Redemption of shares
The redemption price of the fund's shares will be the net asset value next
determined after receipt by the fund of a redemption order from a separate
account. The fund will ordinarily pay redemption proceeds within one business
day, and must pay redemption proceeds within seven days after receipt of the
request in good order, except on a day when the New York Stock Exchange is
closed or as permitted by the Securities and Exchange Commission in
extraordinary circumstances.
Share Price
The fund's net asset value is the value of its assets minus its liabilities.
The fund calculates its net asset value every day the New York Stock Exchange
is open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time). If the Exchange closes early, the fund
accelerates the calculation of its net asset value to the actual closing time.
The fund generally values its portfolio securities based on market prices or
quotations. To the extent the fund holds securities denominated in a foreign
currency, the fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When market prices are not
available, or when the manager believes they are unreliable or that the value
of a security has been materially affected by events occurring after a foreign
exchange closes, the fund may price that security at fair value. Fair value is
determined in accordance with procedures approved by the fund's board. A fund
that uses fair value to price securities may value those securities higher or
lower than another fund that uses market quotations to price the same
securities.
International markets may be open on days when U.S. markets are closed, and the
value of foreign securities owned by the fund could change on days when fund
shares may not be purchased or redeemed.
Greenwich Street Series Fund
7
<PAGE>
Dividends, Distributions and Taxes
All income and capital gain distributions are automatically reinvested in
additional shares of the fund at net asset value and are includable in gross
income of the separate accounts holding these shares. See the accompanying
separate account contract prospectus for information regarding the federal
income tax treatment of distributions to the separate accounts and to holders
of the contracts.
If a fund fails to comply with special diversification requirements under the
Internal Revenue Code of 1986 (the "Code"), the contracts invested in that fund
would not be treated as annuity, endowment or life insurance contracts under
the Code.
Greenwich Street Series Fund
8
<PAGE>
This page is intentionally left blank
<PAGE>
Greenwich Street Series Fund
Additional Information
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends one report to a household if more than one account has the same
address. Contact your participating life insurance company representative if
you do not want this policy to apply to you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund. It is incorporated by
reference into this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by calling 1-800-451-2010
or writing to Greenwich Street Series Fund, 388 Greenwich Street, New York NY
10013.
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can obtain copies of these materials upon payment of a
duplicating fee, by writing to the Public Reference Section of the Commission,
Washington, D.C. 20549-60019. You can get the same reports and information free
from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. The fund is not offering to sell its
shares to any person to whom the fund may not lawfully sell its shares.
Equity Index Portfolio
Class II Shares
(Investment Company Act file no. 811-6310)
L-21692 4/99
<PAGE>
Greenwich Street Series Fund
- -----------
Prospectus
- -----------
April 30, 1999
Total Return Portfolio
- --------------------------------------------------------------------------------
Shares of the fund are offered only to insurance company separate accounts that
fund certain variable annuity and variable life insurance contracts. This
prospectus should be read together with the prospectus for those contracts.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
Greenwich Street Series Fund consists of 10 separate investment funds, each
with its own investment objective and policies. This prospectus relates only to
one fund--the Total Return Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
------------------------------------------
<S> <C>
Fund's goals and investments 2
More on the fund's investments 4
Management 6
Share transactions 8
Dividends, distributions and taxes 9
Financial highlights 10
</TABLE>
- --------------------------------------------------------------------------------
The Manager:
Davis Skaggs Investment Management (Davis Skaggs) is the manager of the fund.
The manager is a division of SSBC Fund Management Inc., (SSBC). SSBC is an
affiliate of Salomon Smith Barney Inc. (Salomon Smith Barney) and a subsidiary
of Citigroup Inc. (Citigroup). Citigroup businesses produce a broad range of
financial services.
Davis Skaggs selects investments for the fund as manager.
SSBC is the fund's administrator.
You should know:
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
1
<PAGE>
The Fund's Goal and Investments
Manager
Davis Skaggs is the manager
Portfolio Manager
John G. Goode (since 1993)
Mr. Goode is an investment officer of SSBC and chairman and chief investment
officer of Davis Skaggs
Investment Goal
Total return, consisting of long-term capital appreciation and income.
Key Investments
The fund invests primarily in dividend-paying common stocks of U.S. and
foreign companies. These companies tend to have large market capitalizations,
but the fund also may invest in medium and small capitalization stocks.
The fund may invest up to 35% of its assets in convertible bonds and preferred
stock, warrants and interest paying debt securities. Up to 10% of the fund's
assets may be invested in below investment grade bonds (commonly known as
"junk bonds").
- --------------------------------------------------------------------------------
Selection Process
The manager emphasizes individual security selection while
spreading investments among many industries and sectors.
The manager uses fundamental analysis to identify
individual companies it believes offer favorable prospects
for dividend growth and capital appreciation.
In selecting individual companies for investment, the
manager looks for the following:
. Above average earnings growth
. High relative return on invested capital
. History of consistent dividend payments
. Strong financial condition or stable or improving credit
quality
. Experienced and effective management
. Effective research, product development and marketing
. Competitive advantages
Greenwich Street Series Fund
2
<PAGE>
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
. The U.S. stock market declines
. Rising interest rates depress the value of dividend paying stocks or debt
securities in the fund's portfolio
. Large capitalization companies fall out of favor with investors
. Companies in which the fund invests suffer unexpected losses or lower than
expected earnings, or pay lower than expected dividends
. The manager's judgment about the attractiveness, value or income potential of
a particular security proves to be incorrect
. The issuer of a debt security owned by the fund defaults on its obligation to
pay principal and/or interest, or the security's credit rating is downgraded.
This risk is higher for below investment grade bonds. These bonds are
considered speculative because they have a higher risk of issuer default, are
subject to greater price volatility and may be illiquid
Because the fund seeks total return by emphasizing investments in dividend-
paying common stocks, it will not have as much investment flexibility as total
return funds that do not emphasize dividend-paying stocks.
- --------------------------------------------------------------------------------
Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the S&P 500 Index, an unmanaged broad-based index of common stocks. Past
performance does not necessarily indicate how the fund will perform in the
future. Performance figures do not reflect expenses incurred from investing
through a separate account; if these expenses had been reflected, performance
would have been lower. Please refer to the separate account prospectus for more
information on expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% Total Return
<S> <C> <C> <C> <C>
7.40% 25.04% 25.33% 16.84% 4.97%
- --------------------------------------------------------------------------------
1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
</TABLE>
Calendar years ended
December 31
The bar chart shows the funds' performance for each full calendar year since
inception since inception.
Quarterly returns:
Highest: 10.51% in 4th quarter 1996
Lowest: -8.71% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
<TABLE>
- ---------------------------------------
<CAPTION>
One Five Since
year years inception*
- ---------------------------------------
<S> <C> <C> <C>
Fund 4.97% 15.60% 16.01%
S&P 500 Index 28.60% 24.05% 24.05%
- ---------------------------------------
</TABLE>
* Inception date of 12/03/93
Index comparison begins on December 31, 1993
Greenwich Street Series Fund
3
<PAGE>
More on the Fund's Investments
Additional investments and investment techniques
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The fund describes its investment objective and its principal
investment strategies and risks under "Fund goals and invest-
ments."
- --------------------------------------------------------------------------------
This section provides additional information about the fund's
investments and certain portfolio management techniques the
fund may use. More information about the fund's investments
and portfolio management techniques, some of which entail
risks, is included in the statement of additional information
(SAI).
- --------------------------------------------------------------------------------
Equity Equity securities include exchange-traded and over-the-
investments counter (OTC) common and preferred stocks, warrants, rights,
convertible securities, depositary receipts and shares, trust
certificates, limited partnership interests, shares of other
investment companies, real estate investment trusts and eq-
uity participations.
- --------------------------------------------------------------------------------
Fixed income Fixed income securities include bonds, notes (including
investments structured notes), mortgage-related securities, asset-backed
securities, convertible securities, Eurodollar and Yankee
dollar instruments, preferred stocks and money market instru-
ments. Fixed income securities may be issued by U.S. and for-
eign companies; U.S. and foreign banks; the U.S. government,
its agencies, authorities, instrumentalities or sponsored en-
terprises; state and municipal governments; supranational or-
ganizations; and foreign governments and their political sub-
divisions. Fixed income securities may have all types of in-
terest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment
in kind and auction rate features.
Mortgage-related securities may be issued by private compa-
nies or by agencies of the U.S. government and represent di-
rect or indirect participations in, or are collateralized by
and payable from, mortgage loans secured by real property.
- --------------------------------------------------------------------------------
Credit quality of fixed income securities
If a security receives different ratings, the fund will treat
the securities as being rated in the highest rating category.
The fund may choose not to sell securities that are down-
graded below the fund's minimum acceptable credit rating af-
ter their purchase. The fund's credit standards also apply to
counterparties to OTC derivative contracts.
Below investment grade securities
Securities are below investment grade if:
. They are rated, respectively, below one of the top four
long-term rating categories by all the nationally
recognized rating organizations that have rated the
securities
Greenwich Street Series Fund
4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
. They have received comparable short-term ratings, or
. They are unrated securities the manager believes are of
comparable quality to below investment grade securities
- --------------------------------------------------------------------------------
Risks of high yield, lower quality fixed income securities
The issuers of lower quality bonds may be highly leveraged
and have difficulty servicing their debt, especially during
prolonged economic recessions or periods of rising interest
rates. The prices of lower quality securities are volatile
and may go down because of market perceptions of deteriorat-
ing creditworthiness or economic conditions. Lower quality
securities may become illiquid and hard to value in down mar-
kets.
- --------------------------------------------------------------------------------
Derivatives
and hedging The fund may, but need not, use derivative contracts, such as
techniques futures and options on securities, securities indices or cur-
rencies; options on these futures; forward currency con-
tracts; and interest rate or currency swaps for any of the
following purposes:
. To hedge against the economic impact of adverse changes in
the market value of its securities, because of changes in
stock market prices, currency exchange rates or interest
rates
. As a substitute for buying or selling securities
A derivative contract will obligate or entitle a fund to de-
liver or receive an asset or cash payment based on the change
in value of one or more securities, currencies or indices.
Even a small investment in derivative contracts can have a
big impact on the fund's stock market, currency and interest
rate exposure. Therefore, using derivatives can dispropor-
tionately increase losses and reduce opportunities for gains
when stock prices, currency rates or interest rates are
changing. The fund may not fully benefit from or may lose
money on derivatives if changes in their value do not corre-
spond accurately to changes in the value of the fund's hold-
ings. The other parties to certain derivative contracts pres-
ent the same types of credit risk as issuers of fixed income
securities. Derivatives can also make the fund less liquid
and harder to value, especially in declining markets.
- --------------------------------------------------------------------------------
Defensive
investing The fund may depart from its principal investment strategies
in response to adverse market, economic or political condi-
tions by taking temporary defensive positions in all types of
money market and short-term debt securities. If the fund
takes a temporary defensive position, it may be unable to
achieve its investment goal.
- --------------------------------------------------------------------------------
Portfolio
turnover The fund may engage in active and frequent trading to achieve
its principal investment strategies. Frequent trading also
increases transaction costs, which could detract from the
fund's performance.
Greenwich Street Series Fund
5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Management
The manager
Davis Skaggs, located at 1 Sansone Place, San Francisco CA is a division of
SSBC. SSBC is an investment manager to investment companies having aggregate
assets as of March 31, 1999 in excess of $114 billion.
SSBC is a wholly owned subsidiary of Citigroup, a financial services holding
company engaged, through its subsidiaries, principally in five business
segments: Investment Services, Asset Management, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services.
Management fees
The fund's manager oversees the investment operations of the fund and receives
the following fee for these services:
<TABLE>
---------------------------------------------------------------
<CAPTION>
Actual management fee
paid for the fiscal year
ended December 31, 1998
(as a percentage
of the fund's
Fund Manager average daily net assets)
---------------------------------------------------------------
<S> <C> <C>
Total Return Portfolio Davis Skaggs 0.55%
---------------------------------------------------------------
</TABLE>
Greenwich Street Series Fund
6
<PAGE>
Administrator
SSBC serves as administrator to the fund, performing certain account
maintenance and administrative services. As compensation for these services
SSBC receives a fee equal on an annual basis to 0.20% of the fund's average
daily net assets.
Year 2000 issue
Information technology experts are concerned about computer systems' ability to
process date-related information on and after January 1, 2000. This situation,
commonly known as the "Year 2000" issue, could have an adverse impact on the
funds. Individual companies and governmental issuers of securities held by a
fund may also be adversely affected by the cost of addressing their Year 2000
systems problem, which could be substantial. The manager and administrator are
addressing the Year 2000 issue for their systems. The fund has been informed by
its other service providers that they are taking similar measures. Although the
fund does not expect the Year 2000 issue to adversely affect it, the fund
cannot guarantee that its efforts or the efforts of its service providers to
correct the problem will be successful.
Greenwich Street Series Fund
7
<PAGE>
Share Transactions
Availability of the fund
Shares of the fund are available only through the purchase of variable annuity
or variable life insurance contracts issued by insurance companies through
their separate accounts.
The interests of different variable contract separate accounts investing in the
fund could conflict due to differences of tax treatment and other
considerations. The fund currently does not foresee any disadvantages to
investors arising from the fact that the fund may offer its shares to different
insurance company separate accounts that serve as the investment medium for
their variable annuity and variable life products. Nevertheless, the board of
trustees intends to monitor events to identify any material conflicts which may
arise, and to determine what action, if any, should be taken in response to
these conflicts. If a conflict were to occur, one or more insurance companies'
separate accounts might be required to withdraw their investments in the fund
and shares of another fund might be substituted. In addition, the sale of
shares may be suspended or terminated if required by law or regulatory
authority or if in the best interests of the fund's shareholders.
Redemption of shares
The redemption price of the fund's shares will be the net asset value next
determined after receipt by the fund of a redemption order from a separate
account. The fund will ordinarily pay redemption proceeds within one business
day, and must pay redemption proceeds within seven days after receipt of the
request in good order, except on a day when the New York Stock Exchange is
closed or as permitted by the Securities and Exchange Commission in
extraordinary circumstances.
Share Price
The fund's net asset value is the value of its assets minus its liabilities.
The fund calculates its net asset value every day the New York Stock Exchange
is open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time). If the Exchange closes early, the fund
accelerates the calculation of its net asset value to the actual closing time.
The fund generally values its portfolio securities based on market prices or
quotations. To the extent the fund holds securities denominated in a foreign
currency, the fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When market prices are not
available, or when the manager believes they are unreliable or that the value
of a security has been materially affected by events occurring after a foreign
exchange closes, the fund may price that security at fair value. Fair value is
determined in accordance with procedures approved by the fund's board. A fund
that uses fair value to price securities may value those securities higher or
lower than another fund that uses market quotations to price the same
securities.
International markets may be open on days when U.S. markets are closed, and the
value of foreign securities owned by the fund could change on days when fund
shares may not be purchased or redeemed.
Greenwich Street Series Fund
8
<PAGE>
Dividends, Distributions and Taxes
All income and capital gain distributions are automatically reinvested in
additional shares of the fund at net asset value and are includable in gross
income of the separate accounts holding these shares. See the accompanying
separate account contract prospectus for information regarding the federal
income tax treatment of distributions to the separate accounts and to holders
of the contracts.
If a fund fails to comply with special diversification requirements under the
Internal Revenue Code of 1986 (the "Code"), the contracts invested in that fund
would not be treated as annuity, endowment or life insurance contracts under
the Code.
Greenwich Street Series Fund
9
<PAGE>
Financial Highlights
The financial highlights tables are intended to help you understand the
performance of the fund for the past five years. The information in the
following table was audited by KPMG LLP, independent accountants, whose report,
along with the fund's financial statements, are included in the annual report
(available upon request). Certain information reflects financial results for a
single share. Total return represents the rate that a shareholder would have
earned (or lost) on a share of the fund assuming reinvestment of all dividends
and distributions. The information for the fiscal year ended December 31, 1994
has been audited by other auditors.
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
Total Return Portfolio
1998 (1) 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $17.62 $15.73 $12.75 $10.78 $10.30
- ------------------------------------------------------------------------------
Income from operations:
Net investment income (2) 0.49 0.37 0.26 0.43 0.34
Net realized and unrealized gain 0.38 2.26 2.97 2.19 0.42(3)
- ------------------------------------------------------------------------------
Total income from operations 0.87 2.63 3.23 2.62 0.76
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.43) (0.21) (0.07) (0.41) (0.28)
Net realized gains (0.51) (0.53) (0.18) (0.24) --
- ------------------------------------------------------------------------------
Total distributions (0.94) (0.74) (0.25) (0.65) (0.28)
- ------------------------------------------------------------------------------
Net asset value, end of year $17.55 $17.62 $15.73 $12.75 $10.78
- ------------------------------------------------------------------------------
Total return 4.97% 16.84% 25.33% 25.04% 7.40%
- ------------------------------------------------------------------------------
Net assets, end of year (millions) $ 298 $ 274 $ 172 $ 78 $ 23
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.79% 0.79% 0.83% 1.00% 1.00%
Net investment income 2.79 3.24 3.06 3.80 3.84
- ------------------------------------------------------------------------------
Portfolio turnover rate 72% 75% 82% 81% 118%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
(2) The manager waived all or part of its fees for the year ended December 31,
1994. IDS Life reimbursed expenses of $7,873 for the year ended December
31, 1994. If such fees had not been waived and expenses reimbursed, the per
share effect on net investment income and the expense ratios would have
been as follows:
<TABLE>
-------------------------------------------------------
<CAPTION>
Expense Ratio
Per Share Decrease to Without Waivers
Net Investment Income and Reimbursements
-------------------------------------------------------
Portfolio 1994 1994
-------------------------------------------------------
<S> <C> <C>
Total Return $0.01 1.11%
-------------------------------------------------------
</TABLE>
(3) The amount shown in this caption for each share outstanding throughout the
year may not accord with the change in the aggregate gains and losses in
the fund's securities for the year because of the timing of purchases and
withdrawals of shares in relation to the fluctuating market values of the
fund.
Greenwich Street Series Fund
10
<PAGE>
This page is intentionally left blank
<PAGE>
Greenwich Street Series Fund
Additional Information
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends one report to a household if more than one account has the same
address. Contact your participating life insurance company representative if
you do not want this policy to apply to you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund. It is incorporated by
reference into this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by calling 1-800-451-2010
or writing to Greenwich Street Series Fund, 388 Greenwich Street, New York, NY
10013.
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can obtain copies of these materials upon payment of a
duplicating fee, by writing to the Public Reference Section of the Commission,
Washington, D.C. 20549-60019. You can get the same reports and information free
from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. The fund is not offering to sell its
shares to any person to whom the fund may not lawfully sell its shares.
Total Return Portfolio
(Investment Company Act file no. 811-6310)
L-21693 4/99
<PAGE>
Greenwich Street Series Fund
- ----------
Prospectus
- ----------
April 30, 1999
Fixed Income Fund Equity Fund
- ---------------------------------- --------------------------------------
Intermediate High Grade Portfolio Total Return Portfolio
Shares of each fund are offered only to insurance company separate accounts that
fund certain variable annuity and variable life insurance contracts. This
prospectus should be read together with the prospectus for those contracts.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
Greenwich Street Series Fund consists of 10 separate investment funds, each
with its own investment objective and policies. This prospectus relates to two
of these funds - the Total Return Portfolio and the Intermediate High Grade
Portfolio. Each fund offers different levels of potential return and involves
different levels of risk.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund goals and investments Page
------------------------------------------
<S> <C>
Total Return Portfolio 2
Intermediate High Grade Portfolio 4
More on the funds' investments 6
Management 8
Share transactions 9
Share price 9
Dividends, distributions and taxes 10
Financial highlights 11
</TABLE>
- --------------------------------------------------------------------------------
The Managers:
SSBC Fund Management Inc. (SSBC) and Davis Skaggs Investment Management (Davis
Skaggs), a division of SSBC, are each the manager of one or more of the funds.
SSBC is an affiliate of Salomon Smith Barney Inc. (Salomon Smith Barney) and a
subsidiary of Citigroup Inc. (Citigroup). Citigroup businesses produce a broad
range of financial services.
SSBC and Davis Skaggs select investments for the funds for which they serve as
managers.
You should know:
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
<PAGE>
The Fund's Goal and Investments
Total Return Portfolio
Manager
Davis Skaggs is the manager
Portfolio Manager
John G. Goode (since 1993)
Mr. Goode is an investment officer of SSBC and chairman and chief investment
officer of Davis Skaggs
Investment Goal
Total return, consisting of long-term capital appreciation and income.
Key Investments
The fund invests primarily in dividend-paying common stocks of U.S. and
foreign companies. These companies tend to have large market capitalizations,
but the fund also may invest in medium and small capitalization stocks.
The fund may invest up to 35% of its assets in convertible bonds and preferred
stock, warrants and interest paying debt securities. Up to 10% of the fund's
assets may be invested in below investment grade bonds (commonly known as
"junk bonds").
- --------------------------------------------------------------------------------
Selection Process
The manager emphasizes individual security selection while
spreading investments among many industries and sectors.
The manager uses fundamental analysis to identify
individual companies it believes offer favorable prospects
for dividend growth and capital appreciation.
In selecting individual companies for investment, the
manager looks for the following:
. Above average earnings growth
. High relative return on invested capital
. History of consistent dividend payments
. Strong financial condition or stable or improving credit
quality
. Experienced and effective management
. Effective research, product development and marketing
. Competitive advantages
Greenwich Street Series Fund
2
<PAGE>
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
. The U.S. stock market declines
. Rising interest rates depress the value of dividend paying stocks or debt
securities in the fund's portfolio
. Large capitalization companies fall out of favor with investors
. Companies in which the fund invests suffer unexpected losses or lower than
expected earnings, or pay lower than expected dividends
. The manager's judgment about the attractiveness, value or income potential of
a particular security proves to be incorrect
. The issuer of a debt security owned by the fund defaults on its obligation to
pay principal and/or interest, or the security's credit rating is downgraded.
This risk is higher for below investment grade bonds. These bonds are
considered speculative because they have a higher risk of issuer default, are
subject to greater price volatility and may be illiquid
Because the fund seeks total return by emphasizing investments in dividend-
paying common stocks, it will not have as much investment flexibility as total
return funds that do not emphasize dividend-paying stocks.
- --------------------------------------------------------------------------------
Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the S&P 500 Index, an unmanaged broad-based index of common stocks. Past
performance does not necessarily indicate how the fund will perform in the
future. Performance figures do not reflect expenses incurred from investing
through a separate account; if these expenses had been reflected, performance
would have been lower. Please refer to the separate account prospectus for more
information on expenses.
[GRAPHIC]
% Total Return
Calendar years ended December 31
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
7.40% 25.04% 25.33% 16.84% 4.97%
The bar chart shows the fund's performance for each full calendar year since
inception.
Quarterly returns:
Highest: 10.51% in 4th quarter 1996
Lowest: -8.71% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
<TABLE>
- ---------------------------------------
<CAPTION>
One Five Since
year years inception*
- ---------------------------------------
<S> <C> <C> <C>
Fund 4.97% 15.60% 16.01%
S&P 500 Index 28.60% 24.05% 24.05%
- ---------------------------------------
</TABLE>
* Inception date of 12/03/93
Index comparison begins on December 31, 1993
Greenwich Street Series Fund
3
<PAGE>
The Fund's Goal and Investments
Intermediate High Grade Portfolio
Manager
SSBC is the manager.
Portfolio Manager
Denis Doherty (since 1998)
Mr. Doherty is an investment officer of SSBC and a director of Salomon Smith
Barney
Investment Goals
As high a level of current income as is consistent with protection of capital.
Key Investments
The fund invests primarily in U.S. government securities and high-grade
corporate bonds of U.S. issuers. The fund may also invest up to 35% of its
assets in other fixed income securities.
U.S. government securities include U.S. Treasury securities and mortgage-
related securities. Mortgage-related securities issued by federal agencies or
instrumentalities may be backed by the full faith and credit of the U.S.
Treasury, by the right of the issuer to borrow from the U.S. government or
only by the credit of the issuer itself.
Credit Quality: The fund invests primarily in high-grade bonds rated
within the three highest rating categories by a nationally recognized rating
organization, or, if unrated, judged by the manager to be of comparable credit
quality. The fund may invest up to 35% of its assets in securities that are
not high grade if they are at least investment grade.
Maturity: The fund's average weighted maturity generally will be between three
and 10 years, depending on the manager's outlook for interest rates. However,
the fund may invest in individual securities of any maturity.
- --------------------------------------------------------------------------------
Selection Process
U.S. government securities
In selecting U.S. government securities, the manager
focuses on identifying undervalued sectors and securities.
