GREENWICH STREET SERIES FUND (the "Trust")
on behalf of the
Total Return Portfolio (the "Portfolio")
Supplement dated December 21, 2000
to Prospectus dated April 28, 2000
The information supplements certain information set forth in the
Prospectus of the Trust listed above by adding the following text
under the section "More on the Funds' Investments."
Total Return Portfolio
The Portfolio may invest up to 10% of its assets in securities of
other investment companies, including shares in a portfolio of
securities that seeks to track the performance of an underlying
equity index or a portion of an equity index.
FD 0
April 28, 2000
As Amended June 9, 2000
And December 21, 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.
Securities of Other Investment Companies (Total
Return Portfolio) The portfolio may invest in
securities of other investment companies to the
extent permitted under the 1940 Act. Presently,
under the 1940 Act, the fund may hold securities of
another investment company in amounts which (i) do
not exceed 3% of the total outstanding voting stock
of such company, (ii) do not exceed 5% of the value
of the fund's total assets and (iii) when added to
all other investment company securities held by the
fund, do not exceed 10% of the value of the fund's
total assets.
To the extent the portfolio invests in securities of
other investment companies, fund shareholders would
indirectly pay a portion of the operating costs of
such companies in addition to the expenses of its own
operation. These costs include management,
brokerage, shareholder servicing and other
operational expenses. Indirectly, then, if the
portfolio invests in Equity Equivalents it's
shareholders may pay higher operational costs than if
they owned the underlying investment companies
directly. Additionally, the portfolio's investments
in such investment companies are subject to
limitations under the 1940 Act and market
availability.
Index-Related Securities ("Equity Equivalents")(Total
Return Portfolio) The portfolio may invest in certain
types of securities that enable investors to purchase
or sell shares in a portfolio of securities that
seeks to track the performance of an underlying index
or a portion of an Index. Such Equity Equivalents
include among others DIAMONDS (interests in a
portfolio of securities that seeks to track the
performance of the Dow Jones Industrial Average),
SPDRs or Standard & Poor's Depositary Receipts
(interests in a portfolio of securities that seeks to
track the performance of the S&P 500 Index), WEBS or
World Equity Benchmark Shares (interests in a
portfolio of securities that seeks to track the
performance of a benchmark index of a particular
foreign country's stocks), and the Nasdaq-100 Trust
(interests in a portfolio of securities of the
largest and most actively traded non-financial
companies listed on the Nasdaq Stock Market). Such
securities are similar to index mutual funds, but
they are traded on various stock exchanges or
secondary markets. The value of these securities is
dependent upon the performance of the underlying
index on which they are based. Thus, these
securities are subject to the same risks as their
underlying indexes as well as the securities that
make up those indexes. For example, if the securities
comprising an index that an index-related security
seeks to track perform poorly, the index-related
security will lose value.
Equity Equivalents may be used for several purposes,
including, to simulate full investment in the
underlying index while retaining a cash balance for
fund management purposes, to facilitate trading, to
reduce transaction costs or to seek higher investment
returns where an Equity Equivalent is priced more
attractively than securities in the underlying index.
Because the expense associated with an investment in
Equity Equivalents may be substantially lower than
the expense of small investments directly in the
securities comprising the indices they seek to track,
investments in Equity Equivalents may provide a cost-
effective means of diversifying the fund's assets
across a broad range of equity securities.
The prices of Equity Equivalents are derived and
based upon the securities held by the particular
investment company. Accordingly, the level of risk
involved in the purchase or sale of an Equity
Equivalent is similar to the risk involved in the
purchase or sale of traditional common stock, with
the exception that the pricing mechanism for such
instruments is based on a basket of stocks. The
market prices of Equity Equivalents are expected to
fluctuate in accordance with both changes in the net
asset values of their underlying indices and the
supply and demand for the instruments on the
exchanges on which they are traded. Substantial
market or other disruptions affecting an Equity
Equivalent could adversely affect the liquidity and
value of the shares of the fund investing in such
instruments.
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.
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