THE LAZARD FUNDS, INC.
30 Rockefeller Plaza
New York, New York 10112
(800) 823-6300
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
AS REVISED, AUGUST 13, 1999
The Lazard Funds, Inc. (the "Fund") is a no-load, open-end management
investment company known as a mutual fund. This Statement of Additional
Information, which is not a prospectus, supplements and should be read in
conjunction with the current Prospectus of the Fund, dated May 1, 1999, as it
may be revised from time to time, relating to the following eleven portfolios
(individually, a "Portfolio" and collectively, the "Portfolios"):
Lazard Equity Portfolio Lazard Emerging Markets Portfolio
Lazard Mid Cap Portfolio Lazard Bond Portfolio
Lazard Small Cap Portfolio Lazard High Yield Portfolio
Lazard Global Equity Portfolio Lazard International Fixed-Income
Lazard International Equity Portfolio Portfolio
Lazard International Small Cap Portfolio Lazard Strategic Yield Portfolio
Each Portfolio currently offers two classes of shares--Institutional
Shares and Open Shares. Institutional Shares and Open Shares are identical,
except as to minimum investment requirements and the services offered to and
expenses borne by each Class.
To obtain a copy of the Fund's Prospectus, please write or call the
Fund at the address and telephone number given above.
The most recent Annual Report and Semi-Annual Report to Shareholders
for each Portfolio are separate documents supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing in the Annual Report are incorporated
by reference into this Statement of Additional Information.
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TABLE OF CONTENTS
Page
Description of the Fund and Portfolios.......................................3
Investment Restrictions.....................................................27
Management..................................................................31
Determination of Net Asset Value............................................38
Portfolio Transactions......................................................39
How to Buy and How to Sell Shares...........................................42
Distribution and Servicing Plan.............................................43
Dividends and Distributions.................................................45
Taxation....................................................................46
Performance Information.....................................................50
Information About the Fund and Portfolios...................................54
Counsel and Independent Auditors............................................66
Additional Information......................................................67
Appendix....................................................................68
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DESCRIPTION OF THE FUND AND PORTFOLIOS
The Fund is a Maryland corporation organized on May 17, 1991. Each
Portfolio is a separate portfolio of the Fund, an open-end management investment
company, known as a mutual fund. The Equity Portfolio is a diversified
investment company, which means that, with respect to 75% of its total assets,
the Equity Portfolio will not invest more than 5% of its assets in the
securities of any single issuer. Each of the other Portfolios is a
non-diversified investment company, which means that the proportion of the
Portfolio's assets that may be invested in the securities of a single issuer is
not limited by the Investment Company Act of 1940, as amended (the "1940 Act").
Lazard Asset Management, a division of Lazard Freres & Co. LLC
("Lazard Freres"), serves as the investment manager (the "Investment Manager")
to each of the Portfolios.
Lazard Freres is the distributor of each Portfolio's shares.
CERTAIN PORTFOLIO SECURITIES
The following information supplements and should be read in
conjunction with the Fund's Prospectus.
DEPOSITORY RECEIPTS. (All Portfolios, except the Small Cap Portfolio)
Each of these Portfolios may invest in the securities of foreign issuers in the
form of American Depositary Receipts ("ADRs") and Global Depositary Receipts
("GDRs"). 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 United States bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. GDRs are
receipts issued outside the United States, typically by non-United States banks
and trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in the
United States securities markets and GDRs in bearer form are designed for use
outside the United States.
These securities may be purchased through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the deposited
security. Holders of unsponsored depositary receipts generally bear all the
costs of such facilities and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts in respect of the deposited securities.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL ENTITIES.
(All Portfolios, except the Equity Portfolio and Small Cap Portfolio) Each of
these Portfolios may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Investment Manager to be of
comparable quality to the other obligations in which the Portfolio may invest.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
CONVERTIBLE SECURITIES. (All Portfolios) Convertible securities may be
converted at either a stated price or stated rate into underlying shares of
common stock. Convertible securities have characteristics similar to both
fixed-income and equity securities. 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.
Although to a lesser extent than with fixed-income securities, 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 stock. 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.
Convertible securities are investments that provide for a stable
stream of income with generally higher yields than common stocks. There can be
no assurance of current income because the issuers of the convertible securities
may default on their obligations. 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, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
WARRANTS. (All Portfolios, except the International Equity Portfolio,
Bond Portfolio and International Fixed-Income Portfolio) A warrant is an
instrument issued by a corporation which gives the holder the right to subscribe
to a specified amount of the corporation's capital stock at a set price for a
specified period of time. A Portfolio may invest up to 5% of its total assets in
warrants, except that this limitation does not apply to warrants purchased by
the Portfolio that are sold in units with, or attached to, other securities.
PARTICIPATION INTERESTS. (All Portfolios) Each Portfolio may purchase
from financial institutions participation interests in securities in which the
Portfolio may invest. A participation interest gives the Portfolio an undivided
interest in the security in the proportion that the Portfolio's participation
interest bears to the total principal amount of the security. These instruments
may have fixed, floating or variable rates of interest with remaining maturities
of 13 months or less. If the participation interest is unrated, or has been
given a rating below that which is permissible for purchase by the Portfolio,
the participation interest will be collateralized by U.S. Government securities,
or, in the case of unrated participation interests, the Investment Manager must
have determined that the instrument is of comparable quality to those
instruments in which the Portfolio may invest.
Each Portfolio may invest in corporate obligations denominated in U.S.
or (except with respect to the Equity Portfolio and Small Cap Portfolio) foreign
currencies that are originated, negotiated and structured by a syndicate of
lenders ("Co-Lenders") consisting of commercial banks, thrift institutions,
insurance companies, financial companies or other financial institutions one or
more of which administers the security on behalf of the syndicate (the "Agent
Bank"). Co-Lenders may sell such securities to third parties called
"Participants." Each Portfolio may invest in such securities either by
participating as a Co-Lender at origination or by acquiring an interest in the
security from a Co-Lender or a Participant (collectively, "participation
interests"). Co-Lenders and Participants interposed between the Portfolio and
the corporate borrower (the "Borrower"), together with Agent Banks, are referred
to herein as "Intermediate Participants." Each Portfolio also may purchase a
participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the Fund,
on behalf of the Portfolio, and the Borrower. In such cases, the Portfolio would
be required to rely on the Intermediate Participant that sold the participation
interest not only for the enforcement of the Portfolio's rights against the
Borrower, but also for the receipt and processing of payments due to the
Portfolio under the security. Because it may be necessary to assert through an
Intermediate Participant such rights as may exist against the Borrower, if the
Borrower fails to pay principal and interest when due, the Portfolio may be
subject to delays, expenses and risks that are greater than those that would be
involved if the Portfolio were to enforce its rights directly against the
Borrower. Moreover, under the terms of a participation interest, the Portfolio
may be regarded as a creditor of the Intermediate Participant (rather than of
the Borrower), so that the Portfolio also may be subject to the risk that the
Intermediate Participant may become insolvent. Similar risks may arise with
respect to the Agent Bank if, for example, assets held by the Agent Bank for the
benefit of the Portfolio were determined by the appropriate regulatory authority
or court to be subject to the claims of the Agent Bank's creditors. In such
case, the Portfolio might incur certain costs and delays in realizing payment in
connection with the participation interest or suffer a loss of principal and/or
interest. Further, in the event of the bankruptcy or insolvency of the Borrower,
the obligation of the Borrower to repay the loan may be subject to certain
defenses that can be asserted by such Borrower as a result of improper conduct
by the Agent Bank or Intermediate Participant.
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VARIABLE AND FLOATING RATE SECURITIES. (All Portfolios) Variable and
floating rate securities provide for a periodic adjustment in the interest rate
paid on the obligations. The terms of such obligations must provide that
interest rates are adjusted periodically based upon an interest rate adjustment
index as provided in the respective obligations. The adjustment intervals may be
regular, and range from daily up to annually, or may be event based, such as
based on a change in the prime rate.
Each Portfolio may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money-market index or Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
Because of the interest rate reset feature, floaters provide the Portfolio with
a certain degree of protection against rises in interest rates, although the
Portfolio will participate in any declines in interest rates as well.
Each Portfolio also may invest in inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an inverse floater resets
in the opposite direction from the market rate of interest to which the inverse
floater is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality.
MUNICIPAL OBLIGATIONS. (Bond Portfolio, High Yield Portfolio and
Strategic Yield Portfolio) In circumstances where the Investment Manager
determines that investment in municipal obligations would facilitate the
Portfolio's ability to accomplish its investment objective, each of these
Portfolios may invest its assets in such obligations, including municipal
obligations issued at a discount. Dividends on shares attributable to interest
on municipal obligations held by the Portfolio will not be exempt from federal
income taxes. Municipal obligations are susceptible to risks arising from the
financial condition of the states, public bodies or municipalities issuing the
securities. To the extent that state or local governmental entities are unable
to meet their financial obligations, the income derived by the Portfolio from
municipal obligations could be impaired.
Municipal obligations are debt obligations issued by states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, or multistate
agencies or authorities. Municipal obligations bear fixed, floating or variable
rates of interest. Certain municipal obligations are subject to redemption at a
date earlier than their stated maturity pursuant to call options, which may be
separated from the related municipal obligations and purchased and sold
separately. Each of these Portfolios also may acquire call options on specific
municipal obligations. The Portfolio generally would purchase these call options
to protect the Portfolio from the issuer of the related municipal obligation
redeeming, or other holder of the call option from calling away, the municipal
obligation before maturity.
Municipal obligations generally include debt obligations issued to
obtain funds for various public purposes as well as certain industrial
development bonds issued by or on behalf of public authorities. Municipal
obligations are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Industrial
development bonds, in most cases, are revenue bonds and generally do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities.
While, in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain municipal obligations are taxable obligations,
offering yields comparable to, and in some cases greater than, the yields
available on other permissible Portfolio investments. Dividends received by
shareholders on Portfolio shares which are attributable to interest income
received by the Portfolio from municipal obligations generally will be subject
to federal income tax. Each of these Portfolios will invest in municipal
obligations, the ratings of which correspond with the ratings of other
permissible Portfolio investments. Each of these Portfolios currently intends to
invest no more than 25% of its assets in municipal obligations. However, this
percentage may be varied from time to time without shareholder approval.
ZERO COUPON AND STRIPPED U.S. TREASURY SECURITIES. (Bond Portfolio,
High Yield Portfolio and Strategic Yield Portfolio) Each of these Portfolios may
invest in zero coupon U.S. Treasury securities, which are Treasury notes and
Bonds that have been stripped of their unmatured interest coupons, the coupons
themselves and receipts or certificates representing interests in such stripped
debt obligations and coupons. Zero coupon securities also are issued by
corporations and financial institutions which constitute a proportionate
ownership of the issuer's pool of underlying U.S. Treasury securities. A zero
coupon security pays no interest to its holder during its life and is sold at a
discount to its face value at maturity. The market prices of zero coupon
securities generally are more volatile than the market prices of securities that
pay interest periodically and are likely to respond to a greater degree to
changes in interest rates than non- zero coupon securities having similar
maturities and credit qualities.
MORTGAGE-RELATED SECURITIES. (Bond Portfolio, High Yield Portfolio,
International Fixed-Income Portfolio and Strategic Yield Portfolio and, to a
limited extent, the Equity Portfolio, Mid Cap Portfolio, Small Cap Portfolio and
Global Equity Portfolio) Mortgage-related securities are secured, directly or
indirectly, by pools of mortgages, and may include complex instruments such as
collateralized mortgage obligations and stripped mortgage-backed securities.
These securities also may include mortgage pass-through securities, interests in
REMICs or other kinds of mortgage-backed securities. The mortgage-related
securities which may be purchased include those with fixed, floating and
variable interest rates, those with interest rates that change based on
multiples of changes in interest rates and those with interest rates that change
inversely to changes in interest rates.
RESIDENTIAL MORTGAGE-RELATED SECURITIES--Each of these Portfolios may invest in
mortgage-related securities representing participation interests in pools of
one- to four-family residential mortgage loans issued by governmental agencies
or instrumentalities, such as the GNMA, FNMA and FHLMC, or by private entities.
Residential mortgage-related securities issued by private entities are
structured to provide protection to the senior class investors against potential
losses on the underlying mortgage loans. This protection is generally provided
by having the holders of the subordinated class of securities ("Subordinated
Securities") take the first loss if there are defaults on the underlying
commercial mortgage loans. Other protection, which may benefit all of the
classes or particular classes, may include issuer guarantees, reserve funds,
additional Subordinated Securities, cross-collateralization and
over-collateralization.
COMMERCIAL MORTGAGE-RELATED SECURITIES--Each of these Portfolios may invest in
commercial mortgage-related securities, which generally are multi-class debt or
pass-through certificates secured by mortgage loans on commercial properties.
Similar to residential mortgage-related securities, commercial mortgage-related
securities have been issued using a variety of structures, including multi-class
structures featuring senior and subordinated classes.
SUBORDINATED SECURITIES--Each of these Portfolios may invest in Subordinated
Securities issued or sponsored by commercial banks, savings and loan
institutions, mortgage bankers, private mortgage insurance companies and other
non-governmental issuers. Subordinated Securities have no governmental
guarantee, and are subordinated in some manner as to the payment of principal
and/or interest to the holders of more senior mortgage-related securities
arising out of the same pool of mortgages. The holders of Subordinated
Securities typically are compensated with a higher stated yield than are the
holders of more senior mortgage-related securities. On the other hand,
Subordinated Securities typically subject the holder to greater risk than senior
mortgage-related securities and tend to be rated in a lower rating category, and
frequently a substantially lower rating category, than the senior
mortgage-related securities issued in respect of the same pool of mortgage.
Subordinated Securities generally are likely to be more sensitive to changes in
prepayment and interest rates and the market for such securities may be less
liquid than is the case for traditional fixed-income securities and senior
mortgage-related securities.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES--Collateralized mortgage obligations or "CMOs" are multiclass bonds
backed by pools of mortgage pass-through certificates or mortgage loans. CMOs
may be collateralized by (a) pass-through certificates issued or guaranteed by
GNMA, FNMA or FHLMC, (b) unsecuritized mortgage loans insured by the Federal
Housing Administration or guaranteed by the Department of Veterans' Affairs, (c)
unsecuritized conventional mortgages, (d) other mortgage-related securities or
(e) any combination thereof. CMOs may be issued by agencies or instrumentalities
of the U.S. Government, or by private originators of, or investors in, mortgage
loans, including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing. The issuer of CMOs or multi-class
pass-through securities may elect to be treated as a REMIC. The Bond Portfolio,
High Yield Portfolio and International Fixed-Income Portfolio may invest, to a
limited extent, in residual interests in REMICs. See "Taxation."
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Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date; these
characteristics will vary from one tranche to another. Principal prepayments on
collateral underlying a CMO may cause it to be retired substantially earlier
than the stated maturities or final distribution dates. The principal and
interest on the underlying mortgages may be allocated among the several classes
of a series of a CMO in many ways. One or more tranches of a CMO may have coupon
rates which reset periodically at a specified increment over an index, such as
the London Interbank Offered Rate ("LIBOR") (or sometimes more than one index).
These floating rate CMOs typically are issued with lifetime caps on the coupon
rate thereon. Each of these Portfolios also may invest in inverse floating rate
CMOs. Inverse floating rate CMOs constitute a tranche of a CMO with a coupon
rate that moves in the reverse direction to an applicable index such as the
LIBOR. Accordingly, the coupon rate thereon will increase as interest rates
decrease. Inverse floating rate CMOs are typically more volatile than fixed or
floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of the applicable indexes. The coupon varying inversely to a multiple
of an applicable index creates a leverage factor. The markets for inverse
floating rate CMOs with highly leveraged characteristics may at times be very
thin. The Portfolio's ability to dispose of its positions in such securities
will depend on the degree of liquidity in the markets for such securities. It is
impossible to predict the amount of trading interest that may exist in such
securities, and therefore the future degree of liquidity. It should be noted
that inverse floaters based on multiples of a stated index are designed to be
highly sensitive to changes in interest rates and can subject the holders
thereof to extreme reductions of yield and loss of principal.