Specifically, the manager:
. Monitors the yield spreads between U.S. Treasury and
government agency or instrumentality securities and
purchases agency and instrumentality securities when
their additional yield justifies their additional risk
. Uses research to uncover inefficient sectors of the
government and mortgage markets and adjusts portfolio
positions to take advantage of new information
. Measures the potential impact of supply/demand
imbalances, yield curve shifts and changing prepayment
patterns to identify individual securities that balance
potential return and risk
Corporate bonds
In selecting high-grade corporate bonds, the manager
emphasizes individual bond selection while diversifying the
fund's investments across a range of issuers, industries
and maturity dates. In selecting individual corporate
bonds, the manager:
. Uses fundamental credit analysis to estimate the relative
value and attractiveness of various companies and bonds
. Identifies undervalued corporate bond issues and attempts
to identify bonds that may be subject to credit upgrades
and avoid bonds that may be subject to credit downgrades
For both U.S. government securities and corporate bonds,
the manager emphasizes those sectors and maturities that
seem most undervalued based on the manager's economic and
interest rate outlook. The manager buys and sells
securities in order to adjust portfolio maturity. The
manager also makes ongoing adjustments based on the
relative values or overall investment merits of individual
bonds or changes in the creditworthiness of an issuer.
Greenwich Street Series Fund
4
<PAGE>
Principal risks of investing in the fund
Investors could lose money in the fund, or the fund's performance could fall
below other possible investments, if:
. Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio. The fund has greater
sensitivity to changes in interest rates than a fund investing in securities
with shorter maturities
. The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest, or the security's credit rating is downgraded
. As interest rates decline, the issuers of mortgage-related securities held by
the fund may pay principal earlier than scheduled or exercise a right to call
the securities, forcing the fund to reinvest in lower yielding securities.
This is known as prepayment or call risk
. As interest rates increase, slower than expected principal payments may
extend the average life of fixed income securities, locking in below-market
interest rates and reducing the value of these securities. This is known as
extension risk
. The manager's judgment about interest rates or the attractiveness, value or
income potential of a particular security proves incorrect
Payments of principal and interest on mortgage pools issued by
instrumentalities of the U.S. government are not guaranteed by the U.S.
government. Although payments of principal and interest on mortgage pools
issued by some U.S. agencies are guaranteed, this guarantee does not apply to
losses resulting from declines in the market value of these securities.
- --------------------------------------------------------------------------------
Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the Lehman Government/Corporate Bond Index ("Lehman Index"). The Lehman Index
is a weighted composite of the Lehman Brothers Government Bond Index, which is
a broad-based index of all public debt obligations of the U.S. Government and
its agencies and has an average maturity of nine years the Lehman Brothers
Corporate Bond Index, which is comprised of all public fixed-rate non-
convertible investment grade domestic corporate debt, excluding collateralized
mortgage obligations. Past performance does not necessarily indicate how the
fund will perform in the future. Performance figures do not reflect expenses
incurred from investing through a separate account; if these expenses had been
reflected, performance would have been lower. Please refer to the separate
account prospectus for more information on expenses.
[GRAPHIC]
% Total Return
Calendar years ended December 31
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
5.28% 8.00% -3.05% 17.78% 1.69% 8.57% 6.79%
The bar chart shows the fund's performance for each full calendar year since
inception.
Quarterly returns:
Highest: 5.78% in 2nd quarter 1995
Lowest: -2.64% in 1st quarter 1996
Average Annual Total Returns
(for the periods ended December 31, 1998)
<TABLE>
- ------------------------------------
<CAPTION>
One Five Since
year years inception*
- ------------------------------------
<S> <C> <C> <C>
Fund 6.79% 6.14% 6.44%
Lehman Index 9.47% 7.30% 8.33%
- ------------------------------------
</TABLE>
* Inception date 10/16/91
Index Comparison begins on October 31, 1991
Greenwich Street Series Fund
5
<PAGE>
More on the Funds' Investments
Additional investments and investment techniques
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Intermediate High Grade Portfolio
The fund may invest up to 10% of its assets in government
stripped mortgage-backed securities.
Each fund de-
scribes its
investment ob-
jective and
its principal
investment
strategies and
risks under
"Fund goals
and invest-
ments."
Equity Equity securities include exchange-traded and over-the-
investments counter (OTC) common and preferred stocks, warrants, rights,
convertible securities, depositary receipts and shares, trust
Total Return certificates, limited partnership interests, shares of other
Portfolio investment companies, real estate investment trusts and eq-
uity participations.
- --------------------------------------------------------------------------------
Fixed income Fixed income securities include bonds, notes (including
investments structured notes), mortgage-related securities, asset-backed
securities, convertible securities, Eurodollar and Yankee
Intermediate dollar instruments, preferred stocks and money market instru-
High Grade ments. Fixed income securities may be issued by U.S. and for-
Portfolio and, eign companies; U.S. and foreign banks; the U.S. government,
to a limited its agencies, authorities, instrumentalities or sponsored en-
extent, Total terprises; state and municipal governments; supranational or-
Return Portfo- ganizations; and foreign governments and their political sub-
lio divisions. Fixed income securities may have all types of in-
terest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment
in kind and auction rate features.
Mortgage-related securities may be issued by private compa-
nies or by agencies of the U.S. government and represent di-
rect or indirect participations in, or are collateralized by
and payable from, mortgage loans secured by real property.
These funds may invest in asset-backed securities. Asset-
Intermediate backed securities represent participations in, or are secured
High Grade by and payable from, assets such as installment sales or loan
Portfolio contracts, leases, credit card receivables and other catego-
ries of receivables.
- --------------------------------------------------------------------------------
This section
provides addi-
tional infor-
mation about
the funds' in-
vestments and
certain port-
folio manage-
ment tech-
niques the
funds may use.
More informa-
tion about the
funds' invest-
ments and
portfolio man-
agement tech-
niques, some
of which en-
tail risks, is
included in
the statement
of additional
information
(SAI).
Greenwich Street Series Fund
6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Credit quality of fixed income securities
If a security receives different ratings, a fund will treat
the securities as being rated in the highest rating category.
A fund may choose not to sell securities that are downgraded
below the fund's minimum acceptable credit rating after their
purchase. Each fund's credit standards also apply to
counterparties to OTC derivative contracts.
Below investment grade securities
Securities are below investment grade if:
. They are rated, respectively, below one of the top four
long-term rating categories by all the nationally
recognized rating organizations that have rated the
securities
. They have received comparable short-term ratings, or
. They are unrated securities the manager believes are of
comparable quality to below investment grade securities
- --------------------------------------------------------------------------------
Risks of high yield, lower quality fixed income securities
The issuers of lower quality bonds may be highly leveraged
Total Return and have difficulty servicing their debt, especially during
Portfolio and prolonged economic recessions or periods of rising interest
Intermediate rates. The prices of lower quality securities are volatile
High Grade and may go down because of market perceptions of deteriorat-
Portfolio ing creditworthiness or economic conditions. Lower quality
securities may become illiquid and hard to value in down mar-
kets.
- --------------------------------------------------------------------------------
Derivatives Each fund may, but need not, use derivative contracts, such
and hedging as futures and options on securities, securities indices or
techniques currencies; options on these futures; forward currency con-
tracts; and interest rate or currency swaps for any of the
following purposes:
Total Return
Portfolio and
Intermediate
High Grade
Portfolio
. To hedge against the economic impact of adverse changes in
the market value of its securities, because of changes in
stock market prices, currency exchange rates or interest
rates
. As a substitute for buying or selling securities
A derivative contract will obligate or entitle a fund to de-
liver or receive an asset or cash payment based on the change
in value of one or more securities, currencies or indices.
Even a small investment in derivative contracts can have a
big impact on a fund's stock market, currency and interest
rate exposure. Therefore, using derivatives can dispropor-
tionately increase losses and reduce opportunities for gains
when stock prices, currency rates or interest rates are
changing. A fund may not fully benefit from or may lose money
on derivatives if changes in their value do not correspond
accurately to changes in the value of the fund's holdings.
The other parties to certain derivative contracts present the
same types of credit risk as issuers of fixed income securi-
ties. Derivatives can also make a fund less liquid and harder
to value, especially in declining markets.
Greenwich Street Series Fund
7
<PAGE>
- --------------------------------------------------------------------------------
Defensive Each fund may depart from its principal investment strategies
investing in response to adverse market, economic or political condi-
tions by taking temporary defensive positions in all types of
money market and short-term debt securities. If a fund takes
a temporary defensive position, it may be unable to achieve
its investment goal.
- --------------------------------------------------------------------------------
Portfolio Each fund may engage in active and frequent trading to
turnover achieve its principal investment strategies. Frequent trading
also increases transaction costs, which could detract from a
fund's performance.
Management
The managers
SSBC Fund Management Inc. (SSBC)
Davis Skaggs Investment Management (Davis Skaggs)
SSBC, located at 388 Greenwich Street, New York, New York 10013, acts as
investment manager to investment companies having aggregate assets as of March
31, 1999 in excess of $114 billion. Davis Skaggs, located at 1 Sansone Place,
San Francisco CA, 94104, is a division of SSBC.
SSBC is a wholly owned subsidiary of Citigroup, a financial services holding
company engaged, through its subsidiaries, principally in five business
segments: Investment Services, Asset Management, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services.
Management fees
Each fund's manager oversees the investment operations of the fund and receives
the following fee for these services:
<TABLE>
--------------------------------------------------------------------------
<CAPTION>
Actual management fee
paid for the fiscal year
ended December 31, 1998
(as a percentage
of the fund's
Fund Manager average daily net assets)
--------------------------------------------------------------------------
<S> <C> <C>
Total Return Portfolio Davis Skaggs 0.55%
Intermediate High Grade Portfolio SSBC 0.40%
--------------------------------------------------------------------------
</TABLE>
Administrator
SSBC serves as administrator to each fund, performing certain account
maintenance and administrative services. As compensation for these services
SSBC receives a fee equal on an annual basis to 0.20% of each fund's average
daily net assets.
Year 2000 issue
Information technology experts are concerned about computer systems' ability to
process date-related information on and after January 1, 2000. This situation,
commonly known as the "Year 2000" issue, could have an adverse impact on the
funds. Individual companies and governmental issuers of securities held by a
fund may also be adversely affected by the cost of addressing their Year 2000
systems problem, which cannot be substantial. The managers and the
administrator are addressing the Year 2000 issue for their systems. The funds
have been informed by their other service providers that they are taking
similar measures. Although the funds do not expect the Year 2000 issue to
adversely affect them, the funds cannot guarantee that their efforts or the
efforts of their service providers to correct the problem will be successful.
Greenwich Street Series Fund
8
<PAGE>
Share Transactions
Availability of the funds
Shares of the funds are available only through the purchase of variable annuity
or variable life insurance contracts issued by insurance companies through
their separate accounts. The separate accounts may or may not invest in all the
funds described in this prospectus.
The interests of different variable contract separate accounts investing in a
fund could conflict due to differences of tax treatment and other
considerations. The funds currently do not foresee any disadvantages to
investors arising from the fact that each fund may offer its shares to
different insurance company separate accounts that serve as the investment
medium for their variable annuity and variable life products. Nevertheless, the
board of trustees intends to monitor events to identify any material conflicts
which may arise, and to determine what action, if any, should be taken in
response to these conflicts. If a conflict were to occur, one or more insurance
companies' separate accounts might be required to withdraw their investments in
one or more funds and shares of another fund might be substituted. In addition,
the sale of shares may be suspended or terminated if required by law or
regulatory authority or if in the best interests of the funds' shareholders.
Redemption of shares
The redemption price of each fund's shares will be the net asset value next
determined after receipt by the fund of a redemption order from a separate
account. The fund will ordinarily pay redemption proceeds within one business
day, and must pay redemption proceeds within seven days after receipt of the
request in good order, except on a day when the New York Stock Exchange is
closed or as permitted by the Securities and Exchange Commission in
extraordinary circumstances.
Share Price
Each fund's net asset value is the value of its assets minus its liabilities.
Each fund calculates its net asset value every day the New York Stock Exchange
is open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time). If the New York Stock Exchange closes
early, each fund accelerates the calculation of its net asset value to the
actual closing time.
Each fund generally values its portfolio securities based on market prices or
quotations. To the extent a fund holds securities denominated in a foreign
currency, the fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When market prices are not
available, or when the manager believes they are unreliable or that the value
of a security has been materially affected by events occurring after a foreign
exchange closes, the funds may price that security at fair value. Fair value is
determined in accordance with procedures approved by the fund's board. A fund
that uses fair value to price securities may value those securities higher or
lower than another fund that uses market quotations to price the same
securities.
International markets may be open on days when U.S. markets are closed, and the
value of foreign securities owned by the fund could change on days when fund
shares may not be purchased or redeemed.
Greenwich Street Series Fund
9
<PAGE>
Dividends, Distributions and Taxes
All income and capital gain distributions are automatically reinvested in
additional shares of the fund at net asset value and are includable in gross
income of the separate accounts holding these shares. See the accompanying
separate account contract prospectus for information regarding the federal
income tax treatment of distributions to the separate accounts and to holders
of the contracts.
If a fund fails to comply with special diversification requirements under the
Internal Revenue Code of 1986 (the "Code"), the contracts invested in that fund
would not be treated as annuity, endowment or life insurance contracts under
the Code.
Greenwich Street Series Fund
10
<PAGE>
Financial Highlights
The financial highlights tables are intended to help you understand the
performance of each fund for the past five years. The information in the
following tables was audited by KPMG LLP, independent accountants, whose
report, along with each fund's financial statements, are included in the annual
report (available upon request). Certain information reflects financial results
for a single share. Total return represents the rate that a shareholder would
have earned (or lost) on a share of a fund assuming reinvestment of all
dividends and distributions. The information for the fiscal year ended December
31, 1994 has been audited by other auditors.
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
Total Return Portfolio
1998 (1) 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $17.62 $15.73 $12.75 $10.78 $10.30
- ------------------------------------------------------------------------------
Income from operations:
Net investment income (2) 0.49 0.37 0.26 0.43 0.34
Net realized and unrealized gain 0.38 2.26 2.97 2.19 0.42(3)
- ------------------------------------------------------------------------------
Total income from operations 0.87 2.63 3.23 2.62 0.76
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.43) (0.21) (0.07) (0.41) (0.28)
Net realized gains (0.51) (0.53) (0.18) (0.24) --
- ------------------------------------------------------------------------------
Total distributions (0.94) (0.74) (0.25) (0.65) (0.28)
- ------------------------------------------------------------------------------
Net asset value, end of year $17.55 $17.62 $15.73 $12.75 $10.78
- ------------------------------------------------------------------------------
Total return 4.97% 16.84% 25.33% 25.04% 7.40%
- ------------------------------------------------------------------------------
Net assets, end of year (millions) $ 298 $ 274 $ 172 $ 78 $ 23
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.79% 0.79% 0.83% 1.00% 1.00%
Net investment income 2.79 3.24 3.06 3.80 3.84
- ------------------------------------------------------------------------------
Portfolio turnover rate 72% 75% 82% 81% 118%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
(2) The manager waived all or part of its fees for the year ended December 31,
1994. IDS Life reimbursed expenses of $7,873 for the year ended December
31, 1994. If such fees had not been waived and expenses reimbursed, the per
share effect on net investment income and the expense ratios would have
been as follows:
<TABLE>
-------------------------------------------------------
<CAPTION>
Expense Ratio
Per Share Decrease to Without Waivers
Net Investment Income and Reimbursements
-------------------------------------------------------
Portfolio 1994 1994
-------------------------------------------------------
<S> <C> <C>
Total Return $0.01 1.11%
-------------------------------------------------------
</TABLE>
(3) The amount shown in this caption for each share outstanding throughout the
year may not accord with the change in the aggregate gains and losses in
the fund's securities for the year because of the timing of purchases and
withdrawals of shares in relation to the fluctuating market values of the
fund.
Greenwich Street Series Fund
11
<PAGE>
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
Intermediate High Grade Portfolio
1998 (1) 1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.89 $10.70 $10.60 $ 9.66 $10.69
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (2) 0.65 0.72 0.71 0.66 0.61
Net realized and unrealized gain
(loss) 0.07 0.21 (0.53) 1.00 (0.94)
- ------------------------------------------------------------------------------
Total income (loss) from operations 0.72 0.93 0.18 1.66 (0.33)
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.71) (0.74) (0.08) (0.72) (0.61)
Net realized gains -- -- -- -- (0.09)
- ------------------------------------------------------------------------------
Total distributions (0.71) (0.74) (0.08) (0.72) (0.70)
- ------------------------------------------------------------------------------
Net asset value, end of year
(millions) $10.90 $10.89 $10.70 $10.60 $ 9.66
- ------------------------------------------------------------------------------
Total return 6.79% 8.67% 1.69% 17.76% (3.05)%
- ------------------------------------------------------------------------------
Net assets, end of year (millions) $ 13 $ 15 $ 15 $ 16 $ 13
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.93% 0.95% 0.90% 0.86% 0.85%
Net investment income 5.82 6.28 6.35 6.63 6.57
- ------------------------------------------------------------------------------
Portfolio turnover rate 60% 66% 116% 121% 90%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
(2) The manager waived all or part of its fees for the three years ended
December 31, 1996. IDS Life reimbursed expenses of $3,006 and $12,616 for
the two years ended December 31, 1995. If such fees had not been waived and
expenses reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
<TABLE>
----------------------------------------------------------------------
<CAPTION>
Expense Ratios
Per Share Decreases to Without Waivers
Net Investment Income and Reimbursements
----------------------------------------------------------------------
Portfolio 1996 1995 1994 1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intermediate High Grade $ 0.02 0.00* 0.02 1.07% 0.94% 1.05%
----------------------------------------------------------------------
</TABLE>
*Amount represents less than $0.01 per share.
Greenwich Street Series Fund
12
<PAGE>
This page is intentionally left blank
<PAGE>
Greenwich Street Series Fund
Additional Information
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about each fund's investments. These reports discuss the
market conditions and investment strategies that affected the funds'
performance.
The funds send one report to a household if more than one account has the same
address. Contact your participating life insurance company representative if
you do not want this policy to apply to you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund. It is incorporated by
reference into this prospectus.
You can make inquiries about the funds or obtain shareholder reports or the
statement of additional information (without charge) by calling 1-800-451-2010
or writing to Greenwich Street Series Fund, 388 Greenwich Street, New York, New
York 10013.
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can obtain copies of these materials upon payment of a
duplicating fee, by writing to the Public Reference Section of the Commission,
Washington, D.C. 20549-60019. You can get the same reports and information free
from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Each fund is not offering to sell its
shares to any person to whom the fund may not lawfully sell its shares.
(Investment Company Act file no. 811-6310)
L-12410 4/99
April 30, 1999
STATEMENT OF ADDITIONAL INFORMATION
GREENWICH STREET SERIES FUND
388 Greenwich Street,
New York, New York 10013
(800) 451-2010
This Statement of Additional Information ("SAI") is not a prospectus
and should be read in conjunction with the prospectus of the Greenwich
Street Series Fund (the "fund") dated April 30, 1999, as amended or
supplemented from time to time), and is incorporated by reference in
its entirety into the prospectus. Additional information about the
fund's investments is available in the fund's annual and semi-annual
reports to shareholders which are incorporated herein by reference.
The prospectus and copies of the reports may be obtained free of charge
by contacting a Salomon Smith Barney Financial Consultant, or by
writing or calling Salomon Smith Barney Inc. at the address or
telephone number above.
TABLE OF CONTENTS
Management of the Fund 3
Trustees of the Trust and Executive Officers of the Fund 4
Investment Management and Other Services 12
Investment Objective and Management Policies
Emerging Growth Portfolio
15
International Equity Portfolio
16
Appreciation Portfolio
17
Equity Index Portfolio
18
Growth & Income Portfolio
19
Equity Income Portfolio
19
Total Return Portfolio
20
Diversified Strategic Income Portfolio
20
Intermediate High Grade Portfolio
21
Money Market Portfolio
22
Additional Investment Policies 22
Risk Factors 46
Investment Restrictions......55
Portfolio Turnover.................. 58
Portfolio Transactions 59
Purchase of Shares 65
Redemption of Shares 66
Net Asset Value 67
Performance Data 68
Dividends, Distributions and Taxes 74
Custodian and Transfer Agent 75
Financial Statements 76
Appendix A
The fund is a diversified, open-end management investment company with
ten portfolios, each with separate goals and investment policies:
The Emerging Growth Portfolio's goal is to provide capital
appreciation. This portfolio invests primarily in common stocks of
small and medium-sized companies, both domestic and foreign, considered
to be emerging growth companies by its investment adviser.
The International Equity Portfolio's goal is to provide total return on
its assets from growth of capital and income. This portfolio invests in
a diversified portfolio of equity securities of established non-U.S.
issuers.
The Appreciation Portfolio's goal is long-term appreciation of capital.
This portfolio invests primarily in equity securities.
The Equity Index Portfolio's goal is to provide investment results
that, before deduction of operating expenses, match the price and yield
performance of U.S. publicly traded common stocks, as measured by the
Standard & Poor's Daily Price Index of 500 Common Stocks (the "S&P 500
Index"). This portfolio invests in the common stocks of companies
represented in the S&P 500 Index.
The Growth & Income Portfolio's goal is income and long-term capital
growth. This portfolio invests primarily in dividend-paying equity
securities meeting certain specified investment criteria.
The Equity Income Portfolio's primary goal is current income, with a
secondary goal of long-term capital appreciation. This portfolio
invests primarily in dividend-paying common stocks, concentrating in
securities of companies in the utility industry.
The Total Return Portfolio's goal is to provide shareholders with total
return, consisting of long-term capital appreciation and income. This
portfolio invests primarily in a diversified portfolio of dividend-
paying common stocks.
The Diversified Strategic Income Portfolio's goal is high current
income. This portfolio invests primarily in three types of fixed-income
securities: U.S. government and mortgage-related securities, foreign
government bonds and corporate bonds rated below investment grade.
The Intermediate High Grade Portfolio's goal is to provide as high a
level of current income as is consistent with the protection of
capital. This portfolio invests in high-quality intermediate-term U.S.
government securities and corporate bonds of U.S. issuers.
The Money Market Portfolio's goal is maximum current income to the
extent consistent with the preservation of capital and the maintenance
of liquidity. This portfolio invests in high-quality short-term money
market instruments.
MANAGEMENT OF THE FUND
The executive officers of the fund are employees of certain of the
organizations that provide services to the fund. These organizations
are as follows:
Name
Service
SSBC Fund Management Inc.
("SSBC" or "adviser" and
"administrator") formerly known as
Mutual Management, Corp.
Investment Adviser to Money Market,
Intermediate High Grade,
Diversified Strategic Income,
Equity Income, Growth & Income,
Appreciation and International
Equity Portfolios; Administrator to
each Portfolio
Davis Skaggs Investment Management,
a division of SSBC ("Davis Skaggs"
or "adviser")
Investment Adviser to Total Return
Portfolio
Smith Barney Global Capital
Management Inc.
("Global Capital Management" or
"sub-adviser")
Sub-Investment Adviser to
Diversified Strategic Income
Portfolio
Travelers Investment Management
Company ("TIMCO" or "adviser")
Investment Adviser to Equity Index
Portfolio
Van Kampen Asset Management, Inc.
("VKAM" or "adviser")
Investment Adviser to Emerging
Growth Portfolio
CFBDS, Inc.
("CFBDS" or "distributor")
Distributor
PNC Bank, National Association
("PNC" or "custodian")
Custodian for Appreciation,
Emerging Growth, Equity Income,
Equity Index, Growth & Income,
Intermediate High Grade, Money
Market and Total Return Portfolios
Chase Manhattan Bank
("Chase" or "custodian")
Custodian for Diversified Strategic
Income and International Equity
Portfolios
First Data Investor Services Group,
Inc.
("First Data" or "transfer agent")
Transfer and Dividend Paying Agent
These organizations and the functions they perform for the fund are
discussed in the prospectus and in this SAI.
Trustees and Officers of the Fund
Overall responsibility for management and supervision of the fund and
the portfolios rests with the fund's Board of Trustees. The trustees
approve all significant agreements between the fund and the persons or
companies that furnish services to the fund and its portfolios,
including agreements with the advisers and/or sub-adviser, and
administrator of the portfolios and with the portfolios' custodian,
transfer agent and distributor. The day-to-day operations of the
portfolios are delegated to the advisers and/or sub-advisers, and
administrator of the portfolios. The names of the trustees and
executive officers of the fund, together with information as to their
principal business occupations during the past five years, are set
forth below. Each trustee who is an "interested person" of the fund,
as defined in the Investment Company Act of 1940, as amended (the "1940
Act"), is indicated by an asterisk. As of April 16, 1999, trustees and
officers of the fund as a group owned no shares of the fund.
