GREENWICH STREET SERIES FUND (the "Fund")
on behalf of the
Diversified Strategic Income Portfolio
Supplement dated June 9, 2000
to Prospectus dated April 28, 2000
The information supplements certain information set forth in
the Prospectus of the Fund listed above under the section
"More on the Funds' Investments - Diversified Strategic
Income Portfolio."
Investments in Corporate Loans The fund may invest up to
15% of its total assets in corporate loans. The primary risk
in an investment in corporate loans is that borrowers may be
unable to meet their interest and/or principal payment
obligations. The fund may acquire an interest in corporate
loans by purchasing both participations in and assignments
of portions of corporate loans from third parties. Corporate
loans in which the fund may invest may be collateralized or
uncollateralized and senior or subordinate. Investments in
uncollateralized and/or subordinate loans entail a greater
risk of nonpayment than do investments in corporate loans
which hold a more senior position in the borrower's capital
structure or that are secured with collateral. The fund's
policy limiting its illiquid securities will be applicable
to corporate loans which are also subject to the risks
generally associated with investments in illiquid
securities.
FD _____________
April 28, 2000
As Amended June 9, 2000
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 28, 2000, 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 Advisers, Sub-Investment Adviser & Administrator 13
Investment Goals and Policies of Portfolios
Emerging Growth Portfolio
17
International Equity Portfolio
18 Appreciation Portfolio
19
Equity Index Portfolio
19
Growth & Income Portfolio
20
Equity Income Portfolio
21
Total Return Portfolio
22
Diversified Strategic Income Portfolio
22
Intermediate High Grade Portfolio
23
Money Market Portfolio
24
Additional Investment Policies 24
Risk Factors 49
Investment Restrictions...... ...................................58
Portfolio Turnover.................. .............................61
Portfolio Transactions.................. .........................62
Purchase of Shares .............................................68
Redemption of Shares 69
Net Asset Value 70
Performance Data ...................................................... .71
Dividends, Distributions and Taxes 76
Organization of the Fund
78
Custodian, Transfer Agent and Sub-Transfer Agent 79
Financial Statements ...................................................80
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, both domestic and foreign, considered by its
investment adviser to be emerging growth companies, without
regard to market capitalization.
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") successor to SSBC
Fund Management Inc.
Investment Adviser to Emerging
Growth, 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
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
Citi Fiduciary Trust Company
("transfer agent")
PFPC Global Fund Services
("PFPC" or "sub-transfer agent")
Transfer and Dividend Paying Agent
Sub-Transfer 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.
Herbert Barg, Trustee (Age 77). Private Investor. His
address is 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania
19004. Director/Trustee of sixteen investment companies
associated with Citigroup, Inc. ("Citigroup").
*Alfred J. Bianchetti, Trustee (Age 77). Retired; formerly
Senior Consultant to Dean Witter Reynolds Inc. His address
is 19 Circle End Drive, Ramsey, New Jersey 07466.
Director/Trustee of eleven investment companies associated
with Citigroup.
Martin Brody, Trustee (Age 78). Consultant, HMK Associates;
Retired Vice Chairman of the Board of Restaurant Associates
Corp. His address is c/o HMK Associates, 30 Columbia
Turnpike, Florham Park, New Jersey 07932. Director/Trustee
of twenty-one investment companies associated with
Citigroup.
Dwight B. Crane, Trustee (Age 62). Professor, Harvard
Business School. His address is c/o Harvard Business
School, Soldiers Field Road, Boston, Massachusetts 02163.
Director/Trustee of twenty-four investment companies
associated with Citigroup.
Burt N. Dorsett, Trustee (Age 69). Managing Partner of
Dorsett McCabe Management. Inc., an investment counseling
firm; Director of Research Corporation Technologies, Inc., a
nonprofit patent clearing and licensing firm. His address
is 201 East 62nd Street, New York, New York 10021.
Director/Trustee of eleven investment companies associated
with Citigroup.