STRIPPED MORTGAGE-BACKED SECURITIES--Each of these Portfolios also may invest in
stripped mortgage-backed securities. Stripped mortgage-backed securities are
created by segregating the cash flows from underlying mortgage loans or mortgage
securities to create two or more new securities, each with a specified
percentage of the underlying security's principal or interest payments. Mortgage
securities may be partially stripped so that each investor class received some
interest and some principal. When securities are completely stripped, however,
all of the interest is distributed to holders of one type of security, known as
an interest-only security, or IO, and all of the principal is distributed to
holders of another type of security known as a principal- only security, or PO.
Strips can be created in a pass-through structure or as tranches of a CMO. The
yields to maturity on IOs and POs are very sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the Portfolio may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially and adversely
affected.
REAL ESTATE INVESTMENT TRUSTS--Each of these Portfolios may invest in
Real Estate Investment Trusts ("REITs"), although each of the Mid Cap Portfolio,
Equity Portfolio, Global Equity Portfolio and Small Cap Portfolio currently
intends to limit its investments in REITs to no more than 5% of its assets. A
REIT is a corporation, or a business trust that would otherwise be taxed as a
corporation, which meets the definitional requirements of the Code. The Code
permits a qualifying REIT to deduct dividends paid, thereby effectively
eliminating corporate level Federal income tax and making the REIT a
pass-through vehicle for Federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually a substantial portion of its otherwise
taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid
REITs. Equity REITs, which may include operating or finance companies, own real
estate directly and the value of, and income earned by, the REITs depends upon
the income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the 1940 Act.
GOVERNMENT-AGENCY SECURITIES--Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development.
GOVERNMENT-RELATED SECURITIES--Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States Government. FNMA is a government-sponsored
organization owned entirely by private stockholders.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the
United States Government created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks.
PRIVATE ENTITY SECURITIES--These mortgage-related securities are
issued by commercial banks, savings and loan institutions, mortgage bankers,
private mortgage insurance companies and other non-governmental issuers. Timely
payment of principal and interest on mortgage-related securities backed by pools
created by non-governmental issuers often is supported partially by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance. The insurance and guarantees are issued by government
entities, private insurers and the mortgage poolers. There can be no assurance
that the private insurers or mortgage poolers can meet their obligations under
the policies, so that if the issuers default on their obligations the holders of
the security could sustain a loss. No insurance or guarantee covers the
Portfolio or the price of the Portfolio's shares. Mortgage-related securities
issued by non-governmental issuers generally offer a higher rate of interest
than government-agency and government-related securities because there are no
direct or indirect government guarantees of payment.
CMO RESIDUALS--CMO Residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
The cash flow generated by the Mortgage Assets underlying series of
CMOs is applied first to make required payments of principal of and interest on
the CMOs and second to pay the related administrative expenses of the issuer.
The residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making the foregoing payments. Each payment of such
excess cash flow to a holder of the related CMO Residual represents dividend or
interest income and/or a return of capital. The amount of residual cash flow
resulting from a CMO will depend on, among other things, the characteristics of
the Mortgage Assets, the coupon rate of each class of CMOs, prevailing interest
rates, the amount of administrative expenses and the prepayment experience on
the Mortgage Assets. In particular, the yield to maturity on CMO Residuals is
extremely sensitive to prepayments on the related underlying Mortgage Assets in
the same manner as an IO class of SMBS. See "Stripped Mortgage-Backed
Securities," above. In addition, if a series of a CMO includes a class that
bears interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to the level of the index upon which
interest rate adjustments are based. As described above with respect to SMBS, in
certain circumstances, the Portfolio may fail to fully recoup its initial
investment in a CMO Residual.
CMO Residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
CMO Residuals may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO Residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO Residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act. CMO Residuals, whether or not
registered under the Securities Act, may be subject to certain restrictions of
transferability. Ownership of certain CMO Residuals imposes liability for
certain of the expenses of the related CMO issuer on the purchaser. The
Investment Manager will not purchase any CMO Residual that imposes such
liability on the Portfolio.
OTHER MORTGAGE-RELATED SECURITIES--Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property. Other mortgage-related securities may be equity or debt
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, homebuilders, mortgage banks, commercial banks, investment
banks, partnerships, trusts and special purpose entities of the foregoing.
ASSET-BACKED SECURITIES. (Bond Portfolio, High Yield Portfolio,
International Fixed-Income Portfolio and Strategic Yield Portfolio) Each of
these Portfolios may invest in asset-backed securities, including interests in
pools of receivables, such as motor vehicle installment purchase obligations,
credit card receivables, home equity loans, home improvement loans and
manufactured housing loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities, all of which are issued by
non-governmental entities and carry no direct or indirect government guarantee,
are structurally similar to the collateralized mortgage obligations and mortgage
pass-through securities described above. As with mortgage-backed securities,
asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties and use similar credit enhancement
techniques.
Asset-backed securities present certain risks that are not presented
by mortgage-related securities. Primarily, these securities may provide the
Portfolio with a less effective security interest in the related collateral than
do mortgage-related securities. Therefore, there is the possibility that
recoveries on the underlying collateral may not, in some cases, be available to
support payments on these securities. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors the right to
set off certain amounts owed on the credit cards, thereby reducing the balance
due. Most organizations that issue asset-backed securities relating to motor
vehicle installment purchase obligations perfect their interests in their
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to so do, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the securities. Also, although most such obligations
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to perfect such security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the obligations underlying the
securities, usually is not amended to reflect the assignment of the seller's
security interest for the benefit of the holders of the securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on those securities. In addition,
various state and federal laws give the motor vehicle owner the right to assert
against the holder of the owner's obligation certain defenses such owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the related securities.
INVESTMENT COMPANIES. (All Portfolios) Each Portfolio may invest, to
the extent permitted under the 1940 Act, in securities issued by investment
companies which principally invest in securities of the type in which the
Portfolio invests. Investments in the securities of investment companies may
involve duplication of advisory fees and certain other expenses.
ILLIQUID SECURITIES. (All Portfolios) Each Portfolio may invest up to
10% (15% in the case of the Mid Cap Portfolio and High Yield Portfolio) of the
value of its net assets in securities as to which a liquid trading market does
not exist, provided such investments are consistent with the Portfolio's
investment objective. Such securities may include securities that are not
readily marketable, such as certain securities that are subject to legal or
contractual restrictions on resale, repurchase agreements providing for
settlement in more than seven days after notice, certain mortgage-related
securities, and certain privately negotiated, non-exchange traded options and
securities used to cover such options. As to these securities, the Portfolio is
subject to a risk that should the Portfolio desire to sell them when a ready
buyer is not available at a price the Portfolio deems representative of their
value, the value of the Portfolio's net assets could be adversely affected.
MONEY MARKET INSTRUMENTS. (All Portfolios) When the Investment Manager
determines that adverse market conditions exist, a Portfolio may adopt a
temporary defensive position and invest some or all of its assets in money
market instruments, including U.S. Government securities, repurchase agreements,
bank obligations and commercial paper. Each Portfolio also may purchase money
market instruments when it has cash reserves or in anticipation of taking a
market position.
INVESTMENT TECHNIQUES
The following information supplements and should be read in
conjunction with the Fund's Prospectus.
BORROWING MONEY. (All Portfolios) Each Portfolio, except as noted, is
permitted to borrow money from banks for temporary or emergency (not leveraging)
purposes, including to meet redemption requests which might require the untimely
disposition of securities, in an amount up to 15% (5% for purposes other than
meeting redemption requests) of the value of its total assets (including the
amount borrowed) valued at the lesser of cost or market, less liabilities
(including the amount borrowed) at the time the borrowing is made. The Equity
Portfolio, however, may borrow for temporary purposes only to meet redemption
requests in an amount up to 10% of the value of its total assets. While
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not make
any additional investments. In addition, the Mid Cap Portfolio, Global Equity
Portfolio and, although currently it has no intention of doing so, Equity
Portfolio may borrow for investment purposes to the extent permitted under the
1940 Act, which permits an investment company to borrow in an amount up to
33-1/3% of the value of it total assets. See "Leverage" below.
LEVERAGE. (Equity Portfolio, Mid Cap Portfolio, Global Equity
Portfolio, International Small Cap Portfolio, Emerging Markets Portfolio and
High Yield Portfolio) Leveraging (that is, buying securities using borrowed
money) exaggerates the effect on net asset value of any increase or decrease in
the market value of the Portfolio's investment. Money borrowed for leveraging is
limited to 33-1/3% of the value of the Portfolio's total assets. These
borrowings would be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased; in certain cases, interest costs
may exceed the return received on the securities purchased. For borrowings for
investment purposes, the 1940 Act requires the Portfolio to maintain continuous
asset coverage (that is, total assets including borrowings, less liabilities
exclusive of borrowings) of 300% of the amount borrowed. If the required
coverage should decline as a result of market fluctuations or other reasons, the
Portfolio may be required to sell some of its portfolio securities within three
days to reduce the amount of its borrowings and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell
securities at that time. The Portfolio also may be required to maintain minimum
average balances in connection with such borrowing or pay a commitment or other
fee to maintain a line of credit; either of these requirements would increase
the cost of borrowing over the stated interest rate.
Each of these Portfolios may enter into reverse repurchase agreements
with banks, brokers or dealers. This form of borrowing involves the transfer by
the Portfolio of an underlying debt instrument in return for cash proceeds based
on a percentage of the value of the security. The Portfolio retains the right to
receive interest and principal payments on the security. At an agreed upon
future date, the Portfolio repurchases the security at principal plus accrued
interest. To the extent a Portfolio enters into a reverse repurchase agreement,
the Portfolio will maintain in a segregated custodial account permissible liquid
assets at least equal to the aggregate amount of its reverse repurchase
obligations, plus accrued interest, in certain cases, in accordance with
releases promulgated by the Securities and Exchange Commission. Except for these
transactions, each of these Portfolio's borrowings generally will be unsecured.
LENDING PORTFOLIO SECURITIES. (All Portfolios) Each Portfolio may lend
securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions. The
Portfolio continues to be entitled to payments in amounts equal to the interest,
dividends or other distributions payable on the loaned securities which affords
the Portfolio an opportunity to earn interest on the amount of the loan and on
the loaned securities' collateral. Loans of portfolio securities may not exceed
33-1/3% (10% with respect to the Equity Portfolio, Small Cap Portfolio,
International Equity Portfolio, Bond Portfolio, International Fixed-Income
Portfolio and Strategic Yield Portfolio) of the value of the Portfolio's total
assets, and the Portfolio will receive collateral consisting of cash, U.S.
Government securities or irrevocable letters of credit which will be maintained
at all times in an amount equal to al least 100% of the current market value of
the loaned securities. Such loans are terminable by the Portfolio at any time
upon specified notice. The Portfolio might experience risk of loss if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with the Portfolio. In connection with its securities lending
transactions, a Portfolio may return to the borrower or a third party which is
unaffiliated with the Portfolio, and which is acting as a "placing broker," a
part of the interest earned from the investment of collateral received for
securities loaned.
DERIVATIVES. (All Portfolios) Each Portfolio may invest in, or enter
into, derivatives to the extent described in the Prospectus, for a variety of
reasons, including to hedge certain market risks, to provide a substitute for
purchasing or selling particular securities or to increase potential income
gain. Derivatives may provide a cheaper, quicker or more specifically focused
way for the Portfolio to invest than "traditional" securities would.
Derivatives can be volatile and involve various types and degrees of
risk, depending upon the characteristics of the particular derivative and the
portfolio as a whole. Derivatives permit a Portfolio to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Portfolio can increase or decrease the level
of risk, or change the character of the risk, of its portfolio by making
investments in specific securities.
Derivatives may entail investment exposures that are greater than
their cost would suggest, meaning that a small investment in derivatives could
have a large potential impact on a Portfolio's performance.
If a Portfolio invests in derivatives at inopportune times or judges
market conditions incorrectly, such investments may lower the Portfolio's return
or result in a loss. A Portfolio also could experience losses if its derivatives
were poorly correlated with its other investments, or if the Portfolio were
unable to liquidate its position because of an illiquid secondary market. The
market for many derivatives is, or suddenly can become, illiquid. Changes in
liquidity may result in significant, rapid and unpredictable changes in the
prices for derivatives.
Although neither the Fund nor any Portfolio will be a commodity pool,
certain derivatives subject the Portfolios to the rules of the Commodity Futures
Trading Commission which limit the extent to which a Portfolio can invest in
such derivatives. A Portfolio may invest in futures contracts and options with
respect thereto for hedging purposes without limit. However, no Portfolio may
invest in such contracts and options for other purposes if the sum of the amount
of initial margin deposits and premiums paid for unexpired options with respect
to such contracts, other than for bona fide hedging purposes, exceeds 5% of the
liquidation value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on such contracts and options;
provided, however, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the 5%
limitation.
When required by the Commission, a Portfolio will segregate
permissible liquid assets to cover its obligations relating to its transactions
in derivatives. To maintain this required cover, the Portfolio may have to sell
portfolio securities at disadvantageous prices or times since it may not be
possible to liquidate a derivative position at a reasonable price.
Derivatives may be purchased on established exchanges or through
privately negotiated transactions referred to as over-the-counter derivatives.
Exchange-traded derivatives generally are guaranteed by the clearing agency
which is the issuer or counterparty to such derivatives. This guarantee usually
is supported by a daily payment system (i.e., variation margin requirements)
operated by the clearing agency in order to reduce overall credit risk. As a
result, unless the clearing agency defaults, there is relatively little
counterparty credit risk associated with derivatives purchased on an exchange.
By contrast, no clearing agency guarantees over-the-counter derivatives.
Therefore, each party to an over-the-counter derivative bears the risk that the
counterparty will default. Accordingly, the Investment Manager will consider the
credit worthiness of counterparties to over-the-counter derivatives in the same
manner as it would review the credit quality of a security to be purchased by
the Portfolio. Over-the-counter derivatives are less liquid than exchange-traded
derivatives since the other party to the transaction may be the only investor
with sufficient understanding of the derivative to be interested in bidding for
it.
FUTURES TRANSACTIONS--IN GENERAL. (All Portfolios, except the Equity Portfolio,
Small Cap Portfolio, International Equity Portfolio and Strategic Yield
Portfolio) Each of these Portfolios may enter into futures contracts in U.S.
domestic markets, such as the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange, or on exchanges located
outside the United States, such as the London International Financial Futures
Exchange, the Deutsche Termine Borse and the Sydney Futures Exchange Limited.
Foreign markets may offer advantages such as trading opportunities or arbitrage
possibilities not available in the United States. Foreign markets, however, may
have greater risk potential than domestic markets. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
an investor may look only to the broker for performance of the contract. In
addition, any profits a Portfolio might realize in trading could be eliminated
by adverse changes in the exchange rate, or the Portfolio could incur losses as
a result of those changes. Transactions on foreign exchanges may include both
commodities which are traded on domestic exchanges and those which are not.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission.
Engaging in these transactions involves risk of loss to the Portfolio
which could adversely affect the value of the Portfolio's net assets. Although
each of these Portfolios intends to purchase or sell futures contracts only if
there is an active market for such contracts, no assurance can be given that a
liquid market will exist for any particular contract at any particular time.
Many 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 or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Portfolio
to substantial losses.
Successful use of futures by a Portfolio also is subject to the
Investment Manager's ability to predict correctly movements in the direction of
the relevant market, and, to the extent the transaction is entered into for
hedging purposes, to ascertain the appropriate correlation between the
transaction being hedged and the price movements of the futures contract. For
example, if a Portfolio uses futures to hedge against the possibility of a
decline in the market value of securities held in its portfolio and the prices
of such securities instead increase, the Portfolio will lose part or all of the
benefit of the increased value of securities which it has hedged because it will
have offsetting losses in its futures positions. Furthermore, if in such
circumstances the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. The Portfolio may have
to sell such securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the Commission,
a Portfolio may be required to segregate permissible liquid assets in connection
with its commodities transactions in an amount generally equal to the value of
the underlying commodity. The segregation of such assets will have the effect of
limiting the Portfolio's ability otherwise to invest those assets.