HERBERT BARG (Age 75). Trustee
Private Investor. Director or trustee of 18 investment companies
associated with Citigroup Inc.("Citigroup"). His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania, 19004.
*ALFRED J. BIANCHETTI (Age 76). Trustee
Retired; formerly Senior Consultant to Dean Witter Reynolds Inc.
Director or trustee of 13 investment companies associated with
Citigroup. His address is 19 Circle End Drive, Ramsey, New Jersey
07466.
MARTIN BRODY (Age 77). Trustee
Consultant, HMK Associates. Retired Vice Chairman of the Board of
Restaurant Associates Corp. Director or trustee of 22 investment
companies associated with Citigroup. His address is c/o HMK Associates,
30 Columbia Turnpike, Florham Park, New Jersey 07932.
DWIGHT B. CRANE (Age 61). Trustee
Professor, Harvard Business School. Director or trustee of 25
investment companies associated with Citigroup. His address is c/o
Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02163.
BURT N. DORSETT (Age 68). Trustee
Managing Partner of the investment counseling firm Dorsett McCabe
Management, Inc. Director of Research Corporation Technologies, Inc.,
a nonprofit patent clearing and licensing firm. Director or trustee of
13 investment companies associated with Citigroup.His address is 201
East 62nd Street, New York, New York 10021.
ELLIOT S. JAFFE (Age 72). Trustee
Chairman of the Board and President of The Dress Barn, Inc. Director or
trustee of 13 investment companies associated with Citigroup. His
address is 30 Dunnigan Drive, Suffern, New York 10021.
STEPHEN E. KAUFMAN (Age 67). Trustee
Attorney. Director or trustee of 15 investment companies associated
with Citigroup. His address is 277 Park Avenue, New York, New York
10172.
JOSEPH J. McCANN (Age 68). Trustee
Financial Consultant. Retired Financial Executive, Ryan Homes, Inc.
Director or trustee of 13 investment companies associated with
Citigroup.His address is 200 Oak Park Place, Pittsburgh, Pennsylvania
15243.
*HEATH B. McLENDON (Age 65).Chairman of the Board and Investment
Officer Managing Director of Salomon Smith Barney Inc. ("Salomon Smith
Barney"), Chairman. and President of SSBC and Travelers Investment
Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the Board or
Director or trustee of 64 investment companies associated with
Citigroup. His address is 388 Greenwich Street, New York, New York
10013.
CORNELIUS C. ROSE, JR. (Age 65). Trustee
President, Cornelius C. Rose Associates, Inc., financial consultants,
and Chairman and Director of Performance Learning Systems, an
educational consultant. Director or trustee of 13 investment companies
associated with Citigroup. His address is Meadowbrook Village, Building
4, Apt. 6, West Lebanon, New Hampshire 03784.
LEWIS E. DAIDONE (Age 41). Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney, Chief Financial Officer of
the Smith Barney Mutual Funds; Director and Senior Vice President of
SSBC and TIA; Senior Vice President and Treasurer of 59 investment
companies associated with Citigroup. His address is 388 Greenwich
Street, New York, New York 10013.
HARRY D. COHEN (Age 56). Vice President and Investment Officer
Managing Director of Salomon Smith Barney;
Investment Officer of SSBC; Vice President of 2
investment companies associated with Citigroup. His address is 388
Greenwich Street, New York, New York 10013.
SCOTT GLASSER (Age 32). Vice President and Investment Officer
Director of Salomon Smith Barney; Investment Officer of SSBC; prior to
October 1993, fixed income analyst with Bear, Stearns & Co. Inc; Vice
President of 2 investment companies associated with Citigroup. His
address is 388 Greenwich Street, New York, New York 10013.
SANDIP A. BHAGAT (Age 38). Vice President and Investment Officer
President of TIMCO; Vice President of 4 investment companies associated
with Citigroup. prior to 1995, Senior Portfolio Manager for TIMCO. His
address is One Tower Square, Hartford, Connecticut 06183-2030.
JOHN C. BIANCHI (Age 43). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Investment Officer of SSBC;
Vice President of 6 investment companies associated with Citigroup.His
address is 388 Greenwich Street, New York, New York 10013.
ROBERT BRADY (Age 58). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Investment Officer of SSBC;
Vice President of 3 investment companies associated with Citigroup.
His address is 388 Greenwich Street, New York, New York 10013.
JAMES CONHEADY (Age 63). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Vice President of 4
investment companies associated with Citigroup. Investment Officer of
SSBC; His address is 388 Greenwich Street, New York, New York 10013..
JAMES E. CONROY (Age 48). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Vice President of 4
investment companies associated with Citigroup; Investment Officer of
SSBC; His address is 388 Greenwich Street, New York, New York 10013..
DENIS DOHERTY (Age 35). Vice President and Investment Officer
Director of Salomon Smith Barney; Vice President of 2 investment
companies associated with Citigroup; Investment Officer of SSBC; His
address is 388 Greenwich Street, New York, New York 10013..
R. JAY GERKEN (Age 47). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Investment Officer of SSBC;
Vice President of 4 investment companies associated with Citigroup;His
address is 388 Greenwich Street, New York, New York 10013.
JOHN G. GOODE (Age 53). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Chairman and Chief
Investment Officer of Davis Skaggs; Vice President of 2 investment
companies associated with Citigroup; Investment Officer of SSBC. His
address is One Sansome Street, San Francisco, California 94104.
SIMON HILDRETH (Age 43). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Vice President of 3
investment companies associated with Citigroup; prior to 1994, Director
of Mercury Asset Management Ltd.; Investment Officer of SSBC. His
address is 10 Piccadilly, London, WIV 9LA, U.K.
GARY LEWIS (Age 44). Vice President and Investment Officer
Senior Vice President of Van Kampen American Capital Asset Management,
Inc. Vice President of 1 investment company associated with Citigroup.
His address is 2800 Post Oak Boulevard, Houston, Texas 77056.
JEFFREY RUSSELL (Age 40). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Vice President of 4
investment companies associated with Citigroup; Investment Officer of
SSBC; His address is 388 Greenwich Street, New York, New York 10013.
PHYLLIS ZAHORODNY (Age 40). Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Investment Officer of SSBC;
Vice President of 4 investment companies associated with Citigroup.
Her address is 388 Greenwich Street, New York, New York 10013.
PAUL BROOK (Age 45). Controller
Director of Salomon Smith Barney; Controller or Assistant Treasurer of
43 investment companies associated with Citigroup; from 1997-1998
Managing Director of AMT Capital Services Inc.; prior to 1997 Partner
with Ernst & Young LLP; His address is 388 Greenwich Street, New York,
New York 10013.
IRVING DAVID (Age 38) Controller
Director of Salomon Smith Barney. Controller or Assistant Treasurer of
43 investment companies associated with Citigroup; Formerly Assistant
Treasurer of First Investment Management Company; His address is 388
Greenwich Street, New York, New York 10013.
CHRISTINA T. SYDOR (Age 48). Secretary
Managing Director of Salomon Smith Barney; General Counsel and
Secretary of SSBC and TIA; Secretary of 59 investment companies
associated with Citigroup; Her address is 388 Greenwich Street, New
York, New York 10013.
As of April 16, 1999, the trustees and officers as a group owned less
than 1% of the outstanding common stock of the trust. To the best
knowledge of the trustees, as of April 16, 1999, the following
shareholders or "groups" (as such term is defined in Section 13(d) of
the Securities Exchange Act of 1934, as amended) owned beneficially or
of record more than 5% of the shares of the following classes:
Shareholder
Percent Ownership
Money Market Portfolio
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 5,804,883.280 shares
97.76%
Intermediate High Grade Portfolio
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 1,112,958.457 shares
99.73%
Diversified Strategic Income Portfolio
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 3,744,547.468 shares
50.29%
Diversified Strategic Income Portfolio
Travelers Insurance Company
Separate Account QPM 401(k)-TIC
Travelers Insurance Company
Attn: Roger Ferland 5 MS
One Tower Square
Hartford, CT 06183
Owned 3,701,697.701 shares
49.71%
Equity Index Portfolio - Class I
Travelers Insurance Company
Separate Account QPM 401(k)-TIC
Travelers Insurance Company
Attn: Roger Ferland 5 MS
One Tower Square
Hartford, CT 06183
Owned 7,716,388.469 shares
91.76%
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 693,030.737 shares
8.24%
Equity Income Portfolio
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 2,022,467.519 shares
100%
Shareholder
Growth and Income Portfolio
Percent Ownership
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 1,726,184.653 shares
100%
Appreciation Portfolio
Travelers Insurance Company
Separate Account QPM 401(k)-TIC
Travelers Insurance Company
Attn: Roger Ferland 5 MS
One Tower Square
Hartford, CT 06183
Owned 5,906,811.551 shares
42.72%
Equitable Life of Iowa
Prime Elite
Attn: Gina Keck
604 Locust Street
Des Moines, Iowa 50306
Owned 4,067,008.413 shares
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 3,853,494.944 shares
29.41%
27.87%
Shareholder
Total Return Portfolio
Travelers Insurance Company
Separate Account QPM 401(k)-TIC
Travelers Insurance Company
Attn: Roger Ferland 5 MS
One Tower Square
Hartford, CT 06183
Owned 14,865,796.336 shares
Percent Ownership
90.31%
International Equity Portfolio
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 1,457,298.897 shares
99.31%
Emerging Growth Portfolio
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 902,846.506 shares
98.50%
No officer, director or employee of Salomon Smith Barney, any of the
portfolios' advisers or sub-adviser, or any of their affiliates
receives any compensation from the fund for serving as an officer or
trustee of the fund. The fund pays each trustee who is not a director,
officer or employee of Salomon Smith Barney, the advisers or any of
their affiliates a fee of $10,000 per annum plus $500 per in-person
meeting and $100 per telephonic meeting. The fund pays a trustee
emeritus who is not a trustee, officer or employee of Salomon Smith
Barney, the advisers, or any of their affiliates a fee of $5,000 per
annum plus $250 per in person meeting and $50 per telephonic meeting.
Each trustee is reimbursed for travel and out-of-pocket expenses
incurred to attend such meetings. For the fiscal year ended December
31, 1998, the trustees were reimbursed, in the aggregate, $13,594 for
travel and out-of-pocket expenses.
For the fiscal year ended December 31, 1998, the trustees of the fund
were paid the following compensation:
Name of
Person
Aggregate
Compensation
From Fund
Pension or
Retirement
Benefits
Accrued
as part of
Fund
Expenses
Compensation
From Fund
And Fund Complex
Paid to
Directors
Number of Funds
For which
Trustee
Serves Within
Fund Complex
Herbert Barg**
$7,100
$0
$105,425
18
Alfred
Bianchetti* **
7,100
0
51,200
13
Martin Brody**
6,600
0
132,500
22
Dwight B. Crane**
6,100
0
139,975
25
Burt N. Dorsett*
**
7,100
0
51,200
13
Elliot S. Jaffe**
6,600
0
47,550
13
Stephen E.
Kaufman**
7,100
0
96,400
15
Joseph J.
McCann**
7,100
0
51,200
13
Heath B. McLendon
*
0
0
0
64
Cornelius C.
Rose, Jr.**
7,100
0
51,200
13
* Designates an "interested" trustee.
** Designates member of Audit Committee.
+ Upon attainment of age 80, fund trustees are required to change
to emeritus status. Trustees emeritus are entitled to serve in
emeritus status for a maximum of 10 years. Trustees emeritus may
attend meetings but have no voting rights.
Investment Advisers, Sub-Investment Adviser and Administrator
Each adviser serves as investment adviser to one or more Portfolios
pursuant to a separate written agreement with each portfolio (an
"Advisory Agreement"). The Advisory Agreements for each of the
portfolios were approved by the board of trustees, including a majority
of the trustees who are not interested persons. Subject to the
supervision and direction of the trust's board of trustees, each
adviser manages the portfolios in accordance with the portfolio's
stated investment objective and policies, makes investment decisions
for the portfolio, places orders to purchase and sell securities, and
employs professional portfolio managers and securities analysts who
provide research services to the fund. The adviser pays the salary of
any officer and employee who is employed by both it and the fund. Each
adviser bears all expenses in connection with the performance of its
services.
SSBC is an affiliate of Salomon Smith Barney, and is a wholly owned
subsidiary of Citigroup Inc. Global Capital Management, sub-adviser to
Diversified Strategic Income Portfolio, also is a subsidiary of
Citigroup. Davis Skaggs, adviser to the Total Return Portfolio is a
division of SSBC.
VKAM is a diversified asset management company which provides
investment advice to investment companies with aggregate assets under
management or supervision as of March 31, 1999 of more than $46
billion.
The Portfolios pay their respective advisers an aggregate fee at an
annual percentage of the value of the relevant portfolio's average net
assets as follows:
Appreciation Portfolio
0.55%
Diversified Strategic Income
Portfolio
0.45%
Emerging Growth Portfolio
0.75%
Equity Income Portfolio
0.45%
Equity Index Portfolio
0.15%
Growth & Income Portfolio
0.45%
Intermediate High Grade
Portfolio
0.40%
International Equity
Portfolio
0.85%
Money Market Portfolio
0.30%
Total Return Portfolio
0.55%
Global Capital Management, as Sub-Adviser to the Diversified Strategic
Income Portfolio, is paid a fee by SSBC, the portfolio's Adviser, at
the annual percentage of 0.15% of the value of the Portfolio's average
net assets. The management fees paid by the Appreciation, Total Return,
International Equity and Emerging Growth Portfolios are higher than
those fees paid by most other investment companies, but not necessarily
higher than those paid by funds with similar investment objectives and
policies.
Each adviser and the sub-adviser pay the salaries of all officers and
employees who are employed by both it and the fund, maintains office
facilities for the fund and bears all expenses in connection with the
performance of their respective services under their Agreements with
the fund.
The portfolios incurred the following investment advisory fees for the
past three years, which were partially waived for the years ended
December 31, 1998, 1997 and 1996 by their respective adviser:
Portfolio
Adviser
12/31/98
12/31/97
12/31/96
Appreciation
SSBC
$1,032,03
8
$662,865
$536,120
Diversified Strategic
Income
SSBC
332,908
263,097
266,327
Emerging Growth
VKAM
150,773
146,478
142,425
Equity Income
SSBC
192,581
194,623
215,308
Equity Index
TIMCO
135,564
56,376
69,030
Growth & Income
SSBC
179,897
187,747
166,039
Intermediate High
Grade*
SSBC
58,825
59,572
60,847
International Equity
SSBC
225,622
275,190
278,118
Money Market**
SSBC
14,675
16,034
17,904
Total Return
Davis Skaggs
1,607,515
1,220,026
665,417
* SSBC waived investment advisory fees in the amount of $16,451 for the
fiscal year ended December 31, 1996.
** SSBC waived all of its investment advisory fees for the fiscal year ended
December 31, 1996.
The fund bears expenses incurred in its operation, including taxes,
interest, brokerage fees and commissions, if any; fees of trustees who
are not officers, directors, shareholders or employees of the advisers,
the sub-adviser or Salomon Smith Barney; SEC fees and state blue sky
qualification fees; charges of custodians; transfer and dividend
disbursing agents' fees; certain insurance premiums; outside auditing
and legal expenses; costs of maintenance of corporate existence;
investor services (including allocated telephone and personnel
expenses); and costs of preparation of corporate meetings and of
preparation and printing of prospectuses and shareholder reports for
regulatory purposes and for distribution to shareholders.
Administrator
SSBC serves as administrator to each portfolio pursuant to a separate
written agreement with each portfolio (the "Administration Agreement").
The Administration Agreement was approved by the fund's board of
trustees, including a majority of the disinterested trustees.
As administrator, SSBC performs certain services for the fund. As part
of those services, SSBC pays the salaries of all officers and employees
who are employed by both it and the fund; maintains office facilities
for the fund; furnishes the fund with statistical and research data,
clerical help, accounting, data processing, bookkeeping, internal
auditing and legal services and certain other services required by the
fund; prepares reports to the fund's shareholders and prepares tax
returns, reports to and filings with the SEC and state blue sky
authorities. SSBC bears all expenses in connection with the performance
of its services.
SSBC, as Administrator of the Portfolios, is paid a fee at the annual
percentage of 0.20% of the value of each portfolio's average net
assets, except with respect to the Equity Index Portfolio, for which it
is paid a fee at an annual percentage of 0.06% of the value of the
Portfolio's average net assets. The Smith Barney Money Market
Portfolio waived all of its administration fees for the fiscal year
ended December 31, 1998.
The portfolios incurred the following administration fees for the past
three years, which were partially waived for the years ended December
31, 1998, 1997 and 1996 by their respective adviser:
Portfolio
Administrato
r
12/31/98
12/31/97
12/31/96
Appreciation
SSBC
$375,286
$241,042
$194,953
Diversified Strategic
Income
SSBC
147,959
116.932
118,368
Emerging Growth
SSBC
40,206
39,061
37,980
Equity Income
SSBC
85,592
86,499
95,692
Equity Index*
SSBC
54,226
27,188
34,515
Growth & Income
SSBC
79,954
83,443
73,795
Intermediate High
Grade**
SSBC
29,412
29,786
30,424
International Equity
SSBC
53,087
64,750
65,439
Money Market***
SSBC
9,784
10,689
11,942
Total Return
SSBC
584,551
443,646
241,844
* SSBC agreed to reimburse administration fees in the amount of
$114,983 for the fiscal year ended December 31, 1998.
** SSBC waived administration fees in the amount of $8,226 for the
fiscal year ended December 31,1996.
*** SSBC waived all of its administration fees for the fiscal years
ended December 31, 1998 and
December 31, 1996.
INVESTMENT GOALS AND POLICIES OF THE PORTFOLIOS
The fund's prospectus discusses the investment goals of the portfolios
currently offered by the fund and the policies to be employed to
achieve those goals. This section contains supplemental information
concerning the types of securities and other instruments in which the
portfolios may invest, the investment policies and portfolio strategies
that the portfolios may utilize and certain risks attendant to such
investments, policies and strategies.
Emerging Growth Portfolio
Goal - The Emerging Growth Portfolio's goal is to provide capital
appreciation.
Investment Policies - The portfolio seeks to invest at least 65% of its
total assets in common stocks of small and medium-sized companies, both
domestic and foreign, in the early stages of their life cycle, that its
adviser believes have the potential to become major enterprises. In
managing the portfolio, the subadviser has defined early stage small
and medium sized companies as those with less than $2 billion of market
capitalization or annual sales. Investments in such companies may offer
greater opportunities for growth of capital than larger, more
established companies, but also may involve certain special risks.
Emerging growth companies often have limited product lines, markets or
financial resources, and they may be dependent upon one or a few key
people for management. The securities of such companies may be subject
to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general. While
the portfolio will invest primarily in common stocks, to a limited
extent it may invest in other securities such as preferred stocks,
convertible securities and warrants.
The portfolio does not limit its investments to any single group or
type of security. The portfolio also may invest in special situations
involving new management, special products and techniques, unusual
developments, mergers or liquidations. Investments in unseasoned
companies and special situations often involve much greater risks than
are inherent in ordinary investments, because securities of such
companies may be more likely to experience unexpected fluctuations in
price.
The portfolio may invest in securities that have above- average
volatility of price movement. Because prices of common stocks and other
securities fluctuate, the value of an investment in the portfolio will
vary based upon its investment performance. The portfolio attempts to
reduce overall exposure to risk from declines in securities prices by
spreading its investments over many different companies in a variety of
industries. There is, however, no assurance that the portfolio will be
successful in achieving its objective.
The portfolio may invest up to 20% of its total assets in securities of
foreign issuers. Additionally, the portfolio may invest up to 15% of
the value of its total assets in restricted securities (i.e.,
securities that may not be sold without registration under the
Securities Act of 1933, as amended (the "1933 Act")) and in other
securities not having readily available market quotations. The
portfolio may enter into repurchase agreements with domestic banks and
broker-dealers, which involve certain risks.
International Equity Portfolio
Goal - The International Equity Portfolio's goal is to provide a total
return on its assets from growth of capital and income.
Investment Policies - Under normal market conditions, the portfolio
will invest at least 65% of its assets in a diversified portfolio of
equity securities consisting of dividend and non-dividend paying common
stock, preferred stock, convertible debt and rights and warrants to
such securities, and up to 35% of its assets in bonds, notes and debt
securities (consisting of securities issued in the Euro-currency
markets or obligations of the United States or foreign governments and
their political subdivisions) of established non-United States issuers.
Investments may be made for capital appreciation or income, or any
combination of both for the purpose of achieving a higher overall
return than might otherwise be obtained solely from investing for
growth of capital or for income. There is no limitation on the
percentage or amount of the portfolio's assets which may be invested
for growth or income and therefore, from time to time, the investment
emphasis may be placed solely or primarily on growth of capital or
solely or primarily on income. In seeking to achieve its objective,
the portfolio presently expects to invest its assets primarily in
common stocks of established non-U.S. companies which in the opinion of
its adviser have potential for growth of capital.
The portfolio will generally invest its assets broadly among countries
and will have represented in its portfolio business activities in not
less than three different countries. Except as stated below, the
portfolio will invest at least 65% of its assets in companies
organized, or governments located in, any area of the world other than
the United States, including the Far East (e.g., Hong Kong, Japan,
Malaysia and Singapore), Western Europe (e.g., France, Germany, Italy,
the Netherlands, Switzerland and the United Kingdom), Central and South
America (e.g., Chile, Mexico and Venezuela), Australia, Canada and such
other areas and countries as its adviser may determine from time to
time. The portfolio may invest in securities issued by companies
formerly party to the Warsaw Pact. However, under unusual economic or
market conditions as determined by its adviser, for defensive purposes
the portfolio may temporarily invest all or a major portion of its
assets in U.S. government securities or in debt or equity securities of
companies incorporated in and having their principal business
activities in the United States. To the extent the portfolio's assets
are invested for temporary defensive purposes, such assets will not be
invested in a manner designed to achieve the portfolio's investment
objective.
It is expected that securities held by the portfolio will ordinarily be
traded on a stock exchange or other market in the country in which the
issuer is principally based, but also may be traded on markets in other
countries including, in many cases, U. S. securities exchanges and
over-the-counter markets. To the extent the portfolio's assets are not
otherwise invested as described above, the assets may be held in cash,
in any currency, or invested in U.S. or foreign, high-quality money
market instruments and their equivalents.
Appreciation Portfolio
Goal - The Appreciation Portfolio's goal is long-term appreciation of
capital.
Investment Policies - The portfolio will attempt to achieve its goal by
investing primarily in equity and equity-related securities believed to
afford attractive opportunities for appreciation.
Under normal market conditions, substantially all, but not less than
65%, of the portfolio's assets will consist of common stocks, but the
portfolio may also hold securities convertible into common stocks and
warrants. When the adviser believes that a conservative or defensive
investment posture is warranted or when opportunities for capital
appreciation do not appear attractive, the portfolio may invest
temporarily in debt obligations, preferred securities or short-term
money market instruments. The portfolio may from time to time lend its
portfolio securities and invest in up to 10% of its assets (at the time
of investment) in foreign securities. The portfolio may invest
directly in foreign issuers or invest in depository receipts.
Equity Index Portfolio
Goal - The Equity Index Portfolio's goal is to provide investment
results that, before deduction of operating expenses, match the price
and yield performance of U.S. publicly traded common stocks, as
measured by the S&P 500 Index.
Investment Policies - The portfolio will seek to achieve its goal by
owning all 500 stocks in the S&P 500 Index in proportion to their
actual market capitalization weightings. The portfolio will be
reviewed daily and adjusted, when necessary, to maintain security
weightings as close to those of the S&P 500 Index as possible, given
the amount of assets in the portfolio at that time. The portfolio may
invest up to 5% of its assets in equity securities that are not
included in the S&P 500 Index if the adviser believes such investments
will assist the portfolio in approximating the return of the S&P 500
Index. The portfolio may use up to an additional 20% of its assets to
enter into stock index futures and related options to increase
efficiency, may lend portfolio securities and write covered options to
help offset operating expenses, and may acquire money market
instruments. Portfolio turnover is expected to be lower than for most
other investment companies.
No attempt will be made to manage the portfolio in the traditional
sense using economic, financial and market analysis, nor will the
adverse financial situation of an issuer necessarily result in the
elimination of its securities from the portfolio, unless the securities
are removed from the S&P 500 Index. From time to time, administrative
adjustments may be made in the portfolio because of changes in the
composition of the S&P 500 Index. The adviser reserves the right to
remove an investment from the portfolio if, in its opinion, the merit
of the investment has been substantially impaired by extraordinary
events or financial conditions.