Elliot S. Jaffe, Trustee (Age 73). Chairman of the Board
and President of The Dress Barn, Inc. His address is 30
Dunnigan Drive, Suffern, New York 10901. Director/Trustee
of eleven investment companies associated with Citigroup.
Stephen E. Kaufman, Trustee (Age 68). Attorney. His
address is 277 Park Avenue, New York, New York 10172.
Director/Trustee of thirteen investment companies associated
with Citigroup.
Joseph J. McCann, Trustee (Age 69). Financial Consultant;
Retired Financial Executive, Ryan Homes, Inc. His address
is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
Director/Trustee of eleven investment companies associated
with Citigroup.
*Heath B. McLendon, Trustee (Age 66). Chairman of the Board,
President and Chief Executive Officer; Managing Director of
Salomon Smith Barney; President of SSB Citi and Travelers
Investment Adviser, Inc. ("TIA"); Chairman or Co-Chairman of
the Board of 71 investment companies associated with Salomon
Smith Barney. His address is 7 World Trade Center, New York,
New York 10048.
Cornelius C. Rose, Jr. Trustee (Age 67). President,
Cornelius C. Rose Associates, Inc., financial consultants,
and Chairman and Director of Performance Learning Systems,
an educational consultant. His address is Meadowbrook
Village, Building 4, Apt 6, West Lebanon, New Hampshire
03784. Director/Trustee of eleven investment companies
associated with Citigroup.
Lewis E. Daidone (Age 42). Senior Vice President and
Treasurer; Managing Director of Salomon Smith Barney; Chief
Financial Officer of the Smith Barney Mutual funds;
Treasurer and Senior Vice President or Executive Vice
President of sixty-one investment companies associated with
Citigroup; Director and Senior Vice President of SSB Citi
and TIA. His address is 388 Greenwich Street, New York, New
York 10013.
Paul Brook (Age 46). Controller; Director of Salomon Smith
Barney; Controller or Assistant Treasurer of forty-three
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 39) Controller
Director of Salomon Smith Barney. Controller or Assistant
Treasurer of forty-three investment companies associated
with Citigroup; His address is 388 Greenwich Street, New
York, New York 10013.
Christina T. Sydor (Age 49) Secretary; Managing Director of
Salomon Smith Barney; Secretary of sixty-one investment
companies associated with Citigroup; General Counsel and
Secretary of SSB Citi and TIA. Her address is 388 Greenwich
Street, New York, New York 10013.
Harry D. Cohen (Age 57). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Investment
Officer of SSB Citi; Vice President of two investment
companies associated with Citigroup. His address is 7 World
Trade Center, New York, New York 10048.
Scott Glasser (Age 33). Vice President and Investment
Officer
Director of Salomon Smith Barney; Investment Officer of SSB
Citi; Vice President of two investment companies associated
with Citigroup. His address is 7 World Trade Center, New
York, New York 10048.
Sandip A. Bhagat (Age 39). Vice President and Investment
Officer
President of TIMCO; Vice President of four investment
companies associated with Citigroup; His address is One
Tower Square, Hartford, Connecticut 06183-2030.
John Lau (33) Vice President and Investment Officer
Portfolio Manager of TIMCO; His address is One Tower Square,
Hartford, Connecticut, 06183-2030.
John C. Bianchi (Age 44). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Investment
Officer of SSB Citi; Vice President of six investment
companies associated with Citigroup. His address is 388
Greenwich Street, New York, New York 10013.
Robert Brady (Age 59). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Investment
Officer of SSB Citi; Vice President of three investment
companies associated with Citigroup. His address is 388
Greenwich Street, New York, New York 10013.
James Conheady (Age 64). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Vice President of
four investment companies associated with Citigroup.
Investment Officer of SSB Citi; His address is 7 World Trade
Center, New York, New York 10048.
James E. Conroy (Age 49). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Vice President of
four investment companies associated with Citigroup;
Investment Officer of SSB Citi; His address is 388
Greenwich Street, New York, New York 10013.