The Board of Directors has adopted the requirement that futures
contracts and options on futures contracts be used by the Bond Portfolio or the
International Fixed-Income Portfolio solely as a hedge and not for speculation.
In addition to this requirement, the Board of Directors has also adopted two
percentage restrictions on the use of futures contracts. The first restriction
is that the Bond Portfolio and the International Fixed-Income Portfolio will not
enter into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Portfolio and premiums paid on options on futures contracts would exceed 5% of
the market value of the total assets of the Portfolio. The second restriction is
that the aggregate market value of the outstanding futures contracts purchased
by either the Bond Portfolio or International Fixed-Income Portfolio not exceed
50% of the market value of the total assets of such Portfolio. Neither of these
restrictions will be changed by the Fund's Board of Directors without
considering the policies and concerns of the various applicable federal and
state regulatory agencies.
SPECIFIC FUTURES TRANSACTIONS. Each of these Portfolios, except the Bond
Portfolio, High Yield Portfolio and International Fixed-Income Portfolio, may
purchase and sell stock index futures contracts. A stock index future obligates
the Portfolio to pay or receive an amount of cash equal to a fixed dollar amount
specified in the futures contract multiplied by the difference between the
settlement price of the contract on the contract's last trading day and the
value of the index based on the stock prices of the securities that comprise it
at the opening of trading in such securities on the next business day.
The Bond Portfolio, High Yield Portfolio, International Fixed-Income
Portfolio, Emerging Markets Portfolio, Global Equity Portfolio and International
Small Cap Portfolio may purchase and sell interest rate futures contracts. An
interest rate future obligates the Portfolio to purchase or sell an amount of a
specific debt security at a future date at a specific price.
Each of these Portfolios, except the Bond Portfolio, may purchase and
sell currency futures. A currency future obligates the Portfolio to purchase or
sell an amount of a specific currency at a future date at a specific price.
OPTIONS--IN GENERAL. (All Portfolios, except the Small Cap Portfolio and
International Equity Portfolio) Each of these Portfolios may invest up to 5% of
its assets, represented by the premium paid, in the purchase of call and put
options. A Portfolio may write (i.e., sell) covered call and put option
contracts to the extent of 20% of the value of its net assets at the time such
option contracts are written. A call option gives the purchaser of the option
the right to buy, and obligates the writer to sell, the underlying security or
securities at the exercise price at any time during the option period, or at a
specific date. Conversely, a put option gives the purchaser of the option the
right to sell, and obligates the writer to buy, the underlying security or
securities at the exercise price at any time during the option period, or at a
specified date.
A covered call option written by a Portfolio is a call option with
respect to which the Portfolio owns the underlying security or otherwise covers
the transaction by segregating cash or other securities. A put option written by
a Portfolio is covered when, among other things, cash or liquid securities
having a value equal to or greater than the exercise price of the option are
placed in a segregated account with the Fund's custodian to fulfill the
obligation undertaken. The principal reason for writing covered call and put
options is to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. A Portfolio receives a
premium from writing covered call or put options which it retains whether or not
the option is exercised.
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, at times have rendered
certain of the clearing facilities inadequate and 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 or it otherwise covers its position.
SPECIFIC OPTIONS TRANSACTIONS. Each of these Portfolios may purchase and sell
call and put options in respect of specific securities (or groups or "baskets"
of specific securities) or indices listed on national securities exchanges or
traded in the over-the-counter market. An option on an index is similar to an
option in respect of specific securities, except that settlement does not occur
by delivery of the securities comprising the index. Instead, the option holder
receives an amount of cash if the closing level of the index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. Thus, the effectiveness of
purchasing or writing index options will depend upon price movements in the
level of the index rather than the price of a particular security.
Except as described below, each of the Equity Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio and Global Equity Portfolio will
write call options on indices only if on such date the Portfolio holds a
portfolio of stocks at least equal to the value of the index times the
multiplier times the number of contracts. When one of the Portfolios writes a
call option on a broadly based stock market index, it will segregate or put into
escrow with the Fund's custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities" with a market value at the time the
option is written of not less than 100% of the current index value times the
multiplier times the number of contracts. If one of the Portfolios has written
an option on an industry or market segment index, it will so segregate, escrow,
or pledge at least five "qualified securities," all of which are stocks of
issuers in such industry or market segment, with a market value at the time the
option is written of not less than 100% of the current index value times the
multiplier times the number of contracts. Such stocks will include stocks which
represent at least 50% of the weighting of the industry or market segment index
and will represent at least 50% of the Portfolio's holdings in that industry or
market segment. No individual security will represent more than 15% of the
amount so segregated, escrowed or pledged, in the case of broadly based stock
market index options, or 25% of such amount, in the case of industry or market
segment index options. If at the close of business on any day the market value
of such qualified securities so segregated, escrowed or pledged falls below 100%
of the current index value times the multiplier times the number of contracts,
the Portfolio will so segregate, escrow or pledge an amount in cash, Treasury
bills or other high grade short-term obligations equal in value to the
difference. In addition, when one of the Portfolios writes a call on an index
which is in-the-money at the time the call is written, the Portfolio will
segregate with the Fund's custodian or pledge to the broker as collateral cash,
Treasury bills or other high grade short-term obligations equal in value to the
amount by which the call is in-the-money times the multiplier times the number
of contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to the Portfolio's obligation to segregate additional amounts in the
event that the market value of the qualified securities falls below 100% of the
current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security which is listed on a national
domestic or foreign securities exchange or quoted on the Nasdaq National Market
System against which the Portfolio has not written a stock call option; however,
if the Portfolio owns a call on the same index as the call written where the
exercise price of the call owned is equal to or less than the exercise price of
the call written, or greater than the call written if the difference is
maintained by the Portfolio in permissible liquid assets in a segregated account
with the Fund's custodian, it will not be subject to the requirements described
in this paragraph.
Each of these Portfolios, except the Equity Portfolio, Small Cap
Portfolio and Bond Portfolio, may purchase and sell call and put options on
foreign currency. These options convey the right to buy or sell the underlying
currency at a price which is expected to be lower or higher than the spot price
of the currency at the time the option is exercised or expires.
Each of these Portfolios may purchase cash-settled options on interest
rate swaps, interest rate swaps denominated in foreign currency (except in the
case of the Equity Portfolio), and (except in the case of the Bond Portfolio and
International Fixed-Income Portfolio) equity index swaps in pursuit of its
investment objective. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive interest
(for example, an exchange of floating-rate payments for fixed-rate payments)
denominated in U.S. dollars or foreign currency. Equity index swaps involve the
exchange by the Portfolio with another party of cash flows based upon the
performance of an index or a portion of an index of securities which usually
includes dividends. A cash-settled option on a swap gives the purchaser the
right, but not the obligation, in return for the premium paid, to receive an
amount of cash equal to the value of the underlying swap as of the exercise
date. These options typically are purchased in privately negotiated transactions
from financial institutions, including securities brokerage firms.
Successful use by a Portfolio of options will be subject to the
Investment Manager's ability to predict correctly movements in the prices of
individual stocks, the stock market generally, foreign currencies or interest
rates. To the extent the Investment Manager's predictions are incorrect, the
Portfolio may incur losses.
FUTURE DEVELOPMENTS. The relevant Portfolios may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other Derivatives which are not presently contemplated
for use by the Portfolio or which are not currently available but which may be
developed, to the extent such opportunities are both consistent with the
Portfolio's investment objective and legally permissible for the Portfolio.
Before entering into such transactions or making any such investment, the
Portfolio will provide appropriate disclosure in the Prospectus or Statement of
Additional Information.
SHORT-SELLING. (Mid Cap Portfolio and High Yield Portfolio) Each of
these Portfolios may engage in short sales of securities. In these transactions,
the Portfolio sells a security it does not own in anticipation of a decline in
the market value of the security. To complete the transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio is
obligated to replace the security borrowed by purchasing it subsequently at the
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Portfolio, which would
result in a loss or gain, respectively. The Portfolio also may make short sales
"against the box," in which the Portfolio enters into a short sale of a security
it owns. Securities will not be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Portfolio's net assets.
Until the Portfolio closes its short position or replaces the borrowed
security, it will: (a) maintain a segregated account, containing permissible
liquid assets, at such a level that the amount deposited in the account plus the
amount deposited with the broker as collateral always equals the current value
of the security sold short; or (b) otherwise cover its short position.
FORWARD COMMITMENTS. (All Portfolios) A Portfolio may purchase or sell
securities on a forward commitment, when-issued or delayed delivery basis, which
means delivery and payment take place a number of days after the date of the
commitment to purchase or sell the securities at a predetermined price and/or
yield. Typically, no interest accrues to the purchaser until the security is
delivered. When purchasing a security on a forward commitment basis, the
Portfolio assumes the rights and risks of ownership of the security, including
the risk or price and yield fluctuations, and takes such fluctuations into
account when determining its net asset value. Because the Portfolio is not
required to pay for these securities until the delivery date, these risks are in
addition to the risks associated with the Portfolio's other investments. If the
Portfolio is fully or almost fully invested when forward commitment purchases
are outstanding, such purchases may result in a form of leverage. The Portfolio
intends to engage in forward commitments to increase its portfolio's financial
exposure to the types of securities in which it invests. Leveraging the
portfolio in this manner will increase the Portfolio's exposure to changes in
interest rates and will increase the volatility of its returns. The Portfolio
will set aside in a segregated account permissible liquid assets at least equal
at all times to the amount of the Portfolio's purchase commitments. At no time
will the Portfolio have more than 33-1/3% of its assets committed to purchase
securities on a forward commitment basis.
Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, real or anticipated, in the level of interest rates. Securities
purchased on a forward commitment or when-issued basis may expose a Portfolio to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a forward commitment or when-issued basis can
involve the additional risk that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself. Purchasing securities on a forward commitment or when-issued
basis when the Portfolio is fully or almost fully invested may result in greater
potential fluctuation in the value of the Portfolio's net assets and its net
asset value per share.
SWAP AGREEMENTS. (All Portfolios) To the extent consistent with the
Portfolio's investment objective and management policies as set forth herein,
each Portfolio may enter into equity, interest rate, index, total return and
currency rate swap agreements. These transactions are entered into in an attempt
to obtain a particular return when it is considered desirable to do so, possibly
at a lower cost to the Portfolio than if the Portfolio had invested directly in
the asset that yielded the desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than a year. In a standard swap transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments, which
may be adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the parties are generally calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. Forms
of swap agreements include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent interest
rates exceed a specified rate or "cap"; interest rate floors, under which, in
return for a premium, one party agrees to make payments to the other to the
extent interest rates fall below a specified level or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
Most swap agreements entered into by a Portfolio would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Portfolio's current obligations (or rights) under a swap agreement generally
will be equal only to the net amount to be paid or received under the agreement
based on the relative values of the positions held by each party to the
agreement (the "net amount"). The risk of loss with respect to swaps is limited
to the net amount of payments that the Portfolio is contractually obligated to
make. If the other party to a swap defaults, the Portfolio's risk of loss
consists of the net amount of payments that the Portfolio contractually is
entitled to receive.
FOREIGN CURRENCY TRANSACTIONS. (All Portfolios, except the Equity
Portfolio, Small Cap Portfolio and Bond Portfolio) Foreign currency transactions
may be entered into for a variety of purposes, including: to fix in U.S.
dollars, between trade and settlement date, the value of a security the
Portfolio has agreed to buy or sell; to hedge the U.S. dollar value of
securities the Portfolio already owns, particularly if it expects a decrease in
the value of the currency in which the foreign security is denominated; or to
gain exposure to the foreign currency in an attempt to realize gains.
Foreign currency transactions may involve, for example, the
Portfolio's purchase of foreign currencies for U.S. dollars or the maintenance
of short positions in foreign currencies, which would involve the Portfolio
agreeing to exchange an amount of a currency it did not currently own for
another currency at a future date in anticipation of a decline in the value of
the currency sold relative to the currency the Portfolio contracted to receive
in the exchange. The Portfolio's success in these transactions will depend
principally on the Investment Manager's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar.
INVESTMENT CONSIDERATIONS AND RISKS
EQUITY SECURITIES. (All Portfolios, except the Bond Portfolio, High
Yield Portfolio, International Fixed-Income Portfolio and Strategic Yield
Portfolio) Equity securities fluctuate in value, often based on factors
unrelated to the value of the issuer of the securities, and such fluctuations
can be pronounced. Changes in the value of a Portfolio's investments will result
in changes in the value of its shares and thus the Portfolio's total return to
investors.
The securities of the smaller companies in which the Small Cap,
International Small Cap and Emerging Markets Portfolios may invest may be
subject to more abrupt or erratic market movements than larger, more established
companies, because securities of smaller companies typically are traded in lower
volume and the issuers typically are more subject to changes in earnings and
prospects. Smaller capitalization companies often have limited product lines,
markets or financial resources. They may be dependent on management for one or a
few key persons, and can be more susceptible to losses and the risk of
bankruptcy. In addition, securities of the small capitalization sector may be
thinly traded (and therefore have to be sold at a discount from current market
prices or sold in small lots over an extended period of time), may be followed
by fewer investment research analysts and may be subject to wider price swings,
and thus may create a greater chance of loss than by investing in securities of
larger capitalization companies.
FIXED-INCOME SECURITIES. (All Portfolios) Even though interest-bearing
securities are investments which promise a stable stream of income, the prices
of such securities generally are inversely affected by changes in interest rates
and, therefore, are subject to the risk of market price fluctuations. Certain
portfolio securities, such as those with interest rates that fluctuate directly
or indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes
in the credit rating or financial condition of the issuer. Certain portfolio
securities, such as those rated below investment grade by Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's" and
together with S&P, the "Rating Agencies"), may be subject to such risk with
respect to the issuing entity and to greater market fluctuations than certain
lower yielding, higher rated fixed-income securities. Once the rating of a
portfolio security has been changed, the Portfolio will consider all
circumstances deemed relevant in determining whether to continue to hold the
security.
Federal income tax law requires the holder of a zero coupon security
or of certain pay-in-kind bonds to accrue income with respect to these
securities prior to the receipt of cash payments. A Portfolio investing in such
securities may be required to distribute such income accrued with respect to
these securities and may have to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
MORTGAGE-RELATED SECURITIES. (Bond Portfolio, High Yield Portfolio,
International Fixed-Income Portfolio and Strategic Yield Portfolio) As with
other interest-bearing securities, the prices of certain mortgage-related
securities are inversely affected by changes in interest rates. However,
although the value of a mortgage-related security may decline when interest
rates rise, the converse is not necessarily true, since during periods of
declining interest rates the mortgages underlying the security are more likely
to be prepaid. For this and other reasons, a mortgage-related security's stated
maturity may be shortened by unscheduled prepayments on the underlying
mortgages, and, therefore, it is possible that the realized return of the
security may differ materially from the return originally expected by the
Investment Manager. Moreover, with respect to certain stripped mortgage-backed
securities, if the underlying mortgage securities experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment even if the securities are rated in the highest rating
category by a nationally recognized statistical rating organization. During
periods of rapidly rising interest rates, prepayments of mortgage-related
securities may occur at slower than expected rates. Slower prepayments
effectively may lengthen a mortgage-related security's expected maturity (but
not past its stated maturity), which generally would cause the value of such
security to fluctuate more widely in response to changes in interest rates. Were
the prepayments on the Portfolio's mortgage-related securities to decrease
broadly, the Portfolio's effective duration, and thus sensitivity to interest
rate fluctuations, would increase. Commercial real property loans, however,
often contain provisions that substantially reduce the likelihood that such
securities will be prepaid. The provisions generally impose significant
prepayment penalties on loans and in some cases there may be prohibitions on
principal prepayments for several years following origination.
<PAGE>
Certain mortgage-related securities are subject to credit risks
associated with the performance of the underlying mortgage properties. Adverse
changes in economic conditions and circumstances are more likely to have an
adverse impact on mortgage-related securities secured by loans on commercial
properties than on those secured by loans on residential properties. In
addition, as described above, these securities are subject to prepayment risk,
although commercial mortgages typically have shorter maturities than residential
mortgages and prepayment protection features. Some mortgage-related securities
have structures that make their reactions to interest rate changes and other
factors difficult to predict, making their values highly volatile.