The portfolio will use the S&P 500 Index as its standard for
performance comparison because the S&P 500 Index represents
approximately 70% of the total market value of all U.S. common stocks,
is well known to investors and is representative of the performance of
publicly traded U.S. common stocks.
The portfolio will invest in the common stocks of the companies
represented in the S&P 500 Index with the goal of matching, before
deduction of operating expenses, the price and yield performance of the
S&P 500 Index. The S&P 500 Index is composed of 500 selected common
stocks, most of which are listed on the New York Stock Exchange (the
"NYSE"). S&P chooses the stocks to be included in the S&P 500 Index
solely on a statistical basis. The S&P 500 Index is a trademark of S&P
and inclusion of a stock in the S&P 500 Index in no way implies an
opinion by S&P as to its attractiveness as an investment. S&P is
neither a sponsor nor in any way affiliated with the portfolio.
The portfolio's ability to replicate the performance of the S&P 500
Index will depend to some extent on the size of cash flows into and out
of the portfolio. Investment changes to accommodate these cash flows
will be made to maintain the similarity of the portfolio's assets to
the S&P 500 to the maximum extent practicable.
Growth & Income Portfolio
Goal - The Growth & Income Portfolio's goal is income and long-term
capital growth.
Investment Policies - The portfolio will seek to achieve its goal by
investing in income-producing equity securities, including
dividend-paying common stocks, securities that are convertible into
common stocks and warrants. Under normal market conditions, the
portfolio will invest substantially all, but not less than 65%, of its
assets in equity securities. The portfolio may invest the remainder of
its assets in money market instruments, as well as in corporate bonds,
convertible securities and mortgage-related securities rated investment
grade or deemed to be of comparable quality. The portfolio may enter
into repurchase agreements, lend portfolio securities, enter into
interest rate and stock index futures and related options, purchase or
sell securities on a when-issued or delayed-delivery basis and write
covered options.
Equity Income Portfolio
Goal - The Equity Income Portfolio's primary goal is current income.
Long-term capital appreciation is a secondary goal.
Investment Policies - The portfolio will seek to achieve its goals
principally through investment in dividend-paying common stocks of
companies whose prospects for dividend growth and capital appreciation
are considered favorable by the adviser. The portfolio will normally
invest at least 65% of its assets in equity securities. Under normal
circumstances, the portfolio will concentrate at least 25% of its
assets in equity and debt securities of companies in the utility
industry. A company will be considered to be in the utility industry
if it is principally engaged (i.e., at least 50% of a company's assets
consist of, or gross income or net profits result from, utility
operations or the company is regulated as a utility by a government
agency or authority) in the manufacture, production, generation,
transmission and sale of electric and gas energy and companies
principally engaged in the communications field, including entities
such as telephone, telegraph, satellite, microwave and other companies
regulated by governmental agencies as utilities that provide
communication facilities for the public benefit.
Other types of securities that may be held by the portfolio when deemed
advisable by the adviser include investment-grade debt securities such
as bonds, debentures and commercial paper, U.S. government securities
and money market instruments, and up to 10% of the portfolio's assets
may be invested in debt securities rated as low as B by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("S&P") or the equivalent by another nationally recognized statistical
rating organization ("NRSRO") or in unrated securities deemed by the
adviser to be of comparable quality. When the outlook for common
stocks is not considered promising in the judgment of the adviser, a
substantial portion of the assets of the portfolio may be held in these
other types of securities for temporary defensive purposes.
The portfolio may also invest in securities convertible into or
ultimately exchangeable for common stock (i.e., convertible bonds or
convertible preferred stock) and may purchase common stocks that do not
provide current income but which offer opportunities for capital
appreciation and future income. The portfolio also may enter into
repurchase agreements and reverse repurchase agreements, borrow money,
lend its portfolio securities, write covered options on securities,
purchase options on securities, sell securities short against the box,
purchase and sell securities on a when-issued or delayed delivery
basis, and enter into interest rate futures contracts and related
options.
Total Return Portfolio
Goal - The Total Return Portfolio's goal is to provide shareholders
with total return, consisting of long- term capital appreciation and
income.
Investment Policies - The portfolio will seek to achieve its goal by
investing primarily in a diversified portfolio of dividend-paying
common stocks. The portfolio may engage in various portfolio
strategies involving options to seek to increase its return and to
hedge its portfolio against movements in the equity markets and
interest rates. Because the portfolio seeks total return by
emphasizing investments in dividend-paying common stocks, it will not
have as much investment flexibility as total return funds which may
pursue their objective by investing in income and equity securities
without such an emphasis. The portfolio may also invest up to 10% of
its assets in securities rated less than investment grade by Moody's,
S&P or the equivalent of another NRSRO or, in unrated securities deemed
by the adviser to be of comparable quality. The portfolio may invest
up to 35% of its assets in interest-paying debt securities such as U.S.
government securities, and other securities, including convertible
bonds, convertible preferred stock and warrants. The portfolio also
may lend its portfolio securities and enter into short sales against
the box.
Diversified Strategic Income Portfolio
Goal - The Diversified Strategic Income Portfolio's goal is high
current income.
Investment Policies - The portfolio will seek to achieve its goal
through allocating and reallocating its assets primarily among three
types of fixed-income securities: U.S. government and mortgage-related
securities, foreign government securities and corporate securities
rated below investment grade. Under current market conditions, the
adviser expects to maintain 50% of the portfolio's assets in government
and mortgage-securities, 25% in foreign government securities and 25%
of its assets in high-yield corporate securities. The portions of the
portfolio's assets invested in each type of security will vary from
time to time and, at any given time, the portfolio may be entirely
invested in a single type of fixed-income security. Under normal
circumstances, substantially all, but not less than 65%, of the
portfolio's assets will be invested in fixed-income securities,
including non-convertible preferred stocks.
The portfolio generally will invest in intermediate- and long-term
fixed-income securities with the result that, under normal market
conditions, the weighted average maturity of the portfolio's securities
is expected to be from four to in excess of 12 years. Mortgage-related
securities in which the portfolio may invest, which include mortgage
obligations collateralized by mortgage loans or mortgage pass-through
certificates, will be rated no lower than Aa by Moody's or AA by S&P or
the equivalent from another NRSRO, or if unrated, will be deemed by the
adviser to be of comparable quality. Under normal market conditions,
the portfolio's mortgage-related holdings can be expected to consist
primarily of securities issued or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). The portfolio may invest up to 35% of its assets in
corporate fixed-income securities of U.S. issuers rated Ba or lower by
Moody's or BB or lower by S&P, but not lower than Caa or CCC,
respectively, or the equivalent from another NRSRO, or in unrated
securities deemed by the adviser and the sub-adviser to be of
comparable quality. Special considerations arising from investment in
lower-rated and unrated securities are described in "Special
Considerations and Risk Factors--Medium-, Lower- and Unrated
Securities."
The portfolio may also invest in fixed-income securities issued by
supranational organizations and may engage in transactions in options,
interest rate futures contracts, options on interest rate futures
contracts, forward currency contracts, options on foreign currencies
and foreign currency futures contracts. Up to 5% of the portfolio's
assets may be invested in developing countries.
Intermediate High Grade Portfolio
Goal - The Intermediate High Grade Portfolio's goal is to provide as
high a level of current income as is consistent with the protection of
capital.
Investment Policies - The portfolio will seek to achieve its goal by
investing, under normal circumstances, substantially all, but not less
than 65%, of its assets in U.S. government securities and high-grade
corporate bonds of U.S. issuers (i.e., bonds rated within the three
highest rating categories by Moody's, S&P, or the equivalent from
another NRSRO or, if not rated, believed by the adviser to be of
comparable quality).
Under normal market conditions, the average weighted maturity of the
portfolio's assets will be from three to ten years. The portion of the
portfolio's assets not invested in intermediate-term U.S. government
securities and U.S. corporate bonds may be invested in long- or
short-term U.S. government and corporate obligations, convertible
securities and preferred stock that is not convertible into common
stock. The portfolio may not hold securities rated lower than Baa by
Moody's or BBB by S&P, or the equivalent of another NRSRO or unrated
securities deemed to be comparable to securities rated below investment
grade. The portfolio may invest up to 10% of its total assets in
government stripped mortgage- backed securities and may invest in
floating- or variable-rate demand notes.
Money Market Portfolio
Goal - The Money Market Portfolio's goal is maximum current income to
the extent consistent with the preservation of capital and the
maintenance of liquidity.
Investment Policies - In seeking to achieve its goal, the portfolio
will invest in short-term money market instruments, including:
securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities ("U.S. government securities"); repurchase
agreements, U.S. and foreign bank time deposits, certificates of
deposit and bankers' acceptances; high-grade commercial paper of U.S.
and foreign issuers and other short-term corporate debt obligations of
such issuers that are comparable in priority and security to such
instruments, including variable-rate and floating--rate instruments.
Except when maintaining a temporary defensive position, the Portfolio
intends to invest more than 25% of its assets in short-term bank
instruments. The portfolio will invest in money market instruments
determined by the adviser to present minimal credit risks and which at
the time of purchase are considered to be "Eligible Securities," as
defined by the SEC.
The portfolio will invest only in securities purchased with and payable
in U.S. dollars and that have (or, pursuant to regulations adopted by
the SEC, are deemed to have) remaining maturities of 13 months or less
at the date of purchase by the portfolio. The portfolio will maintain a
dollar-weighted average portfolio maturity of 90 days or less. The
portfolio will follow these policies to maintain a constant net asset
value of $ 1.00 per share, although there is no assurance that it can
do so on a continuing basis.
ADDITIONAL INVESTMENT POLICIES
EQUITY INVESTMENTS
Common Stocks (Appreciation, Emerging Growth, Equity Income, Equity
Index, Growth & Income, International Equity and Total Return
Portfolios). Common stocks are shares of a corporation or other entity
that entitle the holder to a pro rata share of the profits of the
corporation, if any, without preference over any other shareholder or
class of shareholders, including holders of the entity's preferred
stock and other senior equity. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so.
Convertible Securities (Appreciation, Emerging Growth, Equity Income,
Growth & Income, Intermediate High Grade, International Equity and
Total Return Portfolios). The portfolios may invest in convertible
securities, which are fixed-income securities that may be converted at
either a stated price or stated rate into underlying shares of common
stock. Convertible securities have general characteristics similar to
both fixed-income and equity securities. Although to a lesser extent
than with fixed-income securities generally, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition,
because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the
underlying common stocks and, therefore, also will react to variations
in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade
increasingly on a yield basis and so may not experience market value
declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the prices of
the convertible securities tend to rise as a reflection of the value of
the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail
less risk than investments in common stock of the same issuer.
As fixed-income securities, convertible securities provide for a stable
stream of income with generally higher yields than common stocks. Of
course, like all fixed-income securities, there can be no assurance of
current income because the issuers of the convertible securities may
default on their obligations. Convertible securities, however,
generally offer lower interest or dividend yields than non-convertible
securities of similar quality because of the potential for capital
appreciation. A convertible security, in addition to providing fixed
income, offers the potential for capital appreciation through the
conversion feature, which enables the holder to benefit from increases
in the market price of the underlying common stock. There can be no
assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible
bonds, as corporate debt obligations, enjoy seniority in right of
payment to all equity securities, and convertible preferred stock is
senior to common stock of the same issuer. Because of the subordination
feature, however, convertible securities typically have lower ratings
than similar non-convertible securities.
Preferred Stock (Appreciation, Diversified Strategic Income, Emerging
Growth, Equity Income, Intermediate High Grade, International Equity
and Total Return Portfolios). The portfolios may invest in preferred
stocks, which, like debt obligations, are generally fixed-income
securities. Shareholders of preferred stocks normally have the right
to receive dividends at a fixed rate when and as declared by the
issuer's board of directors, but do not participate in other amounts
available for distribution by the issuing corporation. Preferred stock
dividends must be paid before common stock dividends and, for that
reason, preferred stocks generally entail less risk than common stocks.
Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or
stated value, and are senior in right of payment to common stock.
Preferred stocks are, however, equity securities in the sense that they
do not represent a liability of the issuer and, therefore, do not offer
as great a degree of protection of capital or assurance of continued
income as investments in corporate debt securities. In addition,
preferred stocks are subordinated in right of payment to all debt
obligations and creditors of the issuer and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer.
Warrants (Appreciation, Emerging Growth, Equity Income, Growth &
Income, International Equity and Total Return Portfolios). The
portfolios may invest in warrants. Because a warrant does not carry
with it the right to dividends or voting rights with respect to the
securities the warrant holder is entitled to purchase, and because it
does not represent any rights to the assets of the issuer, warrants may
be considered more speculative than certain other types of investments.
Also, the value of a warrant does not necessarily change with the
value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date.
Real Estate Investment Trusts (Total Return and the Intermediate High
Grade Portfolios). The portfolios may invest in real estate investment
trusts ("REITs"). REITs are entities which either own properties or
make construction or mortgage loans. Equity trusts own real estate
directly and the value of and income earned by, the trust depends upon
the income of the underlying properties and the rental income they
earn. Equity trusts may also include operating or finance companies.
Equity trusts can also realize capital gains by selling properties that
have appreciated in value. Mortgage trusts can make construction,
development or long-term mortgage loans, and are sensitive to the
credit quality of the borrower. Mortgage trusts derive their income
from interest payments. Hybrid trusts combine the characteristics of
both equity and mortgage trusts, generally by holding both ownership
interests and mortgage interests in real estate. The values of
securities issued by REITs are affected by tax and regulatory
requirements and by perceptions of management skill. They are also
subject to heavy cash flow dependency, defaults by borrowers or
tenants, self-liquidation, the possibility of failing to qualify for
tax-free status under the Internal Revenue Code of 1986, as amended
(the "Code"), and failing to maintain exemption from the Investment
Company Act of 1940, as amended.
American, European and Continental Depository Receipts (Appreciation,
Emerging Growth, Equity Income, Growth & Income, International Equity
and Total Return Portfolios). The portfolios may invest in the
securities of foreign and U.S. issuers in the form of American
Depository Receipts ("ADRs") and European Depository Receipts ("EDRs").
These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a foreign corporation.
EDRs, which sometimes are referred to as Continental Depository
Receipts ("CDRs"), are receipts issued in Europe, typically by foreign
banks and trust companies, that evidence ownership of either foreign or
U.S. securities. Generally, ADRs, in registered form, are designed for
use in U.S. securities markets and EDRs and CDRs, in bearer form, are
designed for use in European securities markets.
FIXED INCOME SECURITIES
Bank Obligations (All Portfolios). U.S. commercial banks organized
under Federal law are supervised and examined by the U.S. Comptroller
of the Currency and are required to be members of the Federal Reserve
System and to be insured by the Federal Deposit Insurance Corporation
("FDIC"). U.S. banks organized under state law are supervised and
examined by state banking authorities but are members of the Federal
Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material
benefit to a portfolio, depending upon the principal amount of
certificates of deposit ("CDs") of each bank held by the portfolio) and
are subject to Federal examination and to a substantial body of Federal
law and regulation. As a result of government regulations, U.S.
branches of U.S. banks are, among other things, generally required to
maintain specified levels of reserves and are subject to other
supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of U.S. banks and of foreign branches
of foreign banks, such as CDs and time deposits ("TDs"), may be general
obligations of the parent bank in addition to the issuing branch, or
may be limited by the terms of a specific obligation and governmental
regulation. Such obligations are subject to different risks than are
those of U.S. banks or U.S. branches of foreign banks. These risks
include foreign economic and political developments, foreign
governmental restrictions that may adversely affect payment of
principal and interest on the obligations, foreign exchange controls
and foreign withholding and other taxes on interest income. Foreign
branches of U.S. banks and foreign branches of foreign banks are not
necessarily subject to the same or similar regulatory requirements that
apply to U.S. banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial record keeping
requirements. In addition, less information may be publicly available
about a foreign branch of a U.S. bank or about a foreign bank than
about a U.S. bank.
Obligations of U.S. branches of foreign banks may be general
obligations of the parent bank, in addition to being general
obligations of the issuing branch, or may be limited by the terms of
specific obligations and by governmental regulation as well as
governmental action in the country in which the foreign bank is
headquartered. A U.S. branch of a foreign bank with assets in excess
of $1 billion may or may not be subject to reserve requirements imposed
by the Federal Reserve System or by the state in which the branch is
located if the branch is licensed in that state. In addition, branches
licensed by the Comptroller of the Currency and branches licensed by
certain states may or may not be required to (a) pledge to the
regulator an amount of its assets equal to 5% of its total liabilities
by depositing assets with a designated bank within the state and (b)
maintain assets within the state in an amount equal to a specified
percentage of the aggregate amount of liabilities of the foreign bank
payable at or through all of its agencies or branches within the state.
The deposits of state branches may not necessarily be insured by the
FDIC. In addition, there may be less publicly available information
about a U.S. branch of a foreign bank than about a U.S. bank.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of U.S. banks, by U.S. branches of
foreign banks or by foreign branches of foreign banks, the Portfolios'
Advisers will carefully evaluate such investments on a case-by-case
basis.
The Money Market Portfolio will not purchase TDs maturing in more than
six months and will limit its investment in TDs maturing from two
business days through six months to 10% of its total assets. Except
when maintaining a temporary defensive position, the portfolio will
invest more than 25% of its assets in short-term bank instruments of
the types discussed above.
The Money Market Portfolio may purchase a CD issued by a bank, savings
and loan association or similar institution with less than $1 billion
in assets (a "Small Issuer CD") so long as (a) the issuer is a member
of the FDIC or Office of Thrift Supervision (the "OTS") and is insured
by the Savings Association Insurance Fund (the "SAIF"), which is
administered by the FDIC and is backed by the full faith and credit of
the U.S. government, and (b) the principal amount of the Small Issuer
CD is fully insured and is no more than $100,000. The Money Market
Portfolio will at any one time hold only one Small Issuer CD from any
one issuer.
Savings and loan associations whose CDs may be purchased by the
Portfolios are supervised by the OTS and are insured by SAIF. As a
result, such savings and loan associations are subject to regulation
and examination.
U.S. Government Securities (All Portfolios). The Portfolios may invest
in debt obligations of varying maturities issued or guaranteed by the
United States government, its agencies or instrumentalities ("U.S.
Government Securities"). Direct obligations of the U.S. Treasury
include a variety of securities that differ in their interest rates,
maturities and dates of issuance. U.S. Government Securities also
include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Loan Administration, Export-Import Bank of
the United States, Small Business Administration, GNMA, General
Services Administration, Central Bank for Cooperatives, Federal Farm
Credit Banks, Federal Home Loan Banks, FHLMC, Federal Intermediate
Credit Banks, Federal Land Banks, FNMA, Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board and
Student Loan Marketing Association. A portfolio may also invest in
instruments that are supported by the right of the issuer to borrow
from the U.S. Treasury and instruments that are supported by the credit
of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, a portfolio
will invest in obligations issued by such an instrumentality only if
the adviser determines that the credit risk with respect to the
instrumentality does not make its securities unsuitable for investment
by the portfolio.
The portfolios may invest up to 5% of their net assets in U.S.
government securities for which the principal repayment at maturity,
while paid in U.S. dollars, is determined by reference to the exchange
rate between the U.S. dollar and the currency of one or more foreign
countries ("Exchange Rate-Related Securities"). Exchange Rate-Related
Securities are issued in a variety of forms, depending on the structure
of the principal repayment formula. The principal repayment formula may
be structured so that the securityholder will benefit if a particular
foreign currency to which the security is linked is stable or
appreciates against the U.S. dollar. In the alternative, the principal
repayment formula may be structured so that the securityholder benefits
if the U.S. dollar is stable or appreciates against the linked foreign
currency. Finally, the principal repayment formula can be a function of
more than one currency and, therefore, be designed in either of the
aforementioned forms or a combination of those forms.
Investments in Exchange Rate-Related Securities entail special risks.
There is the possibility of significant changes in rates of exchange
between the U.S. dollar and any foreign currency to which an Exchange
Rate-Related Security is linked. If currency exchange rates do not move
in the direction or to the extent anticipated at the time of purchase
of the security, the amount of principal repaid at maturity might be
significantly below the par value of the security, which might not be
offset by the interest earned by the portfolios over the term of the
security. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the
foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. The
imposition or modification of foreign exchange controls by the United
States or foreign governments, or intervention by central banks, could
also affect exchange rates. Finally, there is no assurance that
sufficient trading interest to create a liquid secondary market will
exist for particular Exchange Rate-Related Securities due to conditions
in the debt and foreign currency markets. illiquidity in the forward
foreign exchange market and the high volatility of the foreign exchange
market may from time to time combine to make it difficult to sell an
Exchange Rate-Related Security prior to maturity without incurring a
significant price loss.
Commercial Paper (All Portfolios). Commercial paper consists of short-
term (usually from 1 to 270 days) unsecured promissory notes issued by
corporations in order to finance their current operations. A variable
amount master demand note represents a direct borrowing arrangement
involving periodically fluctuating rates of interest under a letter
agreement between a commercial paper issuer and an institutional
lender, such as a portfolio, pursuant to which the lender may determine
to invest varying amounts. Transfer of such notes is usually
restricted by the issuer, and there is no secondary trading market for
such notes. A portfolio, therefore, may not invest in a master demand
note if as a result more than 10% of the value of the portfolio's total
assets would be invested in such notes and other illiquid securities.
Money Market Instruments (All Portfolios). The Money Market Portfolio
will invest exclusively in money market instruments. Each of the
remaining portfolios may, as a cash management tool, hold up to 20%
(except that each of the Total Return, Emerging Growth and
International Equity Portfolios may invest up to 35%) of the value of
its total assets in cash and invest in short-term instruments and, for
temporary defensive purposes, may hold cash and invest in short-term
instruments without limitation. Short-term instrument with respect to
other short-term debt securities and comparable unrated securities.
"Requisite NRSROs" means (a) any two NRSROs that have issued a rating
with respect to a security or class of debt obligations of an issuer,
or (b) one NRSRO, if only one NRSRO has issued such a rating at the
time that the Portfolio acquires the security. Currently, there are
five NRSROs: S&P, Moody's, Fitch IBCA, Inc., Duff and Phelps Credit
Rating Co. and Thomson BankWatch. A discussion of the ratings
categories of the NRSROs is contained in the Appendix to the SAI.
The Money Market Portfolio generally may not invest more than 5% of its
total assets in the securities of any one issuer, except for U.S.
government securities. In addition, the portfolio may not invest more
than 5% of its total assets in Eligible Securities that have not
received the highest rating from the Requisite NRSROs and comparable
unrated securities ("Second Tier Securities") and may not invest more
than 1% of its total assets in the Second Tier Securities of any one
issuer. The portfolio may invest up to 25% of the then-current value of
the portfolio's total assets in the securities of a single issuer for a
period of up to three business days, provided (a) the securities are
rated by the Requisite NRSROs in the highest short-term rating
category, are securities of issuers that have received such rating with
respect to other short-term debt securities or are comparable unrated
securities, and (b) the portfolio does not make more than one such
investment at any one time.
Ratings as Investment Criteria (All Portfolios). In general, the
ratings of Moody's, S&P and other NRSROs represent the opinions of
these agencies as to the quality of securities that they rate. Such
ratings, however, are relative and subjective, and are not absolute
standards of quality. Nor do such ratings evaluate the market value
risk of the securities. These ratings will be used by the portfolios
as initial criteria for the selection of portfolio securities, but the
portfolios also will rely upon the independent advice of their
respective advisers to evaluate potential investments. Among the
factors that will be considered are the long-term ability of the issuer
to pay principal and interest and general economic trends. The
Appendix to this SAI contains further information concerning the
ratings of Moody's, S&P and other NRSROs.
Subsequent to its purchase by a portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum
required for purchase by the portfolio. In addition, it is possible
that Moody's, S&P or another NRSRO might not change its rating of a
particular issue to reflect subsequent events. None of these events
will require sale of such securities by the portfolio, but the relevant
adviser will consider such events in determining whether the portfolio
should continue to hold the securities.
In addition, to the extent the rating given by Moody's, S&P or another
NRSRO changes as a result of changes in such organization or its rating
system, or because of a corporate reorganization of such organization,
a portfolio will attempt to use comparable ratings as standards for its
investments in accordance with its investment goal and policies.