Denis Doherty (Age 36). Vice President and Investment
Officer
Director of Salomon Smith Barney; Vice President of two
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 48). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Investment
Officer of SSB Citi; Vice President of four investment
companies associated with Citigroup; His address is 388
Greenwich Street, New York, New York 10013.
John G. Goode (Age 54). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Chairman and
Chief Investment Officer of Davis Skaggs; Vice President of
two investment companies associated with Citigroup;
Investment Officer of SSB Citi. His address is One Sansone
Street, San Francisco, California 94104.
Simon Hildreth (Age 44). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Vice President of
three investment companies associated with Citigroup;
Investment Officer of SSB Citi. His address is Cottons
Centre, Hays Lane, London, SE1 2QT, U.K.
Richard A. Freeman (Age 45). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney. Vice President of
three investment companies associated with Citigroup;
Investment Officer of SSB Citi; His address is 388 Greenwich
Street, New York, New York 10013.
Jeffrey Russell (Age 41). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Vice President of
four investment companies associated with Citigroup;
Investment Officer of SSB Citi; His address is 388 Greenwich
Street, New York, New York 10013.
Phyllis Zahorodny (Age 41). Vice President and Investment
Officer
Managing Director of Salomon Smith Barney; Investment
Officer of SSB Citi; Vice President of four investment
companies associated with Citigroup. Her address is 388
Greenwich Street, New York, New York 10013.
As of April 7, 2000, 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
7, 2000, 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 4,327,677.580 shares
96.90%
Intermediate High Grade Portfolio
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 798,932.702 shares
99.80%
Diversified Strategic Income Portfolio
Travelers Insurance Company
Separate Account QPN 401(k)-TIC
Travelers Insurance Company
Attn: Roger Ferland
One Tower Square
Hartford, CT 06183
Owned 4,432,551.014
64.91%
Diversified Strategic Income Portfolio
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 2,395,768.386 shares
35.09%
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 20,444,633.472 shares
97.88%
Equity Index Portfolio - Class II
Travelers Insurance Company
Separate Account QPM 401(k)-TIC
Travelers Insurance Company
Attn: Roger Ferland 5 MS
One Tower Square
Hartford, CT 06183
Owned 1,064,635.884 shares
87.15%
First Citicorp Life Insurance Co.
800 Silver Lake Blvd.
Dover, DE 19904
Owned 138,400.743 shares
11.33%
Shareholder
Equity Income Portfolio
Percent Ownership
IDS Life Variable Account
For Shearson
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 1,493,173.052 shares
100%
Growth and Income Portfolio
IDS Life Variable Account
For Salomon Smith Barney
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 1,300,252.405 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 18,575,135.505 shares
73.65%
Shareholder
Appreciation Portfolio
Equitable Life of Iowa
Prime Elite
Attn: Gina Keck
604 Locust Street
Des Moines, Iowa 50306
Owned 4,091,319.515 shares
IDS Life Variable Account
For Salomon Smith Barney
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 2,554,746.631 shares
Percent Ownership
16.22%
10.13%
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 14,629,522.185 shares
IDS Life Variable Account
For Salomon Smith Barney
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 1,091,619.259 shares
92.92%
6.93%
Shareholder
International Equity Portfolio
Percent Ownership
IDS Life Variable Account
For Salomon Smith Barney
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 1,052,362.235 shares
100%
Emerging Growth Portfolio
IDS Life Variable Account
For Salomon Smith Barney
Attn: Unit 229
IDS Tower 10
Minneapolis, MN 55402
Owned 713,042.535 shares
100%
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, 1999, the trustees were reimbursed, in the aggregate,
$14,438 for travel and out-of-pocket expenses.
For the fiscal year ended December 31, 1999, 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
Trustees
Fund Complex
Herbert Barg**
$7,600
$0
$114,288
16
Alfred
Bianchetti*
7,100
0
53,900
11
Martin Brody**
6,500
0
138,600
21
Dwight B.
Crane**
7,600
0
155,363
24
Burt N. Dorsett*
**
7,600
0
57,950
11
Elliot S.