In certain instances, the credit risk associated with mortgage-related
securities can be reduced by third party guarantees or other forms of credit
support. Improved credit risk does not reduce prepayment risk which is unrelated
to the rating assigned to the mortgage-related security. Prepayment risk can
lead to fluctuations in value of the mortgage-related security which may be
pronounced. If a mortgage-related security is purchased at a premium, all or
part of the premium may be lost if the market value of the security declines
whether resulting from changes in interest rates or prepayments on the
underlying mortgage collateral. Certain mortgage-related securities that may be
purchased by these Portfolios, such as inverse floating rate collateralized
mortgage obligations, have coupons that move inversely to a multiple of a
specific index which may result in increased price volatility.
FOREIGN SECURITIES. (All Portfolios, except the Small Cap Portfolio)
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. Similarly, volume and
liquidity in most foreign securities markets are less than in the United States
and, at times, volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held
outside the United States, the Portfolios will be subject to additional risks
which include possible adverse political and economic developments, seizure or
nationalization of foreign deposits and adoption of governmental restrictions,
which might adversely affect or restrict the payment of principal and interest
on the foreign securities to investors located outside the country of the
issuer, whether from currency blockage or otherwise.
With respect to the Emerging Markets, International Fixed-Income,
Strategic Yield and High Yield Portfolios, emerging market countries have
economic structures that generally are less diverse and mature, and political
systems that are less stable, than those of developed countries. Emerging
markets may be more volatile than the markets of more mature economies; however,
such markets may provide higher rates of return to investors. Many emerging
market countries providing investment opportunities for these Portfolios have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have adverse effects on the economies and securities markets of
certain of these countries.
<PAGE>
Since foreign securities often are purchased with and payable in
currencies of foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations.
FOREIGN CURRENCY TRANSACTION. (All Portfolios, except the Equity
Portfolio, Small Cap Portfolio and Bond Portfolio) Currency exchange rates may
fluctuate significantly over short periods of time. They generally are
determined by the forces of supply and demand in the foreign exchange markets
and the relative merits of investments in different countries, actual or
perceived changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention of U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the United States or abroad.
SIMULTANEOUS INVESTMENTS BY OTHER PORTFOLIOS OR FUNDS. (All
Portfolios) Investment decisions for each Portfolio are made independently from
those of the other portfolios and accounts managed by the Investment Manager.
If, however, such other portfolios or accounts desire to invest in, or dispose
of, the same securities as the Portfolio, available investments or opportunities
for sales will be allocated equitably to each. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by a
Portfolio or the price paid or received by a Portfolio.
LOWER RATED SECURITIES. (Bond Portfolio, High Yield Portfolio,
International Fixed-Income Portfolio and Strategic Yield Portfolio). Each of
these Portfolios may invest in securities rated below investment grade such as
those rated Ba by Moody's or BB by S&P, and as low as the lowest rating assigned
by the Rating Agencies (commonly known as junk bonds). They may be subject to
certain risks and to greater market fluctuations than lower yielding investment
grade securities. See "Appendix" for a general description of the Rating
Agencies' ratings. Although ratings may be useful in evaluating the safety of
interest and principal payments, they do not evaluate the market value risk of
these securities. The Portfolio will rely on the Investment Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer.
You should be aware that the market values of many of these securities
tend to be more sensitive to economic conditions than are higher rated
securities and will fluctuate over time. These securities generally are
considered by the Rating Agencies to be, on balance, predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
Companies that issue certain of these securities often are highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with the higher rated securities.
For example, during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of these securities may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be affected adversely by
specific corporate developments, forecasts, or the unavailability of additional
financing. The risk of loss because of default by the issuer is significantly
greater for the holders of these securities because such securities generally
are unsecured and often are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many of
these securities, the Portfolio anticipates that such securities could be sold
only to a limited number of dealers or institutional investors. To the extent a
secondary trading market for these securities does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a liquid
secondary market may have an adverse impact on market price and yield and the
Portfolio's ability to dispose of particular issues when necessary to meet the
Portfolio's liquidity needs or in response to a specific economic event such as
a deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Portfolio to obtain accurate market quotations for purposes of valuing its
portfolio and calculating its net asset value. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of these securities. In such cases, judgment may play a
greater role in valuation because less reliable, objective data may be
available.
These securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
The Portfolio may acquire these securities during an initial offering.
Such securities may involve special risks because they are new issues. The
Portfolio has no arrangement with any persons concerning the acquisition of such
securities, and the Investment Manager will review carefully the credit and
other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also
apply to lower rated zero coupon securities and pay-in-kind bonds, in which each
of these Portfolios may invest. Pay- in-kind bonds pay interest through the
issuance of additional securities. Zero coupon securities and pay-in-kind bonds
carry an additional risk in that, unlike bonds which pay interest throughout the
period to maturity, the Portfolio will realize no cash until the cash payment
date unless a portion of such securities are sold and, if the issuer defaults,
the Portfolio may obtain no return at all on its investment.
STRATEGIC YIELD PORTFOLIO--During the year ended December 31, 1998, the
percentages of the Strategic Yield Portfolio's assets invested in securities
rated in particular rating categories by S&P were, on a weighted average basis,
as follows:
<PAGE>
PERCENTAGE OF
S&P RATINGS TOTAL INVESTMENTS
- ----------- -----------------
TSY 4.17%
AGY 21.17%
AAA 10.83%
AA- 1.33%
A+ 0.56%
A 3.19%
A- 0.53%
A1+ 2.10%
A1 3.94%
A3 0.17%
BBB+ 0.29%
BBB 0.39%
BBB- 1.46%
BB+ 0.43%
BB 2.96%
BB- 1.27%
B+ 3.51%
B 9.05%
B- 8.76%
CCC+ 0.16%
CCC 0.49%
No Rating* 23.24%
------
100.0%
- ----------------------
* The Investment Manager estimates these securities to have an average
rating of BBB.
The actual distribution of the Portfolio's investments by ratings on
any given date will vary. In addition, the distribution of the Portfolio's
investments by ratings as set forth above should not be considered as
representative of the Portfolio's future investment portfolio composition.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective is a fundamental policy, which
cannot be changed without approval by the holders of a majority (as defined in
the 1940 Act) of the Portfolio's outstanding voting shares. In addition, the
following investment restrictions, except as otherwise noted, are fundamental
policies. However, the amendment of these restrictions to add an additional
Portfolio, which amendment does not substantively affect the restrictions with
respect to an existing Portfolio, will not require approval as described in the
preceding sentence. None of the Portfolios may:
<PAGE>
(i) issue senior securities, borrow money or pledge or mortgage its
assets, except that (A) each Portfolio may borrow from banks for
temporary purposes, including the meeting of redemption requests which
might require the untimely disposition of securities, as described in
the Prospectus, (B) each of the Mid Cap Portfolio, International Small
Cap Portfolio, High Yield Portfolio, Emerging Markets Portfolio and
Global Equity Portfolio also may borrow money to the extent permitted
under the 1940 Act and, as a non-fundamental policy, may pledge,
hypothecate, mortgage or otherwise encumber its assets to secure
permitted borrowings; provided, however, that the Portfolio will not
make new investments to the extent borrowings exceed 5% of its total
assets, except for borrowings covered within the interpretations of
Section 18(f) of the 1940 Act, and (C) the Equity Portfolio may
additionally utilize leverage as described in the Prospectus. For
purposes of this investment restriction, a Portfolio's entry into
options, forward contracts, futures contracts, including those related
to indexes, shall not constitute borrowing;
(ii) make loans, except loans of portfolio securities not having a
value in excess of 33-1/3% (10% in the case of the Equity Portfolio,
Small Cap Portfolio, International Equity Portfolio, Bond Portfolio,
International Fixed-Income Portfolio and Strategic Yield Portfolio) of
a Portfolio's total assets and except that each Portfolio may purchase
debt obligations in accordance with its investment objectives and
policies;
(iii) invest in illiquid securities as defined in "Investment
Objectives and Management Policies--Illiquid Securities" if
immediately after such investment more than 10% (15% in the case of
the Mid Cap Portfolio and High Yield Portfolio) of the value of the
Portfolio's net assets, or, in the case of the Equity Portfolio, more
than 10% of the value of that Portfolio's total assets, taken at
market value, would be invested in such securities (this restriction
is not a fundamental policy of the Mid Cap Portfolio, High Yield
Portfolio and Global Equity Portfolio);
(iv) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization; provided, however, that this restriction is not a
fundamental policy of the Mid Cap Portfolio, International Small Cap
Portfolio, Emerging Markets Portfolio, Global Equity Portfolio and
High Yield Portfolio, and provided further, that (A) the Mid Cap
Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio and High Yield Portfolio may
purchase securities of other investment companies to the extent
permitted under the 1940 Act (this restriction is not a fundamental
policy of these Portfolios) and (B) the Equity Portfolio,
International Equity Portfolio and Small Cap Portfolio may purchase
securities in an amount up to 5% of the value of the Portfolio's total
assets in any one closed-end fund and may purchase in the aggregate
securities of closed-end funds in an amount of up to 10% of the value
of the Portfolio's total assets;
<PAGE>
(v) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of the Portfolio's
investments in that industry would exceed 25% of the current value of
such Portfolio's total assets, provided that there is no limitation
with respect to investments in obligations of the U.S. Government, its
agencies or instrumentalities;
(vi) (A) purchase or sell real estate or real estate limited
partnerships, except that a Portfolio may purchase and sell securities
of companies which deal in real estate or interests therein and the
Mid Cap Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio and High Yield Portfolio also may
purchase and sell securities that are secured by real estate; (B)
purchase or sell commodities or commodity contracts (except that the
Mid Cap Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio and High Yield Portfolio may
purchase and sell swaps, options, forward contracts, futures
contracts, including those relating to indices, and options on futures
contracts or indices, the Mid Cap Portfolio, International Equity
Portfolio, International Fixed-Income Portfolio, Strategic Yield
Portfolio and High Yield Portfolio may purchase or sell foreign
currency forward exchange contracts, the International Fixed-Income
Portfolio and Bond Portfolio may enter into futures contracts and
options on futures contracts, the International Fixed-Income Portfolio
may enter into futures contracts on foreign currencies and the
International Fixed-Income Portfolio and Strategic Yield Portfolio may
purchase and write put and call options on foreign currencies); and
(C) invest in interests in or leases relating to oil, gas, or other
mineral exploration or development programs; provided, however, that
this clause (C) is not a fundamental policy of the Equity Portfolio,
Mid Cap Portfolio, Global Equity Portfolio and High Yield Portfolio;
(vii) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions) or, except for the Mid
Cap Portfolio and High Yield Portfolio, make short sales of
securities, provided, however, that this prohibition on short sales is
not a fundamental policy of the Global Equity Portfolio;
(viii) underwrite securities of other issuers, except to the extent
that the purchase of municipal obligations or other permitted
investments directly from the issuer thereof or from an underwriter
for an issuer and the later disposition of such securities in
accordance with the Portfolio's investment program may be deemed to be
an underwriting; or
(ix) make investments for the purpose of exercising control or
management; provided, however, that this restriction is not a
fundamental policy of the International Small Cap Portfolio, Emerging
Markets Portfolio and Global Equity Portfolio. This restriction has
not been adopted by the Mid Cap Portfolio or High Yield Portfolio.
In addition to the restrictions noted above, the Equity Portfolio has
adopted the following restrictions as fundamental policies. The Equity Portfolio
may not:
(i) purchase restricted securities, which are securities that must be
registered under the Securities Act of 1933, as amended, before they
may be offered or sold to the public, except that the Equity Portfolio
may invest up to 5% of the value of its total assets, taken at cost,
in such securities;
(ii) invest more than 5% of the current value of its total assets in
the securities of any one issuer, other than obligations of the United
States Government, its agencies or instrumentalities or securities
which are backed by the full faith and credit of the United States; or
(iii) purchase securities of an issuer if, as a result, as to 75% of
the Portfolio's total assets, the Portfolio would own more than 10% of
the voting securities of such issuer.
* * *
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
<PAGE>
MANAGEMENT
The Fund's Board is responsible for the management and supervision of
each Portfolio. The Board approves all significant agreements with those
companies that furnish services to the Portfolios. These companies are as
follows:
Lazard Asset Management........................... Investment Manager
Lazard Freres & Co. LLC........................... Distributor
Boston Financial Data Services, Inc............... Transfer Agent and
Dividend Disbursing Agent
State Street Bank and Trust Company............... Custodian
The Directors and officers of the Fund and their principal occupations
during the past five years are set forth below. Unless otherwise specified, the
address of each of the following persons is 30 Rockefeller Plaza, New York, New
York 10112.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------------- ------------------ -----------------------------------------
<S> <C> <C>
Norman Eig* (58) Chairman of the Board Vice Chairman and Managing Director (formerly
General Partner), Lazard Freres.
Herbert W. Gullquist* (61) President, Director Vice Chairman and Managing Director (formerly
General Partner), Lazard Freres; Chief Investment
Officer of the Investment Manager.
John J. Burke (70) Director Retired; Former Vice Chairman, Director, Montana
50 Burning Tree Lane Power Company.
Butte, MT 59701
Kenneth S. Davidson (54) Director Managing Partner, Davidson Capital Management
Davidson Capital Management Corporation; Director, Blackthorn Fund N.V. and
Corporation Ottertail Valley Railroad.
500 Park Avenue
Suite 510
New York, NY 10022
Carl Frischling* (62) Director Senior Partner, Kramer, Levin, Naftalis & Frankel;
Kramer, Levin, Naftalis & from 1992 to 1994, Senior Partner, Reid & Priest.
Frankel
919 Third Avenue
New York, NY 10022
Lester Z. Lieberman (68) Director Private Investor; Director of Dowel Associates;
1500 Mt. Kemble Avenue Chairman of the Board of Trustees of Newark Beth
Morristown, NJ 07960 Israel Medical Center and Irvington General Hospital;
Member of the New Jersey State Investment Council;
prior to 1994, Director of United Jersey Bank, N.A.
and Clarkson University.
Richard Reiss, Jr. (55) Director Managing Partner, Georgica Advisers LLC, an
Georgica Advisers LLC investment manager.
1114 Avenue of the Americas
New York, NY 10036
John Rutledge (50) Director President, Rutledge & Company, an economics and
Rutledge & Company investment advisory firm; Chairman, Claremont
One Greenwich Office Park Economics Institute.
51 Weaver Street
Greenwich, CT 06831
William Katz (45) Director President and Chief Operating Officer of BBDO, an
BBDO Worldwide Network advertising agency; from May 1994 to February 1996,
1285 Avenue of the Americas General Manager of BBDO; prior thereto, Executive
New York, NY 10019 Vice President and Senior Account Director of
BBDO.
William G. Butterly, III (38) Vice President, Secretary Senior Vice President, Legal Affairs of the
Investment Manager.
James Giallanza (33) Treasurer Certified Public Accountant; Vice President of the
Investment Manager; from August 1990 to July 1998,
Manager, Price Waterhouse LLP.
- -----------
* An "interested person" of the Fund as defined in the 1940 Act.
</TABLE>
The Fund has adopted a Distribution and Servicing Plan with respect to
shares of the Portfolios. So long as the Plan remains in effect, the Directors
who are not "interested persons" of the Fund, as defined in the 1940 Act, will
be selected and nominated by the Directors who are not "interested persons" of
the Fund.
The Fund pays its Directors its allocable share of the aggregate of a
fixed fee of $20,000 per annum and a per meeting fee of $1,000 for the Fund and
Lazard Retirement Series, Inc., and reimburses them for their expenses. The
aggregate amount of compensation paid to each Director by the Fund for the year
ended December 31, 1998, was as follows:
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION THE FUND AND
NAME OF DIRECTOR FROM THE FUND LAZARD RETIREMENT SERIES, INC.