The Money Market Portfolio is prohibited from purchasing a security
unless that security is (a) rated by at least two NRSROs (such as
Moody's or S&P) within the highest rating assigned to short-term debt
securities (or, if not rated or rated by only one agency, is determined
to be of comparable quality) or (b) rated by at least two NRSROs within
the two highest ratings assigned to short-term debt securities (or, if
not rated or rated by only one agency, is determined to be of
comparable quality) and not more than 5% of the assets of the portfolio
will be invested in such securities. Comparable quality shall be
determined in accordance with procedures established by the Board of
Trustees of the fund.
Zero Coupon Securities (Diversified Strategic Income and the
Intermediate High Grade Portfolios). The Diversified Strategic Income
Portfolio and the Intermediate High Grade Portfolio may invest in zero
coupon securities. A zero coupon security is a debt obligation that
does not entitle the holder to any periodic payments of interest prior
to maturity and therefore is issued and traded at a discount from its
face amount. Zero coupon securities may be created by separating the
interest and principal components of securities issued or guaranteed by
the United States government or one of its agencies or
instrumentalities ("U.S. Government securities") or issued by private
corporate issuers. The discount from face value at which zero coupon
securities are purchased varies depending on the time remaining until
maturity, prevailing interest rates and the liquidity of the security.
Because the discount from face value is known at the time of
investment, investors holding zero coupon securities until maturity
know the total amount of their investment return at the time of
investment. In contrast, a portion of the total realized return from
conventional interest-paying obligations comes from the reinvestment of
periodic interest. Because the rate to be earned on these reinvestments
may be higher or lower than the rate quoted on the interest-paying
obligations at the time of the original purchase, the investor's return
on reinvestments is uncertain even if the securities are held to
maturity. This uncertainty is commonly referred to as reinvestment
risk. With zero coupon securities, however, there are no cash
distributions to reinvest, so investors bear no reinvestment risk if
they hold the zero coupon securities to maturity; holders of zero
coupon securities, however, forego the possibility of reinvesting at a
higher yield than the rate paid on the originally issued security. With
both zero coupon and interest-paying securities, there is no
reinvestment risk on the principal amount of the investment.
Zero coupon securities of the type held by the portfolios can he sold
prior to their due date in the secondary market at their then
prevailing market value which, depending on prevailing levels of
interest rates and the time remaining to maturity, may be more or less
than the securities' "accreted value;" that is, their value based
solely on the amount due at maturity and accretion of interest to date.
The market prices of zero coupon securities are generally more volatile
than the market prices of securities that pay interest periodically
and, accordingly, are likely to respond to a greater degree to changes
in interest rates than do non-zero coupon securities having similar
maturities and yields
Medium-, Lower- and Unrated Securities (Intermediate High Grade,
Diversified Strategic Income, Equity Income, Growth & Income and Total
Return Portfolios). The Intermediate High Grade, Diversified Strategic
Income, Equity Income, Growth & Income and Total Return Portfolios may
invest in medium- or lower-rated securities and unrated securities of
comparable quality. Generally, these securities offer a higher current
yield than is offered by higher-rated securities, but also will likely
have some quality and protective characteristics that, in the judgement
of the rating organizations, are outweighed by large uncertainties or
major risk exposures to adverse conditions and are predominantly
speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation. The
market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher- quality securities. In addition, medium- and
lower-rated securities and comparable unrated securities generally
present a higher degree of credit risk. Issuers of medium-, lower-rated
and comparable unrated securities are often highly leveraged and may
not have more traditional methods of financing available to them so
that their ability to service their debt obligations during a major
economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default by such issuers is
significantly greater because medium- and lower-rated securities and
comparable unrated securities are generally unsecured and frequently
are subordinated to the prior payment of senior indebtedness. In light
of these risks, each portfolio's adviser, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take
various factors established by the fund's Board of Trustees into
consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the
operating history of and the community support for the facility
financed by the issue, the ability of the issuer's management and
regulatory matters.
The markets in which medium- and lower-rated or comparable unrated
securities are traded are generally more limited than those in which
higher-rated securities are traded. The existence of limited markets
for these securities may restrict the availability of securities for a
portfolio to purchase and also may have the effect of limiting the
ability of the portfolio to (a) obtain accurate market quotations for
purposes of valuing securities and calculating net asset value and (b)
sell securities at their fair value either to meet redemption requests
or to respond to changes in the economy or the financial markets. The
market for medium-, lower-rated and comparable unrated securities is
relatively new and has not fully weathered a major economic recession.
Any such recession, however, would disrupt severely the market for such
securities and adversely affect the value of such securities, and could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon.
Fixed-income securities, including medium., lower-rated and comparable
unrated securities, frequently have call or buy-back features that
permit their issuers to call or repurchase the securities from their
holders, such as a portfolio. If an issuer exercises these rights
during periods of declining interest rates, the portfolio may have to
replace the security with a lower-yielding security resulting in a
decreased return to the portfolio.
The market values of securities in lower rating categories are more
volatile than that of higher quality securities, and the markets in
which medium- and lower-rated or comparable unrated securities are
traded are more limited than those in which higher-rated securities are
traded. Adverse publicity and investor perceptions may also have a
negative impact on the value and liquidity of lower-rated, high-yield
securities, especially in a limited trading market.
Subsequent to its purchase by a portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum
required for purchase by the portfolio. Neither event will require sale
of such securities by the portfolio involved, but it's adviser will
consider such event in its determination of whether the portfolio
should continue to hold the securities.
Securities rated Ba by Moody's or BB by S&P or the equivalent from
another NRSRO have speculative characteristics with respect to their
capacity to pay interest and repay principal. Securities rated B
generally lack the characteristics of a desirable investment and
assurance of interest and principal payments over any long period of
time may be small. Securities rated Caa or CCC are of poor standing.
These issues may be in default or present elements of danger with
respect to principal or interest
Floating- and Variable-Rate Demand Notes (Money Market Portfolio). The
Money Market Portfolio may acquire floating- and variable-rate demand
notes of corporate issuers. Although floating- and variable-rate demand
notes are frequently not rated by credit rating agencies, unrated notes
purchased by the portfolio must be determined by it's adviser to be of
comparable quality at the time of purchase to instruments rated "high
quality" (i.e., within the two highest rating categories) by any NRSRO.
Moreover, while there may be no active secondary market with respect to
a particular floating- or variable-rate demand note purchased by the
portfolio, the portfolio may, upon the notice specified in the note,
demand payment of the principal of and accrued interest on the note at
any time and may resell the note at any time to a third party. The
absence of such an active secondary market, however, could make it
difficult for the portfolio to dispose of a particular floating- or
variable- rate demand note in the event the issuer of the note
defaulted on its payment obligations, and the portfolio could, for this
or other reasons, suffer a loss to the extent of the default.
When-Issued Securities and Delayed-Delivery Transactions (Diversified
Strategic Income, Emerging Growth, Equity Income, Growth & Income,
Intermediate High Grade, International Equity and Total Return
Portfolios) The portfolios may purchase securities on a "when-issued"
basis, for delayed delivery (i.e., payment or delivery occur beyond the
normal settlement date at a stated price and yield) or on a forward
commitment basis. No portfolio intends to engage in these transactions
for speculative purposes, but only in furtherance of its investment
goal. These transactions occur when securities are purchased or sold
by the portfolios with payment and delivery taking place in the future
to secure what is considered an advantageous yield and price to the
portfolios at the time of entering into the transaction. The payment
obligation and the interest rate that will be received on when-issued
securities are fixed at the time the buyer enters into the commitment.
Because of fluctuations in the value of securities purchased or sold
on a when-issued, delayed-delivery basis or forward commitment basis,
the prices obtained on such securities may be higher or lower than the
prices available in the market on the dates when the investments are
actually delivered to the buyers.
When the portfolios agree to purchase when-issued or delayed-delivery
securities, the fund will set aside cash or liquid securities equal to
the amount of the commitment in a segregated account on the fund's
books. Normally, the portfolio will set aside portfolio securities to
satisfy a purchase commitment, and in such a case the portfolio may be
required subsequently to place additional assets in the segregated
account in order to ensure that the value of the account remains equal
to the amount of the portfolio's commitment. The assets contained in
the segregated account will be marked-to-market daily. It may be
expected that the portfolio's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. When the portfolio engages
in when-issued or delayed-delivery transactions, it relies on the other
party to consummate the trade. Failure of the seller to do so may
result in the portfolios' incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
Mortgage-Related Securities (Diversified Strategic Income, Growth &
Income, and Intermediate High Grade Portfolios). The mortgage pass-
through securities in which these portfolios may invest may be backed
by adjustable-rate, as well as conventional, mortgages. Those backed by
adjustable-rate mortgages bear interest at a rate that is adjusted
monthly, quarterly or annually. The average maturity of pass-through
pools of mortgage-related securities varies with the maturities of the
underlying mortgage instruments. In addition, a pool's stated maturity
may be shortened by unscheduled payments on the underlying mortgages.
Factors affecting mortgage prepayments include interest rate levels,
general economic and social conditions, the location of the mortgaged
property and the age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, it is not possible to accurately
predict the average life of a particular pool. Pools of mortgages with
varying maturities or different characteristics will have varying
average life assumptions and the prepayment experience of securities
backed by adjustable-rate mortgages may vary from those backed by
fixed-rate mortgages.
Mortgage-related securities may be classified as private, governmental
or government-related, depending on the issuer or guarantor. Private
mortgage-related securities represent pass-through pools consisting
principally of conventional residential mortgage loans created by non-
governmental issuers, such as commercial banks, savings and loan
associations and private mortgage insurance companies. Government
mortgage-related securities are backed by the full faith and credit of
the United States. GNMA, the principal guarantor of such securities, is
a wholly owned U.S. government corporation within the Department of
Housing and Urban Development. Government-related mortgage-related
securities are not backed by the full faith and credit of the United
States. Issuers of such securities include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private
stockholders, which is subject to general regulation by the Secretary
of Housing and Urban Development. Pass-through securities issued by
FNMA are guaranteed as to timely payment of principal and interest by
FNMA. FHLMC is a corporate instrumentality of the United States, the
stock of which is owned by the Federal Home Loan Banks. Participation
certificates representing interests in mortgages from the FHLMC
national portfolio are guaranteed as to the timely payment of interest
and ultimate collection of principal by FHLMC.
The portfolios expect that private, governmental or government-related
entities may create mortgage loan pools offering pass-through
investments in addition to those described above. The mortgages
underlying these securities may be alternative mortgage instruments;
that is, mortgage instruments whose principal or interest payments may
vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage-related securities are developed
and offered to investors, the portfolios, consistent with their
investment goals and policies, will consider making investments in such
new types of securities.
Forward Roll Transactions (Intermediate High Grade and Diversified
Strategic Income Portfolios). In order to enhance current income, the
Intermediate High Grade and Diversified Strategic Income Portfolios may
enter into forward roll transactions with respect to mortgage- related
securities issued by GNMA, FNMA and FHLMC. In a forward roll
transaction, a portfolio sells a mortgage security to a financial
institution, such as a bank or broker-dealer, and simultaneously agrees
to repurchase a similar security from the institution at a later date
at an agreed-upon price. The mortgage securities that are repurchased
will bear the same interest rate as those sold, but generally will be
collateralized by different pools of mortgages with different
prepayment histories than those sold. During the period between the
sale and repurchase, the portfolio will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the
sale will be invested in short-term instruments, particularly
repurchase agreements, and the income from these investments, together
with any additional fee income received on the sale, will generate
income for the portfolio exceeding the yield on the securities sold.
Forward roll transactions involve the risk that the market value of the
securities sold by a portfolio may decline below the repurchase price
of those securities. When a portfolio enters into a forward roll
transaction, it will place in a segregated account on the fund's books
cash, U.S. government securities, equity securities or debt obligations
of any grade having a value equal to or greater than the repurchase
price (including accrued interest) provided such securities have been
determined by the adviser to be liquid and unencumbered, and are marked
to market daily pursuant to guidelines established by the trustees, and
will subsequently monitor the account to insure that such equivalent
value is maintained. Forward roll transactions are considered to be
borrowings by a portfolio.
Floating- and Variable-Rate Obligations (Money Market Portfolio). The
Money Market Portfolio may purchase floating-rate and variable-rate
obligations, including participation interests therein. Variable-rate
obligations provide for a specified periodic adjustment in the interest
rate, while floating-rate obligations have an interest rate that
changes whenever there is a change in the external interest rate. The
portfolio may purchase floating-rate and variable-rate obligations that
carry a demand feature that would permit the portfolio to tender them
back to the issuer or remarketing agent at par value prior to maturity.
Frequently, floating-rate and variable-rate obligations are secured by
letters of credit or other credit support arrangements provided by
banks.
Eurodollar or Yankee Obligations (All Portfolios including the Money
Market Portfolio). Each portfolio including the Money Market Portfolio
may invest in Eurodollar and Yankee obligations. Eurodollar bank
obligations are dollar-denominated debt obligations issued outside the
U.S. capital markets by foreign branches of U.S. banks and by foreign
banks. Yankee obligations are dollar-denominated obligations issued in
the U.S. capital markets by foreign issuers. Eurodollar (and to a
limited extent, Yankee) obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government
might prevent U.S.dollars from leaving the country. Other risks
include: adverse political and economic developments in a foreign
country; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes;
and expropriation or nationalization of foreign issuers.
DERIVATIVE CONTRACTS
As described in the prospectus, certain of the portfolios may enter
into various types of securities, index and currency futures, options
and related contracts in order to hedge the existing or anticipated
value of its portfolio. No portfolio is required to enter into hedging
transactions with regard to its foreign currency-denominated securities
and a portfolio will not do so unless deemed appropriate by its
adviser. 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 one can achieve at some
future point in time. Each portfolio will invest in these instruments
only in markets believed by its adviser to be active and sufficiently
liquid.
Options on Securities (Diversified Strategic Income, Emerging Growth,
Equity Income, Equity Index, Growth & Income, Intermediate High Grade,
International Equity, and Total Return Portfolios). The portfolios may
engage in the writing of covered put and call options and may enter
into closing transactions. The Intermediate High Grade, Diversified
Strategic Income, Equity Income, Total Return, International Equity and
Emerging Growth Portfolios also may purchase put and call options.
The principal reason for writing covered call options on securities is
to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. In return for a
premium, the writer of a covered call option forfeits the right to any
appreciation in the value of the underlying security above the strike
price for the life of the option (or until a closing purchase
transaction can be effected). Nevertheless, the call writer retains the
risk of a decline in the price of the underlying security. Similarly,
the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security.
The size of the premiums a portfolio may receive may be adversely
affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
Options written by a portfolio normally will have expiration dates
between one and nine months from the date written. The exercise price
of the options may be below, equal to or above the market values of the
underlying securities at the times the options are written. In the
case of call options, these exercise prices are referred to as "in-the-
money," "at-the-money" and "out-of-the-money," respectively. A
portfolio may write (a) in-the-money call options when its adviser
expects that the price of the underlying security will remain flat or
decline moderately during the option period, (b) at-the-money call
options when its adviser expects that the price of the underlying
security will remain flat or advance moderately during the option
period and (c) out-of-the-money call options when its adviser expects
that the price of the underlying security may increase but not above a
price equal to the sum of the exercise price plus the premiums received
from writing the call option. In any of the preceding situations, if
the market price of the underlying security declines and the security
is sold at this lower price, the amount of any realized loss will be
offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options
as to the relation of exercise price to market price) may be utilized
in the same market environments that such call options are used in
equivalent transactions.
So long as the obligation of a portfolio as the writer of an option
continues, the portfolio may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the
portfolio to deliver, in the case of a call, or take delivery of, in
the case of a put, the underlying security against payment of the
exercise price. This obligation terminates when the option expires or
the portfolio effects a closing purchase transaction. A portfolio can
no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice. To secure its
obligation to deliver the underlying security when it writes a call
option, or to pay for the underling security when it writes a put
option, a portfolio will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the
Options Clearing Corporation ("Clearing Corporation") and of the
securities exchange on which the option is written.
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized
securities exchange or in the over-the-counter market. Because of this
and current trading conditions, the Intermediate High Grade,
Diversified Strategic Income, Equity Income, Total Return,
International Equity and Emerging Growth Portfolios expect to purchase
not only call or put options issued by the Clearing Corporation, but
also options in the domestic and foreign over-the-counter markets.
Portfolios with the authority to write options expect to do so only if
a secondary market exists on a U.S. securities exchange or in the over-
the-counter market.
A portfolio may realize a profit or loss upon entering into a closing
transaction. In cases in which a portfolio has written an option, it
will realize a profit if the cost of the closing purchase transaction
is less than the premium received upon writing the option and will
incur a loss if the cost of the closing purchase transaction exceeds
the premium received upon writing the option. Similarly, when a
portfolio has purchased an option and engages in a closing sale
transaction, whether the portfolio realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction
is more or less than the premium that the portfolio initially paid for
the original option plus the related transaction costs.
Although a portfolio generally will purchase or write only those
options for which its adviser believes there is an active secondary
market so as to facilitate closing transactions, there is no assurance
that sufficient trading interest to create a liquid secondary market on
a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated
trading activity or order flow or other unforeseen events have at times
rendered inadequate certain of the facilities of the Clearing
Corporation and securities exchanges which have resulted in the
institution of special procedures, such as trading rotations,
restrictions on certain types of orders or trading halts or suspensions
in one or more options. There can be no assurance that similar events,
or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be
possible to effect closing transactions in particular options. If, as
a covered call option writer, a portfolio is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell
the underlying security until the option expires or it delivers the
underlying security upon exercise.
Securities exchanges generally have established limitations governing
the maximum number of calls and puts of each class which may be held or
written, or exercised within certain time periods, by an investor or
group of investors acting in concert (regardless of whether the options
are written on the same or different securities exchanges or are held,
written or exercised in one or more accounts or through one or more
brokers). It is possible that the portfolios and other clients of
their respective advisers and certain of their affiliates may be
considered to be such a group. A securities exchange may order the
liquidation of positions found to be in violation of these limits and
it may impose certain other sanctions.
In the case of options written by a portfolio that are deemed covered
by virtue of the portfolio's holding convertible or exchangeable
preferred stock or debt securities, the time required to convert or
exchange and obtain physical delivery of the underlying common stocks
with respect to which the portfolio has written options may exceed the
time within which the portfolio must make delivery in accordance with
an exercise notice. In these instances, a portfolio may purchase or
temporarily borrow the underlying securities for purposes of physical
delivery. By so doing, the portfolio will not bear any market risk,
because the portfolio will have the absolute right to receive from the
issuer of the underlying security an equal number of shares to replace
the borrowed stock, but the portfolio may incur additional transaction
costs or interest expenses in connection with any such purchase or
borrowing.
Additional risks exist with respect to certain of the U.S. government
securities for which a portfolio may write covered call options. If a
portfolio writes covered call options on mortgage-backed securities,
the securities it holds as cover may, because of scheduled amortization
or unscheduled prepayments, cease to be sufficient cover. The
portfolio will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of those securities.
Stock Index Options (Equity Income, Equity Index, Emerging Growth,
Growth & Income, International Equity and Total Return Portfolios).
The portfolios may purchase call options on stock indexes listed on
U.S. securities exchanges for the purpose of hedging their portfolios.
The Total Return Portfolio may also write call and buy put options on
stock indexes. A stock index fluctuates with changes in the market
values of the stocks included in the index. Stock index options may be
based on a broad market index such as the New York Stock Exchange
Composite Index or a narrower market index such as the S&P 500 Index.
Indexes also may be based on an industry or market segment.
Options on stock indexes are generally similar to options on stock
except with respect to delivery. Instead of giving the right to take
or make delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive a cash "exercise settlement
amount" equal to (a) the amount, if any, 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 exercise, multiplied by (b) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the
option. The amount of cash received will be equal to such difference
between the closing price of the index and the exercise price of the
option, expressed in dollars, times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make
delivery of this amount. The writer may offset its position in stock
index options prior to expiration by entering into a closing
transaction on an exchange, or it may let the option expire
unexercised.
The effectiveness of purchasing stock index options as a hedging
technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price
movements in the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the portfolio will realize a gain
or loss from the purchase or writing of options on an index depends
upon movements in stock prices in the stock market generally or, in the
case of certain indexes, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly, successful
use by the portfolio of options on stock indexes will be subject to its
adviser's ability to predict correctly movements in the direction of
the stock market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
A portfolio will engage in stock index option transactions only when it
is determined by its adviser to be consistent with the portfolio's
efforts to control risk. There can be no assurance that such judgment
will be accurate or that the use of these portfolio strategies will be
successful.
Futures Activities (Diversified Strategic Income, Emerging Growth,
Equity Income, Equity Index, Growth & Income, Intermediate High Grade,
International Equity and Total Return Portfolios). The Intermediate
High Grade, Diversified Strategic Income, Equity Income, Growth &
Income, Total Return, International Equity and Emerging Growth
Portfolios may enter into interest rate futures contracts. The Equity
Index, Equity Income, Growth & Income, Total Return, International
Equity and Emerging Growth Portfolios may enter into stock index
futures contracts. The Diversified Strategic Income, Emerging Growth
and International Equity Portfolios may enter into foreign currency
futures contracts. The portfolios may enter into related options traded
on a U.S. exchange or board of trade.
An interest rate futures contract provides for the future sale by one
party and the purchase by another party of a certain amount of a
specific financial instrument (debt security) at a specified price,
date, time and place. Similarly, a foreign currency futures contract
provides for the future sale by one party and the purchase by another
party of a certain amount of a particular currency at a specified
price, date, time and place. A stock index futures contract 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. No physical
delivery of the underlying securities in the index is made.
The purpose of the acquisition or sale of a futures contract by a
portfolio, other than the Equity Index, Total Return, International
Equity and Emerging Growth Portfolios, is to mitigate the effects of
fluctuations in the value of its securities caused by anticipated
changes in interest rates, market conditions or currency values without
actually buying or selling the securities. Of course, because the
value of portfolio securities will far exceed the value of the futures
contracts entered into by a portfolio, an increase in the value of the
futures contracts could only mitigate, but not totally offset, the
decline in the value of the portfolio.
No consideration is paid or received by a portfolio upon entering into
a futures contract. Initially, a portfolio will be required to deposit
with the broker an amount of cash or cash equivalents equal to
approximately 1% to 10% of the contract amount (this amount is subject
to change by the board of trade on which the contract is traded and
members of such board of trade may charge a higher amount). This
amount, known as "initial margin," is in the nature of a performance
bond or good faith deposit on the contract and is returned to a
portfolio upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker will be made daily
as the price of the securities, currency or index underlying the
futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-
market." At any time prior to expiration of a futures contract, a
portfolio may elect to close the position by taking an opposite
position, which will operate to terminate the portfolio's existing
position in the contract.
Several risks are associated with the use of futures contracts as a
hedging device. Successful use of futures contracts by a portfolio is
subject to the ability of its adviser to predict correctly movements in
interest rates, changes in market conditions or fluctuations in
currency values. These predictions involve skills and techniques that
may be different from those involved in the management of the portfolio
being hedged. In addition, there can be no assurance that there will
be a correlation between movements in the price of the underlying
securities, index or currency and movements in the price of the
securities or currency that is the subject of a hedge. A decision of
whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected trends in interest
rates or currency values.
Although the portfolios intend to enter into futures contracts only if
there is an active market for such contracts, there is no assurance
that an active market will exist for the contracts at any particular
time. Most U.S. futures exchanges and boards of trade limit the amount
of fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit.
It is possible that futures contract prices could move 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. In such event,
and in the event of adverse price movements, a portfolio would be
required to make daily cash payments of variation margin, and an
increase in the value of the portion of the portfolio being hedged, if
any, may partially or completely offset losses on the futures contract.
As described above, however, there is no guarantee that the price of
the securities or value of the currency being hedged will, in fact,
correlate with the price movements in a futures contract and thus
provide an offset to losses on the futures contract.
If a portfolio has hedged against the possibility of a change in
interest rates, market conditions or currency values adversely
affecting the value of securities held in its portfolio and interest
rates, market conditions or currency values move in a direction
opposite to that which has been anticipated, the portfolio will lose
part or all of the benefit of the increased value of securities or
currencies it has hedged because it will have offsetting losses in its
futures positions. Additionally, if in such situations the portfolio
has insufficient cash, it may have to sell securities to meet daily
variation margin requirements at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be
at increased prices that reflect the change in interest rates, market
conditions or currency values, as the case may be.