Jaffe**
6,100
0
45,100
11
Stephen E.
Kaufman**
7,500
0
110.650
13
Joseph J.
McCann**
7,600
0
58,050
11
Heath B.
McLendon *
0
0
0
71
Cornelius C.
Rose, Jr.**
7,100
0
53,500
11
* 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 (successor to SSBC Fund Management Inc.) is a
wholly owned subsidiary of Salomon Smith Barney Holdings
Inc. (''Holdings''). Holdings is a wholly owned subsidiary
of Citigroup. SSB Citi was incorporated on March 12, 1968
under the laws of Delaware and converted to a Delaware
limited liability company in September 1999. As of March
31, 2000 SSB Citi rendered investment advice to investment
companies that had aggregate assets under management in
excess of $134 billion. SSB Citi, Salomon Smith Barney and
Holdings are each located at 388 Greenwich Street, New York,
New York 10013. The term ''Smith Barney'' in the title of
the Company and the funds has been adopted by permission of
Salomon Smith Barney and is subject to the right of Salomon
Smith Barney to elect that the Company stop using the term
in any form or combination of its name.
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.
At a meeting of the Board of Trustees of the trust held on
January 31, 2000, the Trustees approved an interim sub-
advisory contract and subject to shareholder approval, a new
Advisory Agreement ("Agreement"), with SSB Citi, on behalf
of the fund. The Trustees also approved the termination of
the current advisory agreement with Van Kampen Asset
Management ("VKAM"). The interim advisory contract
commenced on February 10, 2000 and will terminate on the
later of 150 days or upon shareholder approval of the
Agreement. If the 150 days expires without shareholder
approval of the Agreement, SSB Citi would manage the fund
until the Board determines that additional action is
appropriate. Both the interim advisory contract and the
Agreement obligate SSB Citi to provide investment advisory
services to the fund. The interim advisory contract is
substantively identical to the current advisory agreement
with VKAM in all material respects. There are no material
changes in its terms and conditions and no change in fees.
The Agreement, if approved by shareholders would provide for
fees to be paid by the Emerging Growth Portfolio at a rate
of 0.75% of the average daily net assets, computed daily and
paid monthly.
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 years ended December 31, 1999, 1998 and 1997 by
their respective adviser:
Portfolio
Adviser
12/31/99
12/31/98
12/31/97
Appreciation
SSB Citi
$2,049,520
$1,032,038
$662,865
Diversified Strategic
Income
SSB Citi
358,768
332,908
263,097
Emerging Growth*
SSB Citi
155,879
150,773
146,478
Equity Income
SSB Citi
134,493
192,581
194,623
Equity Index**
TIMCO
556,038
135,564
56,376
Growth & Income
SSB Citi
139,088
179,897
187,747
Intermediate High
Grade
SSB Citi
44,383
58,825
59,572
International Equity
SSB Citi
182,496
225,622
275,190
Money Market***
SSB Citi
14,405
14,675
16,034
Total Return
Davis Skaggs
1,718,707
1,607,515
1,220,026
* VKAM received the investment advisory fees for the past three years.
** TIMCO and SSB Citi have voluntarily agreed to limit the
ratio of expenses to average net assets to 0.30%.
TIMCO and/or SSB Citi will reimburse fees for the amount
that exceeds the limitation.
*** SSB Citi waived $8,710 and $14, 675 of its investment advisory
fees for the fiscal years ended December 31, 1999 and 1998,
respectively.
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 portfolios incurred the following administration fees
for the years ended December 31, 1999,1998 and 1997:
Portfolio
Administrato
r
12/31/99
12/31/98
12/31/97
Appreciation
SSB Citi
$745,280
$375,286
$241,042
Diversified Strategic
Income
SSB Citi
159,452
147,959
116.932
Emerging Growth
SSB Citi
41,568
40,206
39,061
Equity Income
SSB Citi
59,774
85,592
86,499
Equity Index*
SSB Citi
222,721
54,226
27,188
Growth & Income
SSB Citi
61,817
79,954
83,443
Intermediate High
Grade
SSB Citi
22,191
29,412
29,786
International Equity
SSB Citi
42,940
53,087
64,750
Money Market**
SSB Citi
7,610
9,784
10,689
Total Return
SSB Citi
624,984
584,551
443,646
* SSB Citi agreed to reimburse administration fees in the
amount of $114,983 for the fiscal year ended
December 31, 1998. TIMCO and SSB Citi have voluntarily
agreed to limit the ratio of expenses to average net
assets to 0.30%. TIMCO and/or SSB Citi will reimburse fees
for the amount that exceeds the limitation.