- ---------------- ---------------------- ------------------------------
<S> <C> <C>
John J. Burke $18,600 $24,000
Kenneth S. Davidson $18,600 $24,000
Norman Eig N/A N/A
Carl Frischling $18,600 $24,000
Herbert W. Gullquist N/A N/A
William Katz $18,600 $24,000
Lester Z. Lieberman $18,600 $24,000
Richard Reiss, Jr. $18,600 $24,000
John Rutledge $18,600 $24,000
</TABLE>
The Fund does not compensate officers or Directors who are employees
or affiliated persons of the Investment Manager. As of April 6, 1999, the Fund's
officers and Directors, as a group, owned less than 1% of the shares of each
Portfolio.
<PAGE>
INVESTMENT MANAGER AND INVESTMENT MANAGEMENT AGREEMENTS
Lazard Asset Management, 30 Rockefeller Plaza, New York, New York
10112, has entered into an investment management agreement with the Fund on
behalf of each Portfolio (the "Management Agreements"). Pursuant to each
Management Agreement, Lazard Asset Management regularly provides each Portfolio
with investment research, advice and supervision and furnishes continuously an
investment program for each Portfolio consistent with its investment objectives
and policies, including the purchase, retention and disposition of securities.
Lazard Asset Management is a division of Lazard Freres, a New York
limited liability company, which is registered as an investment adviser with the
Commission and is a member of the New York, American and Midwest Stock
Exchanges. Lazard Freres provides its clients with a wide variety of investment
banking and related services, including investment management. It is a major
underwriter of corporate securities, conducts a broad range of trading and
brokerage activities in corporate and governmental bonds and stocks and acts as
a financial adviser to utilities. Lazard Asset Management provides investment
management services to client discretionary accounts with assets as of March 31,
1999 totaling approximately $64 billion. Its clients are both individuals and
institutions, some of whose accounts have investment policies similar to those
of several of the Portfolios. As of April 6, 1999, Lazard Asset Management held
voting and dispositive power with respect to a sufficient number of shares of
each Portfolio held by client accounts as to be considered a controlling person
of such Portfolio.
Under the terms of each Management Agreement, the Investment Manager
will pay the compensation of all personnel of the Fund, except the fees of
Directors of the Fund who are not employees or affiliated persons of the
Investment Manager. The Investment Manager will make available to the Portfolios
such of the Investment Manager's members, directors, officers and employees as
are reasonably necessary for the operations of each Portfolio, or as may be duly
elected officers or directors of the Fund. Under each Management Agreement, the
Investment Manager also pays each Portfolio's office rent and provides
investment advisory research and statistical facilities and all clerical
services relating to research, statistical and investment work. The Investment
Manager, including its employees who serve the Portfolios, may render investment
advice, management and other services to others.
As compensation for its services, each of the Portfolios has agreed to
pay the Investment Manager an investment management fee, accrued daily and
payable monthly, at the annual rates set forth below as a percentage of the
average daily value of the net assets of the relevant Portfolio:
<PAGE>
INVESTMENT MANAGEMENT
NAME OF PORTFOLIO FEE PAYABLE
- ----------------- ---------------------
Equity Portfolio .75%
Mid Cap Portfolio .75%
Small Cap Portfolio .75%
Global Equity Portfolio .75%
International Equity Portfolio .75%
International Small Cap Portfolio .75%
Emerging Markets Portfolio 1.00%
Bond Portfolio .50%
High Yield Portfolio .75%
International Fixed-Income Portfolio .75%
Strategic Yield Portfolio .75%
For the fiscal year ending December 31, 1999, the Investment Manager
has agreed to waive its management fees or otherwise bear the expenses of the
following Portfolios to the extent the aggregate expenses of the Portfolios
exceed the percentage of the value of the Portfolio's average daily net assets
set forth opposite the Portfolio's name:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO MAXIMUM TOTAL PORTFOLIO OPERATING EXPENSES
- ----------------- ------------------------------------------
Institutional Shares Open Shares
<S> <C> <C>
Mid Cap Portfolio 1.05% 1.35%
Global Equity Portfolio 1.05% 1.35%
International Small Cap Portfolio 1.04% 1.43%
Emerging Markets Portfolio 1.28% 1.60%
Bond Portfolio .78% 1.10%
High Yield Portfolio 1.05% 1.35%
International Fixed-Income Portfolio 1.09% 1.35%
</TABLE>
For the fiscal years ended December 31, 1996, 1997 and 1998, the
management fees payable by each Portfolio, the amounts waived by the Investment
Manager and the net fees paid to the Investment Manager were as follows:
<PAGE>
<TABLE>
<CAPTION>
FEE PAYABLE FOR FEE PAYABLE FOR FEE PAYABLE FOR
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
NAME OF PORTFOLIO DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Equity Portfolio $1,829,111 $2,475,417 $3,316,469
Mid Cap Portfolio N/A $56,562 $459,760
Small Cap Portfolio 6,243,613 $8,868,261 $11,726,934
Global Equity Portfolio $39,032 $87,691 $119,985
International Equity Portfolio $11,746,379 $15,062,772 $19,452,067
International Small Cap
Portfolio $870,310 $1,061,698 $1,354,903
Emerging Markets Portfolio $983,215 $2,418,181 $2,794,119
Bond Portfolio $306,035 $429,720 $523,656
High Yield Portfolio N/A N/A $225,562
International Fixed-Income
Portfolio $462,235 $772,515 $857,644
Strategic Yield Portfolio $908,760 $2,447,618 $3,422,135
</TABLE>
<TABLE>
<CAPTION>
REDUCTION IN FEE REDUCTION IN FEE REDUCTION IN FEE
FOR FISCAL YEAR FOR FISCAL YEAR FOR FISCAL YEAR
ENDED ENDED ENDED
NAME OF PORTFOLIO DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Equity Portfolio -0- $11,054 -0-
Mid Cap Portfolio N/A $24,010 $119,681
Small Cap Portfolio -0- $11,502 -0-
Global Equity Portfolio $39,032 $87,691 $119,985
International Equity Portfolio -0- $16,852 -0-
International Small Cap
Portfolio -0- $21,116 $ 16,356
Emerging Markets Portfolio $87,108 $19,725 $ 17,870
Bond Portfolio $37,009 $21,802 $ 11,309
High Yield Portfolio N/A N/A $107,939
International Fixed-Income
Portfolio $100,766 $58,602 $ 21,538
Strategic Yield Portfolio -0- $3,456 -0-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NET FEE PAID FOR NET FEE PAID FOR NET FEE PAID FOR
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
NAME OF PORTFOLIO DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Equity Portfolio $ 1,829,111 $ 2,464,363 $ 3,316,469
Mid Cap Portfolio N/A $ 32,552 $ 340,079
Small Cap Portfolio $ 6,243,613 $ 8,856,759 $11,726,934
Global Equity Portfolio -0- -0- $ -0-
International Equity Portfolio $ 11,746,379 $15,045,920 $19,452,067
International Small Cap
Portfolio $ 870,310 $ 1,040,582 $ 1,338,547
Emerging Markets Portfolio $ 896,107 $ 2,398,456 $ 2,776,249
Bond Portfolio $ 269,026 $ 407,918 $ 512,347
High Yield Portfolio N/A N/A $ 117,623
International Fixed-Income
Portfolio $ 361,469 $ 713,913 $ 836,106
Strategic Yield Portfolio $ 908,760 $ 2,444,162 $ 3,422,135
</TABLE>
Each Management Agreement provides that the relevant Portfolio pays
all of its expenses that are not specifically assumed by the Investment Manager.
Expenses attributable to each Portfolio will be charged against the assets of
that Portfolio. Other expenses of the Fund will be allocated among the
Portfolios in a manner which may, but need not, be proportionate in relation to
the net assets of each Portfolio. Expenses payable by each of the Portfolios
include, but are not limited to, clerical salaries, brokerage and other expenses
of executing portfolio transactions; legal, auditing or accounting expenses;
trade association dues; taxes or governmental fees; the fees and expenses of any
person providing administrative services to the Fund; the fees and expenses of
the custodian and transfer agent of the Fund; clerical expenses of issue,
redemption or repurchase of shares of the Portfolio; the expenses and fees for
registering and qualifying securities for sale; the fees of Directors of the
Fund who are not employees or affiliated persons of the Investment Manager or
its affiliates; travel expenses of all Directors, officers and employees;
insurance premiums; and the cost of preparing and distributing reports and
notices to shareholders. In addition, the Open Shares of each Portfolio are
subject to an annual distribution and servicing fee. See "Distribution and
Servicing Plan." The organizational expenses of the Fund are being amortized and
allocated among the International Equity Portfolio, International Fixed-Income
Portfolio, Bond Portfolio, Strategic Yield Portfolio and Small Cap Portfolio.
Each Management Agreement is subject to annual approval by (i) the
Fund's Board or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the relevant Portfolio, provided that in either
event the continuance also is approved by a majority of the Directors who are
not "interested persons" (as defined in the 1940 Act) of the Fund or the
Investment Manager, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Management Agreement was approved by
shareholders of the Equity Portfolio, Small Cap Portfolio, International Equity
Portfolio, International Fixed-Income Portfolio, Bond Portfolio and Strategic
Yield Portfolio on December 16, 1992 and initially by the Board on September 11,
1991 (and amended and restated on October 19, 1993); by the sole shareholder for
the International Small Cap Portfolio and Emerging Markets Portfolio on August
25, 1993 and initially by the Board on July 20, 1993; by the sole shareholder
for the Global Equity Portfolio and initially by the Board on October 16, 1995;
and by the sole shareholder for the Mid Cap Portfolio and High Yield Portfolio
and by the Board on July 29, 1997. The Management Agreement for each Portfolio
was last approved by the Fund's Board, including a majority of the Directors who
are not "interested persons" of any party to the Management Agreement, at a
meeting held on October 27, 1998. Each Management Agreement is terminable
without penalty, on 60 days' notice, by the Fund's Board or by vote of the
holders of a majority of the shares of such Portfolio, or, upon not less than 60
days' notice, by the Investment Manager. Each Management Agreement provides for
automatic termination in the event of its assignment (as defined in the 1940
Act). Each Management Agreement provides that in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Investment
Manager, or of reckless disregard of its obligations thereunder, the Investment
Manager shall not be liable for any action or failure to act in accordance with
its duties thereunder.
ADMINISTRATOR AND CUSTODIAN
The Fund has engaged State Street Bank and Trust Company ("State
Street"), 225 Franklin Street, Boston, Massachusetts 02110, to provide certain
administrative services to the Portfolios. Each Portfolio will bear the cost of
such administrative expenses at the annual rate of $45,000 plus .02% of the
value of the average daily net assets of each Class of the Portfolio up to $1
billion and .01% of the value of such assets over $1 billion.
State Street also acts as the Fund's custodian. As the Fund's
custodian, State Street, among other things, maintains a custody account or
accounts in the name of each Portfolio; receives and delivers all assets for
each Portfolio upon purchase and upon sale or maturity; collects and receives
all income and other payments and distributions on account of the assets of each
Portfolio and disburses the Portfolio's assets in payment of its expenses. The
custodian does not determine the investment policies of any Portfolio or decide
which securities any Portfolio will buy or sell.
DISTRIBUTOR
Lazard Freres serves as the distributor of each Portfolio's shares and
conducts a continuous offering pursuant to a "best efforts" arrangement. As the
distributor, it accepts purchase and redemption orders for Portfolio shares. In
addition, the distribution agreement obligates Lazard Freres to pay certain
expenses in connection with the offering of Portfolio shares. After the
prospectus and periodic reports have been prepared, set in type and mailed to
shareholders, Lazard Freres also will pay for the printing and distribution of
copies thereof used in connection with the offering to prospective investors.
<PAGE>
DETERMINATION OF NET ASSET VALUE
Net asset value per share for each Class of each Portfolio is
determined by State Street for the Fund on each day the New York Stock Exchange
is open for trading. The New York Stock Exchange is ordinarily closed on the
following national holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Net asset value per share is determined by
dividing the value of the total assets of the Portfolio represented by such
Class, less all liabilities, by the total number of Portfolio shares of such
Class outstanding.
The value of securities, other than options listed on national
securities exchanges and debt securities maturing in 60 days or less, is
determined as of the close of regular trading on the New York Stock Exchange.
Options on stock and stock indices traded on national securities exchanges are
valued as of the close of options trading on such exchanges (which is currently
4:10 p.m., New York time). Debt securities maturing in 60 days or less are
valued at amortized cost, except where to do so would not reflect accurately
their fair value, in which case such securities would be valued at their fair
value as determined under the supervision of the Board of Directors. Each
security for which the primary market is on a national securities exchange is
valued at the last sale price on the principal exchange on which it is traded,
or, if no sales are reported on such exchange on that day, at the closing bid
price.
Any security held by a Portfolio for which the primary market is the
Nasdaq National Market System is valued at the last sale price as quoted by such
system or, in the absence of any sale on the valuation date, at the closing bid
price. Any other unlisted security for which current over-the-counter market
quotations or bids are readily available is valued at its last quoted bid price
or, if available, the mean of two such prices.
All other securities and other assets for which current market
quotations are not readily available are valued at fair value as determined in
good faith by the Fund's Board of Directors and in accordance with procedures
adopted by the Board of Directors. The portfolio securities of any of the
Portfolios also may be valued on the basis of prices provided by a pricing
service when such prices are believed by the Investment Manager to reflect the
fair market value of such securities.
The International Small Cap Portfolio and Small Cap Portfolio invest
primarily in equity securities of companies with relatively small market
capitalizations. Because of the difference between the bid and asked prices of
over-the-counter securities, there may be an immediate reduction in the net
asset value of the shares of the International Small Cap Portfolio or Small Cap
Portfolio after such Portfolio has completed a purchase of securities that will
be valued by the relevant Portfolio at their bid price, since those securities
usually will have been purchased at or near the asked price.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets ordinarily is completed well before the close of
business on each business day in New York (i.e., a day on which the New York
Stock Exchange is open). In addition, European or Far Eastern securities trading
generally or in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the net asset value of a Portfolio is not
calculated. Each Portfolio calculates net asset value per share, and therefore
effects sales, redemptions and repurchases of its shares, as of the close of
regular trading on the New York Stock Exchange once on each day on which the New
York Stock Exchange is open. Such calculation may not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when the Portfolio's net asset value is calculated, such
securities will be valued at fair value as determined in good faith by the Board
of Directors.
PORTFOLIO TRANSACTIONS
GENERAL
Subject to the supervision of the Board of Directors, the Investment
Manager is primarily responsible for the investment decisions and the placing of
portfolio transactions for each Portfolio. In selecting brokers or dealers to
execute portfolio transactions on behalf of a Portfolio, the Investment Manager
seeks the best overall terms available, taking into account such factors as
price, size of order, difficulty of execution and skill required of the
executing broker. While the Investment Manager will generally seek reasonably
competitive spreads or commissions, the Portfolios will not necessarily be
paying the lowest spread or commission available.
Purchases and sales of portfolio securities on a securities exchange
are effected by the Investment Manager through brokers who charge a negotiated
commission for their services based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates.
Orders may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Lazard Freres. In the over-the-counter market,
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount.
<PAGE>
To the extent consistent with applicable provisions of the 1940 Act
and the rules adopted by the Commission thereunder, the Fund's Board has
determined that securities transactions for a Portfolio may be executed through
Lazard Freres if, in the judgment of the Investment Manager, the use of Lazard
Freres is likely to result in price and execution at least as favorable as those
of other qualified brokers or dealers, and if, in the transaction, Lazard Freres
charges the Portfolio a rate consistent with that charged to comparable
unaffiliated customers in similar transactions.
Purchase and sale orders for securities held by a Portfolio may be
combined with those for other Portfolios in the interest of the most favorable
net results for all. When the Investment Manager determines that a particular
security should be bought for or sold by more than one Portfolio, the Investment
Manager undertakes to allocate those transactions between the participants
equitably.