Options on Futures Contracts. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a
position in the underlying futures contract at a specified exercise
price at any time prior to the expiration date of the option. Upon
exercise of an 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
futures contract exceeds, in the case of a call, or is less than, in
the case of put, the exercise price of the option on the futures
contract. The potential for loss related to the purchase of an option
on a futures contract is limited to the premium paid for the option
plus transaction costs. Because the value of the option is fixed at
the point of sale, there are no daily cash payments to reflect changes
in the value of the underlying contract; however, the value of the
option does change daily and that change would be reflected in the net
asset value of a portfolio holding the options.
The portfolios may purchase and write put and call options on futures
contracts traded on a U.S. exchange or board of trade as a hedge
against changes in the value of their portfolio securities, or, in the
case of the Equity Index Portfolio, in anticipation of the purchase of
securities, and may enter into closing transactions with respect to
such options to terminate existing positions. There is no guarantee
that such closing transactions can be effected.
Several risks are associated with options on futures contracts. The
ability to establish and close out positions on such options will be
subject to the existence of a liquid market. In addition, the purchase
of put or call options will be based upon predictions by an adviser as
to anticipated trends, and such predictions could prove to be
incorrect. Even if an adviser's expectations are correct, there may be
an imperfect correlation between the change in the value of the options
and of the portfolio securities being hedged.
Currency Exchange Transactions (Diversified Strategic Income, Emerging
Growth, and International Equity Portfolios). The portfolios' dealings
in forward currency exchange will be limited to hedging involving
either specific transactions or portfolio positions. Transaction
hedging is the forward purchase or sale of currency with respect to
specific receivables or payables of the portfolio, generally arising in
connection with the purchase or sale of its portfolio securities.
Position hedging is the forward sale of currency with respect to
portfolio security positions denominated or quoted in the currency.
The portfolios may not position hedge with respect to a particular
currency to an extent greater than the aggregate market value at any
time of the securities held in its portfolio denominated or quoted in
or currently convertible (such as through exercise of an option or
consummation of a forward contract) into that particular currency. If
a portfolio enters into a transaction hedging or position hedging
transaction, it will cover the transaction through one or more of the
following methods: (a) ownership of the underlying currency or an
option to purchase such currency; (b) ownership of an option to enter
into an offsetting forward contract; (c) entering into a forward
contract to purchase currency being sold or to sell currency being
purchased, provided such covering contract is itself covered by one of
these methods, unless the covering contract closes out the first
contract; or (d) depositing into a segregated account on the fund's
books cash or readily marketable securities in an amount equal to the
value of the portfolio's total assets committed to the consummation of
the forward contract and not otherwise covered. In the case of
transaction hedging, any securities placed in the account must be
liquid debt securities. In any case, if the value of the securities
placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the
account will equal the above amount. Hedging transactions may be made
from any foreign currency into U.S. dollars or into other appropriate
currencies.
At or before the maturity of a forward contract, the portfolio either
may sell a portfolio security and make delivery of the currency, or
retain the security and offset its contractual obligation to deliver
the currency by purchasing a second contract pursuant to which the
portfolio will obtain, on the same maturity date, the same amount of
the currency it is obligated to deliver. If the portfolio retains the
portfolio security and engages in an offsetting transaction, at the
time of execution of the offsetting transaction, it will incur a gain
or loss to the extent movement has occurred in forward contract
prices. Should forward prices decline during the period between the
portfolio's entering into a forward contract for the sale of a currency
and the date it enters into an offsetting contract for the purchase of
the currency, the portfolio will realize a gain to the extent that 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 realize a loss to the extent the price of the currency
it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The cost to a portfolio of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because transactions
in currency exchange are usually conducted on a principal basis, no
fees or commissions are involved. The use of forward currency
contracts does not eliminate fluctuations in the underlying prices of
the securities, but it does establish a rate of exchange that can be
achieved in the future. In addition, although forward currency
contracts limit the risk of loss due to a decline in the value of the
hedged currency, at the same time they limit any potential gain might
result should the value of the currency increase.
If a devaluation is generally anticipated, a portfolio may not be able
to contract to sell the currency at a price above the devaluation level
it anticipates.
Foreign Currency Options (Diversified Strategic Income, Emerging Growth
and International Equity Portfolios). The portfolios may purchase put
and call options on foreign currencies for the purpose of hedging
against changes in future currency exchange rates. Put options convey
the right to sell the underlying currency at a price that is
anticipated to be higher than the spot price of the currency at the
time the option expires. Call options convey the right to buy the
underlying currency at a price that is expected to be lower than the
spot price of the currency at the time the option expires.
A portfolio may use foreign currency options under the same
circumstances it could use forward currency exchange transactions. A
decline in the U.S. dollar value of a foreign currency in which the
portfolio's securities are denominated, for example, will reduce the
U.S. dollar value of the securities, even if their value in the foreign
currency remains constant. In order to protect against such diminution
in the value of securities it holds, the portfolio may purchase put
options on the foreign currency. If the value of the currency does
decline, the portfolio will have the right to sell the currency for a
fixed amount in U.S. dollars and will thereby offset, in whole or in
part, the adverse effect on its securities that otherwise would have
resulted. Conversely, if a rise in the U.S. dollar value of a currency
in which securities to be acquired are denominated is projected,
thereby potentially increasing the cost of the securities, the
portfolio may purchase call options on the particular currency. The
purchase of these options could offset, at least partially, the effects
of the adverse movements in exchange rates. The benefit to the
portfolio derived from purchases of foreign currency options, like the
benefit derived from other types of options, will be reduced by the
amount of the premium and related transaction costs. In addition, if
currency exchange rates do not move in the direction or to the extent
anticipated, the portfolio could sustain losses on transactions in
foreign currency options that would require it to forego a portion or
all of the benefits of advantageous changes in the rates.
OTHER PRACTICES
Repurchase Agreements (All portfolios). The Money Market Portfolio
will enter into repurchase agreements with respect to U.S. government
securities and each other portfolio may engage in repurchase agreement
transactions on portfolio securities, in each case with banks which are
the issuers of instruments acceptable for purchase by the portfolio and
with certain dealers on the Federal Reserve Bank of New York's list of
reporting dealers. The portfolios may agree to purchase securities from
a bank or recognized securities dealer and simultaneously commit to
resell the securities to the bank or dealer at an agreed-upon date and
price reflecting a market rate of interest unrelated to the coupon rate
or maturity of the purchased securities ("repurchase agreements"). The
portfolios would maintain custody of the underlying securities prior to
their repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to would be, in effect, secured by
such securities. If the value of such securities were less than the
repurchase price, plus interest, the other party to the agreement would
be required to provide additional collateral so that at all times the
collateral is at least 102% of the repurchase price plus accrued
interest. Default by or bankruptcy of a seller would expose the fund
to possible loss because of adverse market action, expenses and/or
delays in connection with the disposition of the underlying
obligations. The financial institutions with which the fund may enter
into repurchase agreements will be banks and non-bank dealers of U.S.
Government securities listed on the Federal Reserve Bank of New York's
list of reporting dealers, if such banks and non-bank dealers are
deemed creditworthy by the portfolios' adviser. The adviser will
continue to monitor creditworthiness of the seller under a repurchase
agreement, and will require the seller to maintain during the term of
the agreement the value of the securities subject to the agreement to
equal at least 102% of the repurchase price (including accrued
interest). In addition, the adviser will require that the value of
this collateral, after transaction costs (including loss of interest)
reasonably expected to be incurred on a default, be equal to 102% or
greater than the repurchase price (including accrued premium) provided
in the repurchase agreement or the daily amortization of the difference
between the purchase price and the repurchase price specified in the
repurchase agreement. The adviser will mark-to-market daily the value
of the securities. Repurchase agreements are considered to be loans by
the fund under the 1940 Act.
Restricted Securities (All portfolios). Each portfolio may invest up
to 10% (15% in the case of the Total Return, Emerging Growth,
International Equity, Intermediate High Grade Portfolio and Diversified
Strategic Income Portfolios) of the value of its net assets in
restricted securities (i.e., securities which may not be sold without
registration under the 1933 Act) and in other securities that are not
readily marketable, including repurchase agreements maturing in more
than seven days. With respect to the Diversified Strategic Income
Portfolio, this restriction will not apply to securities subject to
Rule 144A of the 1933 Act. Restricted securities are generally
purchased at a discount from the market price of unrestricted
securities of the same issuer. Investments in restricted securities
are not readily marketable without some time delay. Investments in
securities which have no readily available market value are valued at
fair value as determined in good faith by the fund's board of trustees.
Ordinarily, a portfolio would invest in restricted securities only
when it receives the issuer's commitment to register the securities
without expense to the portfolio. However, registration and
underwriting expenses (which may range from 7% to 15% of the gross
proceeds of the securities sold) may be paid by the portfolio. A
portfolio position in restricted securities might adversely affect the
liquidity and marketability of such securities, and the portfolio might
not be able to dispose of its holdings in such securities at reasonable
price levels.
Reverse Repurchase Agreements (Diversified Strategic Income, Equity
Income, Intermediate High Grade and International Equity Portfolios).
The fund does not currently intend to commit more than 5% of the
portfolio's net assets to reverse repurchase agreements. A portfolio
may enter into reverse repurchase agreements with the same parties with
whom it may enter into repurchase agreements. Reverse repurchase
agreements involve the sale of securities held by the portfolio
pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time a portfolio enters into
a reverse repurchase agreement, it will establish and maintain a
segregated account on the fund's books containing cash or liquid
securities having a value not less than the repurchase price (including
accrued interest). The assets contained in the segregated account will
be marked-to-market daily and additional assets will be placed in such
account on any day in which the assets fall below the repurchase price
(plus accrued interest). The portfolio's liquidity and ability to
manage its assets might be affected when it sets aside cash or
portfolio securities to cover such commitments. Reverse repurchase
agreements involve the risk that the market value of the securities
retained in lieu of sale may decline below the price of the securities
the portfolio has sold but is obligated to repurchase. If the buyer of
securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the portfolio's
obligation to repurchase the securities, and the portfolio's use of the
proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
Short Sales Against the Box (Emerging Growth, Equity Income,
International Equity and Total Return Portfolios). The portfolios may
enter into a short sale of common stock such that when the short
position is open the portfolio involved owns an equal amount of
preferred stocks or debt securities, convertible or exchangeable,
without payment of further consideration, into an equal number of
shares of the common stock sold short. This kind of short sale, which
is described as "against the box," will be entered into by a portfolio
for the purpose of receiving a portion of the interest earned by the
executing broker from the proceeds of the sale. The proceeds of the
sale will be held by the broker until the settlement date when the
portfolio delivers the convertible or exchangeable securities to close
out its short position. Although prior to delivery a portfolio will
have to pay an amount equal to any dividends paid on the common stock
sold short, the portfolio will receive the dividends from the preferred
stock or interest from the debt securities convertible or exchangeable
into the stock sold short, plus a portion of the interest earned from
the proceeds of the short sale. The portfolio will deposit, in a
segregated account on its books, convertible preferred stock or
convertible debt securities in connection with short sales against the
box.
Lending of Portfolio Securities (Appreciation, Diversified Strategic
Income, Emerging Growth, Equity Index, Equity Income, Growth & Income,
Intermediate High Grade, International Equity and Total Return
Portfolios) Consistent with applicable regulatory requirements, a
portfolio may lend securities to brokers, dealers and other financial
organizations that meet capital and other credit requirements or other
criteria established by the Board. A portfolio will not lend
securities to affiliates of the adviser unless they have applied for
and received specific authority to do so from the SEC. Loans of
portfolio securities will be collateralized by cash, letters of credit
or U.S. Government Securities, which are maintained at all times in an
amount equal to at least 102% of the current market value of the loaned
securities. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the
account of the a portfolio. From time to time, a portfolio may return a
part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party that is
unaffiliated with the fund and that is acting as a "finder."
By lending its securities, a portfolio can increase its income by
continuing to receive interest and any dividends on the loaned
securities as well as by either investing the collateral received for
securities loaned in short-term instruments or obtaining yield in the
form of interest paid by the borrower when U.S. Government Securities
are used as collateral. Income received could be used to pay a
portfolio's expenses and would increase an investor's total return. A
portfolio will adhere to the following conditions whenever its
portfolio securities are loaned: (i) a portfolio must receive at least
102% cash collateral or equivalent securities of the type discussed in
the preceding paragraph from the borrower; (ii) the borrower must
increase such collateral whenever the market value of the securities
rises above the level of such collateral; (iii) a portfolio must be
able to terminate the loan at any time; (iv) a portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities and any increase in market
value; (v) a portfolio may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a
material event adversely affecting the investment occurs, the board
must terminate the loan and regain the right to vote the securities.
Loan agreements involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions
upon a portfolio's ability to recover the loaned securities or dispose
of the collateral for the loan.
Borrowing (All portfolios). Each portfolio may borrow from banks for
temporary or emergency purposes, but not for leverage, in an amount up
to 33 1/3% of its assets, and may pledge its assets to the same extent
in connection with such borrowings. Whenever borrowings from banks
exceed 5% of the value of the assets of a portfolio, the portfolio will
not make any additional investments. The International Equity Portfolio
may borrow for investment purposes, provided that any transactions
constituting borrowing by the portfolio may not exceed one-third of its
assets. Except for the limitations on borrowing, the investment
guidelines set forth in this paragraph may be changed at any time
without shareholder consent by vote of the board of trustees of the
fund.
Foreign Securities (All Portfolios). Each portfolio may invest in
obligations of companies and governments of foreign nations, which
involve certain risks in addition to the usual risks inherent in U.S.
investments. These risks include those resulting from revaluation of
currencies; future adverse political and economic developments and the
possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions; reduced availability of public
information concerning issuers; and the lack of uniform accounting,
auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to U.S.
companies. The performance of a portfolio investing in foreign
securities may be adversely affected by fluctuations in value of one or
more foreign currencies relative to the U.S. dollar. Moreover,
securities of many foreign companies may be less liquid and their
prices more volatile than those of securities of comparable U.S.
companies. In addition, with respect to certain foreign countries,
there is the possibility of expropriation, nationalization,
confiscatory taxation and limitations on the use or removal of funds or
other assets of a portfolio, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that
could reduce the return on such securities. Changes in foreign currency
exchange rates may affect the value of portfolio securities and the
appreciation or depreciation of investments. Investment in foreign
securities may also result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed
brokerage commissions on foreign exchanges, which are generally higher
than commissions on U.S. exchanges, and the expense of maintaining
securities with foreign custodians.
In addition, the Diversified Strategic Income Portfolio may invest up
to 5% of its total assets in securities traded in markets of developing
countries. A developing country is generally considered to be a country
in the initial stages of its industrialization cycle. Investing in the
equity and fixed-income markets of developing countries involves
exposure to economic structures that are generally less diverse and
mature, and to political systems that can be expected to have less
stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more
volatile than the markets of the more mature economies of developed
countries; however, such markets often have provided higher rates of
return to investors.
Leverage (International Equity Portfolio). The International Equity
Portfolio may borrow from banks, on a secured or unsecured basis, up to
one- third of the value of its assets. If the portfolio borrows and
uses the proceeds to make additional investments, income and
appreciation from such investments will improve its performance if they
exceed the associated borrowing costs but impair its performance if
they are less than such borrowing costs. This speculative factor is
known as "leverage."
Leverage creates an opportunity for increased returns to shareholders
of the portfolio but, at the same time, creates special risks. For
example, leverage may exaggerate changes in the net asset value of the
portfolio's shares and in the portfolio's yield. Although the principal
or stated value of such borrowings will be fixed, the portfolio's
assets may change in value during the time the borrowing is
outstanding. Leverage will create interest or dividend expenses for the
portfolio that can exceed the income from the assets retained. To the
extent the income or other gain derived from securities purchased with
borrowed fluids exceed the interest or dividends the portfolio will
have to pay in respect thereof, the portfolio's net income or other
gain will be greater than if leverage had not been used. Conversely, if
the income or other gain from the incremental assets is not sufficient
to cover the cost of leverage, the net income or other gain of the
portfolio will be less than if leverage had not been used. If the
amount of income from the incremental securities is insufficient to
cover the cost of borrowing, securities might have to be liquidated to
obtain required fluids. Depending on market or other conditions, such
liquidations could be disadvantageous to the portfolio.
RISK FACTORS
General. Investors should realize that risk of loss is inherent in the
ownership of any securities and that each Portfolio's net asset value
will fluctuate, reflecting fluctuations in the market value of its
portfolio positions.
Fixed Income Securities. Investments in fixed income securities may
subject the portfolios to risks, including the following.
Interest Rate Risk. When interest rates decline, the market
value of fixed income securities tends to increase. Conversely, when
interest rates increase, the market value of fixed income securities
tends to decline. The volatility of a security's market value will
differ depending upon the security's duration, the issuer and the type
of instrument.
Default Risk/Credit Risk. Investments in fixed income securities
are subject to the risk that the issuer of the security could default
on its obligations, causing a portfolio to sustain losses on such
investments. A default could impact both interest and principal
payments.
Call Risk and Extension Risk. Fixed income securities may be
subject to both call risk and extension risk. Call risk exists when
the issuer may exercise its right to pay principal on an obligation
earlier than scheduled, which would cause cash flows to be returned
earlier than expected. This typically results when interest rates have
declined and a portfolio will suffer from having to reinvest in lower
yielding securities. Extension risk exists when the issuer exercises
its right to pay principal on an obligation later than expected. This
typically results when interest rates have increased, and a portfolio
will suffer from the inability to invest in higher yield securities.
Lower Rated and Below Investment Grade Fixed Income Securities.
Securities which are rated BBB by S&P or Baa by Moody's are generally
regarded as having adequate capacity to pay interest and repay
principal, but may have some speculative characteristics. Securities
rated below Baa by Moody's or BBB by S&P may have speculative
characteristics, including the possibility of default or bankruptcy of
the issuers of such securities, market price volatility based upon
interest rate sensitivity, questionable creditworthiness and relative
liquidity of the secondary trading market. Because high yield bonds
have been found to be more sensitive to adverse economic changes or
individual corporate developments and less sensitive to interest rate
changes than higher-rated investments, an economic downturn could
disrupt the market for high yield bonds and adversely affect the value
of outstanding bonds and the ability of issuers to repay principal and
interest. In addition, in a declining interest rate market, issuers of
high yield bonds may exercise redemption or call provisions, which may
force a portfolio, to the extent it owns such securities, to replace
those securities with lower yielding securities. This could result in
a decreased return.
Subsequent to its purchase by a portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum
required for purchase by the portfolio. In addition, it is possible
that Moody's, S&P and other ratings agencies might not timely change
their ratings of a particular issue to reflect subsequent events.
Foreign Securities. Investments in securities of foreign issuers
involve certain risks not ordinarily associated with investments in
securities of domestic issuers. Such risks include fluctuations in
foreign exchange rates, future political and economic developments, and
the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Since each portfolio will invest
heavily in securities denominated or quoted in currencies other than
the U.S. dollar, changes in foreign currency exchange rates will, to
the extent the portfolio does not adequately hedge against such
fluctuations, affect the value of securities in its portfolio and the
unrealized appreciation or depreciation of investments so far as U.S.
investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those
countries.
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 or as uniform as those of U.S. companies.
Foreign securities markets, while growing in volume, have, for the most
part, substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices more volatile
than securities of comparable U.S. companies. Transaction costs on
foreign securities markets are generally higher than in the U.S. There
is generally less government supervision and regulation of exchanges,
brokers and issuers than there is in the U.S. A portfolio might have
greater difficulty taking appropriate legal action in foreign courts.
Dividend and interest income from foreign securities will generally be
subject to withholding taxes by the country in which the issuer is
located and may not be recoverable by the portfolio or the investors.
Capital gains are also subject to taxation in some foreign countries.
Currency Risks. The U.S. dollar value of securities denominated in a
foreign currency will vary with changes in currency exchange rates,
which can be volatile. Accordingly, changes in the value of the
currency in which a portfolio's investments are denominated relative to
the U.S. dollar will affect the portfolio's net asset value. Exchange
rates are generally affected by the forces of supply and demand in the
international currency markets, the relative merits of investing in
different countries and the intervention or failure to intervene of
U.S. or foreign governments and central banks. However, currency
exchange rates may fluctuate based on factors intrinsic to a country's
economy. Some emerging market countries also may have managed
currencies, which are not free floating against the U.S. dollar. In
addition, emerging markets are subject to the risk of restrictions upon
the free conversion of their currencies into other currencies. Any
devaluations relative to the U.S. dollar in the currencies in which a
portfolio's securities are quoted would reduce the portfolio's net
asset value per share.
Special Risks of Countries in the Asia Pacific Region. Certain of the
risks associated with international investments are heightened for
investments in these countries. For example, some of the currencies of
these countries have experienced devaluations relative to the U.S.
dollar, and adjustments have been made periodically in certain of such
currencies. Certain countries, such as Indonesia, face serious
exchange constraints. Jurisdictional disputes also exist, for example,
between South Korea and North Korea. In addition, Hong Kong reverted
to Chinese administration on July 1, 1997. The long-term effects of
this reversion are not known at this time.
Securities of Developing/Emerging Markets Countries. A developing or
emerging markets country generally is considered to be a country that
is in the initial stages of its industrialization cycle. Investing in
the equity markets of developing countries involves exposure to
economic structures that are generally less diverse and mature, and to
political systems that can be expected to have less stability, than
those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the
markets of the more mature economies of developed countries; however,
such markets often have provided higher rates of return to investors.
One or more of the risks discussed above could affect adversely the
economy of a developing market or a portfolio's investments in such a
market. In Eastern Europe, for example, upon the accession to power of
Communist regimes in the past, the governments of a number of Eastern
European countries expropriated a large amount of property. The claims
of many property owners against those of governments may remain
unsettled. There can be no assurance that any investments that a
portfolio might make in such emerging markets would not be
expropriated, nationalized or otherwise confiscated at some time in the
future. In such an event, the portfolio could lose its entire
investment in the market involved. Moreover, changes in the leadership
or policies of such markets could halt the expansion or reverse the
liberalization of foreign investment policies now occurring in certain
of these markets and adversely affect existing investment
opportunities.
Many of a portfolio's investments in the securities of emerging markets
may be unrated or rated below investment grade. Securities rated below
investment grade (and comparable unrated securities) are the equivalent
of high yield, high risk bonds, commonly known as "junk bonds." Such
securities are regarded as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance
with the terms of the obligations and involve major risk exposure to
adverse business, financial, economic, or political conditions.
Derivative Instruments. In accordance with its investment policies,
each portfolio may invest in certain derivative instruments which are
securities or contracts that provide for payments based on or "derived"
from the performance of an underlying asset, index or other economic
benchmark. Essentially, a derivative instrument is a financial
arrangement or a contract between two parties. Transactions in
derivative instruments can be, but are not necessarily, riskier than
investments in conventional stocks, bonds and money market instruments.
A derivative instrument is more accurately viewed as a way of
reallocating risk among different parties or substituting one type of
risk for another. Every investment by a portfolio, including an
investment in conventional securities, reflects an implicit prediction
about future changes in the value of that investment. Every portfolio
investment also involves a risk that the portfolio manager's
expectations will be wrong. Transactions in derivative instruments
often enable a portfolio to take investment positions that more
precisely reflect the portfolio manager's expectations concerning the
future performance of the various investments available to the
portfolio. Derivative instruments can be a legitimate and often cost-
effective method of accomplishing the same investment goals as could be
achieved through other investment in conventional securities.
Derivative contracts include options, futures contracts, forward
contracts, forward commitment and when-issued securities transactions,
forward foreign currency exchange contracts and interest rate, mortgage
and currency swaps. The following are the principal risks associated
with derivative instruments.
Each derivative instrument purchased for a portfolio's portfolio is
reviewed and analyzed by the portfolio's adviser to assess the risk and
reward of each such instrument in relation the portfolio's investment
strategy. The decision to invest in derivative instruments or
conventional securities is made by measuring the respective
instrument's ability to provide value to the portfolio and its
shareholders.
Special Risks of Using Futures Contracts and Options on Futures
Contracts. The prices of futures contracts are volatile and are
influenced by, among other things, actual and anticipated changes in
interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities or currencies being hedged can be only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative market demand for
futures and for debt securities or currencies, including technical
influences in futures trading; and differences between the financial
instruments being hedged and the instruments underlying the standard
futures contracts available for trading, with respect to interest rate
levels, maturities, and creditworthiness of issuers. A decision of
whether, when, and how to hedge involves skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small
price movement in a futures contract may result in immediate and
substantial loss, as well as gain, to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit,
before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the futures contract were closed
out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. A
portfolio, however, would presumably have sustained comparable losses
if, instead of the futures contract, it had invested in the underlying
financial instrument and sold it after the decline. Where a portfolio
enters into futures transactions for non-hedging purposes, it will be
subject to greater risks and could sustain losses which are not offset
by gains on other portfolio assets.