** SSB Citi agreed to waive administration fees in the
amount of $5,806 for the fiscal year ended December 31,
1999. SSB Citi waived all of its administration fees for
the fiscal years ended December 31,1998.
Code of Ethics
Pursuant to Rule 17j-1 of the 1940 Act, the fund, its
investment advisers and principal underwriter have adopted
codes of ethics that permit personnel to invest in
securities for their own accounts, including securities that
may be purchased or held by the fund. All personnel must
place the interests of clients first and avoid activities,
interests and relationships that might interfere with the
duty to make decisions in the best interests of the clients.
All personal securities transactions by employees must
adhere to the requirements of the codes and must be
conducted in such a manner as to avoid any actual or
potential conflict of interest, the appearance of such a
conflict, or the abuse of an employee's position of trust
and responsibility.
A copy of the fund's Code of Ethics is on file with the
Securities and Exchange Commission.
Auditors
KPMG LLP, independent auditors, 757 Third Avenue, New York,
New York 10017, 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, 2000.
Counsel
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New
York 10019, serves as counsel to the fund.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York,
New York, serves as counsel to the directors who are not
"interested persons" of the fund.
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 adviser 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
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 by
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% 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.
Although the portfolio invests primarily in fixed income
securities, it may invest up to 20% of its assets in common
stock and other equity-related securities, including
convertible securities, preferred stock, warrants and
rights.
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 by 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 by
another NRSRO or unrated securities deemed by the adviser 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, Diversified Strategic Income,
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,
Diversified Strategic Income, 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, Diversified Strategic Income,
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 securities of foreign issuers
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.
Each portfolio may invest for temporary defensive purposes
in corporate and government bonds and notes and money market
instruments. Money market instruments include: obligations
issued or guaranteed by the United States government, its
agencies or instrumentalities ("U.S. government
securities"); certificates of deposit, time deposits and
bankers' acceptances issued by domestic banks (including
their branches located outside the United States and
subsidiaries located in Canada), domestic branches of
foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase
agreements with respect to the foregoing types of
instruments. Certificates of deposit ("CDs") are short-
term, negotiable obligations of commercial banks. Time
deposits ("TDs") are non-negotiable deposits maintained in
banking institutions for specified periods of time at stated
interest rates. Bankers' acceptances are time drafts drawn
on commercial banks by borrowers, usually in connection with
international transactions. The fund may invest in cash and
in short-term instruments, and it may hold cash and short-
term instruments without limitation when the manager
determines that it is appropriate to maintain a temporary
defensive posture. Short-term instruments in which the fund
may invest include: (a) obligations issued or guaranteed as
to principal and interest by the United States government,
its agencies or instrumentalities (including repurchase
agreements with respect to such securities); (b) bank
obligations (including certificates of deposit, time
deposits and bankers' acceptances of domestic or foreign
banks, domestic savings and loan associations and similar
institutions); (c) floating rate securities and other
instruments denominated in U.S. dollars issued by
international development agencies, banks and other
financial institutions, governments and their agencies or
instrumentalities and corporations located in countries that
are members of the Organization for Foreign Cooperation and
Development; and (d) commercial paper rated no lower than A-
2 by Standard & Poor's Ratings Group ("S&P") or Prime-2 by
Moody's Investors Service, Inc. ("Moody's") or the
equivalent from another nationally recognized statistical
rating organization ("NRSRO") or, if unrated, of an issuer
having an outstanding, unsecured debt issue then rated
within the three highest rating categories. "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.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). 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
Corporation Loans (Diversified Strategic Income Portfolio).