RESEARCH AND STATISTICAL INFORMATION
When it can be done consistently with the policy of obtaining the best
overall terms available, the Investment Manager may select brokers or dealers
who supply market quotations to the Fund's custodian for valuation purposes, or
who supply research, market and statistical information to the Investment
Manager. Although such research, market and statistical information may be
useful to the Investment Manager, it is only supplementary to the Investment
Manager's own research efforts, since the information must still be analyzed,
weighed and reviewed by the Investment Manager's staff. Information so received
will be in addition to, and not in lieu of, the services required to be
performed by the Investment Manager under the Management Agreement with the Fund
on behalf of the Portfolios. Such information may be useful to the Investment
Manager in providing services to both the Portfolios and clients other than the
Portfolios, and, conversely, supplemental information obtained by the placement
of business of other clients may be useful to the Investment Manager in carrying
out its obligations to the Portfolios. The total dollar amount of transactions
pursuant to which brokerage was directed in consideration of research services
provided during the year ended December 31, 1998, was $1,894,819,000, and the
related commissions were $4,385,000. In addition, when it can be done
consistently with the above stated policy, the Investment Manager may place
orders with brokers and dealers (i) who refer persons to the Investment Manager
for the purpose of purchasing shares of the Portfolios or (ii) who provide
services to the Fund at no fee or for a reduced fee.
<PAGE>
BROKERAGE COMMISSIONS
In connection with its portfolio securities transactions for the
fiscal years ended December 31, 1996, 1997 and 1998, each Portfolio indicated
below paid brokerage commissions as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
PERCENTAGE OF
AMOUNT OF PERCENTAGE OF TOTAL BROKERAGE
BROKERAGE TOTAL BROKERAGE TRANSACTIONS
BROKERAGE COMMISSIONS PAID COMMISSIONS PAID EFFECTED THROUGH
NAME OF PORTFOLIO COMMISSIONS PAID TO LAZARD FRERES TO LAZARD FRERES LAZARD FRERES
- ----------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Equity Portfolio $ 483,954 -0- -0- -0-
Small Cap Portfolio $ 1,522,251 $4,465 0.29% 0.31%
Global Equity Portfolio $ 29,963 $1,104 3.69% 9.28%
International Equity Portfolio $ 2,707,977 -0- -0- -0-
International Small Cap
Portfolio $ 580,942 -0- -0- -0-
Emerging Markets Portfolio $ 621,547 -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
PERCENTAGE OF
AMOUNT OF PERCENTAGE OF TOTAL BROKERAGE
BROKERAGE TOTAL BROKERAGE TRANSACTIONS
BROKERAGE COMMISSIONS PAID COMMISSIONS PAID EFFECTED THROUGH
NAME OF PORTFOLIO COMMISSIONS PAID TO LAZARD FRERES TO LAZARD FRERES LAZARD FRERES
- ----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Equity Portfolio $ 592,299 -0- -0- -0-
Mid Cap Portfolio $ 59,461 -0- -0- -0-
Small Cap Portfolio $ 2,003,525 -0- -0- -0-
Global Equity Portfolio $ 26,640 $45 0.17% 0.19%
International Equity Portfolio $ 3,041,586 -0- -0- -0-
International Small Cap
Portfolio $ 429,111 -0- -0- -0-
Emerging Markets Portfolio $ 1,098,476 -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
PERCENTAGE OF
AMOUNT OF PERCENTAGE OF TOTAL BROKERAGE
BROKERAGE TOTAL BROKERAGE TRANSACTIONS
BROKERAGE COMMISSIONS PAID COMMISSIONS PAID EFFECTED THROUGH
NAME OF PORTFOLIO COMMISSIONS PAID TO LAZARD FRERES TO LAZARD FRERES LAZARD FRERES
- ----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Equity Portfolio $ 802,204 $ 51,625 6.44% 7.24%
Mid Cap Portfolio $ 183,975 $ 5,270 2.86% 2.73%
Small Cap Portfolio $ 2,544,527 $ 61,090 2.40% 0.95%
Global Equity Portfolio $ 33,371 $ 2,734 8.87% 14.52%
International Equity Portfolio $ 4,724,137 -0- -0- -0-
International Small Cap
Portfolio $ 439,572 -0- -0- -0-
Emerging Markets Portfolio $ 1,016,826 $ 812 0.23% 0.39%
</TABLE>
<PAGE>
HOW TO BUY AND HOW TO SELL SHARES
GENERAL. The minimum initial investment for each Portfolio is $10,000
for Open Shares, unless the investor is a client of a securities dealer or other
institution which has made an aggregate minimum initial purchase for its clients
of at least $10,000, and $1,000,000 for Institutional Shares. Subsequent
investments for each Portfolio must be at least $1,000 for Open Shares and
$5,000 for Institutional Shares. For directors, members and employees of Lazard
Freres and its affiliates, and the trustees of benefit plans covering any of the
foregoing individuals, the minimum initial investment for each Portfolio is
$5,000 for Institutional Shares. The minimum investment requirements may be
waived or lowered for investments effected through banks and other institutions
that have entered into special arrangements with the Fund or Lazard Freres and
for investments effected on a group basis by certain other entities and their
employees, such as pursuant to a payroll deduction plan. The Fund reserves the
right to vary further the initial and subsequent investment minimum requirements
at any time.
Securities dealers and other institutions effecting transactions in
Portfolio shares for the accounts of their clients may charge their clients
direct fees in connection with such transactions. The Fund and Lazard Freres
reserve the right to reject any purchase order. All funds will be invested in
full and fractional shares. Stock certificates will not be issued.
Shares of each Portfolio may be purchased in exchange for securities
which are permissible investments of that Portfolio, subject to the Investment
Manager's determination that the securities are acceptable. Securities accepted
in exchange for Portfolio shares will be valued at the mean between their bid
and asked quotations. In addition, securities accepted in exchange for Portfolio
shares are required to be liquid securities that are not restricted as to
transfer and have a value that is readily ascertainable (and not established
only by valuation procedures) as evidenced by a listing on the American Stock
Exchange, the New York Stock Exchange, The Nasdaq Stock Market, a recognized
non-U.S. exchange or non-Nasdaq listing with at least two market makers.
PURCHASES THROUGH THE TRANSFER AGENT. Orders for Portfolio shares will
become effective at the net asset value per share next determined after receipt
by the Transfer Agent or other agent of a check drawn on any member of the
Federal Reserve System or after receipt by the Custodian or other agent of a
bank wire or Federal Reserve Wire. Checks must be payable in United States
dollars and will be accepted subject to collection at full face value. The
Transfer Agent and Lazard Freres, in certain cases, may agree to next day
settlement for certain purchases through the Transfer Agent.
By investing in a Portfolio, a shareholder appoints the Transfer
Agent, as agent, to establish an open account to which all shares purchased will
be credited, together with any dividends and capital gain distributions that are
paid in additional shares.
<PAGE>
PURCHASES THROUGH A LAZARD FRERES BROKERAGE ACCOUNT. Shares of all of
the Portfolios are sold by Lazard Freres only to customers of Lazard Freres
without a sales charge, on a continuing basis at the net asset value of the
Portfolio next determined after receipt of a purchase order by Lazard Freres.
Payments must be made to Lazard Freres within three business days of the order.
Because Lazard Freres does not forward investors' funds until the business day
on which the order is settled, it may benefit from temporary use of these funds.
Please contact your Lazard Freres account representative for specific
instructions on how to purchase Portfolio shares through your Lazard Freres
brokerage account.
AUTHORIZED BROKERS. The Fund has authorized one or more brokers to
accept on its behalf purchase and redemption orders. Such brokers are authorized
to designate other intermediaries to accept purchase and redemption orders on
the Fund's behalf. The Fund will be deemed to have received a purchase or
redemption order when an authorized broker or, if applicable, a broker's
authorized designee, accepts the order. Customer orders will be priced at the
Fund's net asset value next computed after such orders are accepted by an
authorized broker or the broker's authorized designee.
REDEMPTION COMMITMENT. The Fund has committed to pay in cash all
redemption requests by any shareholder of record, limited in amount during any
90-day period to the lesser of $250,000 or 1% of the value of a Portfolio's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Commission. In the case of requests for redemption in
excess of such amount, the Fund's Board reserves the rights to make payments in
whole or part in securities (which may include non-marketable securities) or
other assets of the Portfolio in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In such event, the securities would be valued in the same
manner as the Portfolio's investments are valued. If the recipient sold such
securities, brokerage charges might be incurred.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Commission so that disposal of the
Portfolio's investments or determination of its net asset value is not
reasonably practicable, or (c) for such other periods as the Commission by order
may permit to protect the Portfolio's shareholders.
DISTRIBUTION AND SERVICING PLAN
(OPEN SHARES ONLY)
Open Shares are subject to a Distribution and Servicing Plan adopted
pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution and Servicing
Plan, the Fund pays Lazard Freres for advertising, marketing and distributing
each Portfolio's Open Shares and for the provision of certain services to the
holders of Open Shares a fee at an annual rate of .25% of the value of the
average daily net assets of the Portfolio's Open Class. The services provided
may include personal services relating to shareholder accounts, such as
answering shareholder inquiries regarding the Fund and providing reports and
other information, and services related to the maintenance of shareholder
accounts. The fee payable for such services is intended to be a "service fee" as
defined in Conduct Rules of the NASD. Under the Distribution and Servicing Plan,
Lazard Freres may make payments to third parties in respect of these services.
From time to time, Lazard Freres may defer or waive receipt of fees under the
Distribution and Servicing Plan while retaining the ability to be paid by the
Fund under the Distribution and Servicing Plan thereafter. The fees payable to
Lazard Freres under the Distribution and Servicing Plan for advertising,
marketing and distributing Open Shares and for payments to third parties are
payable without regard to actual expenses incurred.
Rule 12b-1 (the "Rule") adopted by the Commission under the 1940 Act
provides, among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Fund's Board has adopted such a plan (the "Distribution and Servicing
Plan") with respect to each Portfolio's Open Shares, pursuant to which the Fund
pays Lazard Freres for advertising, marketing and distributing Open Shares of
the Portfolios and for the provision of certain services to the holders of Open
Shares of the Portfolios. Lazard Freres may make payments to certain financial
institutions, securities dealers and other industry professionals (collectively,
"Service Agents") for providing these services. The Fund's Board determined, in
the exercise of its business judgment, that the Fund's Distribution and
Servicing Plan is reasonably likely to benefit each Portfolio and holders of
Open Shares.
A quarterly report of the amounts expended under the Distribution
Servicing Plan, and the purposes for which such expenditures were incurred, must
be made to the Board for its review. In addition, the Distribution and Servicing
Plan provides that it may not be amended to increase materially the costs which
holders of Open Shares of a Portfolio may bear for distribution pursuant to the
Distribution and Servicing Plan without such shareholders' approval and that
other material amendments of the Distribution and Servicing Plan must be
approved by the Board and by the Board members who are not "interested persons"
(as defined in the 1940 Act) of the Fund and have no direct or indirect
financial interest in the operation of the Distribution and Servicing Plan or in
any agreements entered into in connection with the Distribution and Servicing
Plan, by vote cast in person at a meeting called for the purpose of considering
such amendments. The Distribution and Servicing Plan is subject to annual
approval by such vote cast in person at a meeting called for the purpose of
voting on the Distribution and Servicing Plan. The Distribution and Servicing
Plan was last so approved on October 27, 1998. As to each Portfolio, the
Distribution and Servicing Plan may be terminated at any time by vote of a
majority of the Board members who are not "interested persons" and have no
direct or indirect financial interest in the operation of the Distribution and
Servicing Plan or in any agreements entered into in connection with the
Distribution and Servicing Plan or by vote of the holders of a majority of such
Portfolio's Open Shares.
<PAGE>
For the fiscal year ended December 31, 1998, each Portfolio paid the
Distributor the amount set forth below with respect to its Open Shares under the
Distribution and Servicing Plan:
AMOUNT PAID TO DISTRIBUTOR
UNDER DISTRIBUTION AND SERVICING
PLAN FOR FISCAL YEAR
NAME OF PORTFOLIO ENDED DECEMBER 31, 1998
- ----------------- --------------------------
Equity Portfolio $ 219,862
Mid Cap Portfolio $ 22,660
Small Cap Portfolio $ 245,099
Global Equity Portfolio $ 9,246
International Equity Portfolio $ 76,823
International Small Cap Portfolio $ 8,134
Emerging Markets Portfolio $ 29,160
Bond Portfolio $ 28,672
High Yield Portfolio $ 573
International Fixed-Income Portfolio $ 9,533
Strategic Yield Portfolio $ 48,934
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare as a dividend on the outstanding shares of
each of the Bond Portfolio, High Yield Portfolio, International Fixed-Income
Portfolio and Strategic Yield Portfolio substantially all of the Portfolio's net
investment income at the close of each business day to shareholders of record at
4:00 p.m. (New York time). Net investment income for a Saturday, Sunday or
holiday will be included in the dividend declared on the previous business day.
Dividends declared on the shares of the Bond Portfolio, High Yield Portfolio,
International Fixed-Income Portfolio and Strategic Yield Portfolio ordinarily
will be paid on the last business day of each month. Shareholders who redeem all
their shares of any of these Portfolios prior to a dividend payment date will
receive, in addition to the redemption proceeds, any dividends that are declared
but unpaid. Shareholders of any of these Portfolios who redeem only a portion of
their shares will be entitled to all dividends that are declared by unpaid on
the redeemed shares on the next dividend payment date.
Dividends from net investment income on the Equity Portfolio, Mid Cap
Portfolio, International Equity Portfolio, Small Cap Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio and Global Equity Portfolio
generally will be declared and paid at least annually and may be declared and
paid twice annually.
Dividends for each Class of a Portfolio will be calculated at the same
time and in the same manner and will be of the same amount, except that certain
expenses will be borne exclusively by one Class and not by the other, such as
fees payable under the Distribution and Servicing Plan. Open Shares will receive
lower per share dividends than Institutional Shares because of the higher
expenses borne by Open Shares.
Investment income for a Portfolio includes, among other things,
interest income, accretion of market and original issue discount and
amortization of premium and, in the case of the Equity Portfolio, Mid Cap
Portfolio, International Equity Portfolio, Small Cap Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio and Global Equity Portfolio,
also would include dividends.
With respect to all of the Portfolios, net realized capital gains, if
any, will be distributed at least annually and may be declared and paid twice
annually. If a dividend check mailed to a shareholder who elected to receive
dividends and/or capital gain distributions in cash is returned as undeliverable
by the postal or other delivery service, such shareholder's distribution option
automatically will be converted to all dividends and other distributions
reinvested in additional shares. NO INTEREST WILL ACCRUE ON AMOUNTS REPRESENTED
BY UNCASHED DISTRIBUTION OR REDEMPTION CHECKS. Each Portfolio forwards to the
Fund's custodian the monies for dividends to be paid in cash on the payment
date.
TAXATION
Management believes that each Portfolio has qualified for the fiscal
year ended December 31, 1998 as a "regulated investment company" under
Subchapter M of the Code. It is intended that each such Portfolio will continue
to so qualify as a regulated investment company, if such qualification is in the
best interests of its shareholders. Each Portfolio will be treated as a separate
entity for tax purposes and thus the provisions of the Code applicable to
regulated investment companies generally will be applied to each Portfolio
separately, rather than to the Fund as a whole. As a regulated investment
company, a Portfolio will pay no Federal income tax on net investment income and
net realized securities gains to the extent that such income and gains are
distributed to shareholders in accordance with applicable provisions of the
Code. To qualify as a regulated investment company, the Portfolio must
distribute at least 90% of its net income (consisting of net investment income
and net short-term capital gain) to its shareholders and meet certain asset
diversification and other requirements. If the Portfolio did not qualify as a
regulated investment company, it would be treated for tax purposes as an
ordinary corporation subject to Federal income tax. The term "regulated
investment company" does not imply the supervision of management of investment
practices or policies by any government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the net asset value of the shares below the cost
of the investment. Such a dividend or distribution would be a return of
investment in an economic sense, although taxable as stated in the Prospectus.
In addition, the Code provides that if a shareholder holds shares of a Portfolio
for six months or less and has received a capital gain distribution with respect
to such shares, any loss incurred on the sale of such shares will be treated as
long-term capital loss to the extent of the capital gain distribution received.