Furthermore, in the case of a futures contract purchase, in order to be
certain that each portfolio has sufficient assets to satisfy its
obligations under a futures contract, the portfolio segregates on its
books and commits to back the futures contract an amount of cash and
liquid securities equal in value to the current value of the underlying
instrument less the margin deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily
limit establishes the maximum amount 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.
As with options on debt securities, the holder of an option may
terminate his position by selling an option of the same series. There
is no guarantee that such closing transactions can be effected. The
portfolio will be required to deposit initial margin and maintenance
margin with respect to put and call options on futures contracts
described above, and, in addition, net option premiums received will be
included as initial margin deposits.
In addition to the risks which apply to all options transaction, there
are several special risks relating to options on futures contracts.
The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary
market. It is not certain that this market will develop. The
portfolio will not purchase options on futures contracts on any
exchange unless and until, in the investment advisor's opinion, the
market for such options had developed sufficiently that the risks in
connection with options on futures contracts are not greater than the
risks in connection with futures contracts. Compared to the use of
futures contracts, the purchase of options on futures contracts
involves less potential risk to the portfolio because the maximum
amount of risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the use of an option
on a futures contract would result in a loss to the portfolio when the
use of a futures contract would not, such as when there is no movement
in the prices of debt securities. Writing an option on a futures
contract involves risks similar to those arising in the sale of futures
contracts, as described above.
Non-Publicly Traded and Illiquid Securities. Each portfolio may
purchase securities that are not publicly traded. The sale of
securities that are not publicly traded is typically restricted under
federal securities laws. As a result, a portfolio may be forced to sell
these securities at less than fair market value or may not be able to
sell them when its adviser believes it desirable to do so. The
portfolios' investments in illiquid securities are subject to the risk
that should a portfolio desire to sell any of these securities when a
ready buyer is not available at a price that the portfolio deems
representative of their value, the value of the portfolio's net assets
could be adversely affected.
Mortgage-Related Securities. If a portfolio purchases mortgage-related
securities at a premium, mortgage foreclosures and prepayments of
principal by mortgagors (which may be made at any time without penalty)
may result in some loss of the portfolio's principal investment to the
extent of the premium paid. The yield of a portfolio that invests in
mortgage-related securities may be affected by reinvestment of
prepayments at higher or lower rates than the original investment. In
addition, like other debt securities, the values of mortgage-related
securities, including government and government-related mortgage pools,
will generally fluctuate in relation to interest rates.
Asset-Backed Securities. The Diversified Strategic Income Portfolio
and Intermediate High Grade Portfolio may invest in asset-backed
securities arising through the grouping by governmental,
government-related and private organizations of loans, receivables and
other assets originated by various lenders. Interests in pools of these
assets differ from other forms of debt securities, which normally
provide for periodic payment of interest in fixed amounts with
principal paid at maturity or specified call dates. Instead,
asset-backed securities provide periodic payments that generally
consist of both interest and principal payments.
The estimated life of an asset-backed security varies with the
prepayment experience with respect to the underlying debt instruments.
For example, falling interest rates generally result in an increase in
the rate of prepayments of mortgage loans while rising interest rates
generally decrease the rate of prepayments. An acceleration of
prepayments in response to sharply falling interest rates will shorten
the security's average maturity and limit the potential appreciation in
the security's value relative to a conventional debt security.
Consequently, asset-backed securities are not effective in locking in
high long-term yields. Conversely, in periods of sharply rising rates,
prepayments generally slow, increasing the security's average life and
its potential for price depreciation. The rate of such prepayments, and
hence the life of an asset-backed security, will be primarily a
function of current market interest rates, although other economic and
demographic factors may be involved.
Government Stripped Mortgage-Backed Securities. The Intermediate High
Grade Portfolio may invest up to 10% of its total assets in government
stripped mortgage-backed securities issued and guaranteed by GNMA, FNMA
or FHLMC. These securities represent beneficial ownership interests in
either periodic principal distributions ("principal-only") or interest
distributions ("interest-only") on mortgage-backed certificates issued
by GNMA, FNMA or FHLMC, as the case may be. The certificates underlying
government stripped mortgage-backed securities represent all or part of
the beneficial interest in pools of mortgage loans.
Investing in government stripped mortgage-backed securities involves
the risks normally associated with investing in mortgage-backed
securities issued by government or government-related entities. See
"Mortgage-Related Securities" above. In addition, the yields on
government stripped mortgage-backed securities are extremely sensitive
to the prepayment experience on the mortgage loans underlying the
certificates collateralizing the securities. If a decline in prevailing
interest rates results in a rate of principal prepayments higher than
anticipated, distributions of principal will be accelerated, thereby
reducing the yield to maturity on interest-only government stripped
mortgage-backed securities and increasing the yield to maturity on
principal-only government stripped mortgage-backed securities.
Sufficiently high prepayment rates could result in the portfolio not
fully recovering its initial investment in an interest-only government
stripped mortgage-backed security. Government stripped mortgage-backed
securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no
assurance that the portfolio will be able to effect a trade of a
government stripped mortgage-backed security when it wishes to do so,
although the portfolio will acquire government stripped mortgage-backed
securities only if a secondary market for the securities exists at the
time of acquisition.
Concentration. The Money Market Portfolio will concentrate at least
25% of its assets in the banking industry and the Equity Income
Portfolio will concentrate at least 25% of its assets in the utility
industry, provided that, if, at some future date, adverse economic
conditions prevail in either of those industries, the relevant
portfolio may temporarily invest less than 25% of its assets in the
affected industry for defensive purposes. Because of its concentration
policy, either of these portfolios may be subject to greater risk and
market fluctuation than a fund that had securities representing a
broader range of investment alternatives. The Money Market and Equity
Income Portfolios' concentration policies are fundamental policies that
cannot be changed without the approval of a majority of the relevant
portfolio's outstanding voting securities.
Securities of Unseasoned Issuers. The Diversified Strategic Income,
Total Return, International Equity and Emerging Growth Portfolios may
invest in securities of unseasoned issuers, which may have limited
marketability and, therefore, may be subject to wide fluctuations in
market value. In addition, certain securities may lack a significant
operating history and may be dependent on products or services without
an established market share.
Investment in Utility Securities. The Equity Income Portfolio is
subject to risks that are inherent in the utility industry, including:
difficulty in obtaining an adequate return on invested capital;
difficulty in financing large construction programs during an
inflationary period; restrictions on operations and increased cost and
delays attributable to environmental considerations and regulation;
difficulty in raising capital in adequate amounts on reasonable terms
in periods of high inflation and unsettled capital markets; increased
costs and reduced availability of certain types of fuel; occasionally
reduced availability and high costs of natural gas for resale; the
effects of energy conservation; the effects of a national energy policy
and lengthy delays; and greatly increased costs and other problems
associated with the design, construction, licensing, regulation and
operation of nuclear facilities for electric generation (including,
among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes). Costs
incurred by utilities, such as fuel costs, are subject to immediate
market action resulting from political or military forces operating in
geographic regions where oil production is concentrated, such as the
Persian Gulf, while the rates of return of utility companies are
generally subject to review and limitation by state public utility
commissions, which results ordinarily in a lag between costs and
return. There are substantial differences between the regulatory
practices and policies of various jurisdictions, and any given
regulatory agency may make major shifts in policy from time to time.
There is no assurance that regulatory authorities will grant rate
increases in the future or that such increases will be adequate to
permit the payment of dividends on common stocks. Additionally,
existing and possible future regulatory legislation may make it even
more difficult for these utilities to obtain adequate relief. The
issuers of certain securities in the portfolio may own or operate
nuclear generating facilities. Governmental authorities may from time
to time review existing policies and impose additional requirements
governing the licensing, construction and operation of nuclear power
plants.
Each of the above-referenced risks could adversely affect the ability
and inclination of public utilities to declare or pay dividends and the
ability of holders of common stock to realize any value from the assets
of the issuer upon liquidation or bankruptcy. Many, if not all, of the
utilities that are issuers of the securities expected to be included in
the portfolio have been experiencing one or more of these problems in
varying degrees. Moreover, price disparities within selected utility
groups and discrepancies in relation to averages and indices have
occurred frequently for reasons not directly related to the general
movements or price trends of utility common stocks. Causes of these
discrepancies include changes in the overall demand for and supply of
various securities (including the potentially depressing effect of new
stock offerings) and changes in investment objectives, market
expectations or cash requirements of other purchasers and sellers of
securities.
Economic and Monetary Union (EMU). EMU conversion began on January 1,
1999, through which 11 European countries adopted a single currency -
the euro. For participating countries, EMU means sharing a single
currency and single official interest rate and adhering to agreed upon
limits on government borrowing. Budgetary decisions remain in the
hands of each participating country, but are subject to each country's
commitment to avoid "excessive deficits" and other more specific
budgetary criteria. A European Central Bank will be responsible for
setting the official interest rate to maintain price stability within
the euro zone. EMU is driven by the expectation of a number of
economic benefits, including lower transaction costs, reduced exchange
risk, greater competition, and a broadening and deepening of European
financial markets. However, there are a number of significant risks
associated with EMU. Monetary and economic union on this scale has
never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain committed
to EMU in the face of changing economic conditions. This uncertainty
may increase the volatility of European markets and may adversely
affect the prices of securities of European issuers in the portfolios.
Portfolio Turnover. Each portfolio may purchase or sell securities
without regard to the length of time the security has been held and
thus may experience a high rate of portfolio turnover. A 100% turnover
rate would occur, for example, if all the securities in a portfolio
were replaced in a period of one year. Under certain market conditions,
the portfolio may experience a high rate of portfolio turnover. This
may occur, for example, if a portfolio writes a substantial number of
covered call options and the market prices of the underlying securities
appreciate. The rate of portfolio turnover is not a limiting factor
when the manager deems it desirable to purchase or sell securities or
to engage in options transactions. High portfolio turnover involves
correspondingly greater transaction costs, including any brokerage
commissions, which are borne directly by the respective portfolio and
may increase the recognition of short-term, rather than long-term,
capital gains if securities are held for one year or less and may be
subject to applicable income taxes.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 7 have been adopted by
the fund with respect to the portfolios as fundamental policies for the
protection of shareholders. Under the 1940 Act, a portfolio's
fundamental policy may not be changed without the vote of a "majority"
of the outstanding voting securities of that portfolio. "Majority" is
defined in the 1940 Act as the lesser of (a) 67% or more of the shares
present at a fund meeting, if the holders of more than 50% of the
outstanding shares of that portfolio are present or represented by
proxy, or (b) more than 50% of the outstanding shares. A fundamental
policy affecting a particular portfolio may not be changed without the
vote of a majority of the outstanding shares of that portfolio. The
remaining restrictions are non-fundamental policies and may be changed
by vote of a majority of the fund's board of trustees at any time.
The investment policies adopted by the fund prohibit a portfolio from:
1. Investing in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Borrowing money, except that (a) the portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, and (b)
the portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques.
To the extent that it engages in transactions described in (a)
and (b), the portfolio will be limited so that no more than 33
1/3% of the value of its total assets (including the amount
borrowed), valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) valued at the
time the borrowing is made, is derived from such transactions.
3. Engaging in the business of underwriting securities issued by
other persons, except to the extent that the fund may technically
be deemed to be an underwriter under the 1933 Act, in disposing
of portfolio securities.
4. Purchasing or selling real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the portfolios' investment
objective and policies); or (d) investing in real estate
investment trust securities.
5. Making loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
6. Invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities
of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered
to be issued by members of any industry; provided that this
limitation shall not apply to the purchase of (a) with respect
to the Money Market Portfolio, U.S. dollar-denominated bank
instruments such as certificates of deposit, time deposits,
bankers' acceptances and letters of credit that have been issued
by U.S. banks or (b) with respect to the Equity Income Portfolio,
the securities of companies within the utility industry.
7. Issuing "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
8. Investing in oil, gas or other mineral exploration or
development programs, except that the portfolios may invest in
the securities of companies that invest in or sponsor these
programs.
9. Purchasing any securities on margin (except for such short-
term credits as are necessary for the clearance of purchases and
sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
10. Purchasing, writing or selling puts, calls, straddles,
spreads or combinations thereof, except as permitted under the
portfolio's investment goals and policies.
11. Purchasing restricted securities, illiquid securities or
other securities that are not readily marketable if more than 10%
(15% in the case of the Total Return, International Equity,
Emerging Growth, Intermediate High Grade Portfolio and
Diversified Strategic Income Portfolios) of the total assets of
the portfolio would be invested in such securities. However, with
respect to the Money Market Portfolio, Diversified Strategic
Income Portfolio and the Intermediate High Grade Portfolio this
restriction will not apply to securities subject to Rule 144A of
the 1933 Act if two or more dealers make a market in such
securities.
12. Investing more than 10% of its total assets in time deposits
maturing in more than six months seven calendar days (in the case
of the Money Market Portfolio, time deposits. maturing from two
business days through six months).
13. Purchasing any security if as a result the portfolio would
then have more than 5% of its total assets invested in securities
of companies (including predecessors) that have been in
continuous operation for less than three years. (For purposes of
this limitation, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and originators
of underlying assets.)
14. Making investments for the purpose of exercising control or
management.
15. Investing in warrants (except as permitted under the
portfolio's investment goals and policies or other than warrants
acquired by the portfolio as part of a unit or attached to
securities at the time of purchase) if, as a result, the
investments (valued at the lower of cost or market) would exceed
5% of the value of the portfolio's net assets or if, as a result,
more than 2% (5% in the case of the International Equity
Portfolio) of the portfolio's net assets would be invested in
warrants not listed on a recognized U.S. or foreign exchange to
the extent permitted by applicable state securities laws.
16. With regard to the Equity Income Portfolio, purchase 10% or
more of the voting securities of a public utility or public
utility holding company, so as to become a public utility holding
company as defined in the Public Utility Holding Company Act of
1935, as amended.
17. Investing in securities of other investment companies
registered or required to be registered under the 1940 Act,
except as they may be acquired as part of a merger,
consolidation, reorganization, acquisition of assets or an offer
of exchange or as otherwise permitted by law.
The percentage limitations contained in the restrictions listed above
apply at the time of purchases of securities.
Portfolio Turnover
The Money Market Portfolio may attempt to increase yields by trading to
take advantage of short-term market variations, which results in high
portfolio turnover. Because purchases and sales of money market
instruments are usually effected as principal transactions, this policy
does not result in high brokerage commissions to the portfolio. The
other portfolios do not intend to seek profits through short-term
trading. Nevertheless, the portfolios will not consider portfolio
turnover rate a limiting factor in making investment decisions.
A portfolio's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the
monthly average value of the portfolio's securities. Securities or
options with remaining maturities of one year or less on the date of
acquisition are excluded from the calculation. Under certain market
conditions, a portfolio authorized to engage in transactions in options
may experience increased portfolio turnover as a result of its
investment strategies. For instance, the exercise of a substantial
number of options written by a portfolio (due to appreciation of the
underlying security in the case of call options or depreciation of the
underlying security in the case of put options) could result in a
turnover rate in excess of 100%. A portfolio turnover rate of 100%
would occur if all of a portfolio's securities that are included in the
computation of turnover were replaced once during a period of one year.
The portfolios cannot accurately predict their portfolio turnover rates
but anticipate that annual turnover for each portfolio will not exceed
the following percentages: Intermediate High Grade Portfolio - 100%;
Diversified Strategic Income Portfolio - 100%; Equity Income Portfolio
- - 100%; Equity Index Portfolio - 20%; Growth & Income Portfolio - 50%;
Appreciation Portfolio - 50%; Total Return Portfolio - 100%; Emerging
Growth Portfolio - 100%; and International Equity Portfolio - 100%.
For regulatory purposes, the portfolio turnover rate for the Money
Market Portfolio will be considered 0%.
For the 1998 and 1997 fiscal years, the portfolio turnover rates for
portfolios having operations during the stated periods were as follows:
Portfolio
12/31/98
12/31/97
Appreciation
22%
34%
Diversified Strategic
Income
86%
47%
Emerging Growth
98%
102%
Equity Income
43%
42%
Equity Index
5%
6%
Growth & Income
13%
17%
Intermediate High
Grade
60%
66%
International Equity
30%
21%
Total Return
72%
75%
Certain other practices that may be employed by a portfolio also could
result in high portfolio turnover. For example, portfolio securities
may be sold in anticipation of a rise in interest rates (market
decline) or purchased in anticipation of a decline in interest rates
(market rise) and later sold. In addition, a security may be sold and
another of comparable quality purchased at approximately the same time
to take advantage of what an adviser believes to be a temporary
disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to
the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply
of, various types of securities. Higher portfolio turnover rates can
result in corresponding increases in brokerage commissions. Short-term
gains realized from portfolio transactions are taxable to shareholders
as ordinary income.
Portfolio turnover rates may vary greatly from year to year as well as
within a particular year and may be affected by cash requirements for
redemptions of a portfolio's shares as well as by requirements that
enable the portfolio to receive favorable tax treatment.
The fund's board of trustees will review periodically the commissions
paid by the portfolios to determine if the commissions paid over
representative periods of time were reasonable in relation to the
benefits inuring to the portfolios.
Portfolio Transactions
Most of the purchases and sales of securities for a portfolio, whether
effected on a securities exchange or over-the-counter, will be effected
in the primary trading market for the securities. Decisions to buy and
sell securities for a portfolio are made by its adviser, which also is
responsible for placing these transactions, subject to the overall
review of the fund's Trustees. With respect to the Diversified
Strategic Income Portfolio, decisions to buy and sell U.S. securities
for the Portfolio are made by the portfolio's adviser, which also is
responsible for placing these transactions; however, the responsibility
to make investment decisions with respect to foreign securities and to
place these transactions rests with Global Capital Management, the
portfolio's sub-adviser. Although investment decisions for each
portfolio are made independently from those of the other accounts
managed by its adviser, investments of the type the portfolio may make
also may be made by those other accounts. When a portfolio and one or
more other accounts managed by its adviser are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
adviser to be equitable to each. In some cases, this procedure may
adversely affect the price paid or received by a portfolio or the size
of the position obtained or disposed of by the portfolio.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges
on which commissions are negotiated, the cost of transactions may vary
among different brokers. Commissions generally are fixed on most
foreign exchanges. There is generally no stated commission in the case
of securities traded in U.S. or foreign over-the-counter markets, but
the prices of those securities include undisclosed commissions or mark-
ups. The cost of securities purchased from underwriters includes an
underwriting commission or concession and the prices at which
securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. U.S. government securities generally are
purchased from underwriters or dealers, although certain newly issued
U.S. government securities may be purchased directly from the United
States Treasury or from the issuing agency or instrumentality.
The following table sets forth certain information regarding each
portfolio's payment of brokerage commissions with the exception of the
Money Market Portfolio and Intermediate High Grade Portfolio, which did
not pay any brokerage commissions during these time periods.
Fiscal Year Ended December 31, 1998
Total Brokerage
Brokerage Commissions
Portfolio
Commissions Paid
Paid to Salomon Smith Barney
Appreciation
$0
$0
Diversified Strategic
Income
0
0
Emerging Growth
26,923
853
Equity Income
78,529
600
Equity Index
62,186
0
Growth & Income
21,272
300
International Equity
53,838
1,393
Total Return
515,729
26,965
% of Aggregate
% of Aggregate Dollar
Brokerage Commissions
Amount of Transactions
Paid to Salomon Smith
Involving Commissions
Portfolio
Barney Inc.
Paid to Salomon Smith Barney
Inc.
Appreciation
0%
0%
Diversified
Strategic
Income
0%
0%
Emerging Growth
3.17%
0.95%
Equity Income
0.76%
0.48%
Equity Index
0%
0%
Growth & Income
1.41%
0.96%
International Equity
2.59%
4.60%
Total Return
5.23%
3.20%
Fiscal Year Ended December 31, 1997
Total Brokerage
Brokerage Commissions
Portfolio
Commissions Paid
Paid to Salomon Smith
Barney
Appreciation
$76,960
$3,240
Diversified Strategic
Income
0
0
Emerging Growth
24,590
324
Equity Income
75,365
1,200
Equity Index
6,685
0
Growth & Income
157,715
0
International Equity
57,156
650
Total Return
46,446
14,850
% of Aggregate
Dollar
% of Aggregate
Amount of
Transactions
Brokerage
Commissions
Involving
Commissions
Portfolio
Paid to Salomon
Smith Barney Inc.
Paid to Salomon
Smith Barney Inc.
Appreciation
0.04%
0%
Diversified Strategic
Income
0
0
Emerging Growth
1.32
0.95%
Equity Income
1.59
3.08%
Equity Index
0.03
0
Growth & Income
0
0
International Equity
1.14
2.43%
Total Return
3.71
2.98%
Fiscal Year Ended December 31, 1996
Total Brokerage
Brokerage Commissions
Portfolio
Commissions Paid
Paid to Salomon Smith
Barney
Appreciation
$97,345
$0
Diversified Strategic
Income
1,200
0
Emerging Growth
24,692
566
Equity Income
54,224
4,320
Equity Index
3,060
0
Growth & Income
6,360
60
International Equity
79,738
1,859
Total Return
338,129
6,000
% of Aggregate
% of Aggregate
Dollar
Brokerage
Commissions
Amount of
Transactions
Paid to Salomon
Smith
Involving
Commissions
Portfolio
Barney
Paid to Salomon
Smith Barney
Appreciation
Diversified Strategic Income
0%
0
0%
0
Emerging Growth
2.20
0.85%
Equity Income
7.97
7.35%
Equity Index
0
0
Growth & Income
6.12
3.90%
International Equity
0.0233
0.06%
Total Return
1.77
6.40%
In selecting brokers or dealers to execute securities transactions on
behalf of a portfolio, its adviser seeks the best overall terms
available. In assessing the best overall terms available for any
transaction, each adviser will consider the factors the adviser deems
relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability
of the broker or dealer and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. In
addition, each advisory agreement between the Fund and an adviser
authorizes the adviser, in selecting brokers or dealers to execute a
particular transaction and in evaluating the best overall terms
available, to consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of
1934) provided to the portfolio, the other portfolios and/or other
accounts over which the adviser or its affiliates exercise investment
discretion. The fees under the investment advisory agreements and the
sub-investment advisory and/or administration agreements between the
fund and the advisers and the sub-adviser and/or administrator,
respectively, are not reduced by reason of their receiving such
brokerage and research services. The fund's board of trustees, in its
discretion, may authorize the advisers to cause the portfolios to pay a
broker that provides such brokerage and research services a brokerage
commission in excess of that which another broker might have charged
for effecting the same transaction, in recognition of the value of such
brokerage and research services. The fund's Board of Trustees
periodically will review the commissions paid by the portfolios to
determine if the commissions paid over representative periods of time
were reasonable in relation to the benefits inuring to the portfolio.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the SEC thereunder, the fund's
board of trustees has determined that portfolio transactions for a
portfolio may be executed through Salomon Smith Barney and other
affiliated broker-dealers if, in the judgment of its adviser, the use
of such broker-dealer is likely to result in price and execution at
least as favorable as those of other qualified broker-dealers, and if,
in the transaction, such broker-dealer charges the portfolio a rate
consistent with that charged to comparable unaffiliated customers in
similar transactions. In addition, under rules adopted by the SEC,
Salomon Smith Barney may directly execute transactions for a portfolio
of the fund on the floor of any national securities exchange, provided:
(a) the Board of Trustees has expressly authorized Salomon Smith Barney
to effect such transactions; and (b) Salomon Smith Barney annually
advises the fund of the aggregate compensation it earned on such
transactions. Over-the-counter purchases and sales are transacted
directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere.
The portfolios will not purchase any security, including U.S.
government securities, during the existence of any underwriting or
selling group relating thereto of which Salomon Smith Barney is a
member, except to the extent permitted by the SEC.
The portfolios may use Salomon Smith Barney as a commodities broker in
connection with entering into futures contracts and options on futures
contracts. Salomon Smith Barney has agreed to charge the portfolios
commodity commissions at rates comparable to those charged by Salomon
Smith Barney to its most favored clients for comparable trades in
comparable accounts.
Auditors
KPMG LLP, independent auditors, 345 Park Avenue, New York, New York
10154, has been selected as the fund's independent auditors to examine
and report on the fund's financial statements and highlights for the
fiscal year ending December 31, 1999.
Organization of the Fund
The fund was organized as a business trust under the laws of the
Commonwealth of Massachusetts pursuant to a Master Trust Agreement
dated May 13, 1991, as amended from time to time (the "Trust
Agreement"). The fund commenced operations on October 16, 1991, under
the name Shearson Series Fund. On July 30, 1993, October 14, 1994 and
July 24, 1997, the Fund changed its name to Smith Barney Shearson
Series Fund, Smith Barney Series Fund, and Greenwich Street Series
Fund, respectively.