This fund may invest up to 15% of its total assets in
corporate loans. Corporate loans are negotiated and
underwritten by a bank or syndicate of banks and other
institutional investors. The fund may acquire an interest
in corporate loans through the primary market by acting as
one of a group of lenders of a corporate loan. The primary
risk in an investment in corporate loans is that the
borrower may be unable to meet their interest and/or
principal payment obligations. The occurrence of such
default with regard to a corporate loan in which the funds
had invested would have an adverse affect on each fund's net
asset value. Corporate loans in that the funds may invest
may be collateralized or uncollateralized and senior or
subordinate. Investments in uncollateralized and/or
subordinate loans entail a greater risk of nonpayment than
do investments in corporate loans which hold a more senior
position in the borrower's capital structure or that are
secured with collateral.
The fund may also acquire an interest in corporate loans by
purchasing both participations ("Participations") in and
assignments ("Assignments") of portions of corporate loans
from third parties. By purchasing a Participation, the
funds acquire some or all of the interest of a bank or other
leading institution in a loan to a corporate borrower. The
Participations typically will result in the fund having a
contractual relationship only with the lender and not the
borrower. The fund will have the right to receive payments
or principal, interest and any fees to which it is entitled
only from the lender selling the Participation and only upon
receipt by the lender of the payments from the borrower. In
connection with purchasing Participations, the fund
generally will have no right to enforce compliance by the
borrower with the terms of the loan agreement relating to
the loan, nor any rights of set-off against the borrower,
and the fund may not directly benefit from any collateral
supporting the loan in which it has purchased the
Participation. As a result, the funds will assume the
credit risk of both the borrower and the lender that is
selling the Participation. The fund will acquire
Participations only if the lender interpositioned between
the fund and the borrower is determined by management to be
creditworthy. When the funds purchases Assignments from
lenders, the fund will acquire direct rights against the
borrower on the loan. However, since Assignments are
arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired
by the fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigned
lender.
In addition, the fund may have difficulty disposing of its
investments in corporate loans. The liquidity of such
securities is limited and the fund anticipates that such
securities could be sold only to a limited number of
institutional investors. The lack of liquid secondary
market could have an adverse impact on the value of such
securities and on the fund's ability to dispose of
particular Assignments or Participations when necessary to
meet the fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of liquid
secondary market for corporate loans also may make it more
difficult for the fund to assign a value to those securities
for purposes of valuing the fund's investments and
calculating its net asset value. The fund's policy limiting
its illiquid securities will be applicable to investments in
corporate loans.
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 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
portfolio's 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). 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
writing 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 Appreciation, 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 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, Money Market and Intermediate High Grade Portfolios,
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
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.
Economic and Monetary Union (EMU). EMU began on January 1,
1999 when 11 European countries adopted a single currency --
the Euro. EMU may create new economic opportunities for
investors, such as lower interest rates, easier cross-border
mergers, acquisitions and similar restructurings, more
efficient distribution and product packaging and greater
competition. Budgetary decisions remain in the hands of
each participating country, but are subject to each
country's commitment to avoid "excessive deficits" and other
more specific budgetary criteria. A European Central Bank
is responsible for setting the official interest rate within
the Euro zone. EMU and the introduction of the Euro,
however, present unique risks and uncertainties for
investors in EMU-participating countries, including: (i)
monetary and economic union on this scale has never before
been attempted; (ii) there is uncertainty whether
participating countries will remain committed to EMU in the
face of changing economic conditions; (iii) instability
within EMU may increase the volatility of European markets
and may adversely affect the prices of securities of
European issuers in the funds' portfolios; (iv) there is
uncertainty concerning the fluctuation of the Euro relative
to non-Euro currencies during the transition period from
January 1, 1999 to December 31, 2000, and beyond; and (v)
there is no assurance that interest rate, tax and labor
regimes of EMU-participating countries will converge over
time. These and other factors may cause market disruption
and could adversely affect European securities and
currencies held by the funds.
