April 30, 1999
Amended October 14, 1999
And as of December 7, 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
SSB Citi Fund Management LLC
("SSB Citi" or "adviser" and
"administrator") formerly known as
SSBC Fund Management Inc. and
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 SSB Citi ("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 other 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 13 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 SSB Citi 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 SSB
Citi 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 SSB
Citi; 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 SSB Citi; 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 SSB
Citi; 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 SSB
Citi; 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
SSB Citi; 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
SSB Citi; 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 SSB Citi; 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 SSB
Citi; 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 SSB Citi. 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 SSB Citi. 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
SSB Citi; 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 SSB
Citi; 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 SSB Citi 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:
Pension or
Compensation
Number of
Retirement
From Fund
Funds for
Aggregate
Benefits
Accrued
And Fund
Which Trustee
Compensat
ion
as part of
Complex
Serves Within
Name of Person
from Fund
+
Fund
Expenses
Paid to
Directors
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
13
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.
SSB Citi 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 SSB Citi.
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 SSB Citi, 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
SSB Citi
$1,032,038
$662,865
$536,120
Diversified Strategic
Income
SSB Citi
332,908
263,097
266,327
Emerging Growth
VKAM
150,773
146,478
142,425
Equity Income
SSB Citi
192,581
194,623
215,308
Equity Index
TIMCO
135,564
56,376
69,030
Growth & Income
SSB Citi
179,897
187,747
166,039
Intermediate High
Grade*
SSB Citi
58,825
59,572
60,847
International Equity
SSB Citi
225,622
275,190
278,118
Money Market**
SSB Citi
14,675
16,034
17,904
Total Return
Davis Skaggs
1,607,515
1,220,026
665,417
* SSB Citi waived investment advisory fees in the amount of $16,451 for
the fiscal year ended December 31, 1996.
** SSB Citi 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
SSB Citi 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, SSB Citi performs certain services for the fund. As
part of those services, SSB Citi 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. SSB Citi bears all expenses in connection with the
performance of its services.
SSB Citi, 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
Administrator
12/31/98
12/31/97
12/31/96
Appreciation
SSB Citi
$375,286
$241,042
$194,953
Diversified Strategic
Income
SSB Citi
147,959
116.932
118,368
Emerging Growth
SSB Citi
40,206
39,061
37,980
Equity Income
SSB Citi
85,592
86,499
95,692
Equity Index*
SSB Citi
54,226
27,188
34,515
Growth & Income
SSB Citi
79,954
83,443
73,795
Intermediate High
Grade**
SSB Citi
29,412
29,786
30,424
International Equity
SSB Citi
53,087
64,750
65,439
Money Market***
SSB Citi
9,784
10,689
11,942
Total Return
SSB Citi
584,551
443,646
241,844
* SSB Citi agreed to reimburse administration fees in the amount of
$114,983 for the fiscal year ended December 31, 1998.
** SSB Citi waived administration fees in the amount of $8,226 for the
fiscal year ended December 31,1996.
*** SSB Citi 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 invests primarily in
common stocks of emerging growth companies, without regard
to market capitalization. These are domestic or foreign companies
the manager believes are in the early stages of their life cycles and
have the potential to become major enterprises. Investments
in such companies may offer greater opportunities for growth of
capital than larger, more established companies, but also may
involve certain special risks. 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 (Appreciation, 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 (Appreciation, 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
Portfolio
Total Brokerage
Commissions
Brokerage
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 Dollar
Brokerage Commissions
Paid to Salomon Smith
Barney Inc.
% of Aggregate
Amount of Transactions
Involving Commissions
Portfolio
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
Portfolio
Total Brokerage
Commissions
Brokerage
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
Brokerage Commissions
Paid to Salomon Smith
Barney Inc.
% of Aggregate
Amount of Transactions
Involving Commissions
Portfolio
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
Portfolio
Total Brokerage
Commissions
Brokerage
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 Dollar
Brokerage Commissions
Paid to Salomon Smith
Barney Inc.
% of Aggregate
Amount of Transactions
Involving Commissions
Portfolio
Paid to Salomon Smith Barney
Inc.
Appreciation
0%
0%
Diversified Strategic Income
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, 757 Third Avenue, New York, New York
10022, 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*
SSB Citi
19.15%
18.10%
15.00%
Diversified Strategic
Income*
SSB Citi
6.41%
7.63%
7.39%
Emerging Growth**
VKAM
37.14%
20.95%
21.55%
Equity Income*
SSB Citi
16.99%
12.76%
12.20%
Equity Index*
TIMCO
28.46%
23.12%
18.89%
Growth & Income*
SSB Citi
11.88%
15.79%
13.53%
Intermediate High
Grade*
SSB Citi
6.79%
6.14%
6.44%
International
Equity**
SSB Citi
18.84%
7.06%
7.06%
Money Market*
SSB Citi
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*
SSB Citi
19.15%
129.77%
174.02%
Diversified Strategic
Income*
SSB Citi
6.41%
44.44%
67.20%
Emerging Growth**
VKAM
37.14%
158.82%
169.43%
Equity Income*
SSB Citi
16.99%
82.31%
129.41%
Equity Index*
TIMCO
28.46%
182.74%
248.46%
Growth & Income*
SSB Citi
11.88%
108.18%
149.72%
Intermediate High
Grade*
SSB Citi
6.79%
34.74%
56.87%
International
Equity**
SSB Citi
18.84%
40.68%
41.38%
Money Market*
SSB Citi
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.