<PAGE>
Corporate shareholders of the Equity Portfolio, Mid Cap Portfolio,
Small Cap Portfolio and Global Equity Portfolio will be eligible for the
dividends-received deduction on the dividends (excluding the net capital gain
dividends) paid by the Portfolio, to the extent that the Portfolio's income is
derived from certain dividends received from domestic corporations. A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in the Portfolio for 46 days or more during the 90-day
period commencing 45 days before the shares become ex-dividend. Furthermore, a
corporation's dividends-received deduction will be disallowed to the extent a
corporation's investment in shares of the Portfolio is financed with
indebtedness. It is anticipated that distributions from Portfolios, other than
the Equity Portfolio, Mid Cap Portfolio, Small Cap Portfolio and Global Equity
Portfolio, will not qualify for the dividends-received distribution. Each year
the Fund will notify shareholders of the federal income tax status of
distributions.
The Bond Portfolio, High Yield Portfolio and International
Fixed-Income Portfolio may invest in Real Estate Mortgage Investment Conduits
("REMICs"). Interests in REMICs are classified as either "regular" interests or
"residual" interests. Under the Code, special rules apply with respect to the
treatment of a portion of the Portfolio's income from REMIC residual interests.
(Such portion is referred to herein as "Excess Inclusion Income.") Excess
Inclusion Income generally cannot be offset by net operating losses and, in
addition, constitutes unrelated business taxable income to entities which are
subject to the unrelated business income tax. The Code provides that a portion
of Excess Inclusion Income attributable to REMIC residual interests held by
regulated investment companies such as the Portfolios shall, pursuant to
regulations, be allocated to the shareholders of such regulated investment
company in proportion to the dividends received by such shareholders.
Accordingly, shareholders of the Bond Portfolio, High Yield Portfolio and
International Fixed-Income Portfolio generally will not be able to use net
operating losses to offset such Excess Inclusion Income. In addition, if a
shareholder of one of the Portfolios is an entity subject to the unrelated
business income tax (including a qualified pension plan, an IRA, a 401(k) plan,
a Keogh plan, or another tax-exempt entity) and is allocated any amount of
Excess Inclusion Income, such a shareholder may be required to file a return and
pay a tax on such Excess Inclusion Income even though a shareholder might not
have been required to pay such tax or file such return absent the receipt of
such Excess Inclusion Income. The Investment Manager anticipates that only a
small portion, if any, of the assets of the Bond Portfolio, High Yield Portfolio
and International Fixed-Income Portfolio will be invested in REMIC residual
interests. Accordingly, the amount of Excess Inclusion Income, if any, received
by the Portfolios and allocated to their shareholders should be quite small.
Shareholders that are subject to the unrelated business income tax should
consult their own tax adviser regarding the treatment of their income derived
from the Portfolios.
Except as discussed above with respect to Excess Inclusion Income, a
dividend or capital gains distribution with respect to shares held by a
tax-deferred or qualified plan, such as an IRA, 403(b)(7) retirement plan or
corporate pension or profit sharing plan, will not be taxable to the plan.
Distributions from such plans will be taxable to individual participants under
applicable tax rules without regard to the income earned by the qualified plan.
<PAGE>
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gains and losses. However, all or a portion of the gain or
loss realized from the disposition of foreign currency, non-U.S. dollar
denominated debt instruments, and certain financial futures and options, may be
treated as ordinary income or loss under Section 988 of the Code. In addition,
all or a portion of the gain realized from the disposition of certain market
discount bonds will be treated as ordinary income under Section 1276 of the
Code. Finally, all or a portion of the gain realized from engaging in
"conversion transactions" may be treated as ordinary income under Section 1258
of the Code. "Conversion transactions" are defined to include certain forward,
futures, option and straddle transactions, transactions marketed or sold to
produce capital gains, or transactions described in Treasury regulations to be
issued in the future.
Under Section 1256 of the Code, gain or loss realized by a Portfolio
from certain financial futures and options transactions (other than those taxed
under Section 988 of the Code) will be treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. Gain or loss will arise upon the
exercise or lapse of such futures and options as well as from closing
transactions. In addition, any such futures or options remaining unexercised at
the end of the Portfolio's taxable year will be treated as sold for their then
fair market value, resulting in additional gain or loss to the Portfolio
characterized in the manner described above.
Offsetting positions held by a Portfolio involving financial futures
and options may constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Sections 1092 and 1258 of the Code, which, in
certain circumstances, overrides or modifies the provisions of Sections 988 and
1256 of the Code. As such, all or a portion of any short- or long-term capital
gain from certain "straddle" transactions may be recharacterized as ordinary
income.
If a Portfolio were treated as entering into straddles by reason of
its future or options transactions, such straddles could be characterized as
"mixed straddles" if the futures or options transactions comprising such
straddles were governed by Section 1256 of the Code. The Portfolio may make one
or more elections with respect to "mixed straddles." Depending upon which
election is made, if any, the results to the Portfolio may differ. If no
election is made, to the extent the straddle rules apply to positions
established by the Portfolio, losses realized by the Portfolio will be deferred
to the extent of unrealized gain in any offsetting positions. Moreover, as a
result of the straddle and conversion transaction rules, short-term capital loss
on straddle positions may be recharacterized as long-term capital loss, and
long-term capital gain may be recharacterized as short-term capital gain or
ordinary income.
The Taxpayer Relief Act of 1997 included constructive sale provisions
that generally apply if a Portfolio either (1) holds an appreciated financial
position with respect to stock, certain debt obligations, or partnership
interests ("appreciated financial position") and then enters into a short sale,
futures or forward contract, or offsetting notional principal contract
(collectively, a "Contract") with respect to the same or substantially identical
property or (2) holds an appreciated financial position that is a Contract and
then acquires property that is the same as, or substantially identical to, the
underlying property. In each instance, with certain exceptions, the Portfolio
generally will be taxed as if the appreciated financial position were sold at
its fair market value on the date the Portfolio enters into the financial
position or acquires the property, respectively. Transactions that are
identified hedging or straddle transactions under other provisions of the Code
can be subject to the constructive sale provisions.
Income received by a Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of each Portfolio's assets to be
invested in various countries is not known.
If more than 50% of the value of a Portfolio's total assets at the
close of its taxable year consists of the stock or securities of foreign
corporations, the Portfolio may elect to "pass through" to its shareholders the
amount of foreign income taxes paid by the Portfolio. Pursuant to such election,
shareholders would be required: (i) to include in gross income, even though not
actually received, their respective pro rata shares of the foreign taxes paid by
the Portfolio; (ii) treat their income from the Portfolio as being from foreign
sources to the extent that the Portfolio's income is from foreign sources; and
(iii) either to deduct their pro rata share of foreign taxes in computing their
taxable income, or to use it as a foreign tax credit against federal income (but
not both). No deduction for foreign taxes could be claimed by a shareholder who
does not itemize deductions.
It is anticipated that each of the International Equity Portfolio,
International Fixed- Income Portfolio, International Small Cap Portfolio,
Emerging Markets Portfolio and Global Equity Portfolio will be operated so as to
meet the requirements of the Code to "pass through" to shareholders of the
Portfolio credits for foreign taxes paid, although there can be no assurance
that these requirements will be met. Each shareholder will be notified within 45
days after the close of each taxable year of the Portfolio whether the foreign
taxes paid by the Portfolio will "pass through" for that year, and, if so, the
amount of each shareholder's pro rata share of (i) the foreign taxes paid, and
(ii) the Portfolio's gross income from foreign sources. Of course, shareholders
who are not liable for federal income taxes, such as retirement plans qualified
under Section 401 of the Code, will not be affected by any such "pass through"
of foreign tax credits.
If a Portfolio invests in an entity that is classified as a "passive
foreign investment company" ("PFIC") for Federal income tax purposes, the
operation of certain provisions of the Code applying to PFICs could result in
the imposition of certain Federal income taxes on the Portfolio. In addition,
gain realized from the sale, other disposition or marking-to-market of PFIC
securities may be treated as ordinary income under Section 1291 or Section 1296
of the Code.
Investment by a Portfolio in securities issued at a discount or
providing for deferred interest or for payment of interest in the form of
additional obligations could, under special tax rules, affect the amount, timing
and character of distributions to shareholders by causing a Portfolio to
recognize income prior to the receipt of cash payments. For example, the
Portfolio could be required to recognize annually a portion of the discount (or
deemed discount) at which such securities were issued and to distribute an
amount equal to such income in order to maintain its qualification as a
regulated investment company. In such case, the Portfolio may have to dispose of
securities which it might otherwise have continued to hold in order to generate
cash to satisfy these distribution requirements.
PERFORMANCE INFORMATION
Current yield is computed pursuant to a formula which operates as
follows: The amount of the relevant Portfolio's expenses accrued for the 30-day
period (net of reimbursements) is subtracted from the amount of the dividends
and interest earned (computed in accordance with the regulatory requirements) by
such Portfolio during the period. That result is then divided by the product of:
(a) the average daily number of such Portfolio's shares outstanding during the
period that were entitled to receive dividends, and (b) the net asset value per
share on the last day of the period less any undistributed earned income per
share reasonably expected to be declared as a dividend shortly thereafter. The
quotient is then added to 1, and that sum is raised to the 6th power, after
which 1 is subtracted. The current yield is then arrived at by multiplying the
result by 2. A Portfolio's "actual distribution rate" is computed in the same
manner as yield, except that actual income dividends declared per share during
the period in question is substituted for net investment income per share.
The yield and the actual distribution rate for the 30-day period ended
December 31, 1998 for Institutional Shares and Open Shares of each Portfolio
indicated below was as follows:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO 30-DAY YIELD DISTRIBUTION RATE
- ---------------- --------------------------------- -------------------------------------
INSTITUTIONAL OPEN INSTITUTIONAL OPEN
SHARES SHARES SHARES SHARES
------------- ------ ------------- ------
<S> <C> <C> <C> <C>
Bond 5.64% 5.27% 5.38% 5.02%
High Yield 9.33% 9.03% 9.03% 8.74%
International Fixed-Income 3.21% 2.90% 1.13% 1.04%
Strategic Yield 7.02% 6.61% 6.94% 5.99%
</TABLE>
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased with a hypothetical $1,000 payment
made at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the "n"
the root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result.
The average annual total return of Institutional Shares and Open
Shares for the indicated Portfolio and periods sended December 31, 1998 (the
date listed in the footnote is the beginning of the period for the indicated
Portfolio) was as follows:
<PAGE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED DECEMBER 31, 1998
NAME OF PORTFOLIO 1-YEAR 5-YEARS 10-YEARS
- ----------------- ------ ------- --------
<S> <C> <C> <C>
Equity 17.31% 20.36% 16.83%(3)
International Equity 16.04% 11.22% 11.26%(4)
International Fixed-Income 13.20% 7.00% 7.86%(5)
Bond 5.77% 5.93% 6.69%(6)
Strategic Yield 0.75% 6.00% 7.36%(7)
Small Cap (12.62)% 11.45% 16.11%(8)
International Small Cap 7.55% 3.94% 5.58%(1)
Emerging Markets (23.49)% (5.10)%(2) N/A
Global Equity 17.10% 16.09%(9) N/A
Mid Cap 3.65% 5.58%(10) N/A
High Yield N/A(11) N/A N/A
- ---------------
(1) December 1, 1993.
(2) July 15, 1994.
(3) June 1, 1987.
(4) October 29, 1991.
(5) November 8, 1991.
(6) November 12, 1991.
(7) October 1, 1991.
(8) October 30, 1991.
(9) January 4, 1996.
(10) November 4, 1997.
(11) January 2, 1998.
</TABLE>
<TABLE>
<CAPTION>
OPEN SHARES AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED DECEMBER 31, 1998
NAME OF PORTFOLIO 1-YEAR 5-YEARS 10-YEARS
- ----------------- ------ -------- ---------
<S> <C> <C> <C>
Equity 16.98% 18.95%(1) N/A
International Equity 15.82% 15.44%(2) N/A
International Fixed-Income 12.92% 3.72%(3) N/A
Bond 5.42% 6.93%(4) N/A
Strategic Yield 0.37% 2.12%(2) N/A
Small Cap (12.86)% 4.82%(5) N/A
International Small Cap 7.21% 1.97%(6) N/A
Emerging Markets (23.30)% (17.99)%(3) N/A
Global Equity 16.82% 17.52%(5) N/A
Mid Cap 3.42% 5.34%(7) N/A
High Yield N/A(8) N/A N/A
- ---------------
(1) February 5, 1997.
(2) January 23, 1997.
(3) January 8, 1997.
(4) March 5, 1997.
(5) January 30, 1997.
(6) February 13, 1997.
(7) November 4, 1997.
(8) February 24, 1998.
</TABLE>
Total return is calculated by subtracting the amount of the relevant
Portfolio's net asset value per share at the beginning of a stated period from
the net asset value per share at the end of the period (after giving effect to
the reinvestment of dividends and distributions during the period), and dividing
the result by the net asset value per share at the beginning of the period.
The total return of Institutional Shares and Open Shares for the
indicated Portfolio from inception through December 31, 1998 (the date listed in
the footnote is the date operations commenced or, with respect to Open Shares,
the initial public offering date for the indicated Portfolio) was as follows:
TOTAL RETURN THROUGH DECEMBER 31, 1998
---------------------------------------
NAME OF PORTFOLIO INSTITUTIONAL SHARES OPEN SHARES
- ----------------- -------------------- -----------
Equity 403.93%(1) 39.08%(12)
Mid Cap 6.50%(2) 6.22%(2)
International Equity 114.93%(3) 32.12%(13)
International Fixed-Income 72.06%(4) 7.49%(14)
Bond 59.05%(5) 13.03%(15)
Strategic Yield 67.42%(6) 4.15%(13)
Small Cap 191.73%(7) 9.44%(16)
International Small Cap 31.80%(8) 3.74%(17)
Emerging Markets (20.86)%(9) (32.49)%(14)
Global Equity 56.27%(10) 36.34%(16)
High Yield 2.90%(11) (2.24)%(18)
- -------------------
(1) June 1, 1987.
(2) November 4, 1997.
(3) October 29, 1991.
(4) November 8, 1991.
(5) November 12, 1991.
(6) October 1, 1991.
(7) October 30, 1991.
(8) December 1, 1993.
(9) July 15, 1994.
(10) January 4, 1996.
(11) January 2, 1998.
(12) February 5, 1997.
(13) January 23, 1997.
(14) January 8, 1997.
(15) March 5, 1997.
(16) January 30, 1997.
(17) February 13, 1997.
(18) February 24, 1998.
A Portfolio's yield, actual distribution rate and total return are not
fixed and will fluctuate in response to prevailing market conditions or as a
function of the type and quality of the securities held by such Portfolio, its
average portfolio maturity and its expenses. Yield, actual distribution rate and
total return information is useful in reviewing a Portfolio's performance and
such information may provide a basis for comparison with other investments but
such information may not provide a basis for comparison with certificates of
deposit, which pay a fixed rate of return, or money market funds, which seek a
stable net asset value. Investment return and principal value of an investment
in a Portfolio will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
Performance of each Class will be calculated separately and will take
into account any applicable distribution and service fees. As a result, at any
given time, the performance of Open Shares should be expect to be lower than
that of Institutional Shares.
From time to time, the Fund may compare a Portfolio's performance
against one or more broad-based indices or data from Lipper Analytical Services,
Inc., Money Magazine, Morningstar, Inc. and other industry publications. In
addition, the Fund may compare a Portfolio's performance against inflation with
the performance of other instruments against inflation, such as short-term
Treasury Bills (which are direct obligations of the U.S. Government) and
FDIC-insured bank money market accounts.
<PAGE>
INFORMATION ABOUT THE FUND AND PORTFOLIOS
On January 1, 1992, the Fund on behalf of the Equity Portfolio
acquired the assets and liabilities of Lazard Equity Fund, formerly a portfolio
of Scudder Fund, Inc. ("Scudder Fund") an open-end, diversified management
investment company. Lazard Freres has agreed to indemnify Scudder Fund and its
directors from any and all claims arising out of the transfer of assets to the
maximum extent that Scudder Fund would be so permitted by the Maryland General
Corporation Law, subject to the limitations of the 1940 Act. In addition, the
Fund has agreed to indemnify, with respect to the Equity Portfolio, the Scudder
Fund and its directors and officers from claims arising out of acts or omissions
occurring prior to the transfer to the same extent that such individuals could
have been indemnified by the Scudder Fund. If, however, the Fund (or the Equity
Portfolio) ceases to exist, Lazard Freres has agreed, in lieu of the Fund, to so
indemnify to so indemnify the directors and officers of Scudder Fund.