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
transactions, 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. A
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.
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 adviser
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), 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 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 normally 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 1999 and 1998 fiscal years, the portfolio turnover
rates for portfolios having operations during the stated
periods were as follows:
Portfolio
12/31/99
12/31/98
Appreciation
53%
22%
Diversified Strategic
Income
111%
86%
Emerging Growth
113%
98%
Equity Income
3%
43%
Equity Index
3%
5%
Growth & Income
47%
13%
Intermediate High
Grade
71%
60%
International Equity
17%
30%
Total Return
41%
72%
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 tables 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, 1999
Total Brokerage
Brokerage Commissions
Portfolio
Commissions Paid
Paid to Salomon Smith
Barney
Appreciation
$313,489
$14,055
Diversified Strategic
Income
0
0
Emerging Growth
2,237
1,596
Equity Income
22,951
0
Equity Index
227,643
0
Growth & Income
13,496
208
International Equity
43,861
1,403
Total Return
515,873
64,233
% of Aggregate
% of Aggregate
Dollar
Brokerage
Commissions
Amount of
Transactions
Paid to Salomon
Smith
Involving
Commissions
Portfolio
Barney
Paid to Salomon
Smith Barney
Appreciation
Diversified Strategic Income
4.48%
0.00%
2.26%
0.00%
Emerging Growth
7.13%
2.33%
Equity Income
0.00%
0.00%
Equity Index
0.00%
0.00%
Growth & Income
1.54%
1.05%
International Equity
3.20%
4.30%
Total Return
12.45%
9.72%
Fiscal Year Ended December 31, 1998
Total Brokerage
Brokerage Commissions
Portfolio
Commissions Paid
Paid to Salomon Smith Barney
Appreciation
$0
$0
Diversified Strategic
Income
0
0
Emerging Growth
26,923
853
Equity Income
78,529
600
Equity Index
62,186
0
Growth & Income
21,272
300
International Equity
53,838
1,393
Total Return
515,729
26,965
% of Aggregate
% of Aggregate Dollar
Brokerage Commissions
Amount of Transactions
Paid to Salomon Smith
Involving Commissions
Portfolio
Barney Inc.
Paid to Salomon Smith Barney
Inc.
Appreciation
0%
0%
Diversified
Strategic
Income
0%
0%
Emerging Growth
3.17%
0.95%
Equity Income
0.76%
0.48%
Equity Index
0%
0%
Growth & Income
1.41%
0.96%
International Equity
2.59%
4.60%
Total Return
5.23%
3.20%
Fiscal Year Ended December 31, 1997
Total Brokerage
Brokerage Commissions
Portfolio
Commissions Paid
Paid to Salomon Smith
Barney
Appreciation
$76,960
$3,240
Diversified Strategic
Income
0
0
Emerging Growth
24,590
324
Equity Income
75,365
1,200
Equity Index
6,685
0
Growth & Income
157,715
0
International Equity
57,156
650
Total Return
46,446
14,850
% of Aggregate
Dollar
% of Aggregate
Amount of
Transactions
Brokerage
Commissions
Involving
Commissions
Portfolio
Paid to Salomon
Smith Barney Inc.
Paid to Salomon
Smith Barney Inc.
Appreciation
0.04%
0%
Diversified Strategic
Income
0
0
Emerging Growth
1.32
0.95%
Equity Income
1.59
3.08%
Equity Index
0.03
0
Growth & Income
0
0
International Equity
1.14
2.43%
Total Return
3.71
2.98%
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.
For the fiscal year ended December 31, 1999, the following
table sets forth certain information regarding a portfolio's
payment of brokerage commissions and brokerage transactions
to brokers because of research services provided:
Amount of Transactions
Total Brokerage
Involving Commissions
Portfolio
Commissions Paid
Paid to Brokers
Appreciation
$4,592
$1,949,325
Emerging Growth
126
160,870
Growth and Income
175
193,820
Total Return
105,363
30,413,473
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.