In the interest of economy and convenience, certificates representing
shares in the Fund are not physically issued. The transfer agent
maintains a record of each shareholder's ownership of fund shares.
Shares do not have cumulative voting rights, which means that holders
of more than 50% of the shares voting for the election of trustees can
elect all of the trustees. Shares are transferable but have no
preemptive, conversion or subscription rights. Annuity owners generally
vote by portfolio, except with respect to the election of trustees and
the selection of independent public accountants. The variable account
will vote the shares of the fund held by the variable account at
regular and special meetings of the shareholders of the various
portfolios in accordance with instructions received from the owners of
a variable annuity contract or a certificate evidencing interest in a
variable annuity (the "Contract"), offered by certain insurance
companies designated by the fund, having a voting interest in the
relevant subaccount (the "Subaccount"). For a discussion of the rights
of Contract owners concerning the voting of shares, please refer to the
Contract prospectus.
The fund offers shares of beneficial interest of separate series with a
par value of $.001 per share. Shares of ten series have been
authorized, which represent the interests in the ten portfolios
described in the prospectus and this SAI. When matters are submitted
for shareholder vote, shareholders of each portfolio will have one vote
for each full share owned and proportionate, fractional votes for
fractional shares held.
The participating life insurance company sends a semi-annual report and
an audited annual report to each owner of a Contract, each of which
includes a list of the investment securities held by the portfolios at
the end of the period covered. Contract owners may make inquiries
regarding the fund and its portfolios, including the current
performance of the portfolios, to a representative of a participating
life insurance company or their Salomon Smith Barney Financial
Consultant.
There will be no meetings of shareholders for the purpose of electing
trustees unless and until such time as less than a majority of the
trustees holding office have been elected by shareholders, at which
time the trustees then in office will call a shareholders' meeting for
the election of trustees. Under the 1940 Act, shareholders of record
of no less than two-thirds of the outstanding shares of the fund may
remove a trustee through a declaration in writing or by vote cast in
person or by proxy at a meeting called for that purpose. Under the
Trust Agreement, the trustees are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of
any such trustee when requested in writing to do so by the shareholders
of record of not less than 10% of the fund's outstanding shares. In
addition, shareholders who meet certain criteria will be assisted by
the fund in communicating with other shareholders in seeking the
holding of such a meeting.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the
fund. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the fund and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered
into or executed by the fund or a trustee. The Trust Agreement
provides for indemnification from the fund's property for all losses
and expenses of any shareholder held personally liable for the
obligations of the fund. Thus, the risk of a Contract owner incurring
financial loss on account of shareholder liability is limited to
circumstances in which the fund would be unable to meet its
obligations, a possibility that the fund's management believes is
remote. Upon payment of any liability incurred by the fund, the
shareholder paying the liability will be entitled to reimbursement from
the general assets of the fund. The trustees intend to conduct the
operations of the fund in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the
fund.
PURCHASE OF SHARES
The fund offers its shares of capital stock on a continuous basis.
Shares can be acquired only by buying a Contract from a life insurance
company designated by the fund and directing the allocation of part or
all of the net purchase payment to one or more of ten subaccounts, each
of which invests in a portfolio as permitted under the Contract
prospectus. Investors should read this SAI and the fund's prospectus
dated April 30, 1999 along with the Contract prospectus.
Sales Charges and Surrender Charges
The fund does not assess any sales charge, either when it sells or when
it redeems shares of the portfolio. Surrender charges may be assessed
under the Contract, as described in the Contract prospectus. Mortality
and expense risk fees and other charges are also described in that
prospectus. Shares of the fund are currently offered exclusively to
Contract owners.
On January 15, 1999, the existing shares of the Equity Index Portfolio
were redesignated as Class I shares. The fund created a separate class
of shares designated as Class II shares.
Class II shares are sold without an initial sales charge, but are
subject to an annual distribution fee of 0.25% of the daily net assets
of the Class. Surrender charges that may be assessed under the Contract
are described in the Contract prospectus. Mortality and expense risk
fees and other charges are also described in the Contract prospectus.
Distribution Arrangements for the Equity Index Portfolio
The fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act
for the Class II shares of the Equity Index Portfolio (the "Plan").
Pursuant to the Plan, the portfolio may pay Salomon Smith Barney (for
remittance to a Participating Insurance Company) for various costs
incurred or paid by such company in connection with the distribution of
Class II Shares of the portfolio. Depending on the Participating
Insurance Company's corporate structure and applicable state law,
Salomon Smith Barney may remit payments to the Participating Insurance
Company's affiliated broker-dealer or other affiliated company rather
than the Participating Insurance Company itself.
The Plan provides that the fund, on behalf of the portfolio, shall pay
Salomon Smith Barney, a fee of up to 0.25% of the average daily net
assets of the portfolio attributable to the Class II shares. Under the
terms of the Plan, the fund is authorized to make payments quarterly to
Salomon Smith Barney for remittance to a Participating Insurance
Company, in order to pay or reimburse such Participating Insurance
Company for distribution expenses incurred or paid by such
Participating Insurance Company.
Expenses payable pursuant to the Plan may include, but are not
necessarily limited to: (a) the printing and mailing of fund
prospectuses, statements of additional information, any supplements
thereto and shareholder reports for existing and prospective Contract
owners; (b) those relating to the development, preparation, printing
and mailing of fund advertisements, sales literature and other
promotional materials describing and/or relating to the fund and
including materials intended for use within the Participating Insurance
Company, or for broker-dealer only use or retail use; (c) holding
seminars and sales meetings designed to promote the distribution of
fund shares; (d) obtaining information and providing explanations to
Contract owners regarding fund investment objectives and policies and
other information about the fund and its portfolios, including the
performance of the portfolios; (e) training sales personnel regarding
the fund; (f) compensating sales personnel in connection with the
allocation of cash values and premiums of the Contracts to the fund;
(g) personal service and/or maintenance of Contract owner accounts with
respect to fund shares attributable to such accounts; and (h) financing
any other activity that the fund's Board of Trustees determines is
primarily intended to result in the sale of shares.
REDEMPTION OF SHARES
The fund will redeem any shares presented by the Subaccounts, its sole
shareholders, for redemption. The Subaccounts' policy on when or
whether to buy or redeem fund shares is described in the Contract
prospectus.
Payment upon redemption of shares of a portfolio is normally made
within three days of receipt of such request. The right of redemption
of shares of a portfolio may be suspended or the date of payment
postponed (a) for any periods during which the New York Stock Exchange
is closed (other than for customary weekend and holiday closings); (b)
when trading in the markets the portfolio customarily utilizes is
restricted, or an emergency, as defined by the rules and regulations of
the SEC, exists, making disposal of the portfolio's investments or
determination of its net asset value not reasonably practicable; or (c)
for such other periods as the SEC by order may permit for the
protection of the portfolio's shareholders.
Should the redemption of shares of a portfolio be suspended or
postponed, the fund's Board of Trustees may make a deduction from the
value of the assets of the portfolio to cover the cost of future
liquidations of the assets so as to distribute fairly these costs among
all owners of the Contract.
NET ASSET VALUE
As noted in the prospectus, the fund will not calculate the net asset
value of the portfolios on certain holidays. On those days, securities
held by a portfolio may nevertheless be actively traded, and the value
of the portfolio's shares could be significantly affected.
Because of the need to obtain prices as of the close of trading on
various exchanges throughout the world, the calculation of the net
asset values of certain portfolios may not take place contemporaneously
with the determination of the prices of some of their respective
portfolio securities used in such calculation. A security that is
listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security.
All assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the mean between
the bid and offered quotations of such currencies against U.S. dollars
as last quoted by any recognized dealer. If such quotations are not
available, the rate of exchange will be determined in good faith by the
fund's Board of Trustees. In carrying out the Board's valuation
policies, the administrator may consult with an independent pricing
service (the "Pricing Service") retained by the fund.
Debt securities of U.S. issuers (other than U.S. government securities
and short-term investments) are valued by the administrator, after
consultation with the Pricing Service. When, in the judgment of the
Pricing Service, quoted bid prices for investments are readily
available and are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid prices and
asked prices. Investments for which, in the judgment of the Pricing
Service, there are no readily obtainable market quotations are carried
at fair value as determined by the Pricing Service. The procedures of
the Pricing Service are reviewed periodically by the officers of the
fund under the general supervision and responsibility of the fund's
board of trustees.
The Money Market Portfolio
The valuation of the portfolio securities of the Money Market Portfolio
is based upon their amortized cost, which does not take into account
unrealized capital gains or losses. Amortized cost valuation involves
initially valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium regardless
of the impact of fluctuating interest rates on the market value of the
instrument. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost,
is higher or lower than the price a portfolio would receive if it sold
the instrument.
The use by the Money Market Portfolio of the amortized cost method of
valuing its portfolio securities is permitted by a rule adopted by the
SEC. Under this rule, the portfolio must maintain a dollar-weighted
average portfolio maturity of ninety days or less, purchase only
instruments having remaining maturities of thirteen months or less, and
invest only in securities determined by the board of trustees of the
fund to be "Eligible Securities," as determined by the SEC, with
minimal credit risks. Pursuant to the rule, the fund's Board of
Trustees also has established procedures designed to stabilize, to the
extent reasonably possible, the portfolio's price per share as computed
for the purpose of sales and redemptions at $1.00. Such procedures
include review of the portfolio's holdings by the fund's Board of
Trustees, at such intervals as it may deem appropriate, to determine
whether the portfolio's net asset value calculated by using available
market quotations or market equivalents deviates from $1.00 per share
based on amortized cost.
The rule also provides that the extent of any deviation between the
portfolio's net asset value based upon available market quotations or
market equivalents and the $1.00 per share net asset value based on
amortized cost must be examined by the fund's board of trustees. If
the fund's board of trustees determines that a deviation exists that
may result in material dilution or other unfair results to investors or
existing shareholders, pursuant to the rule the fund's board of
trustees must cause the portfolio to take such corrective action as the
fund's board of trustees regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize
capital gains or losses or to shorten average portfolio maturity;
withholding dividends or paying distributions from capital gains;
redeeming shares in kind; or establishing a net asset value per share
by using available market quotations.
PERFORMANCE DATA
From time to time, the fund may quote yield or total return in
advertisements or in reports and other communications to shareholders.
YIELD
The Money Market Portfolio may, from time to time, include the yield
and effective yield in advertisements or reports to shareholders or
prospective investors. Current yield for the portfolio will be based
on income received by a hypothetical investment over a given seven-day
period (less expenses accrued during the period), and then "annualized"
(i.e., assuming that the seven-day yield would be received for 52
weeks, stated in terms of an annual percentage return on the
investment). "Effective yield" for the portfolio will be calculated in
a manner similar to that used to calculate yield, but will reflect the
compounding effect of earnings on reinvested dividends. For the seven-
day period ended December 31, 1998, the yield for the Money Market
Portfolio was 3.97% (the effective yield was 4.05%).
For the Diversified Strategic Income Portfolio, the Total Return
Portfolio and the Intermediate High Grade Portfolio, from time to time,
the Fund may advertise the 30-day yield. The yield of a portfolio
refers to the income generated by an investment in such portfolio over
the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the portfolio
during the period by the net assets value per share on the last day of
the period. This income is "annualized" by assuming that the amount of
income is generated each month over a one-year period and is compounded
semi-annually. The annualized income is then shown as a percentage of
the net asset value.
For the thirty-day period ended December 31, 1998, the yields for the
Diversified Strategic Income Portfolio, the Total Return Portfolio and
the Intermediate High Grade Portfolio were 6.13%, 1.93% and 5.56%,
respectively.
Average Annual Total Return
From time to time, a portfolio other than the Money Market Portfolio
may advertise its "average annual total return" over various periods of
time. Such total return figure shows the average percentage change in
value of an investment in the portfolio from the beginning to the end
of the measuring period. These figures reflect changes in the price of
the portfolio's shares and assume that any income dividends and/or
capital gains distributions made by the portfolio during the period
were reinvested in shares of the portfolio. Figures will be given for
recent one-, five- and ten-year periods (if applicable), and may be
given for other periods as well (such as from commencement of the
portfolio's operations or on a year-by-year basis). When considering
average annual total return figures for periods longer than one year,
it is important to note that the relevant portfolio's annual total
return for any one year in the period might have been greater or less
than the average for the entire period. A portfolio also may use
"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in the portfolio for the
specific period (again reflecting changes in a portfolio's share prices
and assuming reinvestment of dividends and distributions). Aggregate
total returns may be shown by means of schedules, charts or graphs and
may indicate subtotals of the various components of total return (i.e.,
changes in value of initial investment, income dividends and capital
gains distributions).
A portfolio's "average annual total return" figure shown below is
computed according to a formula prescribed by the SEC. The formula can
be expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of
$1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at
the beginning of the one-, five- or ten-year (or other) period at the
end of the one-, five- or ten-year (or other) period (or fractional
portion thereof).
The ERV assumes complete redemption of the hypothetical investment at
the end of the measuring period. A portfolio's net investment income
changes in response to fluctuations in interest rates and the expenses
of the portfolio.
The average annual total returns for the portfolios then in existence
were as follows for the periods indicated (reflecting the waivers of
investment advisory and administration fees and reimbursement of
expenses):
Portfolio
Adviser
1 Year
Ended
12/31/98
5 Years
Ended
12/31/98
Since
Commencement
Appreciation*
SSBC
19.15%
18.10%
15.00%
Diversified Strategic
Income*
SSBC
6.41%
7.63%
7.39%
Emerging Growth**
VKAM
37.14%
20.95%
21.55%
Equity Income*
SSBC
16.99%
12.76%
12.20%
Equity Index*
TIMCO
28.46%
23.12%
18.89%
Growth & Income*
SSBC
11.88%
15.79%
13.53%
Intermediate High
Grade*
SSBC
6.79%
6.14%
6.44%
International
Equity**
SSBC
18.84%
7.06%
7.06%
Money Market*
SSBC
4.40%
4.45%
3.86%
Total Return**
Davis
Skaggs
4.97%
15.60%
16.01%
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
Aggregate Total Return
A portfolio's aggregate total return figure described in the prospectus
and shown below represents the cumulative change in the value of an
investment in a portfolio for the specified period and is computed by
the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of
$10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning
of the one-, five- or ten-year (or other)
period at the end of the one-, five- or
ten-year period (or fractional portion
thereof), assuming reinvestment of all
dividends and distributions.
The aggregate total returns for the portfolios then in existence were
as follows for the periods indicated (reflecting the waiver of
investment advisory and administration fees and reimbursement of
expenses):
Portfolio
Adviser
1 Year
Ended
12/31/98
5 Years
Ended
12/31/98
Since
Commencement
Appreciation*
SSBC
19.15%
129.77%
174.02%
Diversified Strategic
Income*
SSBC
6.41%
44.44%
67.20%
Emerging Growth**
VKAM
37.14%
158.82%
169.43%
Equity Income*
SSBC
16.99%
82.31%
129.41%
Equity Index*
TIMCO
28.46%
182.74%
248.46%
Growth & Income*
SSBC
11.88%
108.18%
149.72%
Intermediate High
Grade*
SSBC
6.79%
34.74%
56.87%
International
Equity**
SSBC
18.84%
40.68%
41.38%
Money Market*
SSBC
4.40%
24.32%
31.46%
Total Return**
Davis
Skaggs
4.97%
106.41%
112.60%
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
It is important to note that yield and total return figures are based
on historical earnings and are not intended to indicate future
performance. Shareholders may make inquiries regarding a portfolio,
including current yield quotations or total return figures, to a
representative of a participating life insurance company or their
Salomon Smith Barney Financial Consultant.
From time to time, the fund may quote the performance of a portfolio in
terms of total return in reports or other communications to
shareholders or in advertising material. A portfolio's total return
combines principal changes and income dividends and capital gains
distributions reinvested for the periods shown. Principal changes are
based on the difference between the beginning and closing net asset
values for the period. The period selected will depend upon the
purpose of reporting the performance.
A portfolio's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be
considered representative of the portfolio's performance for any
specified period in the future. In addition, because performance will
fluctuate, it may not provide a basis for comparing an investment in a
portfolio with certain bank deposits or other investments that pay a
fixed yield for a stated period of time.
In reports or other communications to shareholders or in advertising
material, a portfolio may compare its performance with that of other
mutual funds as listed in the rankings prepared by Lipper Analytical
Services, Inc. or similar independent services that monitor the
performance of mutual funds, or with other appropriate indices of
investment securities, such as the S&P 500, Salmon Brothers World
Government Bond Index, Lehman Brothers Government Bond Index and Lehman
Brothers Mortage-Backed Securities Index, with the Consumer Price
Index, Dow Jones Industrial Average and NASDAQ, or with investment or
savings vehicles. The performance information may also include
evaluations of the portfolios published by nationally recognized
ranking services and by financial publications that are also nationally
recognized, such as Barron's, Business Week, Forbes, Fortune,
Institutional Investor, Investor's Business Daily, Kiplinger's Personal
Finance Magazine, Money, Morningstar Mutual Fund Values, Mutual Fund
Forecaster, The New York Times, Stranger's Investment Advisor, USA
Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in
which the comparative data or indices are stated. Any such
advertisement also would include the standard performance information
required by the SEC as described above. For these purposes, the
performance of the portfolios, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of
which would reduce a portfolio's performance.
A portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC
as described above.
No person has been authorized to give any information or to make any
representations other than those contained in the prospectus, this SAI
or the fund's official sales literature in connection with the offering
of the fund's shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized by
the fund. The prospectus does not constitute an offer in any state in
which, or to any person to whom, the offer may not lawfully be made.
DIVIDENDS AND DISTRIBUTIONS
Net Investment Income. Dividends and distributions will be
automatically reinvested, without a sales charge, in the shareholder's
account at net asset value in additional shares of the portfolio that
paid the dividend or distribution, unless the shareholder instructs the
portfolio to pay all dividends and distributions in cash. Net
investment income, including dividends on stocks and interest on bonds
or other securities the fund holds, is distributed to the shareholders
of the portfolios as follows:
? monthly for the Money Market Portfolio;
? annually for the Appreciation, Diversified Strategic
Income, Emerging Growth, Equity Income, Equity Index,
Growth & Income, Intermediate High Grade,
International Equity and Total Return Portfolios.
Capital Gains. Distributions of any net realized capital gains of the
portfolios will be paid annually shortly after the close of the fiscal
year in which they are earned.
TAXES
Each portfolio will be treated as a separate taxpayer for federal
income tax purposes with the result that: (a) each portfolio must
qualify separately as a regulated investment company; and (b) the
amounts of investment income and capital gains earned will be
determined on a portfolio-by-portfolio (rather than on a fund-wide)
basis.
Regulated Investment Company Status
The fund intends that each portfolio will continue to qualify
separately each year as a "regulated investment company" under
Subchapter M of the Code. A qualified portfolio will not be liable for
federal income taxes to the extent its taxable net investment income
and net realized capital gains are distributed to its shareholders,
provided each portfolio receives annually at least 90% of its net
investment income from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock
or securities, or foreign currencies, or other income derived with
respect to its business of investing in such stock, securities or
currencies. In addition, each portfolio must distribute at least 90%
of its net investment income each year.
Segregated Asset Account
The fund has been informed that certain of the life insurance companies
offering Contracts intend to qualify each of the Subaccounts as a
"segregated asset account" within the meaning of the Code. For a
Subaccount to qualify as a segregated asset account, the portfolio in
which such Subaccount holds shares must meet the diversification
requirements of Section 817(h) of the Code and the regulations
promulgated thereunder. To meet those requirements, a portfolio may
not invest more than certain specified percentages of its assets in the
securities of any one, two, three or four issuers. However, certain
increases are made to the percentage limitations to the extent of
investments in United States Treasury obligations. For these purposes,
all obligations of the United States Treasury and each instrumentality
are treated as securities of separate issuers.
Income on assets of a Subaccount qualified as a segregated asset
account whose underlying investments are adequately diversified will
not be taxable to Contract owners. However, in the event a Subaccount
is not so qualified, all annuities allocating any amount of premiums to
such Subaccount will not qualify as annuities for federal income tax
purposes and the holders of such annuities would be taxed on any income
on the annuities during the period of disqualification.
The fund has undertaken to meet the diversification requirements of
Section 817(h) of the Code. This undertaking may limit the ability of a
particular portfolio to make certain otherwise permitted investments.
In particular, the ability of the Money Market and Intermediate High
Grade Portfolios to invest in U.S. government securities other than
direct United States Treasury obligations may be materially limited by
these diversification requirements.
CUSTODIAN AND TRANSFER AGENT
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as the custodian of the fund with respect to all
portfolios except Diversified Strategic Income and International Equity
Portfolios pursuant to a custodian agreement.
Chase, located at Chase MetroTech Center, Brooklyn, New York 11245,
serves as custodian of Diversified Strategic Income Portfolio and
International Equity Portfolio pursuant to a custodian agreement.
Under the custodian agreements, the respective custodian holds the
fund's portfolio securities and keeps all necessary accounts and
records. For its services, the custodian receives a monthly fee based
upon the month-end market value of securities held in custody and also
receives certain securities transaction charges (including out-of-
pocket expenses and costs of any foreign and U.S. sub-custodians). The
assets of the fund are held under bank custodianship in compliance with
the 1940 Act.
First Data, located at Exchange Place, Boston, Massachusetts 02109,
serves as the fund's transfer and dividend-paying agent. Under the
transfer agency agreement, the transfer agent maintains the shareholder
account records for the fund, handles certain communications between
shareholders and the fund, distributes dividends and distributions
payable by the fund and produces statements with respect to account
activity for the fund and its shareholders. For these services, the
transfer agent receives fees from the fund computed on the basis of the
number of shareholder accounts that the transfer agent maintains for
the fund during the month and is reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended December 31, 1998 is
incorporated herein by reference in its entirety. The annual report
was filed on March 15, 1999, Accession Number 91155-99-156.
APPENDIX
RATINGS ON DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moody's Investors Service, Inc.
Aaa - Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in "Aaa"
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present that make the long
term risks appear somewhat larger than in "Aaa" securities.
A - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C - Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Standard & Poor's
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small
degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CC, C - Debt rated `BB', `B', `CCC', `CC' or `C' is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation. `BB' indicates the lowest degree of
speculation and `C' the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-): The ratings from `AA' to `B' may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
judgment with respect to such likelihood and risk.
L - The letter "L" indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully
insured by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp.
+ - Continuance of the rating is contingent upon S&P's receipt of
closing documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Fitch IBCA, Inc.
AAA - Bonds rated AAA by Fitch have the lowest expectation of credit
risk. The obligor has an exceptionally strong capacity for timely
payment of financial commitments which is highly unlikely to be
adversely affected by foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit
risk. They indicate very strong capacity for timely payment of
financial commitment. This capacity is not significantly vulnerable to
foreseeable events.
A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments
is considered to be strong, but may be more vulnerable to changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial commitments
is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to impair this capacity.
This is the lowest investment grade category assigned by Fitch.
BB - Bonds rated BB by Fitch carry the possibility of credit risk
developing, particularly as the result of adverse economic change over
time. Business or financial alternatives may, however, be available to
allow financial commitments to be met. Securities rated in this
category are not considered by Fitch to be investment grade.
B - Bonds rated B by Fitch carry significant credit risk, however, a
limited margin of safety remains. Although financial commitments are
currently being met, capacity for continued payment depends upon a
sustained, favorable business and economic environment.
CCC, CC, C - Default on bonds rated CCC, CC, and C by Fitch is a real
possibility. The capacity to meet financial commitments depends solely
on a sustained, favorable business and economic environment. Default of
some kind on bonds rated CC appears probable, a C rating indicates
imminent default.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus signs
however, are not used in the AAA category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment will normally be evidenced by the following
characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial
changes and high internal cash generation; well-established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Standard & Poor's
A-1 - This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issuers
determined to possess overwhelming safety characteristics will be
denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
Fitch IBCA, Inc.
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes,
and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet financial commitment in
a timely manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payments of financial commitments. The "+" denotes
an exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety is
not as great as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a
reduction to non investment grade.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty of timely payment: short-term
liquidity is clearly outstanding, and safety is just below risk-free
United States Treasury short-term obligations.
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment: liquidity
factors and company fundamentals are sound.
The Thomson BankWatch ("TBW")
TBW-1 - Indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not
as high as for issues rated TBW-1.