As of April 6, 1999, the following shareholders owned beneficially or
of record 5% or more of the indicated Portfolio's outstanding shares:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NAME AND ADDRESS INSTITUTIONAL SHARES OUTSTANDING
- ---------------- --------------------------------
EQUITY PORTFOLIO
<S> <C>
Smith Barney Inc. 14.90%
00109801250
388 Greenwich Street
New York, NY 10013-2339
Seagrams Retirement Savings and Investment Trust 9.34%
c/o The Bank of New York
Attn: Alex Kovalenko
1 Wall Street, 12th Floor
New York, NY 10005-2501
Lazard Freres & Co. LLC 7.04%
Employee Savings Plan--Equity Fund
Attn: Francis J. Conroy
30 Rockefeller Plaza
New York, NY 10112
MID CAP PORTFOLIO
Lazard Freres & Co. LLC 16.09%
District No. 9 IAMAW
30 Rockefeller Plaza, 60th Floor
New York, NY 10112
Norwest Bank Colorado N.A. 5.53%
Cust FBO City of Aurora Fire MPAP
740 Broadway #8751
Denver, CO 80203-3410
SMALL CAP PORTFOLIO
Merrill Lynch For The Sole 9.40%
Benefit of Its Customers
Attn: Fund Admin LZSCX
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Lazard Freres & Co. LLC 7.71%
Mercantile Safe Deposit & Trust Co., Custodian for
Bakery & Confectionery Intl.
Pension Plan--Small Cap-A/C26501-25
Attn: Charles Loritz
P.O. Box 17002
30 Rockefeller Plaza
New York, NY 10112
Northern Trust Trustee 5.34%
FBO ITT Industries Master Retirement Trust #22-51598
PO Box 92956
Chicago, IL 60675-2956
GLOBAL EQUITY PORTFOLIO
Blue Cross Blue Shield of 58.86%
Massachusetts Inc. Managed Care
Attn: Treasury 01/06
100 Summer Street
Boston, MA 02110-2106
Lazard Freres & Co. LLC 10.12%
The Baycrest Centre Foundation
Helaine Maisels
Admin Assistance Finance Dept.
3560 Bathurst Street
North York, Ontario
Blue Cross Blue Shield of 9.33%
Massachusetts Inc. Indemnity
Attn: Treasury 01/06
100 Summer Street
Boston, MA 02110-2106
Lazard Freres & Co. LLC 8.42%
Mount Sinai Hospital
Foundation of Toronto
Attn: Marty Stein
331-600 University Avenue
Toronto, Ontario M5G 1X5
INTERNATIONAL EQUITY PORTFOLIO
Lazard Freres & Co. LLC 8.92%
Mercantile Safe Deposit & Trust Co.
Custodian for Bakery & Confectionery Intl.
A/C 26501-33
Attn: Charles Loritz
P.O. Box 17002
30 Rockefeller Plaza
New York, NY 10112
Merrill Lynch For The Sole 5.50%
Benefit Of Its Customers
Attn: Fund Admin LZIEX
4800 Deerlake Dr. E FL 2
Jacksonville, FL 32246
<PAGE>
INTERNATIONAL SMALL CAP PORTFOLIO
Lazard Freres & Co. LLC 7.57%
The George Washington
University Int'l Small Cap
Attn: Louis Katz & Courtney Lowe
2121 I Street
707 Rice Hall
30 Rockefeller Plaza
New York, NY 10112
Lazard Freres & Co. LLC 5.83%
United Air Lines Inc. Pension & Welfare Plans
Administration Committee
Attn: David V. Drystra
P.O. Box 66100
30 Rockefeller Plaza
New York, NY 10112
EMERGING MARKETS PORTFOLIO
Lazard Freres & Co. LLC 5.85%
University of British Columbia
Faculty Pension Plan
Stanley Hamilton/Dir Ops
235-2075 Wesbrook Mall
Vancouver, BC
Merrill Lynch For The Sole 5.74%
Benefit Of Its Customers
Attn: Fund Admin LZEMX
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246-6484
Lazard Freres & Co. LLC 5.26%
United Air Lines Inc. Pension & Welfare Plans
Administration Committee
Attn: David V. Drystra
P.O. Box 66100
30 Rockefeller Plaza
New York, NY 10112
<PAGE>
BOND PORTFOLIO
Lazard Freres & Co. LLC 7.30%
Elaine Louise David-Weill
c/o Janis Inscho
30 Rockefeller Plaza
New York, NY 10112-0194
Lazard Freres & Co. LLC 5.32%
Local 1922 Pension Fund
Attn: Laurie Greco Fund Mngr
1065 Old Country Road Suite 214
Westbury, NY 11590-5628
NTERNATIONAL FIXED-INCOME PORTFOLIO
Lazard Freres & Co. LLC 32.08%
Graphic Communications Intl.
Union Supplemental Retirement
Disability Fund--Fixed-Income A/C
Attn: Mr. GL Griesbauer Jr.
1900 L Street NW
30 Rockefeller Plaza
New York, NY 10112
M & I Trust Co., Custodian for 18.50%
CUNA Individual Acct Master Plan
1000 N. Water St., 14th Floor
Milwaukee, WI 53202-6648
Smith Barney Inc. 10.11%
00109801250
388 Greenwich Street
New York, NY 10013-2339
HIGH YIELD PORTFOLIO
MAC & CO A/C IBWF8440002
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
<PAGE>
Lazard Freres & Co. LLC 16.06%
Employee Security Fund of the
30 Rockefeller Plaza 60th Floor
New York, NY 10112-0002
Lazard Freres & Co. LLC 12.89%
Mass Bay Transportation
30 Rockefeller Plaza 60th Floor
New York, NY 10112-0002
Lazard Freres & Co. LLC 7.49%
Steamfitters Local Union #420
30 Rockefeller Plaza 60th Fl.
New York, NY 10112-0002
STRATEGIC YIELD PORTFOLIO
Lazard Freres & Co. LLC 14.58%
Mack Trucking Inc. Retirement Trust-Strategic Yield
Attn: Mark Cherry
2100 Mack Blvd.
Allentown, PA 18103-5622
HEP & Co. 9.17%
MF MAC 9139-027
Calabasas, CA
Mac & Co A/C-CLRF5053712 6.50%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
Lazard Freres & Co. LLC 5.74%
DePauw University
Attn: Thomas S. Dixon
313 South Locust Street
Greencastle, IN 46135-1736
EQUITY PORTFOLIO
Connecticut General Life Ins. Co. 83.97%
One Commercial Plaza
280 Trumbull Street
Attn: Liz Pezda H-19-B
P.O. Box 2975
Hartford, CT 06104-2975
SMALL CAP PORTFOLIO
Connecticut General Life Ins Co. 68.53%
One Commercial Plaza
280 Trumbull St.
Attn: Liz Pezda H-19-B
P.O. Box 2975
Hartford, CT 06104-2975
GLOBAL EQUITY PORTFOLIO
Cushion Trust Limited 27.26%
21 Moorfields
London EC2P 2HT United Kingdom
Lazard Freres & Co. LLC 18.90%
Gaetana Enders
555 Park Avenue
New York, NY 10021-8166
Trifid Securities Limited 5.66%
PO Box 108
2-6 Church Street
St. Helier
Jersey
Channel Islands JE4 8QD
Lazard Freres & Co. LLC 5.53%
Estate of H. Fred Baerwald
Attn Jessica Bourgeois
229 Berkeley Place
Brooklyn, NY 11217-3801
INTERNATIONAL EQUITY PORTFOLIO
Connecticut General Life Insurance Co. 35.73%
One Commercial Plaza
280 Trumbull St.
Attn: Liz Pezda H-19-B
P.O. Box 2975
Hartford, CT 06104-2975
Smith Barney 401K Advisor Gr Tr 6.72%
Smith Barney Corporate Trust Co.
DTD 01/01/1998 Pl Val Scvcs
2 Tower Center
PO Box 1063
East Brunswick, NJ 08816-1063
EMERGING MARKETS PORTFOLIO
Charles Schwab & Co. Inc. 16.27%
Special Custody Account
For Benefit of Customers
Attn: Mutual Fund
101 Montgomery Street
San Francisco, CA 94104
Resource Partners LLC 9.64%
225 Main Street
Westport, CT 06880-3216
Saxon & Co FBO A/C 8.03%
10 01 042 0617829 52106N889
P.O. Box 7780-1888
Philadelphia, PA 19182-0001
Sax & Co FBO 7.94%
A/C 10 01 042 0617730 52106N889
P.O. Box 7780-1888
Philadelphia, PA 19182-0001
<PAGE>
PCM Managed Equity Fund I LP 7.86%
4200 Somerset Dr Ste 200
Prairie Village, KS 66208-5244
INTERNATIONAL SMALL CAP PORTFOLIO
Thomas J. Kohout Trustee 12.12%
Thomas J. Kohout Trustee Rev Trust
U/A 12/16/77 Restated 10/09/98
1910 East Bay Tree Circle
Lakeside Val Vista Estates
Gilbert, AZ 85234-4938
Marsha Von Mueffling Crawford 9.79%
770 Park Ave. Apt. 6D
New York, NY 10021-4153
Wendel & Co A/C 154948 8.11%
The Bank of New York
Mutual Fund Reorg Dept.
P.O. Box 1066
Wall Street Station
New York, NY 10268-1066
Lazard Freres and Co. LLC 5.34%
Jeremy N. Rubenstein
Linda Tang Rubenstein
Tenants by the Entirety
5805 Rockmere Drive
Bethesda, MD 20816-2445
BOND PORTFOLIO
Lazard Freres and Co. LLC 11.63%
SUNY Univ. Hospital @ Brooklyn
Brooklyn Anesthesia Research
PC Retirement Trust
Attn: Ed Hahn
450 Clarkson Avenue
30 Rockefeller Plaza
New York, NY 10112
Lazard Freres & Co. LLC 9.83%
The Catholic Cemeteries of The
Archdiocese of Washington Inc.
Attn: Jane S. Landon
13801 Georgia Avenue
Silver Spring, MD 20906-5271
INTERNATIONAL FIXED-INCOME PORTFOLIO
Lazard Freres & Co. LLC 13.29%
Trust U/A DTD 10/30/96 Between
Jane Engelhard Settlor & EG
Beimfohr J. Bemberg S Craighead
Mrs. Engelhard c/o Mrs. Simonton
97 Main St.
30 Rockefeller Plaza
New York, NY 10112
Lazard Freres & Co. LLC 6.11%
NationsBank NA-Madeira School
Attn: Franklin B. Smith
8328 Georgetown Pike
McLean, VA 22102-1203
STRATEGIC YIELD PORTFOLIO
Lazard Freres & Co. LLC 5.46%
North Ottawa Community Hospital
Funded Depreciation Account
Attn: Jim Davidson
1309 Sheldon Road
Grand Haven, MI 49417-248
MID CAP PORTFOLIO
Connecticut General Life Ins. Co. 71.69%
One Commercial Plaza
280 Trumbull Street
Attn Liz Pezda H-19-B
P.O. Box 2975
Hartford, CT 06104-2975
HIGH YIELD PORTFOLIO
Lazard Freres & Co. LLC 60.43%
Marvin Josephson
30 Rockefeller Plaza 60th Fl.
New York, NY 10112-0002
Casey C. Sasner 7.60%
Rick M. Sasner JT Ten
115 Monument Street
Pacific Palisades, CA 90272-3856
Lazard Freres & Co. LLC 7.13%
Mitchel G. Garren
30 Rockefeller Plaza 60th Fl.
New York, NY 10112-0002
Lazard Freres & Co. LLC 5.59%
Frances J. Brooks
30 Rockefeller Plaza 60th Fl.
New York, NY 10112-0002
</TABLE>
A shareholder who beneficially owns, directly or indirectly, more than
25% of the Fund's voting securities may be deemed a "control person" (as defined
in the 1940 Act) of the Fund.
Certain of the shareholders are investment management clients of the
Investment Manager that have entered into agreements with the Investment Manager
pursuant to which the Investment Manager has investment discretion and voting
power over any assets held in the clients' accounts, including shares of the
Portfolios. For purposes of the list above, the Fund considers the Investment
Manager to be a beneficial owner of Portfolio shares held in management accounts
on behalf of its investment management clients.
Generally, all shares have equal voting rights and will be voted in
the aggregate, and not by class, except where voting by Class is required by law
or where the matter involved affects only one Class. As used in this Statement
of Additional Information, the vote of a majority of the outstanding voting
securities means, with respect to the Fund or a Portfolio, the vote of the
lesser of (i) 67% of the shares represented at a meeting if the holders of more
than 50% of the outstanding shares of the Fund or Portfolio, as the case may be,
are present in person or by proxy, or (ii) more than 50% of the outstanding
shares of the Fund or Portfolio, as the case may be. Shareholders are entitled
to one vote for each full share held, and fractional votes for fractional shares
held.
Each share of the applicable Class of a Portfolio is entitled to such
dividends and distributions out of the income earned on the assets belonging to
that Portfolio as are declared in the discretion of the Fund's Board of
Directors. In the event of the liquidation of a Portfolio, shares of each Class
of the Portfolio are entitled to receive the assets attributable to such Class
of that Portfolio that are available for distribution based upon the relative
net assets of the applicable Class.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and non-assessable by the Fund.
COUNSEL AND INDEPENDENT AUDITORS
Legal matters in connection with the issuance of the shares of the
Fund offered hereby will be passed upon by Stroock & Stroock & Lavan LLP, 180
Maiden Lane, New York, New York 10038-4982.
Anchin, Block & Anchin LLP, 1375 Broadway, New York, New York 10018,
has been selected as the independent auditors for the Fund.
<PAGE>
ADDITIONAL INFORMATION
The Fund's Registration Statement, including the Prospectus, the
Statement of Additional Information and the exhibits filed therewith, may be
examined at the office of the Commission in Washington, D.C. Statements
contained in the Prospectus or this Statement of Additional Information as to
the content of any contract or other document referred to herein or in the
Prospectus are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
A special service is available to banks, brokers, investment advisers,
trust companies and others who have a number of accounts in any Portfolio. In
addition to the copy of the regular Statement of Account furnished to the
registered holder after each transaction, a monthly summary of accounts can be
provided. The monthly summary will show for each account the account number, the
month-end share balance and the dividends and distributions paid during the
month. All costs of this service will be borne by the Portfolio. For information
on the special monthly summary of accounts, contact the Fund.
<PAGE>
APPENDIX
Description of certain ratings.
S&P
BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned to a debt obligation.
Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB
Bonds rated BB have less near-term vulnerability to default than other
speculative grade bonds. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.
B
Bonds rated B have a greater vulnerability to default but presently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
<PAGE>
CCC
Bonds rated CCC have a current identifiable vulnerability to default,
and are dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions to meet timely payments of
interest and repayment of principal. In the event of adverse business, financial
or economic conditions, they are not likely to have the capacity to pay interest
and repay principal.
CC
The rating CC is typically applied to bonds subordinated to senior
debt which is assigned an actual or implied CCC rating.
C
The rating C is typically applied to bonds subordinated to senior debt
which is assigned an actual or implied CCC- rating.
D
Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
S&P's letter ratings may be modified by the additional of a plus or a
minus sign, which is used to show relative standing within the major ratings
categories, except in the AAA (Prime Grade) category.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Issues assigned an A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1
This designation indicates the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted within a plus sign (+)
designation.
<PAGE>
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.
Moody's
BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or 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 which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities of fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bond which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
<PAGE>
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 present obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier 1 indicates a rating for the security in
the higher end of a rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of a rating
category.
COMMERCIAL PAPER RATINGS
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
<PAGE>
Issuers (or related supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily will 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 alternative liquidity is
maintained.