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 28, 2000 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.
The total distribution fees paid by Class II shares of
Equity Index Portfolio for the fiscal period ended December
31, 1999 were $14,001.
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, 1999, the yield for the Money Market
Portfolio was 4.69% (the effective yield was 4.80%).
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,
1999, the yields for the Diversified Strategic Income
Portfolio, the Total Return Portfolio and the Intermediate
High Grade Portfolio were 7.58%, 1.76% and 3.97%,
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
12/31/99
5 Years
Ended
12/31/99
Since
Commencement
Appreciation*
SSB Citi
13.12%
21.32%
14.77%
Diversified Strategic
Income*
SSB Citi
1.72%
8.62%
6.68%
Emerging Growth** +
SSB Citi
107.14%
42.10%
32.69%
Equity Income*
SSB Citi
(4.75)%
14.08%
9.98%
Equity Index-Class I*
TIMCO
20.68%
27.62%
19.11%
Equity Index-Class
II***
TIMCO
N/A
N/A
13.96%
Growth & Income*
SSB Citi
10.66%
18.94%
13.17%
Intermediate High
Grade*
SSB Citi
(3.69)%
6.00%
5.15%
International
Equity**
SSB Citi
66.20%
20.60%
15.09%
Money Market*
SSB Citi
4.03%
4.54%
3.88%
Total Return**
Davis
Skaggs
22.02%
18.59%
16.98%
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
*** Portfolio commenced operations on March 22, 1999.
+ Performance produced by VKAM.
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
12/31/99
5 Years
Ended
12/31/99
Since
Commencement
Appreciation*
SSB Citi
13.12%
162.87%
209.98%
Diversified Strategic
Income*
SSB Citi
1.72%
51.17%
70.08%
Emerging Growth** +
SSB Citi
107.14%
479.48%
458.10%
Equity Income*
SSB Citi
(4.75)%
93.24%
118.50%
Equity Index-Class
I*
TIMCO
20.68%
238.55%
320.52%
Equity Index-Class
II***
TIMCO
N/A
N/A
13.96%
Growth & Income*
SSB Citi
10.66%
137.99%
176.33%
Intermediate High
Grade*
SSB Citi
(3.69)%
33.85%
51.09%
International
Equity**
SSB Citi
66.20%
155.14%
134.98%
Money Market*
SSB Citi
4.03%
24.88%
36.75%
Total Return**
Davis
Skaggs
22.02%
134.51%
159.43%
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
*** Portfolio commenced operations on March 22, 1999.
+ Performance produced by VKAM.
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.
On December 31, 1999, the unused capital loss carryovers, by
portfolio, were approximately as follows: Intermediate High
Grade Portfolio, $511,000 and Diversified Strategic Income
Portfolio, $1,725,000. For Federal income tax purposes,
these amounts are available to be applied against future
capital gains of the portfolio that has the carryovers, if
any, that are realized prior to the expiration of the
applicable carryover. The carryovers expire as follows:
FUND
December 31,
(in thousands)
2002
2003
2004
2005
2006
2007
Intermediate
High Grade
$288
--
$5
$24
$84
$110
Diversified
Strategic
Income
--
--
--
--
--
$1,725,00
0
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 agency or instrumentality of the Federal
government 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.
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.
CUSTODIAN, TRANSFER AGENT AND SUB-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.
Citi Fiduciary Trust Company, located at 388 Greenwich
Street, New York, New York 10013, 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.
PFPC Global Fund Services, located at P.O. Box 9699,
Providence, RI 02940-9699, serves as the trust's sub-
transfer agent. Under the transfer agency agreement, the
sub-transfer agent maintains the shareholder account records
for the trust, handles certain communications between
shareholders and the trust and distributes dividends and
distributions payable by the trust. For these services, the
sub-transfer agent receives a monthly fee computed on the
basis of the number of shareholder accounts it maintains for
the trust 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, 1999 is incorporated herein by reference in its
entirety. The annual report was filed on March 8, 2000,
Accession Number 91155-00-184.
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.
